Multistate Tax Commission Holding Hearing on Model Notice and Reporting Statute

The Multistate Tax Commission is holding a public hearing on its draft "model" notice and reporting statute for remote retailers that do not collect sales tax on their sales.  The hearing is being held on May 18th, 2011 in Washington DC.  You can attend via phone.  You can also submit written comments prior to May 18th.  For all of the details, go to MTC public hearing.

For a copy of the agenda and the draft "model" notice and reporting statute, go to MTC Agenda and Draft.

As I discussed in earlier posts, the draft "model" statute appears to still be based on Colorado's enacted notice and reporting statute.  The "model" statute contains notification requirements for each transaction and also annual notification requirements.  On the positive side, it does contain an exclusion for companies with less than $100,000 in sales in the applicable state.  On the negative side, it contains penalties for non-compliance.

There is currently an injunction against Colorado's notification requirements; and it is still to be debated or determined as to whether these requirements are constitutional.  Yet, the MTC is still moving forward????

Michigan Amnesty Program Details NOW Available! (Begins May 15th)

As I reported in an earlier post, Michigan has enacted an Amnesty program that begins May 15th.  In addition, Michigan has just published some information on its website regarding the program.

BACKGROUND

The Michigan Tax Amnesty program provides a 45-day window for taxpayers to settle tax liabilities with the State, for return periods ending on or before December 31, 2009 and avoid penalty payments. Qualifying taxpayers also avoid civil and criminal penalties and prosecution by the Michigan Department of Treasury.

Tax Amnesty is available for individual or business taxpayers who have tax liabilities for eligible taxes for return periods ending on or before December 31, 2009. This includes:

• Underreported tax liabilities
• Non-reported tax liabilities
• Overstated deductions, credits, or exemptions
• Failure to file Michigan tax returns
• Delinquent payment of past due taxes
• Taxpayers who have received a final tax due notice

ELIGIBILITY

Individuals and business taxpayers are not eligible for Tax Amnesty if they are: 

• The subject of a current tax-related Court of Claims case or criminal investigation
• Eligible to enter into a Voluntary Disclosure agreement with the State

VOLUNTARY DISCLOSURE AGREEMENT (VDA) OR AMNESTY?

 

Should a taxpayer file a Voluntary Disclosure Agreement or participate in the Amnesty program? 

 

If a taxpayer is eligible to file a Voluntary Disclosure Agreement (VDA), then it cannot participate in the Amnesty program. This is actually good, because there is no limit to the look-back period under the Amnesty program. A VDA’s lookback period is 4 years. The Amnesty program covers all tax years prior to January 1, 2010, therefore, a  taxpayer would have to file all unfiled returns for years prior to January 1, 2010, and pay tax and interest.

Go to Michigan's website for more information on Michigan's Voluntary Disclosure program.

State Tax Notices: A Game???

State tax notices, got to love them.

I don't know about you, but I am seeing a lot more state tax notices being received by companies. Not only are they first time notices, but they are repeat notices, month after month. This is even after the taxpayer/company has responded to the first notice.

It often feels like the state taxing authority never looked at the response sent by the company. Actually, I recently called a state taxing authority because a company received a repeat notice, and the state said they were probably six months behind on processing incoming responses/mail, etc. Therefore, the company would continue to receive a repeat notice every month until the company's initial response was processed.

Disregarding repeat notices for the moment, even the first notice a company receives gives the perception that the state taxing authority did not even look at the documents that were attached to the originally filed return. The attachments often explain or provide the information that the notice is now requesting. This causes companies and taxpayers to devote additional time and resources to explain something again and again.

Can't taxing authorities get better? Is it just a computer system gone awry? Lack of resources?

What can taxpayers do to eliminate notices and repeat notices?

I understand it isn't always the taxing authority's fault, some taxpayers don't provide adequate information. But for those that do, the notices keep coming.

Sometimes it just feels like a game. A game in which the taxing authorities just want a company or taxpayer to give up and pay the additional tax, interest and/or penalties being imposed.

Nexus: To File or Not to File?

This time of year, or any time of year, a company analyzes what activities it has across the country and in different states. Did the activity change from last year? If so, what activity is the company engaging in, in that particular state? Is it enough to give the company "nexus" or a taxable connection to the state?

