SALT Strategies

SALT Strategies

Updates & Commentary On State & Local Tax Law

Fall Clean Up – SALT Considerations When Merging or Liquidating Entities – Beware of Hidden State Tax Dangers in Those Leaves

Posted in Corporate Income Tax, Income and Franchise, Property and Other State/Local Tax Issues, Sales and Use Tax

fall-leaves-yard-cleanup-4Wow, October is almost gone! One of my favorite but perhaps most frustrating chores this month is raking the leaves. There are several huge Pin Oaks around my home that provide great shade in the summer and a blanket of leaves in the fall. I always rake the leaves into one or two huge piles for the children on my block who love to jump into the leaf piles. I always make sure that no branches or hard objects in my “merger” of leaves end up in the inviting pile of orange and gold.

The same can be said about raking up dangerous state and local tax objects during a seemingly innocuous merger or liquidation of related entities.

This will be the final post in our Fall Clean Up series. We will identify and briefly discuss some of those potentially significant dangerous state and local tax “hard objects” that may be hidden in the leaves of a seemingly“innocuous” merger or liquidation of related entities.

Successor State Tax Liability Considerations      

As we pointed out in our April 2014 post Could You Be Liable Under NY’s Recent “Bulk Sale”

Guidance – Even if You’re Not a Buyer? even transactions that are “tax-free” for multistate income, sales and use tax purposes may create a bulk sale filing responsibility as well as create “Successor Liability,” i.e. create potential transfer of liability of one entity to another entity.

Consider if Company A, which has significant sales and use tax issues in open tax years, is merged into or liquidated into Company B, another commonly owned entity. The affected states in which Company A had legacy sales and use tax issues may now pursue satisfying their claims arising from Company A’s activities against Company B’s assets. Of course the opposite may be true as well with respect to Company B’s legacy sales and use tax issues.

Therefore, each affected state’s bulk sale filing and successor liability provisions should be considered prior to merging, liquidating or transferring operations among commonly owned and controlled legal entities. It should be noted that “successor liability” tax provisions, though historically primarily applicable to sales and use tax liabilities, are now being expanded to include other state taxes including gross receipt, net income and employer payroll taxes.

State Employment Tax Ramifications

State employment tax compliance and employer tax rate considerations are highly entity specific and sensitive. Merging or liquidating an entity may result in loss of that entity’s favorable employment tax attributes – i.e. the entity’s legacy unemployment experience rate. Equally disconcerting, merging or liquidating an entity with less favorable employment tax attributes into a new or existing entity with more favorable employment tax attributes may be considered “SUTA Dumping” – State Unemployment Tax dumping. See the SUTA Dumping Prevention Act of 2004 that President Bush signed into law in 2004.

In its May 2014 Industry Insights issue, Tax Intelligence: State Initiatives to Detect SUTA Dumping, Equifax provides an excellent summary and starting point in understanding the potential breadth and seriousness of this issue. As indicated in the discussion, “The Act was intended to prohibit certain perceived abuses of the state unemployment insurance (“SUI”) system….” The bulletin further states that “The Act continues to have significant implications to employers undertaking merger or acquisition (M+A) transactions.…”

It is critical that complete analysis of the potential SUTA ramifications be thoroughly vetted with a SUTA expert before any entities that historically, presently or prospectively have employees are merged or liquidated.

State Tax Credit and Incentive “Claw-Back” and Transferability Considerations

As noted, state and local tax credits and incentives are highly entity specific. Such tax credits and incentives are often based on both historic as well as future activities of the entity that seeks the credit or incentive. Merging or liquidating an entity that has qualified for a state tax credit or incentive may have significant ramifications on both the historic credit taken as well as the ability to continue to take the credit in the future.

First, many state and local tax credits or incentives may have “claw back” provisions. These provisions may require an entity that has received the benefit or a credit or incentive to pay back prior credits or incentives received if that entity does not continue to meet the credit’s or incentive’s threshold criteria. Such threshold criteria are required to be maintained throughout a period set forth by the state or locality that may extend for a significant time beyond the initial year of the credit or incentive.   Merging or liquidating the entity into another related entity may inadvertently and retroactively disqualify the entity that received the credit or incentive.

