Merry Christmas and a Happy New Year!

I would like to thank everyone who has visited my blog over this past year. I would also like to thank those who contacted me, asked questions, sought advice, provided commentary, etc. I have really enjoyed making new connections and building relationships with interesting people all over the country and world.

I started this blog back in January 2009, but really didn't go full-force until March/April. I really enjoy writing and communicating state and local tax developments in the hope that I am helping others keep up to date and/or providing a forum for interaction and commentary.

I will be taking the next two weeks off for the holidays (Christmas and New Year's), but will be back in 2010 ready to see where next year will take us, and this blog.

Here is a brief list of some of the issues or opportunities I am looking at for 2010:

1. States will continue to have budget problems and will either be forced to raise taxes by enlarging the tax base, or by increasing enforcement efforts.
2. Amnesty programs will continue to rise-up.
3. California will enact some additional type of tax reform (business net receipts tax? maybe.)
4. New York will enact some type of tax reform (probably).
5. Rhode Island is considering a net receipts tax; will it be enacted????
6. State treatment of COD income will be important; is it included in apportionment?
7. More states will move to "market based sourcing" for apportioning Service Income.
8. State NOL carryback rules will come into play.
9. States will continue to decouple from Federal taxpayer favorable legislation.
10. Sales taxation of digital goods, software as a service (SaaS), application service provider (ASP), cloud-computing, e-commerce, will continue to grow in importance.
11. States will continue to increase the frequency with which nexus questionnaires are sent to taxpayers.
12. Taxpayers will be forced to review whether they have a taxable presence in states (nexus) due to FIN 48 requirements and states' increased enforcement efforts. Taxpayers should consider Voluntary Disclosure Agreements to limit the look-back period and obtain relief from interest and penalties.
13. Third-party warranty repair services (agency nexus) will become more of a factor.
14. Economic nexus will spread like wild-fire.
15. Washington's new reseller-permit requirements come into effect.
16. California's new Use Tax registration requirement is in effect; will you comply?
17. Apportionment issues and opportunities abound.
18. Transfer-Pricing for related-party transactions will increase in importance.
19. When apportioning service income, what really is your "income-producing activity"?
20. The state requirements related to Federal Revenue Agent Report (RAR) adjustments will be demanding.
21. Combined reporting will continue to spread.
22. Credits and incentives will arise in places you least expect.

And last but not least, I will continue to strive to be your state and local tax partner, providing cost-effective state and local tax services saving you time, money and mitigating risk.

I will seek to help you meet your compliance requirements, prevent problems, take advantage of opportunities, and represent you when emergencies arise (audits, notices, appeals, etc.).

Again, thank you for visiting and contacting me this year. I look forward to 2010! Merry Christmas and a Happy New Year!

Remember: No Pressure, No Diamonds. Keep moving forward. Finish Strong!

Pennsylvania: Tax Amnesty Program Set for 2010!

Pennsylvania authorized (under Act 48, signed into law on Oct. 9, 2009) a tax amnesty period from April 26 to June 18, 2010.

During this limited, 54-day time frame, the Pennsylvania Department of Revenue will waive 100 percent of penalties and half of the interest for anyone who pays his/her delinquent state taxes.

What Taxes Are Eligible for Amnesty?

All taxes administered by the PA Department of Revenue are eligible for the tax amnesty program. The tax amnesty does not include Unemployment Compensation because it is administered by the PA Department of Labor and Industry. Also, the program does not apply to any tax administered by another state or the federal government/Internal Revenue Service.

Any delinquent taxes as of June 30, 2009, and any non-filed returns due as of June 30, 2009, are eligible for tax amnesty.

How to Obtain Amnesty?

To obtain tax amnesty, you must do the following between April 26 and June 18, 2010:

1. file an amnesty return online with the PA Department of Revenue;
2. file all delinquent tax returns; and
3. pay all delinquent taxes plus 50 percent of the interest due.

For each tax delinquent, the department will send a written notice to the last known address on the department’s records. This notice will contain important information for the recipients to participate in the amnesty program.

