SALT Strategies

SALT Strategies

Updates & Commentary On State & Local Tax Law

Mid-Winter Nexus Clouds Gathering From the Great Lakes Region

Posted in Nexus, Sales and Use Tax

greatlakes.stormNew “click-through” nexus provisions in Michigan and Illinois are fresh cause for concern for out of state retailers – and should be on your Winter 2015 Sales and Use tax Nexus Preparedness Checklist.

Both states recently adopted new legislation that requires otherwise out of state retailers to collect and remit sales tax from their in-state customers.

First, on January 15th, 2015 Michigan, with the adoption of S.B. 658 and S.B.659, has enacted “click-through” and affiliate nexus. Michigan’s provisions are effective October 1, 2015.

Additionally, last August, Illinois Governor Quinn signed S.B. 352, Public Act 98-1089, that adopted “click through” nexus that became effective January 1, 2015. As highlighted below, Illinois FY 2015-07 provides valuable guidance on complying with Illinois’ revised “click through” affiliate nexus provisions.

The potential ease with which Michigan’s nexus presumptions may be found to be met warrants attention from multistate taxpayers, as well as their tax advisors. All multi-state taxpayer activities, as well as their affiliates’ activities, and agreements with Michigan vendors and advertisers should be reviewed in light of Michigan’s new nexus provisions.

Michigan “Click-Through” and “Affiliate” Nexus

Click-Through Nexus

Presumption

Michigan’s legislation sets forth that a “seller of tangible personal property is presumed to be engaged in the business of making sales at retail of tangible personal property” in Michigan if as stated in the statute:

The seller enters into an agreement, directly or indirectly, with 1 or more residents of this state under which the resident, for a commission or other consideration, directly or indirectly, refers potential purchasers, whether by a link on an internet website, in-person oral presentation, or otherwise, to the seller, if all of the following conditions are satisfied:

(a) The cumulative gross receipts from sales by the seller to purchasers in this state who are referred to the seller by all residents of this state with an agreement with the seller are greater than $10,000 during the immediately preceding 12 months.

(b) The seller’s total cumulative gross receipts from sales to purchasers in this state exceed $50,000 during the immediately preceding 12 months.

Rebutting Click-Through Nexus Presumption

The presumption set forth above may be rebutted. The statute states that presumption may be rebutted “by demonstrating that the residents of this state with whom the seller has an agreement did not engage in any solicitation or any other activity within this state that was significantly associated with the seller’s ability to establish or maintain a market in this state for the seller’s sales of tangible personal property to purchasers in this state.”

The statute says an out-of-state retailer satisfies the rebuttal to the presumption by establishing the existence of both of the following:

(a) Written agreements prohibiting all of the residents with an agreement with the seller from engaging in any solicitation activities in this state on behalf of the seller.

(b) Written statements from all of the residents with an agreement with the seller stating that the resident representatives did not engage in any solicitation or other activities in this state on behalf of the seller during the immediately preceding 12 months, if the statements are provided and obtained in good faith.

Establishing and documentation of the aforementioned rebuttal requirements pose significant gauntlet for Multistate taxpayers as well as their tax advisors who may wish to rely on the rebuttal provisions to the “Click-Through” nexus presumption.

 

Engaging Michigan Advertisers May Not Create Presumption

Michigan’s click-through provisions indicate that agreements under which a seller purchases advertisements from a person or persons in Michigan to be delivered through television, radio, print, the internet, or any other medium will not be considered an agreement that creates the aforementioned presumption unless the ad revenue paid to the person or persons in this state consists of commissions or other consideration that is based upon completed sales of tangible personal property.

Affiliate Nexus

Presumption

In addition, Michigan has enacted an “Affiliate Nexus” provision that casts a wide net of activities that will create a presumption of nexus.

The legislation states that a “seller who sells tangible personal property” will be presumed to have nexus, be required to register with the Michigan Department of Treasury and collect tax if the seller, including an affiliate person (other than a common carrier acting as a common carrier) engages or performs any of the activities contained within Michigan’s affiliate nexus provision.

The following excerpt from Michigan’s affiliate nexus provisions highlight some of the activities that may create nexus in Michigan – and could warrant close attention:

(d) Uses, with the seller’s consent or knowledge, trademarks, service marks, or trade names in this state that are the same or substantially similar to those used by the seller.

(g) Shares management, business systems, business practices, or employees with the seller, or in the case of an affiliated person, engages in intercompany transactions related to the activities occurring with the seller to establish or maintain the seller’s market in this state.

(h) Conducts any other activities in this state that are significantly associated with the seller’s ability to establish and maintain a market in this state for the seller’s sales of tangible personal property to purchasers in this state for storage, use, or consumption in this state.

The aforementioned activities within Michigan’s affiliate nexus provisions appear to accommodate aggressive interpretations of what activities may relate the presumption of nexus.

Who Is An Affiliated Person?

Michigan’s Affiliate Nexus provisions state that an “Affiliated person” is defined as either:

(i) Any person that is a part of the same controlled group of corporations as the seller.

(ii) Any other person that, notwithstanding its form of organization, bears the same ownership relationship to the seller as a corporation that is a member of the same controlled group of corporations.

The provision continues in defining the term “Controlled group of corporations” as meaning “that term as defined in section 1563(a) of the internal revenue code, 26 USC 1563.”

Rebuttal of the Affiliate Nexus Presumption

Michigan’s Affiliate Nexus provision state that the presumption may be rebutted by “demonstrating that a person’s activities in this state are not significantly associated with the seller’s ability to establish or maintain a market in the state for the seller’s sales of tangible personal property to purchasers in this state.”

The problem is that the state has not provided any guidance about how to determine this. Absent additional clarification or guidance, the criteria for rebuttal of this presumption may be subjectively and aggressively interpreted.