Equally important, the “credit” or “incentive” may be entity specific – i.e. not transferrable to another entity, even a related or successor entity. Merging or liquidating an entity that has taken or will be eligible for state and local tax credits or incentives may result in a “claw back” as well as loss of future benefits of the credit or incentive by the successor entity.

A comprehensive review of the potential state tax credit ramifications arising from the merger or liquidation of an entity that has or is taking state tax credits or received state or local incentives should be completed before commencing any merger or liquidation of such entity.

State Tax Exams, Appeals and Collection Implications

A careful review of an entity’s current, as well as past, state tax exam status should be completed prior to the merger or liquidation of the entity. Equally important, such an entity’s state tax exam status should be completed prior to transferring a related entity’s assets to the entity, merging or liquidating a related entity into the entity in question.

There are numerous, potentially costly, state tax ramifications that may arise from not adequately vetting an entity’s state tax exam status.   The following are some of the state and local tax exam considerations that you should fully vet before commencing the merger or liquidation of an entity under state tax exam:

  • State Tax Clearance Concerns: If an entity is under state tax exam, that state may not give tax clearance to the entity prior to the close of the current exam.
  • Expansion of Years under Exam: Upon providing the often requisite notification to a state that an entity may be liquidating, if the entity is already under state tax exam by that state, the state may extend the period under exam through to the current tax year.
  • Acceleration of State Tax Exam Assessment: Additionally, upon notifying the State that the entity it is auditing is being merged or liquidated, the State may accelerate its determination of the assessment, thereby limiting the opportunities for submission of additional documentation or informal negotiations.
  • Negative Affect or Procedural Issues on State Tax Appeals: The precise status of each state exam and appeal of a state tax assessment should be known and reviewed prior to merging or liquidation of the entity. The state tax appellate procedures, especially notification or representation, should be carefully reviewed before the entity is merged or liquidated.

Finally, keeping in mind the Successor Liability concerns indicated above, merging or liquidating a related entity into an entity already under state tax exam may significantly increase the assets that the state may attach or pursue in settling a potential assessment against that surviving entity.

Trick or Treat – Don’t Let the Merger or Liquidation of an Entity Result in State Tax BOOs!

Well, it’s almost Halloween. Each year, my wife and I, in an attempt to avoid leftovers, seek to purchase just the correct amount and mix of “treats” to dispense to our assortment of funny, cute and imaginative Halloween visitors. This year I even sought out more expert advice and checked the CDC’s Halloween Health and Safety Tips and the FDA’s Halloween Food Safety Tips for Parents.  Hopefully our Fall Clean Up series has been helpful in assisting those of you who are considering merging or liquidating related entities from experiencing state tax tricks instead of reaping state tax treats from your reorganization endeavors. Have a Happy Halloween!



State Tax Incentives – Dig Deep to Make Sure the Benefit is Worth the Effort

Posted in Corporate Income Tax

States are trying to outdo each other these days in trumpeting tax incentives to boost economic development in their areas. Although the benefits can potentially be vast, the hidden costs to applying for, and then complying with these incentives, can (and should) make business owners question whether the benefit is worth the effort.

How do you decide whether these incentives are right for you?

Before applying for any of these credits in your state, it makes good business sense to take a step back and really understand the cost/benefit of each incentive or credit.

Credits and incentives are enacted into law by the state’s legislative body and made to sound very attractive. However qualifying for these credits can be quite rigorous and the application process lengthy. Frequently a taxpayer must prequalify for the incentive with a specific state agency such as Economic Development or Environmental Protection, depending on the credit. The requirements imposed for eligibility can be very demanding. For instance, the New York State Excelsior Jobs Program provides incentives and tax credits for businesses that create jobs and invest in targeted industries such as biotechnology, pharmaceutical, high-tech, clean-technology, green technology, financial services, agriculture and manufacturing. In order to be eligible for the program, a business must fill out a lengthy application showing that it meets specific program criteria, is operating in one of the targeted industries and provide detailed project descriptions including prior and projected financial information.

Once a taxpayer is deemed qualified the task of insuring that taxpayers are eligible for the specific credits is generally handed to the State tax department. Once you qualify and apply for the credit – you face the very real possibility of an audit. In order to comply with an audit, the record keeping burden could be enormous and frequently overwhelming. For instance in order to obtain the jobs credit under the Excelsior Jobs Program, the taxpayer must maintain detailed records of employees to show that that new full time jobs have been created in the state and last for at least six months.