Who Qualifies for Amnesty?

Individuals, businesses and other entities with Pennsylvania tax delinquencies as of June 30, 2009, are generally eligible to participate in the amnesty program.

Non-filed tax returns or reports, as well as unpaid, under-reported or un-established taxes, whether known or unknown to the PA Department of Revenue, constitute eligible delinquencies.

Consequences for Not Participating in Amnesty?

If you are eligible for the tax amnesty program, but choose not to participate, the department will add a 5 percent non-participation penalty to your balance due.

For more information, see PENNSYLVANIA's WEBSITE.

Illinois: Partnerships Obtain Relief from Negative Legislation!

The Governor of Illinois signed legislation (HB 2239) yesterday repealing the impact of the 2010 Budget Implementation Act (SB 1912 and Public Act 96-0045).

SB 1912 would have most likely resulted in partnerships paying more tax. For tax years ending on or after December 31, 2009, partnerships would have only been allowed to deduct guaranteed payments for services rendered by partners, and would not have been allowed to deduct "reasonable compensation."

HB 2239 states, for tax years ending on or after December 31, 2009, partnerships are permitted to subtract the greater of (1) income of the partnership that constitutes personal service income as defined in IRC Sec. 1348(b)(1) or (2) a reasonable allowance for compensation paid or accrued for services rendered by the partners to the partnership.

This removes the negative impact of SB 1912.

See my prior posts for more details:

November 4, 2009

July 27, 2009

New York: Amnesty (PAID program) Enacted, Begins 1/15/10!

The Governor of New York has signed legislation authorizing some type of tax amnesty program.

According to a New York press release, the legislation authorizes what New York calls the PAID (Penalty and Interest Discount) program.

Apparently, PAID gives taxpayers with older unpaid bills the chance to save up to 80% of the penalty and interest they owe. Bills less than three years old are not eligible under this program.The program will start January 15, 2010.

To take advantage of the program’s savings, eligible taxpayers must make all payments by the program’s expiration date, March 15, 2010.

If they don’t pay in full by that date:

• the opportunity for these savings will be lost forever
• any unpaid tax debts will continue to accrue interest at the full statutory rate.

Benefits of PAID Program include saving:

• 80% of accrued penalty and interest on unpaid bills issued on or before December 31, 2003
• 50% of accrued penalty and interest on unpaid bills issued after December 31, 2003 and on or before December 31, 2006.

In the state's press release, they mention they are increasing their enforcement efforts to collect unpaid bills. If you act now, you may be able to avoid collection actions in the future.

In January 2010, New york will mail letters to taxpayers who qualify for the PAID discounts, inviting them to participate in the program.

As of January 15, 2010 you’ll be able to access New York's site to participate in the program, including checking to see if you have eligible bills.

Washington: Obtain Your Reseller Permit Before 12/31/09!

If you operate a business in Washington State, and usually make purchases with resale certificates, you may need to apply for a reseller permit immediately.

Beginning Jan, 1, 2010, taxpayers who do not provide a copy of a reseller permit or other acceptable exemption certificate to wholesalers must pay retail sales tax when buying goods and services for resale.

According to a NEWS RELEASE by the Washington Department of Revenue (DOR), the 2009 Washington State Legislature replaced self-issued resale certificates with Department-issued reseller permits to reduce misuse of the resale system. The Department estimates that state and local governments lose $100 million annually when businesses buy products for their own use rather than for resale, but claim the exemption.

While the DOR has mailed nearly 180,000 permits to businesses since September, it estimates that as many as 20,000 additional businesses, mostly contractors, have not yet applied for a permit.

If you believe your business qualifies for the reseller permit, you can apply for one immediately at dor.wa.gov/resellerpermit or by calling 1-800-647-7706.

If you need any assistance in this matter, please contact me at brian.strahle@bakertilly.com or 612.876.4824.

For more information on the law change itself, see my earlier post.

Does Your Apportionment Accurately Reflect Your Business Activity in a State?