Illinois’ Second Bite At “Click-Through”/Affiliate Nexus Begins January 1, 2015

Illinois P.A. 1089 was enacted to address the 2013 Illinois Supreme Court decision in Performance Marketing Ass’n, Inc. v. Hamer, in which the Court found that Illinois’ click-through nexus provision was pre-empted by the Federal Internet Tax Freedom Act . It should be noted, as indicated on the Internet Tax Freedom Act Coalition website, that the ITFA, which bars state and local taxes on internet access, was extended a fifth time in December 2014 and is now scheduled to expire October 1, 2015.

Illinois FY 2015-07 sets forth Illinois’ revised “click-through” nexus provisions, effective January 1, 2015, expanded the “type of out-of-state retailers required to register in Illinois and collect and remit Use Tax.”  FY 2015-07 says out-of-state retailers may be eligible for a 30 day grace period with respect to the P.A. 98-1089’s effective date; i.e. February 1, 2015, if the out-of-state retailer fully complies with the Act’s provisions as of February 1, 2015.

FY 2015-07 states in part that:

Public Act 98-1089, 35 ILCS 105/2(1.1) and 35 ILCS 110/2(1.1), applies to out-of-state retailers and servicemen that satisfy the following criteria:

  • the out-of-state retailer has a contract with a person in Illinois;
  • under the contract, the person in Illinois refers potential customers to the retailer and the retailer pays to the person in Illinois a commission or other consideration based on the sale of tangible personal property by the retailer;
  • the person in Illinois provides to the potential customers a promotional code or other mechanism that allows the retailer to trace the purchases made by these customers;
  • the retailer made cumulative gross sales of $10,000 during the preceding four quarterly periods to customers referred by persons located in Illinois, regardless of the location of the customers.

If an out-of-state retailer satisfies all of the above, the retailer is “presumed to be maintaining a place of business in Illinois and is required to register, collect and remit Use Tax on all to Illinois customers.

 Illinois’ Irrebuttable Presumption – A Presumption Al Capone Would Be Proud Of

Illinois’ click-through presumption is not rebuttable. Illinois FY 2007-15 states that:

An entity can rebut the presumption that it is a retailer doing business in Illinois by presenting proof to the Department of Revenue upon audit that the persons in Illinois that referred customers to it had so little connection to Illinois that the nexus standards in the Commerce Clause of the U.S. Constitution prohibit imposing registration and collection requirements.

This indicates that an out-of-state retailer that satisfies the presumption must register, collect and remit the Use Tax and only upon being audited by Illinois Department of Revenue will it have the opportunity to successfully demonstrate that “the persons in Illinois that referred customers to it had so little connection to Illinois that the nexus standards in the Commerce Clause of the U.S. Constitution prohibit imposing registration and collection requirements.”

Michigan and Illinois Nexus Provisions – More Ominous Nexus Clouds

The winter of 2014-15 will probably be considered one of the most challenging and treacherous winters in the history of recorded U.S. weather reporting. Living in the Northeast, most of our winter’s difficult weather and storms this year, as usual, have originated near or around the Great Lakes region and headed east. Akin to the most powerful winter storms that develop over Michigan and Illinois, these State’s nexus provisions pose ominous nexus storm potential for multistate taxpayers and their advisors.

Salt Strategies’ First Year Anniversary

This month marks SaltStrategies First Anniversary. It has been an amazing time for all of us at SALTStrategies. We hope our posts have been insightful and thought provoking as well as informative.   Our first year taught us how demanding it is to achieve and maintain SALTStrategies’ goal of providing VALUE to our readers.

On behalf of Jennifer Dowd, Richard Feldman, Tracey Segarra and everyone at MWE that has made SALT Strategies possible, I wish to say Thank You to all of our readers.

I humbly invite all of you to continue to join us on our journey through the dynamic world of state and local tax exploration.

NYC Corporate Tax Reform – Mayor And Governor Seem To Be In Sync

Posted in Corporate Income Tax

Last month, New York City Mayor de Blasio announced his proposal for “a major reform” of the city’s corporate tax regime.   Considering that the mayor and New York State Governor Cuomo do not always see eye to eye (they held separate press conferences throughout  blizzard Juno, for example), the mayor’s proposal appears to closely parallel one already signed into law by the governor.

According to the Mayor’s Press Release, the proposed modifications to the city’s Corporate Code will result in “modernizing an outdated system, providing vital tax relief to the city’s small businesses and local manufacturers, and streamlining City and State corporate tax codes.”

An initial read of the proposed modifications set forth in the press release indicates that the Mayor’s modifications to the New York City Corporate Tax Code are in line with those adopted by Governor Cuomo that were signed into law last March as highlighted in our New York State Tax “Climate Change” – Higher Taxes Forecast for Multistate Taxpayers .

Key Aspects to Keep In Mind Regarding The Mayor’s Proposal

The Mayor’s Proposal calls for its changes to be retroactively effective to January 1, 2015.

The Mayor’s Proposal does not seek any modifications or modernization of New York City’s Unincorporated Business Tax.

As highlighted in the Mayor’s Press Release the “de Blasio administration’s corporate tax reform will be revenue-neutral on an aggregate basis …”.  

Significant Elements of the Mayor’s Proposal

As outlined in the release, here are some of the significant modifications that the Mayor’s Proposal seeks to implement,  a number of which closely correlate with those included in New York State’s 2014 Corporate Tax Reform:

  • Conforming the City tax code to State provisions in “the most important areas of tax computation, including updating the City’s corporate income tax and minimum tax codes to mirror the State codes.”
  • Adoption of a “new method for determining how corporations attribute net income”, “Market Based” sourcing –“based on where a firm’s markets are located, rather than the location of the business operations.”
  • Implementation of a “new method for computing net income that broadens the tax base by treating most income as business income.”
  • Merging the bank tax into the corporate franchise tax for corporations.
  • Adoption of unitary combined reporting rules.
  • Targeted relief for New York City’s small businesses and local manufacturers.
  • Excluding the first $10,000 of capital tax base.
  • Reducing the tax rate for small non-manufacturers with less than $1 million in allocated net income from 8.85 percent to 6.5 percent.
  • Reducing the tax rate for small manufacturers with less than $10 million in allocated net income from 8.85 percent to 4.425 percent.