Below are some guidelines for deciding whether an incentive or tax credit makes sense for you and your business.

  1. Make sure you understand all the requirements and prerequisites needed to qualify for the particular credit or incentive you are applying for. Also be aware of any deadlines that must be met.
  2. Calculate the net financial benefit of the incentive, taking into account all professional fees and other costs that are involved. You don’t want to pay more to obtain the incentive than it is actually worth.
  3. Be certain that you have the documentation that can withstand an audit. You certainly don’t want to go through all the trouble of applying for a tax credit and then having it denied.

Fall Clean Up – SALT Considerations When Merging or Liquidating Entities – Take Time To Step Back To See The Potential

Posted in Corporate Income Tax, Nexus

leaves-rake-670Here in the Northeast, this Fall season has been filled with tranquil weather that invites us to get out for that last round of golf, long bike ride or outdoor exercise without being concerned about bundling up. However, Northeasterners know that this Fall’s tranquility should not lull anyone into complacency about how demanding the upcoming Winter might be.

Neither should multistate business tax advisors nor management be lulled into complacency about the potentially significant immediate and long term state tax ramifications that may arise from not timely and comprehensively planning the state tax process around the liquidation or merger of related entities.

In this post, we will continue our discussion from our previous Fall Clean Up – SALT Considerations are Crucial When Merging or Liquidating Corporate Entities.

 Loss of State Income Tax Attributes

In reviewing the potential state tax ramifications that may result from merging or liquidating one or more entities, the following should be completed before taking the plunge:

  • careful identification, review and analysis of potential loss of state income tax attributes, i.e.
    • net operating losses
    • state versus Federal tax basis differences
    • eligibility for industry specific state tax benefits

For example, in some states a corporation’s Net Operating Losses (“NOLs”) may be lost if the corporation that generated the NOLs is not the surviving entity in a corporate merger.

The loss of such attributes may have immediate and significant financial statement consequences. For example, let’s assume that:

  • Corporation A files in 20 states and has a $10 million net operating loss carryover attributable to State X.
  • For financial statement purposes, there is not a valuation allowance established for the deferred tax asset attributable to Corporation A’s net operating loss in State X.
  • Parent Company seeks to merge Corporation A into its affiliate Corporation 1 or liquidate Corporation into Parent Company.
  • State X’s corporate tax rate is 9%.
  • State X’s statutes, regulations and administrative guidance indicate that if a corporation that has a net operating loss carryforward is merged out of existence or liquidated up into its parent, that corporation’s net operating loss is not an attribute that survives to the successor entity to the merger or to the parent.

Result: Merging Corporation A into Corporation 1 or liquidating Corporation A into Parent Company will result in a $900,000, pre-Federal benefit, state tax cost on Corporation A’s financial statements. Why? Because Corporation A’s net operating loss in State X will disappear upon its merger into Corporation 1 or liquidation into Parent Company. Once either is done, the state tax benefit of Corporation A’s net operating loss in State X is gone forever!

State Income Tax Filing Methodology and Apportionment Considerations

Merging or liquidating related corporations into affiliated entities may have significant costly state income tax filing methodology and apportionment ramifications. Such ramifications may not be limited to only separate return state filings.

Let’s look at the following example and assumptions:

  • Corporation A files in 5 states in which it has locations and employees.
  • Corporation A’s sales into State X are $50 million. Its total sales are $100 million.
  • Corporation A’s state taxable income is $10 million
  • Corporation A does not have any nexus in State X as its activities are limited to those protected under Public Law 86-272.
  • State X applies a Receipts factor only to apportion income to the state.
  • State X is a separate return state for corporate income tax purposes.
  • State X’s corporate tax rate is 9%.
  • Corporation B files in State X. Corporation B’s total sales are $50 million of which $40 million are in State X.
  • Corporation B’s state taxable income before apportionment is $1 million.
  • Company management wishes to merge Corporation A into Corporation B – which we will call Bigger Corporation B.

The merger of Corporation A into Corporation B results in an increase in Bigger Corporate B’s tax in State X of $522,000. Why? Because prior to the merger, Corporation A’s income was not subject to State X corporate income tax as Corporation A did not have corporate income tax nexus in State X. Post- merger, the Bigger Corporation B’s income increased by $10 million to $11 million. Although Bigger Corporation B’s receipt factor decreased from 80% to 60%, legacy Corporation A’s income of $10 million was now apportioned to State X at a 60% apportionment factor and subject to State X tax of 9%.