In other words, does your apportionment result in a fair and accurate portion of your federal taxable income being taxed by the applicable state? If not, then opportunities may exist to utilize an "alternative apportionment method."

AN ALTERNATIVE APPORTIONMENT METHOD

Some, if not all, states provide an opportunity to request or use an "alternative apportionment method" when the standard apportionment method creates "distortion" or does not properly reflect the amount of business activity in the state.

I'll be honest, the request for alternative apportionment is not an easy one, but when the apportionment factor results in a questionable amount of your taxable income being taxed in a state where you really have very little business activity, an alternative apportionment method may be the solution.

With the states on the perpetual march to lower the threshold of obtaining "nexus" or a taxable presence in a state, the apportionment factor is a way to help ensure that a state does not tax more than its "fair share" of income.

Massachusetts: Amnesty Authorized, Coming in 2010!

Massachusetts Governor authorized the Commissioner of Revenue to establish a tax amnesty program for two consecutive months within fiscal year 2010. The two-month period is to be determined by the Commissioner and not expire later than June 30, 2010.

THE DETAILS

According to Section 41 of House Bill 4539, the commissioner of revenue shall establish a tax amnesty program during which all penalties that could be assessed by the commissioner for the failure of the taxpayer to:

1. timely file any proper return for any tax type and for any tax period;
2. file proper returns which report the full amount of the taxpayer's liability for any tax type and for any tax period;
3. timely pay any tax liability; or
4. pay the proper amount of any required estimated payment toward a tax liability

shall be waived without the need for any showing by the taxpayer of reasonable cause or the absence of willful neglect.

The waiver of a taxpayer’s liability under this section shall apply if the taxpayer files returns, makes payments as required by the commissioner or otherwise comes into compliance with the tax laws of the commonwealth as required by the commissioner pursuant to the tax amnesty.

SCOPE OF PROGRAM - TO BE DETERMINED

The scope of the amnesty program in terms of the particular tax types and periods covered, including any limited look-back period for unfiled returns, shall be determined by the commissioner.

PERIOD OF AMNESTY

The amnesty program shall be established for a period of 2 consecutive months within fiscal year 2010 to be determined by the commissioner, such period to expire not later than June 30, 2010, and all required payments shall be made on or before June 30, 2010, in order for the amnesty to apply.

FAILURE TO PAY BEFORE JUNE 30, 2010

If a taxpayer fails to pay the full liability before June 30, 2010, the commissioner shall retain any payments made and shall apply said payments against the outstanding liability, and the provisions of the tax amnesty program, other than the additional penalty authorized by section 2, shall not apply.

CRIMINAL INVESTIGATION IMPACT

The commissioner's authority to waive penalties during the amnesty period shall not apply to any taxpayer who, before the start date of the amnesty program selected by the commissioner, was the subject of a tax-related criminal investigation or prosecution.

INTEREST NOT WAIVED

The amnesty program shall not authorize the waiver of interest or any amount treated as interest.

TAXPAYERS THAT ARE ELIGIBLE

The commissioner may offer tax amnesty to those taxpayers who have either any unpaid self-assessed liability or who have been assessed a tax liability, whether before or after their filing of a return, which assessed liability remains unpaid.

OTHER FACTORS

To the extent that a taxpayer within the scope of the amnesty program as determined by the commissioner and wishing to participate in the amnesty program has postponed the payment of an assessment of tax, interest and penalty under the authority of subsection (e) of section 32 of chapter 62C of the General Laws, the taxpayer shall waive in writing all rights under said subsection (e) to further delay the payment of the tax and interest portions of the assessment.

The tax and interest portions of the assessment shall be payable in full from the date of the commissioner's notice of assessment. Upon payment by the taxpayer of the tax and interest of the outstanding assessment, the commissioner shall waive all penalties associated with that assessment. The taxpayer and the commissioner shall then proceed with all administrative appeal rights that the taxpayer wishes to pursue with respect to the assessment.

