SALT Strategies

SALT Strategies

Updates & Commentary On State & Local Tax Law

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.

 

2014 Multistate Tax Road Trip – Detour – New York Issues Nonresident Audit Guidelines with Comments on Gaied Decision

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

As I was finalizing some research addressing a New York nonresident issue, I was pleasantly surprised to discover that the State of New York Department of Taxation and Finance just issued its 2014 Nonresident Audit Guidelines. It appears that these revised guidelines incorporate the State’s view of the ramifications arising from the  recent New York State Court of Appeals  decision, In the Matter of John Gaied, Appellant, v New York State Tax Appeals Tribunal et al., Respondents .

In the Gaied court decision, the New York Court of Appeals significantly limited what is considered a permanent place of abode with respect to a statutory residence for New York State personal income tax purposes.  The 2014 Guidelines on page 54 presents the NYS Department of Taxation and Finance’s initial formal guidance on how the department views the ramifications of the Gaied decision.

The Audit Guidelines, as well as a review of the Gaied decision, provide valuable insights for tax advisors who may have clients that are presently under  residency exams by New York State, as well as those seeking to provide guidance to clients that may meet the criteria of a statutory resident.

 

2014 Multistate Tax Road Trip – Setting Out On The Dynamic Highway Known As State Tax Nexus – Some Basics For the Nexus Entrance Ramp Discussion

Posted in Corporate Income Tax, Nexus

 

As we launch our 2014 Multistate Tax Road Trip, we will stop periodically at areas that despite their familiarity still warrant our time and attention.  Today, we will visit with the concept of nexus.  Even in 2014, state tax nexus continues to be a lightning rod for discussion, controversy and concern.  Let’s begin our journey with a brief pit stop at corporate income tax nexus.

State Tax Nexus

Before a state can subject an entity that has derived income from interstate commerce to one or more of its taxes, the state must establish that the company has “nexus.”  In general, state tax “nexus” is the minimum level of contact or activity within a state necessary for a state, city or locality to constitutionally subject an entity to that state, city or locality’s tax provisions and potentially taxation.

In theory, each state may independently adopt state tax “nexus” or “doing business” provisions that define the level of activity or connection that is necessary to establish nexus for the respective state’s taxes.  However, every state’s nexus provisions as well as each state’s application of their provisions must comport with the limitations as set forth by the U.S. Constitution, i.e. in the Commerce and Due Process Clauses, as interpreted by the U.S. Supreme Court decisions and federal statutes that define nexus.

Nexus – The Type of State Tax Matters 

Subject to the limitations mentioned above, states may have established specific state nexus thresholds for different state taxes; i.e. net income, franchise taxes based net worth or capital, gross receipts or sales taxes.  During our road trip, we will discuss the historic as well as the recent state tax income and sales tax nexus issues facing multistate taxpayers.

Corporate Income Tax Nexus – Some Context

Historically, corporate income tax nexus provisions typically required that the out-of-state corporation derive revenue from sources within the state and that the out-of-state corporation have some physical presence in the state.  Recently, states began to adopt ever increasingly aggressive nexus provisions – factor based and economic based corporate income tax nexus provisions.  

As businesses began to generate revenue from interstate commerce without having physical presence in remote states, state corporate income tax nexus provisions evolved by eliminating the physical presence requirement from their corporate income tax “doing business” and nexus provisions

In general, factor based state tax nexus provisions define the level of contact with the state necessary to subject a remote corporation to the state’s tax provisions based on the remote corporation’s receipts, payroll or property in the state.

Economic based state tax nexus provisions define sufficient contact with the state based only on the remote corporation’s receipts determined to be sourced to the state pursuant to the state’s revenue apportionment/allocation provisions.

Therefore, a corporation may be deemed to have sufficient nexus in a state that applies an economic nexus standard without having any physical presence or activities in the state. 

Public Law 86-272  may provide out-of-state entities (whose state activities are limited to the mere solicitation of orders for the sale of tangible personal property that are accepted and shipped from outside the state) with potential immunity from being subject to state taxes based on or measured by net income. 