As the above example demonstrates, merging or liquidating a related entity may increase the organization’s corporate income tax in separate returns states.

However, in addition, such mergers or liquidations my also increase the organization’s corporate income taxes in combined states that follow the Joyce rule with respect to combined member entities.  A concise summary of the Joyce rule versus the Finnigan rule  may be found at an article in titled   Franchise Tax Board Adopts Regulations to Implement the Finnigan Rule 

Proper Fall Preparation Facilitates Winter Ease Of Mind

Just as indicated in Kiplinger’s 15 Ways to Prepare Your Home For Winter, comprehensive state tax due diligence and analysis done in the “lull” of the pre-merger time should minimize post-merger and liquidation sleepless nights.


Fall Clean Up – SALT Considerations are Crucial When Merging or Liquidating Corporate Entities

Posted in Nexus, Sales and Use Tax

suddenlyautumnFall is a beautiful time of year – a time for cleaning up our gardens and preparing for the rigors of winter. It’s also when many organizations review their budgets in preparation for their next fiscal year – which is where they can run into state and local tax trouble.

One of the more common corporate activities at this time of year is the “cleaning up” of a company’s legal organization chart. During this time, management reviews its entities and decides whether the organization should consolidate its operations – often leading to the liquidation or merger of several entities.

Such consolidations can result in significant and onerous state and local tax consequences and costs. This post is the first of a series that identifies some significant and immediate state and local tax considerations that multistate taxpayers and their advisors must consider before their organization merges, liquidates or forms new entities within their organization structure.

Future posts will do a deeper dive into other SALT issues that can crop up when companies clean up their legal entity charts.

Multistate Tax Organizational Considerations

Despite the very real state and local tax effects of these kinds of entity cleanups, countless management, corporate counsel, external business “consultants” and IT executives have innocently asked me, “What could possibly be the state and local tax costs of liquidating or merging two or more commonly owned entities?”

I usually take a deep breath and then inform them that there are significant considerations and ramifications they need to address before an organization with multistate operations merges, liquidates or modifies their organization or operations. Perhaps the most important of such considerations is Nexus.


Careful analysis of the state income, gross receipt, sales and use tax nexus ramifications arising from the merger, liquidation or modification to an organization’s entity structure chart should be completed prior to any change in operations or organization structure. A merger or liquidation may result in significant change in an organization’s state tax compliance responsibilities as well as tax increased state tax costs.

Consider Company A, which has sales tax nexus in 30 states but sells its product exclusively to exempt entities, i.e. non-end-users, for which it has all of the appropriate exemption certificates in its files. Company B (its parent or sister entity) only files in five states common to Company A.   Company B sells its products to taxable customers as well as exempt customers. The organization seeks to merge or liquidate Company A into Company B.

Prior to merging or liquidating Company A into Company B, a thorough analysis of Company B’s new sales tax compliance requirements must be undertaken – most notably, Company B may be required to register in each of the additional 25 states where Company A has sales tax nexus. Company B may be required to charge sales tax in each of those additional 25 states. Finally, more likely than not Company B will be required to get new exemption certificates from all of Company A’s legacy customers. Why? Post-merger or liquidation of Company A into Company B, Company B will be the vendor and the resale certificates received by Company A’s customers were issued with Company A as the vendor.

State and Local Transfer Taxes

States and localities have specific transfer tax, recording fees and registration costs that may be triggered when a related entity is merged or liquidated into a sister or parent entity. The most common of such transfer taxes is sales tax.   The potential sales and use tax ramifications must be thoroughly reviewed prior to the merger or liquidation of commonly owned or controlled entities.

In addition, a thorough analysis and careful consideration of the potentially numerous state and local transfer taxes, recording fees and real property lien or mortgage taxes should be completed prior to the commencement of any merger or liquidation of any entity into its sister or parent entity.

Timing Is Everything !!!

Each of these considerations has a common and potentially costly common concern – timing. The state and local nexus and transfer tax considerations must be undertaken before the liquidation, merger or consolidation of related entities.

The following illustrates the potential danger and significant cost of delaying the analysis. Let’s continue with our earlier example’s assumptions.