CERTAIN PENALTIES MAY NOT BE WAIVED

Amnesty shall not apply to those penalties which the commissioner would not have the sole authority to waive including, but not limited to, fuel taxes administered under the International Fuel Tax Agreement or under the local option portions of taxes or excises collected for the benefit of cities, towns or state governmental authorities.

New York: Accessing of Software via Internet Makes it Taxable!

In New York State Advisory Opinion TSB-A-09(41)S (September 22, 2009), New York concludes the Petitioner’s receipts from licenses for its software are receipts from the sale of prewritten software, which are subject to sales tax to the extent that the software is accessed by the customer’s employees in New York.

FACTS

Petitioner is an international software company with an office located in New York. Petitioner has customers and employees in several states including New York. Petitioner licenses a basic software package that is usually further customized to the customer’s needs.

Petitioner’s customers (e.g., insurance companies) use the software to provide rate quotes, insurance contracts, and other insurance documents to insureds and prospective insureds of the customer.

Petitioner provided the following illustration as a typical use of its software: A vehicle owner contacts Petitioner’s customer and indicates that it is interested in purchasing an automobile insurance policy. The customer logs into Petitioner’s software residing on a third party’s server in Virginia using a URL address provided to the customer by Petitioner. The customer enters the vehicle owner’s pertinent information (name, age, sex, location, etc.) into the software via the Internet connection. Petitioner’s software processes the information entered in the system and produces a quote for the insurance policy.

If the vehicle owner indicates that it wants to purchase the policy, the customer can immediately print an insurance ID card on the customer’s printer and the insurance policy will be processed and issued overnight. The policy documents can be printed and mailed to the vehicle owner by the customer or the documents can be e-mailed to the vehicle owner by the customer.

The software (including the custom modifications) may be installed and stored on the customer’s server(s) and is accessed from one or more of the customer’s locations. The customer’s employees may access the software from the location where the software is stored or from other locations both inside and outside the state where the software is stored.

The software may also be installed on servers located within and without New York owned by Petitioner or its agents and accessed by the customer’s employees from within and without New York.

For customers who purchase the software for use on the customer’s servers, Petitioner bills a flat fee for the license to use the base software package.

When the software is stored on servers owned by Petitioner or its agents, Petitioner is responsible for the maintenance of the hardware and the software. In this case, Petitioner charges the customer an additional separately stated "hosting fee."

KEY POINTS, ANALYSIS and OPINION

The accessing of Petitioner’s software by Petitioner’s customers constitutes a transfer of possession of the software, because the customer gains constructive possession of the software, and gains the "right to use, or control or direct the use of," the software. See Adobe Systems, Inc Adv Op Comm T & F, November 24, 2008, TSB-A-08(62)S.

The location of the code embodying the software is irrelevant. The software is used just as effectively by the customer whether it is stored on the customer’s servers for access by the customer’s employees or is stored on servers owned by Petitioner (or Petitioner’s agents) from which the customer’s employees access the software.

Whether the software is installed on the customer’s server or is stored on Petitioner’s servers, the access and use of the software by the customer’s employees is effectuated. Accordingly, Petitioner's sale of the license to use its basic software package is subject to sales tax under Tax Law §1105(a) regardless of where the software is stored. See Jeffrey J. Coren CPA, TSB-A-09(19)S, May 21, 2009.

The situs of the sale for sales tax purposes is the location associated with the license to use (i.e., the location of the customer’s employees that use the software). See Adobe Systems, Inc. supra.

In the present case, if the locations where the customer’s employees will use the software are both in and out of New York State, Petitioner is only required to collect tax based on the portion of the taxable receipts attributable to the employees’ use of the software at locations in New York. (See KPMG LLP, Adv Op Comm T & F, January 31, 2003, TSB-A-03(5)S.) The determination of the proper local tax rate and jurisdiction is also based on the locations associated with the licensees’ use.