Proposal’s Notable Distinctions

It should be noted that the Mayor’s Proposal will retain the alternative tax base on capital.  The Mayor’s Press Release indicates that the retention of the alternative tax based on capital “will help stabilize revenues in years of low profits for large corporations.”   

The release further indicates that the “[R]emaining eligible banks and corporations will be subject to a capital base with a $10 million tax cap.”  This reflects an increase from the current New York City Corporate capital tax base.

Why You Should Care

The Press Release indicates that the Mayor’s Proposal will closely parallel the recently enacted New York State Corporate Tax amendments.  There are several potential modifications that may have significant corporate tax ramifications.

Market Based Sourcing

The release indicates that Mayor’s Proposal contains a Market Based Sourcing provision.  Market Based Sourcing will most likely increase a corporation’s New York City receipt factor and New York City corporate tax if:

  • The corporation derives revenue from services
  • The corporation performs the services for which it is paid from location(s)  based outside of New York City; and
  • The corporation has a significant portion of its customer base in New York City,

Unitary Combined Filing

The release indicates that the Mayor’s Proposal contains a mandatory unitary combined filing provision.  This provision will affect corporations that may be a member of a unitary group that previously were filing on a separate return basis or filing on a limited combined group basis that did not include all of the members of the combined group.

Retroactivity

The release indicates that the Mayor’s Proposal will be retroactive to January 1, 2015.  Therefore, any potentially affected corporation should consider the ramifications of the Mayor’s Proposals in the calculation of its New York City corporate tax estimates as well as its tax provision.

Mayor’s Proposal Warrants Multistate Corporate Taxpayers Preparedness

Last week, Mayor de Blasio issued repeated warnings regarding the potential dangers arising from the imminent arrival of Winter Storm Juno. Both Mayor de Blasio and Governor Cuomo acted quickly to minimize the potential harm Juno could wreak on the City and State – including shutting down New York City’s subway. 

After New York City was largely spared the wrath of the powerful storm, some expressed dismay of the Mayor’s conservative approach to preparation.  I, for one, thought that Mayor de Blasio’s and Governor Cuomo’s actions were wholly justified and prudent.  Their actions were evidence of their thoughtful leadership given the potential havoc and danger Juno posed to the City and State.

The preparedness reminded me of British statesman and novelist Benjamin Disreali, who wisely wrote “I am prepared for the worst but hope for the best.”

MARKETPLACE FAIRNESS ACT MEETS ANOTHER DETOUR AS A NEW PROPOSAL CIRCULATES FOR ONLINE SALES TAX SIMPLICATION

Posted in Sales and Use Tax

Bob_Goodlatte_OfficialIs the new Congress planning to alter some of the unpopular provisions of the 2013 Marketplace Fairness Act? It sure seems like it.

On January 13th, House Judiciary Chairman, Representative Bob Goodlatte, circulated a draft of the  Online Sales Simplification Act of 2015.  As reported in a Bloomberg BNA article, Goodlatte Turns to Origin Sourcing In New Proposal on Online Sales Tax, the draft seeks to adopt “a hybrid version of so-called origin sourcing” and a participating states’ distribution agreement to address the States’ online retailer sales tax concerns.

According to the article, a Judiciary Committee aide told the publication that OSSA is meant to “serve as a starting point for discussion on the Internet sales tax issue” and that Goodlatte welcomes feedback and new ideas.   The timing and intent of OSSA is well worth noting – both appear to be signs that the 114th U.S. Congress’ Judiciary Committee will take a different road than the one set forth in the 2013 Marketplace Fairness Act.

As we noted in our previous posts, The Marketplace Fairness Act Hearings – Why They Should Be On Your Radar and The Marketplace Fairness Act Hearings Highlight Diverse Solutions. Is the MFA The Answer to The Wrong Question, the MFA provisions affecting remote sellers have been a significant concern for online retailers.  Many of the MFA provisions have been meet with widely divergent comments by sales tax experts, industry groups and lawmakers.

OSSA Key Concepts

Like the MFA, OSSA attempts to address the issue of States’ lost sales tax revenue arising from their residents purchasing taxable items from out of state online retailers who are not registered to collect sales tax in their state. (It should be noted, the aforementioned residents should self-assess use tax on such purchases and remit that use tax to their resident states.) However, OSSA demonstrates a comprehensive departure from the approach set forth in the MFA as evident by its key foundational components.

OSSA relies on the implementation of two key critical foundational components – Origin Based Sourcing and Participating States’ Adoption of a Distribution Agreement- to resolve the States’ loss sales and use tax revenue from residents purchases from out of state online sellers.

Origin Based Sourcing

Unlike the MFA, OSSA does not try to require remote sellers to charge or collect sales tax based on the destination of the sale or location of the remote seller’s customer.  Instead, OSSA applies an origin based sourcing paradigm.  As set forth in the following excerpts from OSSA Section 2

Sec. 2: Limitation on Collecting Tax on Remote Sales

(a) A state may tax a remote sale only if it is the Origin state of the sale and party to the Distribution Agreement (i.e., the clearinghouse that nets out the $).

(b) Tax is applied at the Origin Rate (including local rate).

(c) Privacy Protection – No personally identifiable information is reported to the clearinghouse. Just the amount of the sale, destination state and (zip code). Exception is made for sharing, in the course of an audit only, “compliant taxpayer certificates” established in sec. 4.

(d) Sellers may be audited only by their home state taxing authority

 Distribution Agreement

OSSA’s second foundation concept is the adoption by participating states of a “Distribution Agreement” (i.e. Clearinghouse). The BNA Bloomberg article concisely summarizes the core aspects of OSSA’s Distribution Agreement.  First, OSSA calls for

“a commission, to be appointed by participating states, to determine the states’ shares of online sales tax revenue. Each origin state would forward each destination state its proportional share, based on a distribution agreement reached by the commission.”