  • Company A is a registered vendor and files sales and use tax returns in 30 states.
  • Company A will be merged into Company B that files sales and use tax in only 5 states in common with Company A.
  • Company A has $10 million of inventory, therefore has nexus, is registered as vendor for sales tax and files sales tax returns in State X.
  • Company B does not have nexus nor is it registered as a vendor for sales tax in State X.
  • As part of the merger, Company A will be transferring its $10 million of inventory located in State X to Company B – remember Company B is not registered as a vendor in State X.
  • Let’s assume that State X’s sales tax rate is 8%.

If Company B does not become a registered vendor in State X before Company A transfers its inventory located in State X to Company B, the transfer of the inventory may become subject to sales tax even though Company B will be reselling all of Company A’s inventory!

Why? State X could successfully assert that Company B is not eligible to rely on the State X’s resale exemption provisions. Why? First, State X’s exemption provisions require that in order to be eligible to rely on a resale certificate, the “purchaser” or transferee entity must be registered as a vendor for sales tax in State X. Company B is not registered as a vendor in State X. Secondly, State X has “non cure” provisions that do not permit retroactive documentation of an exemption – so Company B can’t register after the transfer takes place and “retroactively” cure the deficiency. Lastly, State X does not accept another state’s resale certificate or the MTC UNIFORM SALES & EXEMPTION /RESALE CERFICIATE – MULTIJURISIDICTION exemption certificate.

Result: This “tax-free” merger just cost Company B $800,000 in sales tax because the necessary SALT analysis was not completed before the transaction!

Prune Carefully

As with a tree, pruning an organization’s legal entity structure is valuable, if not essential, to the long term heath of the organization. Great care and consideration of the many state and local tax consequences should be completed prior to undertaking the “pruning” of an organization’s legal entity structure.

Make sure you coordinate your organization’s legal entity pruning with your state tax experts. Failure to do so may be extremely costly and hurt the organization as a whole.

Tax Havens – “Water’s Edge” Combined Reporting is Moving Further Abroad

Posted in Corporate Income Tax, Income and Franchise, Nexus

waters-edgeThe initial principle of “Water’s Edge” combined reporting was to require combined reporting for affiliated domestic companies that are engaged in a unitary business. Some states have added foreign companies to the Water’s Edge group. These are companies that have a limited United States presence (20% or more) as long as they are part of the affiliated group and engaged in a unitary business.

An even more recent trend is states pushing to include companies in Water’s Edge reporting whose affiliates are doing business in overseas “tax havens” – regardless of the amount of U.S. activity they have conduct. Over time, states have been pushing the envelope to make water’s edge less and less water’s edge.

Companies that are part of a Water’s Edge combined group all include their income and apportionment factors when calculating the particular combined state tax liability. In general, these combined groups have consisted of:


  • U.S. corporations included in a federal consolidated tax return
  • Corporations incorporated in the U.S.
  • Foreign corporations with a certain threshold of U.S. business activities (80/20 corporations)
  • U.S. corporations that have more than 50% of their voting stock owned or controlled by another U.S. corporation.

Lately, states like Washington DC, Florida, and Maine – just to name a few – have been adding affiliates engaged in a unitary business that are located in overseas “tax haven” countries to the Water’s Edge mix.

Tax havens can be defined as

  • countries that have tax rates lower than that of the U.S. by a certain threshold percentage
  • tax regimes that lack transparency, or are favorable for tax avoidance

As an alternative, a state’s laws may have a “blacklist” of countries that are considered tax havens. The countries in the states’ blacklists may overlap, to a certain degree, but are not exactly identical. The number of blacklisted countries/territories is in the dozens for most states, with the US Virgin Islands being among them. The intent of expanding water’s edge combined reporting appears to be to prevent multinational corporations from shifting U.S. earned income to these tax havens.

Opponents of these “expanded” groups argue that the states’ definitions of tax haven countries are too vague and violate the due process clause. They also argue that this practice taxes foreign source income that is statutorily excluded from U.S. state taxation. In addition, they argue that including these companies located in tax havens creates a substantial risk of multiple international taxation, which violates the Commerce Clause.

What can’t be argued is that more and more states including companies located in tax havens in their combined returns. As unfair as it may seem, tax practitioners need to be aware that it is happening.