Different Types Of Nexus

The answer to that question is not as easy as you might think. The technically correct answer, these days, is that just about any activity in a state gives you nexus. There are different types of nexus, such as: due process clause nexus, commerce clause nexus, substantial nexus, economic nexus, etc.

P.L. 86-272

The other question might be, is your activity protected by P.L. 86-272? To be protected by P.L. 86-272, the tax has to be an "income tax" or a "tax on income." That isn't always a clear cut answer either. After that, you have to be selling tangible personal property, and your only activity in the state can be solicitation of sales where the acceptance of the sale is done out of state. Lastly, the product should be mailed common carrier, not using your own trucks. Sounds easy?

De Minimis?

Now, if your activity isn't protected under P.L. 86-272, is your activity de minimis? Meaning, is your activity in the state not substantial enough to create nexus? Again, these days, everything seems to be substantial enough as states are looking for revenue from out-of-state companies.

Technical vs. Practical?

Okay, so that is the technically correct answer. But what do companies do on a practical level? What level of activity does a company say, okay, we will file a return. What if the apportionment factor is less than 1%? Is that the threshold that determines filing in state on a practical level? That probably isn't the sole factor, other factors might be the amount of tax at stake, the number of years of activity in the state, the future predicted activity in the state, etc. and the list goes on.

What I am trying to say, is that determining if you have nexus or not is a difficult answer. The next question that follows is, "should we file?" Now, I know state tax department of revenues don't like that question, but in any occupation there is the technically correct answer and the practical answer. Sometimes it just depends on what day of the week it is that determines the answer to the question.

Proactive vs. Reactive = Voluntary Disclosure

Please note: I am in no way condoning the "practical approach" I have stated above. It's just throughout my career I have experienced companies that play the "wait and see" game when their activity in a state is minimal. On the other hand, companies can choose to be proactive and start filing; or when they have had a presence in a state for a number of years and haven't filed, they may choose to file a "voluntary disclosure."

A voluntary disclosure allows a company to come forward to a state, file a few back year returns, and obtain some penalty and/or interest relief in the process. Usually the taxpayer and the state agree to only require four back years' worth of tax returns in exchange for future compliance.

Remember, a voluntary disclosure is only able to utilized if the state has not already contacted you. If the state contacts you first, technically, the state can make the taxpayer file returns for all back years since the company started activity in the state. However, usually the state requires six or seven years of back tax returns. But unlike a voluntary disclosure, there is no relief for interest and penalties.

Unconstitutional State Taxes: In Search of A Remedy

I wrote my thesis on this very topic several years ago. However, the issue remains alive and well today.

When a state enacts legislation that later is found to be unconstitutional, what is the appropriate remedy? Prospective relief only? Retroactive refunds for all taxpayers for all years still open under statute? Retroactive refunds for only those taxpayers that have filed protective refund claims?

Or better yet, should states be allowed to change the unconstitutional legislation/statute in such a way as to make it constitutional? If yes, should states be allowed to make that change retroactive to limit the amount of refunds they will have to pay to taxpayers who paid the tax in prior years (or filed protective refund claims)?

The answers to these questions were played out in California a few years ago, with the court cases that found the California LLC Fee to be unconstitutional. California changed the unconstitutional statute to make it constitutional in order to limit the amount of refunds it had to pay. However, should that be allowed?

State Budget Problems = Unconstitutional Taxes and Fees?

In regards to other states, I am concerned that as states continue to fight one of their worst financial budget crises, they will enact, knowingly or unknowingly, unconstitutional state taxes or fees. At this moment when states need new revenue (without "raising taxes” or political “fall-out") certain fees or taxes will become attractive alternatives. However, will those alternatives be constitutional?

Unfortunately, if the past repeats itself, we may only recognize these statutes to be unconstitutional several years from now after the state has collected the taxes and fees. Again I ask, should this be allowed?

It seems not only unfair, but perhaps “illegal,” for states to collect taxes by enacting laws later to be found unconstitutional, and then refuse to give the money back to taxpayers. How can a state profit from collecting taxes it should not have been allowed to collect in the first place?

Remedy?

Are Your Online Services / Software Taxable?

In a recent Massachusetts Letter Ruling (11-2), Massachusetts held that the purchase of the taxpayer's core service offerings and updated data packages were not subject to tax, but were nontaxable database access services.  However, Massachusetts did hold that the workflow add-ons were subject to sales and use tax as sales of a right to use prewritten software.  These charges are optional and separately stated from the core service offering and database charges.