The commission would craft a distribution agreement within 90 days of the panel’s creation. Each month, states would determine how much of the total tax imposed on remote sales is due them, based on sales attributable to that state under origin sourcing.”

As the Distribution Agreement is the backbone of OSSA, it would appear that states would have to “participate” or join in to the Distribution Agreement if they wish to collect tax on remote sales.

The following is an excerpt of some of the key provisions from Section 3 of OSSA:

Sec. 3: Distribution Agreement (i.e., Clearinghouse)

(a) Each State Governor appoints 4 representatives to a commission. At least one must represent remote sellers, the other three represent interests of government, consumers and non-remote sellers in the state. Commission produces a distribution agreement with the following terms:

3) Each Origin State forwards each Destination State its proportional share (determined in (2)) of the sales tax that the Origin State collected during the period via the proven clearinghouse method used in the Fuel Tax context.

4) States that do not join the Distribution Agreement cannot tax remote sales or receive distributions from the clearinghouse.

(b) Commission has 90 days to produce the agreement. After that, states cannot collect tax on remote sales at all (e.g., via aggressive affiliate nexus laws) until an agreement becomes effective.

 OSSA – One Strong Start Addressing Online Sales Tax

According to the House chairman circulates online sales tax draft article contained in THE HILL, OSSA is receiving attention from numerous groups.  One view expressed in the THE HILL article is that “{T}he draft is unlikely to find much support among retail groups that have lobbied for the Marketplace Fairness Act.” 

My initial view is more in line with that of Mr. DelBianco of NetChoice, as quoted in the article:

“With elegant simplicity, this bill treats sales tax obligations the same, whether you entered a store by foot, by mail, by phone, or via the Internet,” … “In short, this bill represents a compromise that gives states the revenue they’re missing, without punishing every small business that goes online to reach customers around the country.” 

In my humble opinion, Representative Goodlatte should be applauded for quickly introducing OSSA in the 114th Congress.  He should also be applauded for drafting OSSA’s strategic provisions that address the states’ sales/use tax concerns arising from online sales without compromising the Constitutional protections established under Quill. 

Multistate Tax ‘Nexus in Texas’ Alert – Comptroller Decision Sounds Sales Tax Warning For Software Providers

Posted in Nexus, Sales and Use Tax

stormsAs someone who regularly tunes into the Weather Channel, I keenly appreciate how meteorologists recognize dangerous patterns and potentially significant storms through analysis of weather hundreds of miles and days away from a location.  This ability to predict weather emergencies allow us to prepare and “batten down the hatches” well in advance of the dangerous weather.  Well, a recent Texas Comptroller’s decision that upheld a Texas ALJ Determination should be recognized by Multistate Tax meteorologists and prognosticators as a potentially dangerous nexus storm for all software providers.

In summary, the Comptroller’s Decision held that a Utah corporation had substantial nexus for sales and use tax arising from its Texas customers’ electronic downloading of software over which the Petitioner retained  “all property rights”  and title.

Comptroller’s Decision Key Facts and Findings

The Comptroller’s Decision was determined on the specific facts and findings pertaining to the Petitioner’s activities in Texas.  Undoubtedly any potential software provider or multistate tax advisor with clients who may be affected by this decision should undertake a comprehensive review of the decision’s specific findings and analysis.

However, I thought it would be helpful to set forth, in excerpt format, some of the key facts and findings contained in the Comptroller’s Decision as set forth in the decision’s “III. FINDINGS OF FACT” and “IV. CONCLUSION OF LAW”

  • Petitioner’s software and computer programs were deemed tangible personal property pursuant to Texas Tax Code Section 151.009.
  • Petitioner sold computer programs and digital content primarily over the Internet and via such common carriers as the U.S. Postal Service (USPS), the United Parcel Service (UPS), and Federal Express during the period under review.
  • Petitioner does not charge any ongoing maintenance or recurring licensing fees for any of its computer programs or digital images.
  • Petitioner does not charge customers for updates to computer programs they have already purchased, but does charge customers for upgrades from an older version of a program to a newer version.
  • The purchase and use of Petitioner’s products is governed by license agreements.
  • All the license agreements granted the customer (or user) a license that entitled them to use Petitioner’s products.
  • The user was either granted a personal non-exclusive, non-transferable license to use the 3-D Models, together with all accompanying written materials, images, and other data files or a license to use the product in accordance with the terms of the license.
  • The license agreements set no fixed period for the customer’s use of the license.
  • In some versions, the license agreements expressly provide that the license remains in effect only for so long as the user is in compliance with the terms and conditions of this agreement.
  • The products licensed under these License Agreements are provided for the user’s exclusive use.
  • The license agreements contain provisions specifically restricting the useof the products by third parties other than the user.

The Comptroller’s Decision also reviewed Petitioner’s other limited activities in Texas.  The Comptroller’s Decision did not find that Petitioner had established sufficient physical presence by its employees’ attendance of a week long education conference in 2002.

Nor did the Comptroller’s Decision find that a Petitioner employee’s attendance at a 2009 Texas conference provided sufficient physical presence in Texas to establish sales and use tax nexus.  It should be noted that the Petitioner was successful in establishing that its employee in 2009 “did not engage in any activities related to developing or promoting Petitioner’s sales. He did not sell, deliver or take orders for Petitioner’s products during his attendance at the conference. He did not visit any of Petitioner’s customers or vendors, offer technical support, or hold any outside meetings related to Petitioner’s business.”

 “Prepare for the Worst” Is Best Advice for Storms and Nexus

The Comptroller’s Decision should sound Texas Nexus Storm warnings to all software firms that are not presently registered  as a vendor for sales and use nor filing Texas sales and use tax returns.   This Decision sets forth the Comptroller’s view of what constitutes substantial nexus for sales and use tax in the context of companies that license the use of their software to customers located in Texas or to customers that may use their software in Texas.  My advice?  Prepare for a “blizzard” and be happy if you only receive  a “dusting” with respect to nexus.  But be mindful,  because for nexus in Texas a “dusting” may just be enough.