Connecticut Law Boosts Tax Revenue from Multistate Corporations

Posted in Corporate Income Tax, Personal Income Tax, Sales and Use Tax

conneticutt_nutmeg_stateConnecticut is known as the “Nutmeg State” because its early settlers were considered ingenious and shrewd for recognizing the value of nutmeg and selling it to travelers.

Early this summer, the state lived up to its shrewd reputation when its General Assembly passed a budget bill containing provisions that would (among other provisions) increase tax revenue from multistate corporations that operate their businesses through separate entities.

On June 4, 2015, the Connecticut General Assembly passed House budget bill H.B 7061 (The New Law).  The New Law includes tax changes that would affect corporate income tax, personal income, and sales and use taxes.   A quick review of the law reveals a tried and true approach aimed at increasing the State’s corporate income tax revenue from multistate corporate taxpayers that operate their business through separate corporate entities.   In addition, the law may have ramifications on Connecticut personal as well as sales taxpayers.

Corporate Tax Provisions

Adopting Mandatory Combined Reporting

Effectively for tax year beginning on or after January 1, 2016, members of a group of companies that have common ownership, are engaged in a unitary business and have at least one company is subject to corporation income tax must file combined reporting. The taxpayer will be deemed to meet the definition of “common ownership” if :

“more than 50% of the voting control of each member of a combined group is directly and indirectly owned by a common owner or owners either corporate or noncorporate, whether or not the owners are members of the combined group.”

“Unitary business” will apply to a group of companies if the companies operates as “a single economic enterprise that is made up either of separate parts of a single business entity or of a group of business entities under common ownership, which enterprise is sufficiently interdependent, integrated or interrelated through its activities so as to provide mutual benefit and produce a significant sharing or exchange of value among such entities, or a significant flow of value among the separate parts.”

A combined group may make an election to have the combined group filed on world-wide basis or affiliated group basis.

Extending Corporate Income Tax Surcharge

The temporary 20% corporation income tax surcharge is extended for two years (through 2017). The surcharge will be reduced to 10% beginning on or after January 1, 2018.

Net Operating Loss Limitation

Beginning on or after January 1, 2015, the amount of net operating loss corporations may carry forward is limited to the lesser of

50% of current year net apportioned income, or
the excess of net operating loss over the NOL being carried forward from the prior year.
Tax Credit Limitation

Beginning on or after January 1, 2015, the amount of tax credit is reduced from 70% to 50.01%.

Personal Income Tax – Rate Changes

Beginning on or after January 1, 2015, the marginal tax rate is increased to 6.9% from 6.7%. For taxpayers whose income is more than $500,000 for single or $1M for married couples, the taxable income is subject to 6.99%

Trust and Estate Tax – Rate Changes

The trust and estate income tax rate is increased to 6.99% from 6.7%.

Sales and Use Tax

Effective July 1, 2015, the luxury goods tax rate is increased from 7 percent to 7.75 percent. Luxury goods include cars, jewelry, clothing or footwear costing more than certain amounts.





Is the U.S. Supreme Court Wynne Decision A Winner For You – Not Just For Maryland Residents?

Posted in Corporate Income Tax, Person Income Tax, Property and Other State/Local Tax Issues

maryland.sealIn a recent decision, the U.S. Supreme Court held that Maryland’s failure to allow a credit against the local portion of Maryland personal income tax for taxes paid to another state was unconstitutional.

The decision, Comptroller of the Treasury of Maryland v. Wynne, May 18, 2015, lay the groundwork for potential refund opportunities for residents other than Maryland, including New York City residents who have paid personal income taxes to other states on income that was also subject to New York City personal income tax.

Wynne Facts and Holding Summary

In a 5-4 decision, the Supreme Court in Wynne held that the failure of Maryland’s personal income tax provisions for residents to permit a credit against the County portion of the State’s personal income tax for taxes paid to other states on pass-through income from an S Corporation was unconstitutional.  It should be noted that the County portion of the Maryland’s personal income tax may be applicable to both residents as well as non-residents of the State.