Facts

The Company is engaged in the business of providing commercial information about the financial condition of businesses to its customers located throughout the U.S. and abroad.  This information is provided through the Company’s Risk Management Solutions database.  This database enables customers to access select financial information to mitigate credit and supplier risk, increase cash flow and drive increased profitability.  Information gathering, analysis, formatting/explanation, and dissemination are conducted at the Company’s locations in either New Jersey or Pennsylvania.

The Company's service offerings included:  (1) a Core service offering, (2) Upgraded Data Packages, and (3) Workflow Add-ons.  For more details on the services, go to the RULING.

Ruling

The Company provides information services to its customers based on data it gathers on the Web and other sources and then provides this information to its customers in various formats and levels of detail depending on which service options a customer chooses. The Company asserts that this is a nontaxable service. We agree that where the object of the transaction is simply to obtain information, the transaction is not subject to tax. The object of the customers’ use of the Company’s core service offering and updated data packages is to obtain database access including reports prepared by the Company, rather than the use of the software itself. Thus, the Company’s core service offering and updated data packages are nontaxable database access services that allow customers to access information that the Company has gathered.

However, the Company describes the workflow add-ons as services that customers can add to their core service offering by purchasing them for an additional fee which is separately invoiced from the basic or upgraded database packages. These optional add-ons are hosted on the Company’s server or on a 3rd party server. The sale of a license or right to use software on a server hosted by the taxpayer or a third party, as described in 830 CMR 64H.1.3(3)(a), are taxable under Massachusetts sales and use tax laws. See 830 CMR 64H.1.3(14)(a).

The workflow add-ons are customizable web-based tools that enable customers to establish rules and approval limits to automate credit decisions. Using this software, customers can also enter information concerning their existing accounts and rules to trigger labeling for such accounts (i.e., a credit indicator drops below a certain level the account gets flagged for review). They can manage overall risk exposure of businesses and create a customizable credit application to meet their personal business needs. The data entered into the application is fed into that customer’s database for the customer to use on an ongoing basis and without further direct involvement by the Company.

Since the workflow add-ons are optional and generally purchased at a later date and are separately invoiced, they are not included in the non-taxable core service offering and updated data packages. With regard to workflow add-ons, the customer itself is using the Company’s software to acquire and manipulate various types of information it chooses with respect to businesses and the customer’s accounts receivable. The object of the transaction is to access the Company’s software for the purpose of manipulating information that the customer inputs as well as information from the database to accommodate current business needs. Therefore, we rule that the workflow add-ons are subject to the Massachusetts sales and use tax.

So What?

More and more companies are providing online services or access to software via the web.  As this trend continues, it is not always clear how a state will tax those services or software access for sales and use tax purposes.  Therefore, it is very important that a company address this issue to mitigate any exposure. 

The above is just one example of how Massachusetts may treat your company's or client's online services.  Other states' treatment may vary. 

Arizona Enacts Tax Recovery Program (Amnesty)!

According to recent legislation (SB1616) enacted by the Governor of Arizona, the director of the department of revenue shall establish a tax recovery program or "Amnesty" program from September 1 through October 1, 2011.

All taxes administered or collected by the department of revenue on behalf of the state of Arizona or a county in Arizona are eligible for amnesty, except estate tax and ad valorem property taxes.

Benefits of Amnesty Program

If a taxpayer complies with the requirements of the amnesty program, the director will abate or waive all or part of the civil penalties and impose interest at a reduced rate for tax liabilities that have been or could be assessed or imposed for any taxable period during the applicable liability period without the need for the taxpayer to show reasonable cause or the absence of wilful neglect.

For the purposes of the amnesty program, "liability period" means:

• For taxpayers filing annually, any taxable period beginning from and after December 31, 2003 and ending before January 1, 2010.
• For taxpayers having a 52-53 week tax year, any taxable period beginning from and after January 14, 2004 and ending before January 1, 2010.
• For all other taxpayers, any taxable period beginning from and after December 31, 2004 and ending before January 1, 2010.

Requirements of Amnesty Program

To qualify for recovery, the taxpayer must:

• Submit a complete and correct application as provided by subsection F of this section during the recovery period.
• Pay the tax, plus any interest due pursuant to this section on or before October 1, 2011.