 

 

Polar Vortexes and November Blizzards – Time to Winterize Your Multistate Tax Machine

Posted in Nexus, Property and Other State/Local Tax Issues

snowblowerIt is not even Thanksgiving, but already as the news reported yesterday, US braces for more icy temperatures and snow as ferocious storm lingers.  Many years ago I adopted an approach for dealing with Northeast winters.  My approach centered around assessment, preparation and planning.  I called it “winterizing.” 

My son Andrew says I am the only person he knows who actually enjoys winter and gets excited by snow forecasts. He’s right – later on I’ll tell you why.  Anyway, I thought my approach for getting ready for Northeast winters might be useful in getting ready for the 2015 state tax year  – a tax year that  has the potential to be full of surprises and challenges. 

So with that in mind – time to “winterize” our State Tax Machine.  As part of the “winterization” of our Multistate Tax Machine,  over the next several posts, SALTStrategies will discuss topics, some tried and true, some relatively new, that should be reviewed as part of your preparation and planning for your 2015 State Tax Season. 

Nexus Check– The First Assessment Step of the Multistate Tax Winterization

Have Your Facts Changed During 2014?

As the 2014 tax year closes, this time of year provides an excellent opportunity to assess your state tax nexus status quo.  I thought I would provide a brief list of questions to help in your evaluation of your 2014 state tax nexus.  These questions were developed to help you evaluate and decide if you should rely on “Same As Last Year” facts and assumptions.  The following list of events may require further state and local tax assessment if they occurred during 2014:

  • Did you start a new business line or form a new entity?
  • Did you generate revenue from the rendering of services for the first time during the current year?
  • Did you add locations in new states?
  • Did your logistical operations or terms of sale change?
  • Did your customers or clients expand into new states that your company did not have nexus in in 2013?
  • Did your company start placing inventory on consignment at customer locations or at new customer locations?
  • For entities that operate as flow through entities (Limited Liability Companies, Partnerships, Limited Partnership, Limited Liability Partnerships and S Corporations), did the composition of any of your members, partners or shareholders change or  have a change in their resident state?
  • Did you start or settle a state tax examination?

If you answered, “yes” to any of these questions, you may not be able to rely on “SALY” and should get to work performing additional comprehensive state tax nexus analysis.

 

2014 Significant State Tax Nexus Developments

During 2014, state tax nexus continues at the forefront of numerous state tax issues facing both State taxing authorities and multistate taxpayers.  The following is a list of some of the significant state tax nexus matters that arose during 2014:

Illinois

Adopts Amended Affiliate (“Click-Through”) Nexus Legislation

In late August, Illinois Governor Quinn signed S.B. 352.  This legislation amended the state’s use tax provisions that pertained to out of state sellers that engaged Illinois commission affiliates.  The law was drafted to address the 2013 Illinois Supreme Court decision in Performance Marketing Ass’n v. Hamer, 2013 IL 114496.   That decision deemed that Illinois’ Click-Through nexus provisions, as effective July 1, 2011, “were preempted by federal law” as the Illinois provisions were in conflict with federal Internet Tax Freedom Act that prohibits “discriminatory taxes on electronic commerce.”  This new legislation modifies and broadens the definition of a “retailer maintaining a place of business in the State” in response to the Illinois Supreme Court’s decision in Performance Marketing.  It is my understanding that S.B. 352 is effective January 1, 2015.

 

New Jersey

Adopts Legislation That Enacts “Click-Through” Nexus for Sales Tax.

In June, New Jersey enacted A.B. 3486 , legislation that contains, in addition to other tax provisions, New Jersey’s adoption of “Click-Through” nexus provisions for sales tax.  This legislation is effective for sales transactions that occur on or after July 1, 2014.

 

Colorado

US Supreme Court Grants Petition for Writ of Certiorari In Direct Marketing Ass’n v. Brohl 

 In July, the US Supreme Court granted petitions for writ of certiorari in two sales and use tax decisions, one of which, Direct Marketing Ass’n v. Brohl, 10th Circuit Court of Appeals, No. 12-175 (08/20/13), deals with Colorado’s use tax reporting provision that may have broad ramifications, especially for non-Colorado remote sellers.

Colorado Enacts House Bill 1269 That Expands the Definition of “Doing Business” In State

In June, Colorado enacted the “Marketplace Fairness and Small Business Protection Act”  that expanded the definition of doing business in Colorado for sales and use tax purposes.  The Act amended the definition of “doing business” that effectively includes remote sellers through a adoption of a definition that a person has “presumptive physical presence” and doing business in the state if the person is (a) part of a group of corporations, and that controlled group has a component member that has physical presence in the state performing certain activities; or (b) the person enters into an arrangement with an in-state party that engages in certain activities for the out of state person.  As the details of The Act are beyond the scope of this post, you may wish to review The Act’s provisions especially those that address how to rebut The Act’s presumption. The Act is effective July 1, 2014.

 

New York Enacts Its FY 2014-15 executive budget Adopting Economic Nexus

When Governor Cuomo signed New York State’s FY 2014-15 executive budget into law in March, he ushered in sweeping changes to New York’s tax provisions – including the adoption of an economic nexus standard.  Although the budget does not specifically identify its provision as an economic nexus standard, a review of the provision immediately reveals New York has adopted an economic nexus standard.  Please see our earlier post New York State Tax “Climate Change” – Higher Taxes Forecast for Multistate Taxpayers  for a more detailed discussion of New York’s economic nexus provision.

 “The time to repair the roof is when the sun is shining.” – John F. Kennedy

As President Kennedy implied in his 1962 Annual Message to Congress on the State of the Union, the time to take care of something is before it has become a problem.  Hopefully, this initial post will shed some light on “Winterizing Your Multistate Tax Machine” from a nexus perspective for 2015. 