Wynne Decision’s Potential Benefit To New York City Residents

New York City personal income tax provisions do not allow a credit for personal income taxes paid to other states.  For example, if a New York City resident pays California personal income tax on a portion of their income, New York City’s personal income tax provisions do not permit any credit for the tax paid to California.  Since California’s top tax bracket has consistently been higher than the top New York State tax rate, New York City residents are effectively paying the California tax on California source income plus New York City tax on the same income.  The New York State tax would have been eliminated by a partial credit of the California tax paid.


As in auto racing and life, timely action is the key to success.  We are closely monitoring New York’s response to the Wynne decision.  It  may prudent for taxpayers who are New York City residents to file protective refund claims for the appropriate credit for personal income taxes paid to other states that have higher tax rates than New York State (such as California).  In particular, the statute of limitations for those who may wish to pursue a refund claim should consider that the New York City personal income tax return statute for claiming a refund of 2011 taxes paid generally expires no later than October 15, 2015 for clients who extended their 2011 individual tax return.  Therefore, protective refund claims may be advisable prior to that time in order to preserve potential refund claims for the 2011 year.

Is Congress Breathing New Life into the Marketplace Fairness Act?

Posted in Nexus

stay_tunedAs we noted in several of our posts, adoption of the Marketplace Fairness Act would subject numerous remote vendors to sales tax nexus in states that they presently may not have any physical presence or nexus. The Marketplace Fairness Act has been a lightning rod with as many proponents as opponents. To date it has yet to be hammered into the law of our Land.

Earlier this year, we noted that Congress might pick up the thorny issue of long-arm sales tax nexus with the introduction of a new version of the Marketplace Fairness Act as well as a competing origin based alternative.

Avalara recently penned an incisive and well-written summary of where the issue stands now in Congress and with the interest groups who have a stake in the outcome.  Could 2015 finally be the year some version of the Act passes Congress and starts affecting your clients?

Stay tuned.


New York State Tax Department Switches Banks – Affecting Taxpayers with Debit Blocks on Their Accounts

Posted in Income and Franchise, Personal Income Tax, Property and Other State/Local Tax Issues, Sales and Use Tax

BankThe New York State Tax Department is switching banks – and that should make you sit up and take notice if you or your clients use debit block services to electronically pay one or more New York State taxes.

You only have until June 25, 2015 to contact your bank and have them add the new bank account information. If you don’t, your bank could reject your next payment and you may also get a bill from the state for the amount due – including penalty and interest.

Debit block services are employed to protect bank accounts from unauthorized electronic charges. Your bank will only permit and process authorized transactions.

If you are currently authorizing the NYS Tax Department to deduct payments from a bank account and there is a debit block on that account, you need to do the following:

  • Contact your bank to add the State’s new company IDs and names to the bank account.  The State asks that you not remove the old company ID.
  • Add the new information for each type of payment you make.  Each payment type, including unemployment insurance, has its own company ID and name.

Affected taxpayers should review the full memo on the NYS Website for full details.

And remember, these steps must be completed by June 25, 2015 for future payments to be successful.



Taxpayer “Victory” in Direct Marketing Case – But Multistate Retailers Shouldn’t Do the Snoopy Dance of Joy Just Yet

Posted in Sales and Use Tax

snoopyhappyIn a seeming victory for online retailers, the U.S. Supreme Court last week ruled that the Tax Injunction Act does not bar a retailer from bringing a suit in federal court. The suit originally brought by the Direct Marketing Association involved whether Colorado could force online retailers to report purchases made by their Colorado customers for tax purposes.

The Tax Injunction Act  holds that federal district courts are barred from hearing a state tax case  if the state courts could easily address the issue themselves. But the high court overturned an appeals court ruling that the TIA barred the district court from hearing the suit  regarding  Colorado legislation  HB10-1193. This law required “non-collecting retailers” with Colorado sales in excess of $100,000 to notify the State and the purchaser of the purchaser’s use tax liability.

While the high court ruling was a victory for online retailers, it may be premature to start doing Snoopy’s happy dance and multistate retailers should be cautiously enthusiastic. In his concurring opinion, Justice Kennedy appears ready to take on a larger issue that could strike even greater fear into the online retail community – in clear language, he indicates his desire to limit – if not overturn,  the Quill decision.