Petitioner’s fees for software support encompass defect fixes and software updates and training and help-desk support. Fees for software updates and patches to fix defects are subject to sales tax as the sale of prewritten software. Separately stated and reasonable fees for training and support may be excluded from the receipt subject to tax. (See TSB-M-93(3)S, supra.) However, if a lump sum charge is made to a customer that includes training and support, or if the separate charge for training and support does not reasonably reflect the value of these items, then the entire charge will be taxable.

BOTTOM-LINE

Under this Advisory Opinion, if you are selling software or licensing software via the web and allowing customers to access the software, the accessing of the software would constitute a transfer or possession of the software resulting in a taxable sale.

If you have questions regarding your taxability, please contact me at brian.strahle@bakertilly.com or 612.876.4824 to discuss.

Service Companies: Impact of "Market-Based Sourcing"?

If you are a service provider who performs services across the country in many states, then a review of your apportionment factor may provide opportunities, and possibly, refunds.

In simple terms, the general practice or treatment by states in determining the apportionment factor (how companies determine the portion of taxable business income each state gets to tax) of service companies has been focused on where the service was performed; however, this treatment is changing.

More and more states are changing to the "benefit derived" treatment or "market-based sourcing" for sales of service providers. Meaning, sales related to services are sourced to where the benefit is being derived by the customer.

As you may guess, determining where the 'benefit is being derived' is not a simple task or interpretation. A simple solution would be to source it to the state where the customer is located; however, what if the customer uses the benefit of the service in other states or more than one state?

In any case, here is a brief summary of the current treatment by states regarding sales by service providers for apportionment purposes:

1. Some states source sales to the state where the service was performed based on the "costs of performance" or "income-producing activity" tests. This can produce an all or nothing result, or a pro-ration of the sales.
2. Some states have changed to "market-based sourcing" or "benefit derived" sourcing; sourcing sales to the state where the benefit of the service is being derived.

The change to "market-based" sourcing can result in favorable results when looking at your state tax position as a whole. You may pay more tax in one state and no tax in others. As always, it just depends.

Third-Party Warranty Repair Services Creating Nexus?

If you manufacture any type of product and provide a warranty with your product, how are the repairs or warranty services provided? Are the services completed by your own employees or by an unrelated third-party?

If the services are provided by an unrelated third-party, and you have no other connection with the state where the services are being provided, you may think you have no tax obligations with that state; but you would be WRONG (sorry).

According to Multistate Tax Commission Nexus Bulletin (NB 95-1), in-state warranty repair services through third-party repair service providers creates constitutional nexus for imposition of use tax collection responsibility for all sales made to customers in that State, and for income, franchise, gross receipts taxes or other comparable taxes in the taxing State where the warranty services are performed. Approximately 25 states have explicitly stated they follow this Bulletin. Other states may as well.

The application of this bulletin has been litigated over the years since it was released, and taxpayers have not fared well.

Alabama: Contingent-Fee Auditors Under Attack

According to a Birmingham Business Journal article, Revenue Recovery Systems, a company that conducts sales tax audits for local governments and municipalities, is being sued in a class-action case.

Apparently, Revenue Recovery Systems, which also operates as Alatax, is a "contingent-fee auditor." A "contingent-fee auditor" simply audits taxpayers on behalf of state and/or city governments and gets paid a percentage of the tax that is assessed and/or collected. Therefore, the more tax they uncover, the more they get paid.

According to the Birmingham Business Journal article, Birmingham’s Washer & Refrigeration Supply Co. Inc. filed a suit in Montgomery against Revenue Recovery Systems claiming the firm is a tax “bounty hunter” that is “violating the Alabama Taxpayer’s Bill of Rights.”

According to the article, the business argues Revenue Recovery Systems is conducting forbidden auditing practices by receiving fees from city governments and municipalities that are contingent upon how much money they collect from businesses, unlawfully seizing property owned by businesses and not allowing businesses to dispute their tax claims.

If you have any additional information regarding the status of this case, or 'contingent-fee auditors' in general, please send me an e-mail at brian.strahle@bakertilly.com or comment on this post.