The director may grant recovery only for the taxable periods and tax liabilities identified in the application and only if the taxpayer satisfies all of the recovery conditions and requirements prescribed by this section.

Taxpayers NOT Eligible for Amnesty

A taxpayer does not qualify for recovery under the Amnesty Program if:

• an audit determination has become final with respect to the taxable period for which recovery is sought.
• the taxpayer is a party to any criminal investigation or to any criminal administrative proceeding or criminal litigation that is pending on January 1, 2011 in any court of the United States or of this state for failure to file or failure to pay, or for fraud with respect to, any tax imposed by any law of this state and required to be collected by the department.
• The taxpayer has been the subject of a past tax-related criminal investigation, indictment or prosecution if the investigation, indictment or prosecution resulted in a conviction, a guilty plea or a plea of no contest.
• The taxpayer has been convicted of a crime relating to any period or assessment of a tax that is the basis of the penalty or interest with respect to which recovery is sought.
• The taxpayer is a party to a closing agreement with the department for the tax periods included in the recovery application.

Application Requirements

An application for recovery:

• Must be on an application form furnished by the department that requires the applicant to identify the tax, the qualifying taxable period and the tax liability for which recovery is sought and to furnish other information prescribed by the director. The taxpayer shall include any returns and reports, including amended returns and reports, for the tax and taxable periods. Any return or report filed under the program is subject to verification as provided by law. A taxpayer who has insufficient information to file a full income tax return may file a gross income return and compute the tax pursuant to established rate brackets based on average tax rates for the applicable taxable years.
• Must be filed with the department as prescribed by the director during the recovery period.

Waiver of Rights To Appeal

An application for recovery constitutes an express and absolute waiver of all administrative and judicial rights of appeal available at that time that have not run or otherwise expired as of the date of application.

The state board of tax appeals and any court shall dismiss each such action or proceeding before that body on receiving a notification from the director that recovery has been granted for the taxable period for that taxpayer. If the audit determination is not final, the taxpayer must withdraw from the proceeding or litigation before recovery is granted.

A taxpayer that files an application for recovery retains all administrative and judicial rights of appeal with respect to any additional tax assessed in a subsequent audit by the department.

Do You Need the "Matrix"?

Does your company or client utilize a sales tax software solution to make tax determinations regarding the products they sell, and goods and services they purchase?

If not, your company and client may need the "Matrix."  Okay, I mean sales and use tax matrix.

Problem

Companies who don't use a sales tax software solution to make tax determinations still need to make those determinations and be accurate.  They may not have decided to use a software solution either due to volume of activity, type of industry, complexity of transactions, etc.  Therefore, a manual solution may be necessary.

If that is the case, a sales and use tax matrix can help.

Solution

From a sales tax perspective, it is important to gain an understanding of all products, goods and services the company sells. Then conduct research for the states in which the company has nexus to determine the taxability of the goods and services the company sells. The result of the research is put into a matrix reflecting the taxability of the goods and services which the company sells on a state-by-state basis.

From a use tax perspective, a company needs to gain an understanding of the most frequent goods and services the company purchases. Then conduct research for the states in which the company uses those goods and services to determine the taxability of those goods and services. The result of the research is put into a matrix reflecting the taxability of the goods and services which the company purchases on a state-by-state basis.

Both matrices are then utilized as a daily tool by the company’s accounts payable or purchasing department to determine when sales or use tax should be self-assessed on an invoice or purchase.

Why?
 
Regardless of volume of activity or industry, companies need to do the best they can to mitigate sales and use tax exposure.  States are hurting for revenue and auditing companies of all sizes.  Reducing potential sales and use tax liabilities, and penalties and interest has become even more important. 

Arkansas Enacts Amazon.com Nexus Law!!!!

The Governor of Arkansas has signed an "affiliate nexus" law and "click-through nexus" (or Amazon.com nexus) law into effect as of April 1, 2011 (SB738).  The laws take effect 90 days after enactment.

Affiliate Nexus Law

Under the Affiliate Nexus law, a seller is presumed to be engaged in the business of selling tangible personal property or taxable services for use in the state if an affiliated person is subject to the sales and use tax jurisdiction of the state and the:

1. Seller sells a similar line of products as the affiliated person and sells the products under the same business name or a similar business name; 
2. Affiliated person uses its in-state employees or in-state facilities to advertise, promote, or facilitate sales by the seller to consumers; 
3. Affiliated person maintains an office, distribution facility, warehouse or storage place, or similar place of business to facilitate the delivery of property or services sold by the seller to the seller's business;
4. Affiliated person uses trademarks, service marks, or trade names in the state that are the same or substantially similar to those used by the seller; or
5. Affiliated person delivers, installs, assembles, or performs maintenance services for the seller's purchasers within the state.