Key Take Away From the Court’s Decision

Justice Thomas’s opinions set forth several significant legal findings. First, the Court found that the Tenth Circuit’s finding that TIA barred DMA’s suit was incorrect. The Tenth Circuit’s determination that TIA was applicable to DMA’s suit versus Colorado was wrong due to the Tenth Circuit’s broad interpretation of the TIA’s term “restrain.”The Court held that by applying the Congressional intended interpretation to the TIA’s “restrain,” a suit against a state “cannot be understood to “restrain” the “assessment, levy or collection” of a state tax if it merely inhibits those activities.”

Secondly, it did not take a position on whether DMA’s suit might be barred under the “comity doctrine.” Justice Thomas’ decision, citing Levin v. Commerce Energy, Inc., 560 U. S. 413, indicates that the “comity doctrine” may bar DMA’s suit based on its principle that “counsels lower federal courts to resist engagement in certain cases falling within their jurisdiction.”  Thomas added that pursuant to this doctrine federal courts are to refrain from “interfer[ing] . . . with the fiscal operations of the state governments . . . in all cases where the Federal rights of the persons could otherwise be preserved unim­paired.” The Court left it to the Tenth Circuit to determine “whether the comity argument remains available to Colorado.”

Finally, Justice Thomas’ opinion indicates that the Court, in its ruling that the TIA does not bar DMA’s suit in federal district court, is not expressing a view “on the merits of” the case’s claims and “remand the case for further proceedings consistent with this opinion.”

Justice Kennedy’s “Concurrence” Should Concern Multistate Retailers

Justice Kennedy’s concurring decision provides a valuable window into at least one of the Justice’s desire to revisit the Court’s decision in Quill. As Justice Thomas notes in his opinion for the Court, it is in the Quill decision that the Court established the precedence that “under our negative Commerce Clause precedents, Colorado may not require retailers who lack a physical presence in the State to collect these taxes on behalf of the Department. See Quill Corp. v. North Da­kota, 504 U. S. 298, 315–318 (1992).”

Justice Kennedy’s concurring opinion stridently sets forth his view that Quill was “[A] case questionable even when decided…” and that Quill now harms the States “to a degree far greater than could have been anticipated earlier.”

Lucy_footballOne may wonder why Justice Kennedy felt it necessary to set forth his view on Quill in his concurring opinion to the Court’s decision in DMA. Especially since the Court’s decision in DMA expressly does not address DMA’s constitutional arguments against Colorado’s statute as set forth in the district court.

Justice Kennedy’s concurring opinion appears to tacitly provide an answer. In his opinion, he  discusses the concept of “stare decisis.” “Stare Decisis,”   as defined in Cornell University Law School’s Legal Information Institute website, is a concept based on the translation and interpretation of the phrase: “to stand by things decided.” Stare decisis is essentially the doctrine of precedent. Courts cite  stare decisis when an issue has been previously brought to the court and a ruling already issued. Generally, courts will adhere to the previous ruling, though this is not universally true.

Justice Kennedy’s opinion, citing Pearson v. Callahan 555 U. S. 223, 233 (2009), is that the Court’s adherence to the stare decisis is “weakened where “experience has pointed up the precedent’s shortcoming.”  Kennedy’s concurring opinion appears to be referring to Quill when he continues “It should be left in place only if a powerful showing can be made that its rationale is still correct.”

Justice Kennedy’s concurring opinion concludes with the following:

“The instant case does not raise this issue in a manner appropriate for the Court to address it. It does provide, however, the means to note the importance of reconsider­ing doubtful authority. The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.”

According to The Law Dictionary’s definition of “CONCURRING OPINION” as contained on its website, a concurring opinion is “an opinion that is given by another authority that is in agreeance and upholds the opinion of the first authority.”  Justice Kennedy’s “concurring opinion” in the Court’s decision in DMA appears to interpret the term “agreeance” quite broadly.

Caveat Emptor

The take away from the Court’s decision is ”caveat emptor” for both multistate retailers and those Colorado purchasers from “non-collecting retailers.” First, the Court’s decision is limited to its finding with respect to the TIA. Next, the Court’s opinion points the Tenth Circuit to revisit whether the “comity doctrine” bars DMA from bringing the suit in the federal district court. Finally, Justice Kennedy’s concurring opinion clearly indicates his desire to “reexamine Quill and Bellas Hess.” This taxpayer friendly decision should be viewed in context of the concurring opinion. In such context it is representative of a successful battle in a continuing conflict between the States’ desire for sales tax revenue and the current Constitutional limitations upon them.