Now why do I enjoy winter? I guess I see winter as a constant challenge that ever since my childhood  I enjoyed trying to meet. The more challenging and cold the weather, the more adventurous my friends and I became– whether it was having never ending snow ball fights, playing midnight “touch” football in the school yard or learning how to drive powerful rear-wheel drive cars in the snow – we loved the challenge!  As General George S. Patton  once said “Accept the challenges so that you can feel the exhilaration of victory.”   Here’s hoping to victory over our Winter Challenges.

 


State Tax Oktoberfest 2014 – Timing is Everything For State Tax Amnesty Programs

Posted in Corporate Income Tax

oktoberfestFor many reasons, October is one of my favorite months.  It marks the last of the year’s tax “busy season.” Fall Foliage throughout the region is coming into full color and there are excellent Oktoberfest feasts to enjoy.

As I reviewed my projects for the post October 15th season, however, I became increasingly aware that this month is an ideal time to focus on opportunities that may require my immediate or additional state tax attention. Most importantly, there are several states that have pending amnesty programs – some of which may close as early as October 31st. 

October 2014 State Tax Amnesty Programs

State tax amnesty programs can provide excellent opportunities to lessen state tax exposures.  Generally a state tax amnesty program will contain provisions that partially or fully abate penalties arising from the additional tax due or failure to timely file the tax return in question.  State tax amnesty programs may also offer a reduced interest rate on the tax being remitted pursuant to the state’s amnesty’s program.  The following is a summary of the State Tax Amnesty Programs (“STAPs”) that are available right now.  The following Summary STAPs was derived from the COST state amnesty program update published in late September.

Note that Louisiana’s Tax Delinquency Amnesty Program was the product of legislation that mandated that the state have an amnesty program to be held for at least two months in 2013, at least one month in the second half of 2014 and at least one month in during the second half of 2015.  Depending on which amnesty program a taxpayer pursued, an eligible taxpayer was entitled to varying abatement of interest and penalties – with the most beneficial abatement of interest and penalties being available to eligible taxpayers who applied to the 2013 amnesty program. A careful review of the Louisiana STAP 2014 and 2015 interest and penalty abatement provisions is definitely warranted.

 State Tax Amnesty Programs – Trick or Treat

Each of these programs may offer significant savings to you or your clients.  However, note that STAPs will generally impose specific limitations on eligibility to enter into the program.  In addition, you need to perform a careful analysis of the types of taxes that are eligible as well as the tax years or periods to be covered by the STAP before applying for any STAP. 

A number of states have formal or informal Voluntary Disclosure Agreement {VDA”} programs that may offer limited look back periods for eligible taxpayers.  VDAs may be excellent vehicles to lessen potential state tax exposures – especially those arising from potential nexus issues.   Analysis of the state tax compliance enhancements potentially afforded by VDA’s should be a best practice for any taxpayer who has state tax exposure concerns.

 Oktoberfest 2014 – Planning and Moderation Key to Enjoyment

 I have always admired the qualities associated with the Teutonic culture – its focus on planning, hard work and precision.  I especially identify with the Teutonic culture’s enthusiasm for celebration as the fruit of one’s hard work that is most clearly evidenced by Oktoberfest.  Hopefully after this long 2014 tax busy season and a careful review of the potential benefits that one or more of the above state tax amnesties may yield, each of us may enjoy a well deserved Oktoberfest celebration.

In Search of a New Jersey Gross Income Tax Treasure – Don’t Forget the Alternative Business Calculation Adjustment

Posted in Personal Income Tax

GreetingsfromNewJerseySearching for opportunities to reduce our clients’ New Jersey Gross Income Tax costs in the midst of the closing days of our 2014 tax busy season, we revisited one of New Jersey’s relatively recent legislative changes – the Alternative Business Calculation Adjustment.

The inability to offset income and losses occurring in different business categories in determining one’s New Jersey Gross Income Tax has always been an issue for individuals, trusts and estates. In 2011, the state passed legislation that lessened its impact. As a result, taxpayers may rely on the ABCA to partially offset gains from one category of gross income with losses from another category of gross income.

The ABCA and Why It May Be Worth Your Consideration

For tax years beginning on or after January 1, 2012, New Jersey Gross Income Tax taxpayers who have losses in certain business-related categories of income are permitted to take into consideration those losses to calculate an adjustment to their taxable income (“ABCA”). Taxpayers may also carry forward unused losses in those categories for a period of 20 years to calculate future adjustments. This change applies to residents, nonresidents, and estates and trusts.

The benefit of the ABCA is phased in commencing in 2012 as follows:

          2012                     10%

          2013                     20%

          2014                     30%

          2015                     40%

          2016 & after         50%

Prior to the adoption of the ABCA, New Jersey GIT tax provisions only permitted the offset of gains and loss if they were incurred in the same business category.  If a New Jersey taxpayer incurred net losses in one or more of the four income categories, those losses were not permitted to offset gross income from one or more of the other gross income categories.

The ABCA permits GIT taxpayers who have losses in one or more of the following categories to include those losses in the calculation of their ABCA to reduce their taxable income:

  • Net profits from business
  • Net gains or net income from rents, royalties, patents and copyrights
  • Distributive share of partnership income 
  • Net pro rata share of S corporation income.

 The ABCA may benefit both New Jersey resident and non-resident taxpayers.

 Don’t Rely on Tax Compliance Software To Automatically Calc the ABCA

Our experience with tax compliance software indicates that it may not automatically prepare the ABCA.  In addition, the software may not identify that the taxpayer may be eligible to use the ABCA in calculating its New Jersey GIT. 

Remember to Complete NJ-BUS-2

Taxpayers with income or losses from one or more of the four income categories are required to complete Schedule NJ-BUS-1, NEW JERSEY GROSS INCOME TAX , BUSINESS INCOME SUMMARY SCHEDULE.  In addition,  taxpayers with income and losses from one or more of the four income categories are required to complete Schedule  NJ-BUS-2,  NEW JERSEY GROSS INCOME TAX, ALTERNATIVE BUSINESS CALCULATION ADJUSTMENT. 