In general, if a corporation’s activities in a state are limited to those permitted under P.L. 86-272, state factor based and economic based state corporation under the law.

However, as revenue streams broaden beyond those exclusively derived from the sale of tangible personal property, the potential protection afforded by P.L. 86-272 may become increasingly limited.

In addition, the application of such factor based and economic based nexus provisions may have significant state tax ramifications in states that have also adopted mandatory combined filing requirements for entities that are determined to be members of a unitary group.  

The Take Away – Don’t Rely On Same As Last Year {“SALY”} Assumptions

Now more than ever, states’ increasing dependence upon  factor based and economic based nexus standards demand that multistate businesses continuously monitor their activities, vendor relationships and related party transactions.   Relying on SALY nexus analysis in determining your corporate income tax nexus may have significant and costly state tax ramifications.

Our next post will explore the inter-play of factor based and economic based nexus provisions with the corporate income tax nexus benchmark, Public Law -86-272.  There may be some good news for businesses – recent court decisions appear to signal reluctance by certain state courts to accept factor based or economic based corporate income tax nexus provisions without some additional connection to the state by the out-of-state taxpayer. 

 

 

State Tax Consulting – Our 2014 Multistate Tax Road Trip: Itinerary and Rules of the Road

Posted in Nexus, Sales and Use Tax

car.saltThe unofficial start of summer 2014 is upon us with the celebration of Memorial Day this weekend. Summer, with its beautiful long days,  is the perfect season for exploration .  For the past 25 years summer  has meant one thing to me: Road Trip!

Road trips have always given me an opportunity to refresh my spirit, visit new places, re-visit past favorite spots and gain new perspectives on things I believed I knew. So I thought this would be an appropriate time for an (albeit virtual) Multistate Tax Road Trip.

In order to have an enjoyable Road Trip, it pays to be familiar with the Rules of the Road.  This post will provide a list of key multistate tax materials, administrative websites and seminal legislation, along with links to those key multistate tax materials.  These materials, or “The Rules of the Road,” will assist and guide our trip.  In future posts, one or more these reference materials will be explored and analyzed.

Our Itinerary

Our Road Trip will visit the numerous multistate tax “must see” hot spots such as nexus and new income sourcing trends.  In addition, we will have Road Trip stops that will highlight some of the dynamic recent state tax legislation pronouncements and guidance facing taxpayers in 2014.

Finally, we will revisit some old favorites, such as combined filing and procedural matters, seeking new points of interest in these well discussed topics.  Our hope is that this Multistate Tax Road Trip will introduce you to new state tax areas of interest as well provide new perspectives on state tax issues with which you’re already familiar.

As briefly outlined last week, our Multistate Tax Road Trip’s itinerary will touch on topics that stretch to the following outer-bank topics of the current Multistate tax landscape:

  • Economic and Factor Based Nexus
  • Market Place Fairness Act and Remote Seller Nexus
  • Customer-Based Sourcing Provisions
  • Flow-through Entity Apportionment Issues
  • Mandatory Combined Filing
  • The Relevance of “Joyce” States
  • Pay to Play Provisions

True to experience, some of the most enjoyable and memorable moments of any road trip are those that are unplanned – so feel free to offer points of interest that you would like us to visit.

Rules of the Road

Through numerous Multistate tax issue explorations, I have looked to one or more of the following for guidance and direction:

  • P.L. 86-272                                      Public Law 86-272
  • UDITPA                                            Uniform Division of Income for Tax Purposes Act
  • COST                                                 Council on State Taxation
  • MTC                                                   Multistate Tax Commission
  • MTC COMPACT                              The Multistate Tax Compact
  • MTC MEMBER STATES\              Multistate Tax Compact Member States
  • SSUTA                                                Streamlined Sales and Use Tax Agreement
  • SSTGB                                                Streamline Sales Tax Governing Board, Inc.
  • SSUTA MEMBER STATES            Streamline Sales Tax Member States – Map Format
  • SSTUA MEMBER STATE LIST    SSUTA Member State List
  • FTA                                                     Federation of Tax Administrators
  • FTA REGIONS