Opportunity to Rebut Presumption

The presumption may be rebutted by demonstrating that the affiliated person's activities in the state are not significantly associated with the seller's ability to establish or maintain a market in the state for the seller's sales.

"Click-Through Nexus" Law

If there is not an affiliated person with respect to a seller in the state, the seller is presumed to be engaged in the business of selling tangible personal property or taxable services for use in the state if the seller enters into an agreement with one or more residents of the state under which the residents, for a commission or other consideration, directly or indirectly refer potential purchasers, whether by a link on an Internet website or otherwise, to the seller.

$10,000 Sales Threshold

However, this nexus presumption only applies if the cumulative gross receipts from sales by the seller to purchasers in the state who are referred to the seller by all residents with an agreement with the seller exceed ten thousand dollars ($10,000) during the preceding twelve (12) months.

Opportunity to Rebut Presumption

The presumption may be rebutted by submitting proof that the residents with whom the seller has an agreement did not engage in any activity within the state that was significantly associated with the seller's ability to establish or maintain the seller's market in the state during the preceding twelve (12) months.

Proof may consist of written statements from all of the residents with whom the seller has an agreement stating that they did not engage in any solicitation in the state on behalf of the seller during the preceding year if the statements were provided and obtained in good faith.

Act 1001 (S.B. 738), Laws 2011, effective 90 days after adjournment of the 2011 Legislature, and as noted

Cloud Computing and Sales Tax: Who Knows?

The sales taxation of digital products and electronic commerce has become increasingly more important. As you may know, states are hurting for revenue, and since our economy has moved more and more towards electronic commerce, the states must figure out a way to tax it, or else lose out on much needed revenue.

According to Wikipedia,

"Cloud computing" describes a new supplement, consumption and delivery model for IT services based on the Internet, and it typically involves the provision of dynamically scalable and often virtualized resources as a service over the Internet. The term cloud is used as a metaphor for the Internet, based on the cloud drawing used to depict the Internet in computer network diagrams as an abstraction of the underlying infrastructure it represents.

Typical cloud computing providers deliver common business applications online which are accessed from a web browser, while the software and data are stored on servers.

These applications are broadly divided into the following categories that emphasize the concept of "Everything-as-a-Service": Software as a Service (SaaS), Utility Computing, Web Services, Platform as a Service (PaaS), Managed Service Providers (MSP), Service Commerce, and Internet Integration.

How are the states going to tax it?

The problem with cloud computing is where is it located? What state has the right to tax it? Some states may tax it where it is used. Some states may tax it based on the location of the servers. Some states may tax it where the office of the cloud computing provider resides. This is only the beginning of the state of confusion regarding the state taxation of cloud computing and other electronic commerce.

States like Washington, North Carolina, and Wisconsin have updated their laws recently to broaden their sales tax to tax more digital products. New York is really reaching to expand the sales tax to services delivered over the Internet, not just tangible personal property delivered electronically.

Impact?

If you or your client is involved in cloud computing or selling just about anything over the Internet, chances are, some state wants to tax that sale.

Contact me to obtain a special report, “Practical Tips for Navigating the Sales Taxation of Cloud Computing.”

Virginia Enacts "Refundable" Research and Development Credit!

The Governor of Virginia signed legislation (HB1447) into law on March 28, 2011 which creates a refundable research and development credit for individuals and businesses starting January 1, 2011.

According to the bill, the legislation allows income tax credits for individuals and businesses for qualified research and development expenses for taxable years beginning on or after January 1, 2011, but before January 1, 2016.

The tax credit amounts are (i) 15 percent of the first $167,000 in Virginia qualified research and development expenses, or (ii) 20 percent of the first $175,000 of Virginia qualified research and development expenses if the research was conducted in conjunction with a Virginia public or private college or university, to the extent the expenses exceed a base amount.

The Tax Department shall develop policies and procedures for the application process for the tax credits.

There is a $5 million cap on the total amount of credits allowed in any fiscal year.