Revisit Your 2012 New Jersey 1040 and 1040 R

Since the ABCA was enacted effective for 2012 tax years, if you or your client incurred losses in one or more of the four business categories and a NJ-BUS-2 was not included in your 2012 New Jersey filing, you may wish to revisit this issue to determine if you have a potential opportunity for a refund as well as to determine if you have ABCA loss carry forward from 2012.

The ABCA One of New Jersey’s Somewhat Hidden Tax Treasures

As with so many states, New Jersey is a state full of “Hidden Treasures” ripe for our exploration.  The ABCA may be one of New Jersey’s not so hidden tax treasures for you and/or your clients.  For additional information check out New Jerseys official release on the Alternative Business Calculation  Adjustment.  Happy hunting!!

From Zero to 100 on the Pennsylvania BAP Highway

Posted in Sales and Use Tax

pennsylvaniaIn the midst of our busy season, we have come across a recurring issue with Pennsylvania RCT-101 Corporate Tax Reports which could lead to a tax due notice for companies with zero apportionment in the state.

 In several instances where a return has been filed that has zero business apportionment, Pennsylvania has adjusted the apportionment to indicate 100% Pennsylvania business apportionment.  This has occurred if such returns haves been prepared with:

  1.  Zeros for both the numerators and denominators on Form RCT-101 Page 4 of 6  Section D Schedule A-1; or
  2.  Zeros for both the numerators and denominators on Form RCT-101 Page 4 of 6  Section D Schedule C-1; or
  3.  Zeros for both the numerator and denominators on Form RCT-106, Page 2, Table 1, Table 2 or Table 3.

Affected taxpayers, i.e. those who have zero Pennsylvania apportionment with any of the above,  have received notices from The Department  for additional tax based on the Department’s unilateral adjustment to the Pennsylvania business apportionment that increases the affected return’s Pennsylvania business apportionment to 100%.

In our discussions with the Department, we were unofficially informed that this adjustment from zero Pennsylvania business apportionment to 100% Pennsylvania business apportionment is being triggered as the result of the aforementioned Forms indicating zeros in the factors’ denominators, “Total” or “ Inside  and Outside PA” input areas.

It appears  that every PA RCT-101 that indicates a zero business apportionment percentage should be reviewed to ensure that the denominators,  “Total” and “ Inside  and Outside PA”  input areas indicate an appropriate positive amount  with respect to that entity AND NOT SIMPLY “0”.

Failure to represent the zero business apportionment as indicated above may result in the Department issuing a tax due notice based on 100% Pennsylvania business apportionment.

In our discussions with the Department, we were informally told that to rectify a notice for additional tax based on the above fact pattern the taxpayer may be required to  file with the Department a BOARD OF APPEALS PETITION FORM, REV-65 BA within the requisite time set forth in the Department notice for additional tax setting forth why the Department’s assessment is incorrect. 

This form may also be submitted electronically to the Department.  In order to submit this Form on line, please see the Department’s Board of Appeals Online Petition Center webpage.  This online process is very effective in that the State sends a confirmation with the appropriate time stamp within one day of submission. 

Slow And Steady Wins The Compliance Race

As an avid auto racing fan, I often hear winning race car drivers during their victory interviews say that they found that “slow and steady wins the race” and that slowing down at certain points on the race track actually resulted in their fastest laps.  Their advice may be applicable and valuable in preparing Pennsylvania corporate returns with zero business apportionment – slow down and complete your apportionment input to avoid potentially costly notices and petitions for appeal. 

Must Reads For Your Summer Leisure – New York Hits The Shore With A Wave of Sales Tax Bulletins and Advisories

Posted in Sales and Use Tax

beachEach year the joy of Summer seems to more quickly pass into the demands of the Fall.  Perhaps your summer, like mine, is a coveted time to catch up on non-technical reading.  However, last week the New York State Department of Taxation and Finance issued approximately 15 Sales Tax Technical Bulletins and several Technical Advisory Opinions that may warrant interrupting your summer easy reading and that should be on your Summer Multistate Tax Reading List as well.  To assist in your reading pleasure and efficiency, this post provides links to New York’s early August blast of sales tax technical releases .  The technical guidance addressed in these tech bulletins and advisory opinions may affect multistate taxpayers in numerous industries and warrants your attention. 

Tax Bulletins/Sales Tax

The Department issued the following Sales Tax Bulletins that provide insights, guidance and links to additional Department materials for the areas discussed:

TB-ST-107, Cartons, Containers, and Packaging Materials

TB-ST-113, Certificate of Capital Improvement – Exemption Form ST 124

TB-ST-126, College Textbooks – Exemption Form ST-121.4

TB-ST-128, Computer Software

TB-ST-190, Drop Shipments

TB-ST-193, Drugstores and Pharmacies

TB-ST-243, Exemptions for Computer System Hardware (Form ST 121.3)

TB-ST-253, Farmers and Commercial Horse Boarding Operators – Exemption Form ST-125

TB-ST- 315, Government Employee Occupancy of Hotel Rooms – Exemption Form ST-129

TB-ST-535, Live Dramatic and Musical Arts Performance – Exemption Form ST-121.9

TB-ST-665, Operators of Internet Data Centers (Web Hosting) – Exemption Form ST-121.5

TB-ST-692, Promotional Materials – Exemption Form ST-121.2

TB-ST-757, Racehorses – Exemption Form ST-126

TB-ST-890, Tractors, Trailers, Semitrailers, or Omnibuses – Exemption Form ST-121.1

Sales Tax Advisory Opinions

In addition, the Department issued several Sales Tax Advisory Opinions, TSB-A’s, in its early August release.  Of particular interest is TSB-A-14(23)S, in which the petitioner requested guidance as to  whether the transfer of tangible personal property to a New York limited liability company (LLC) in consideration for a pro rata share of interest in the LLC is subject to New York sales and use tax.  The Department in this TSB concluded that the transfer of tangible personal property to the LLC is not subject to sales and use tax.  As each TSB-A is highly fact sensitive, you may wish to review the petitioner’s specific facts in your evaluation of this TSB-A’s potential guidance value.