 

1. SEATA (Southeastern Regional Conference)

2. MSATA (Midwestern States Association of Tax Administrators)

3. WSATA (Western Regional Conference)

4. NESTOA (Northeast Regional Conference)

 

In addition, along our Road Trip we will keep the following approaching Federal legislation in our mirrors:

  • MFA  Marketplace Fairness Act of 2013
  • MFA PRINTER FRIENDLY  MFA in printer friendly format
  • MSWTFA  H.R. 4085: Multi-State Worker Tax Fairness Act of 2014
  • MOBILE WORKFORCE 2013 H.R. 1129: Mobile Workforce State Income Tax Simplification Act of 2013

A Memorial Day Thought Before We Embark

Before we head into this summer season I wish to remember and note what this holiday weekend is all about.  As I look forward to extra time with family and friends this Memorial Day, I wish to earnestly take this opportunity to offer my deepest thanks and prayers for all of those courageous  men and women and their families whose ultimate sacrifice secured the freedom and liberty I am able to enjoy in our great country.   May I never forget how blessed I am to have been born in a country with patriots of such selfless bravery.

On behalf of the State and Local team at MWE, we wish everyone a restful and fun-filled summer.  And starting next week, we invite you to join us on our summer sojourn through Multistate tax destinations.

 

 

 

 

 

 

 

 

 

 


States Orchestrating Intricate Tax Opus that Can Eventually Ensnare Most Multistate Taxpayers

Posted in Nexus

It’s often the case that we get so caught up in our daily work that we neglect to step back and fully discern the magnitude of a developing situation.  After drafting the past several posts, I realized that a disconcerting pattern was being composed in front of my eyes – one that warrants all multistate taxpayers’ immediate attention. 

Here is the tune that’s been playing in my head: It is not one or two state taxing authority initiatives or pieces of legislation that are going after multistate taxpayers.  It is a concerto of intricately orchestrated strategies that will at some point affect virtually every multistate taxpayer.

Today, I’ll focus on the state tax melody that is playing out to address the states’ increasing revenue demands.  

Troubling Tax “Notes”

After reviewing the New York State 2014-15 Budget provisions, one cannot help but sense a common theme developing among states with large state budgets and high tax revenue demands.  For example, the similarities between New York and California corporate tax provisions come to mind.  The theme is based on an extensive array of initiatives focusing on broadening their revenue base. 

The following reflects some of the common state tax themes that sound troubling “Tax Notes” for multistate taxpayers;

  • Remote Seller Sales Tax Nexus Provisions
  • Economic or Factor Based Net Income Tax Nexus Provisions
  • Market Based Receipt Sourcing Provisions for Receipts Earned from Services or Intangibles
  • Mandatory Combined Filing For Corporate and Flow Through Taxpayers
  • “Pay to Play” State Tax Procedural Provisions

Each of the above pose disconcerting state tax ramifications for multistate taxpayers. However, it appears that an ever increasing number of states are combining the adoption and implementation of one or more of the above to compose a complex paradigm designed to increase state taxes for all multistate taxpayers.

Take Away: Don’t Rely On “Vinyl” State Tax Advice In the Digital Age

The dynamic symphony of today’s multistate tax requires your advisor to be a “Tax Aficionado.”  In upcoming posts, with a focus on the above, we will attempt to arrange the cacophony of disconcerting state tax notes into a melodic composition to shed light on potential state tax issues that may increase your multistate tax.

States’ Record High Tax Years Beat the Miami Heat To Three-Peat Heaven – What That Could Mean for Multistate Taxpayers

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

Miami-Heat-WallpaperAccording to the U.S. Census Bureau, state government tax coffers are overflowing. They rose for the third consecutive year to $846.2 billion in 2013, with total state tax revenues increasing by 6.1% over the year before.

It’s a safe bet to say states are pleased with their progress and will use every tool in their playbook to ensure that future years are just as rewarding. Which means multistate taxpayers should be prepared to face more intense efforts by the states to squeeze additional revenue from them in 2014 and beyond.

A recent article in Bloomberg  highlighting the States’ record tax collections cites the Census Bureau report and  Donald Boyd , a senior fellow at the Albany, New York-based Nelson A. Rockefeller Institute of Government , who said that  the figures “reflect higher income-tax collections resulting from strong financial markets and an incentive for taxpayers to take profits before higher federal tax rates began.”

Unlike the New York Knicks’ lackluster results this year,  New York’s  tax revenue  for 2013 not only continues to increase but as Crain’s noted recently, despite the economy, New York’s tax revenue “outpaces that of rival states.” (Perhaps Albany can provide some insights to the Knicks to give them the boost they need to outpace their own rivals.)

Is States’ Tax Revenue Three Peat Attributable to Our Economy Improving?

Whether the states’ three year increase in total tax revenues culminating in a second straight tax revenue record is attributable to an improving economy and acceleration of income may be subject to debate.  However, our experience is that the states continue to develop and implement new strategies to increase taxes from businesses and their owners.

One may expect that the states will proceed with several of the following strategic initiatives with the goal of notching additional record breaking tax years ahead:

  • “New Taxpayer” and nexus initiatives.  In addition to state specific “New Taxpayer” and nexus initiatives, the Multistate Tax Commission has an ongoing Nexus Program including a Nexus Committee that meets regularly each year to facilitate the nexus initiatives of its member states.  We are aware of at least one state  that now includes a MTC Nexus Questionnaire as part of the State’s information or document request.
  • State Expansion of Transactions Subject to Sales & Use Tax especially in the area of services and digital products.
  • Increased Reliance and Importance  of  “Desk Audits.” For additional information regarding New York State’s “Desk Audit” and perhaps a predictor of New York’s increasing reliance on “Desk Audits,” New York recently revised its  Publication 130-D dedicated to desk audits.
  • Adoption of new tax legislation that will enhance the states’ ability to subject out of state taxpayers to their taxing regimes and to source additional income to their state from multistate taxpayers.

Many of you may have already experienced one or more of the above.  However, what is new is that the States appear to be implementing several or all of these techniques as part of a more sophisticated and integrated ongoing approach.

Multistate Taxpayers Should “Be Prepared

More now than perhaps ever in recent memory should multistate taxpayers heed the advice and guidance of the Boy Scouts of America – BE PREPARED.  Multistate taxpayers should not rely on past state exam experiences or even successes.  Multistate taxpayers should seek out their tax advisors to discuss their current as well future business operations in this new ever increasingly dynamic and demanding state tax environment.

 

A Company Jet Could Send Your State Taxes Soaring

Posted in Nexus

AA037342Got a company jet ready to fly you anywhere at a moment’s notice? The benefits of such a perk are significant. But did you know that leasing or owning a company jet could increase your state taxes?  While there is plenty of guidance on the most tax efficient way to acquire or initiate the lease of a jet, the potential state tax consequences of operating a company jet are equally important and demand foresight and planning.  Use of the company jet by affiliated or related company employees may expand the potential state tax issues to entities beyond the one that owns or leases the company jet.

Nexus Turbulence

The leasing or ownership of a company jet may create sales and/or income tax nexus in remote states for the company, its affiliates and/or its owners.  Where a company hangars its jet may cause the entity that owns or leases the jet to establish sales tax and possibly income tax nexus in one or more states.  In addition, if the company jet is owned or leased by a single member limited liability company that is disregarded for Federal and state income tax purposes, the owner of the SMLLC may have income tax nexus in additional states arising from the lease or ownership of the company jet. 

Nexus turbulence may worsen if the company, in its attempt to defray some of the jet’s costs, leased the jet to third parties.  The third party usage of the jet may result in the jet’s presence in numerous states in which the company does not  currently have nexus.  This may have disastrous sales tax nexus  consequences especially in states that have adopted aggressive long arm sales tax nexus provisions.  In addition, the unexpected use and presence of a company asset in states in which the company may have carefully limited its activities to those protected under Public Law 86-272 may result in the company having activities beyond those protected by the law in numerous states.