In addition, the Department issued the following Sales Tax TSB-A’s.  For convenience, we have included the Department’s description of each TSB-A as set forth in its August 11th announcement:

TSB-A-14(22)S, Whether sales tax is imposed on Petitioner’s receipts for the service of acting as facilitator in the acquisition from the Federal Bureau of Investigation of criminal history information about applicants for employment with a client of Petitioner.

TSB-A-14(24)S, Whether fines charged for violating parking rules and regulations are subject to sales tax in New York State.

TSB-A-14(25)S, Whether wasabi and soy seasoned almonds are subject to New York State and local sales and use taxes.

August In New York – Why We Love NY

Hopefully New York’s early August wave of sales tax technical guidance and advisory opinions will not significantly interrupt your summer fun and leisure.  Perhaps like many aspects of New York, they will just help make our summer a bit more interesting.  However, just as waves may be more intricate and powerful than first perceived, the Department’s wave of sales tax technical advice warrants careful review even during this season of leisure. 

As the ads for New York tourism  call out to us and  the NYS Fair this month in Syracuse  serves as just one example of why New York remains so attractive  to many I am  reminded of  why I LOVE NY-  it is never boring.

2014 Multistate Tax Road Trip – New Jersey Budget May Create Tax Traffic Headaches for Multistate Taxpayers

Posted in Corporate Income Tax, Nexus

trafficNew Jersey’s Fiscal 2015 Budget, signed by Governor Chris Christie on June 30, 2014, includes Assembly Bill 3486 which contains tax provisions that may increase multistate taxpayers’ New Jersey income taxes.  In addition, the bill includes “click-through” nexus provisions that may impose New Jersey sales tax nexus upon non-New Jersey entities.  This post will summarize some of the more significant portions of the bill that may result in New Jersey tax traffic headaches for multistate taxpayers.

Income Tax Concerns

A.B.3486 contains several provisions that may increase your New Jersey income taxes.

Operational versus Nonoperational Income:  Typically referred to as “business” versus “non-business” income in other states, the bill broadens New Jersey’s definition of “operational.”  Specifically, it defines “operational” income as “income from tangible and intangible property if the acquisition, management, or disposition of the property constitute an integral part of the taxpayer’s regular trade or business operations and includes investment income serving an operational function.”  Thus if any of the three factors are met, the income is deemed to be “operational” income.  Prior to the bill’s adoption, the definition of “operational” income required that all three factors had to be satisfied.  This provision is applicable to all tax years ending on or after July 1, 2014.

Net Operating Loss Adjustment for Debt Cancellation: The bill also provides for an “adjustment”, i.e. reduction, in a corporation’s New Jersey NOL, corresponding to the amount of income excluded from federal taxable income pursuant to the application of IRC Sections 108(a)(1)(A), (B), or (C).  This provision is applicable to all tax years ending on or after July 1, 2014 inclusive of any affected NOL carryover to such period.

Partnerships And New Jersey Non-Resident Partners:   As a result of A.B. 3486, nonresident partners must file a New Jersey tax return that reports income subject to tax in New Jersey in order to be eligible to apply the tax paid by the partnership which is credited to the nonresident partner’s partnership account against its tax liability.  In addition, A.B. 3486 indicates that a partnership cannot “claim a refund of payments credited to any of its nonresident partners.”  This provision is applicable to all tax years ending on or after July 1, 2014.

Each of these provisions may pose complex issues to multistate taxpayers that warrant further analysis.

Sales Tax Concerns: “Click-Through” Nexus Alert

The bill also expands New Jersey’s sales tax nexus by adopting a “click-through” nexus provision.  Pursuant to New Jersey’s new sales tax nexus provision a  “person making sales of tangible personal property, specified digital products, or services taxable under the “Sales and Use Tax Act,” P.L.1966, c. 30 (C.54:32B-1 et seq.) shall be presumed to be soliciting business through an independent contractor or other representative” if:

  • The person making sales enters into an agreement with an independent contractor having physical presence in this State or other representative having physical presence in this State;
  • The agreement calls for a commission or other consideration, under which the independent contractor or representative directly or indirectly refers potential customers, whether by a link on an Internet website or otherwise, and;
  • The cumulative gross receipts from sales to customers in this State who were referred by all independent contractors or representatives that have this type of an agreement with the person making sales are in excess of $10,000 during the preceding four quarterly periods ending on the last day of March, June, September, and December.

The presumption set forth by this provision “may be rebutted by proof that the independent contractor or rep with whom the person making sales has an agreement did not engage in any solicitation in the State on behalf of the person that would satisfy the nexus requirements of the United States Constitution during the four quarterly periods in question. Nothing in this subparagraph shall be construed to narrow the scope of the terms independent contractor or other representative for purposes of any other provision of the ‘Sales and Use Tax Act,’ P.L.1966, c. 30 (C.54:32B-1 et seq.).”

New Jersey’s “click-through” nexus provision applies to sales, transactions involving taxable services rendered and uses occurring on or after July 1, 2014.

 Takeaway Tax Traffic Alert – Be Prepared To Stop

I hope our summary of the significant tax provisions of A.B. 3486 provides a “tax traffic” alert of the potential New Jersey income and sales tax concerns that may affect multistate taxpayers.  As I always slow down and heed the messages on those highly effective electronic signs that now guide travelers along the New Jersey Turnpike, multistate taxpayers and their tax advisors would be well advised to be “prepared to stop” and fully review A.B. 3486  provisions for potential ramifications to their New Jersey income tax and sales tax nexus.