Equally important, private plane flight plan information may be requested by state taxing authorities to help state tax authorities with nexus and residency exams.

A Company Jet Requires A Careful Tax Flight Plan

As part of any pre-flight checklist, a careful and thorough flight plan is a prerequisite to takeoff.  So, too, should a comprehensive tax flight plan that addresses the myriad state tax consequences be prepared prior to owning or leasing a company jet.  

 

New York State Tax “Climate Change” – Higher Taxes Forecast for Multistate Taxpayers

Posted in Corporate Income Tax, Nexus

When Governor Cuomo signed New York State’s FY 2014-15 executive budget into law last month, he ushered in sweeping changes to New York’s tax provisions – including some which may increase taxes for Multistate taxpayers.

The budget contains several provisions that may benefit multistate taxpayers, especially those who qualify as manufacturers.  Equally important, the legislation enacted, modified and/or repealed numerous tax provisions that may end up increasing New York State taxes for Multistate businesses, estates and trusts. 

For this post, we’ll identify those tax provisions that may increase multistate businesses’ New York Tax.  In a later post, we will focus on the provisions that may affect estates and trusts.

Executive Budget’s “Cutting Taxes to Create Jobs”

The state’s official press release highlights that a major provision of the budget is “Cutting Taxes to Create Jobs” in New York.  It focuses on tax relief for certain qualified manufacturers, emerging technology companies and small businesses.  Most importantly, it eliminates the state corporate income tax for New York manufacturers.

(The state’s Office of Tax Policy Analysis’ “Summary of Tax Provisions in SFY 2014-15 Budget” provides an excellent guide to the legislation as well as a summary of its key tax provisions.)

In addition, the budget establishes a “credit for qualified New York manufacturers equal to 20% of the real property taxes paid during the taxable year for real property owned by such manufacturers in New York and principally used for manufacturing. The credit is also allowed for property taxes paid on real property leased from an unrelated third party if the taxes are paid pursuant to explicit requirements in a written lease and remitted directly to the taxing authority.”  This credit may reduce the Article 9-A tax to $25.  The credit is in effect for tax years beginning on or after January 1, 2014.

The Executive Budget also extends the commercial production credit as well as establishes or enhances credits for the musical, theatrical and film industries.  It also extends the Commercial Office Space Lease in Lower Manhattan Sales Tax incentives from September 1, 2015 to September 1, 2017.

New York’s Tax “Climate Change” May Bring Inclement Tax Costs To You

The budget adopts, amends and/or repeals numerous tax provisions that may create an unpleasant tax “climate change” for multistate taxpayers.  As set forth in the Budget Summary, the following enacted changes may increase multistate taxpayers’ New York State tax:

  • Adopting full unitary water’s-edge combined reporting with an ownership requirement of more than 50%;
  • Implementing a single receipts apportionment factor using customer based sourcing rules for all taxpayers;
  • Eliminating the separate treatment of subsidiary capital and income;
  • Narrowing the current definition of investment capital and investment income;
  • Converting existing NOLs into a prior NOL conversion subtraction pool

Conspicuous by its absence, it appears that nowhere in the summary is there mention or discussion of the budget’s adoption of an economic based nexus standard.  In fact, our search of the budget’s language determined that the provision that adopts economic nexus is not referred to under the terms “economic” or “nexus.” The following excerpt from the budget “sets” forth the State’s adoption of its economic nexus standard:

(B) A CORPORATION IS DERIVING RECEIPTS FROM ACTIVITY IN THIS STATE IF IT HAS RECEIPTS WITHIN THIS STATE OF ONE MILLION DOLLARS OR MORE IN THE TAXABLE YEAR. FOR PURPOSES OF THIS SECTION, THE TERM “RECEIPTS” MEANS THE RECEIPTS THAT ARE SUBJECT TO THE APPORTIONMENT RULES SET FORTH IN SECTION TWO HUNDRED TEN-A OF THIS ARTICLE, AND THE TERM “RECEIPTS WITHIN THIS STATE” MEANS THE RECEIPTS INCLUDED IN THE NUMERATOR OF THE APPORTIONMENT FACTOR DETERMINED UNDER SECTION TWO HUNDRED TEN-A OF THIS ARTICLE. FOR PURPOSES OF THIS PARAGRAPH, RECEIPTS FROM PROCESSING CREDIT CARD TRANSACTIONS FOR MERCHANTS INCLUDE MERCHANT DISCOUNT FEES RECEIVED BY THE CORPORATION.

Others Weigh In On New York’s Tax Climate Change

In a recent article in The Torch, “Budget nudges up NY tax ranking, a little bit”, the author makes reference to the Tax Foundation’s recently revised State Business Tax Climate Index stating “while it called the corporate tax changes “impressive,” the Tax Foundation also made it clear that the state’s business tax climate still has plenty of room for improvement.”  In a follow up article, the author refers to the Small Business & Entrepreneurship (SBE) Council’s  2014 assessment  Best to Worst State Tax Systems for Entrepreneurship and Small Business stating that the New York ranked in 45th place “based on a state-by-state comparison of burdens imposed by 21 different taxes including income, capital gains, property, death, unemployment, and various consumption-based taxes, including state gas and diesel levies.”  It should be noted that the author states that the SBE Council’s 2014 survey was completed prior to the enactment of the budget.

New York’s Tax “Climate Change” Should Stay On Your Tax Radar

The tax forecasts that may roll in as a result of New York’s new budget enactment should be on the radar screens of all multistate taxpayers immediately and for the foreseeable future.  As our allies and U.S. forces first used radar to help discern objects that appear seemingly innocuous or friendly from those that may be potentially harmful, so should multistate taxpayers seek out their tax advisors to turn their tax radar on the New York State budget to determine whether it’s a friend or foe.

Could You Be Liable Under NY’s Recent “Bulk Sale” Guidance – Even if You’re Not a Buyer?

Posted in Sales and Use Tax

riskaheadThe implications of New York State’s guidance on bulk sales may have far-reaching consequences and could  result in personal liability for the “buyer”  -  even in a transfer that is  technically not a “sale.” 

In June of 2013, nearly 30 years after New York issued its seminal guidance on bulk sales in TSB-M-83(6)S and during which period the State issued minor guidance on the topic, New York State issued a new technical bulletin  TB-70 regarding bulk sales.  In this bulletin, the state spelled out what transactions are considered “bulk sale” transactions for sales tax – and that guidance is disconcerting.     

If a transfer or transaction is deemed a bulk sale and the “purchaser” does not precisely comply with the state’s notification requirements, that purchaser can be held personally liable for any unpaid sales tax owed by the “seller.”

To better understand this, it helps to understand the nuances of what constitutes a “bulk sale” for New York State sales tax.

What is a Bulk Sale?

According to Regulation Section 537.1, the term “bulk sale”  means any sale, transfer or assignment in bulk of any part or the whole of business assets, other than in the ordinary course of business, by a person required to collect tax and pay it to the Department of Taxation and Finance.

The more recent technical bulletin clarifies the definition by stating that:

The sale, transfer, or assignment of business assets, in whole or in part, by a person required to collect sales tax is called a bulk sale. Business assets means any assets directly related to the conduct of a business, including:

  • tangible personal property
  • real property, and
  • intangible assets, such as goodwill.

(Sales of assets made in the ordinary course of business, such as retail sales to customers, are not considered bulk sales.)

Notification Requirements

Should a transfer be considered as a “bulk sale” for sales tax by the state, a purchaser must notify the state of a pending bulk sale by filing Form AU-196.10, Notification of Sale, Transfer, or Assignment in Bulk, at least 10 days before paying for or taking possession of any business assets, whichever happens first.

Per state procedures, within five days after receiving the form, the Tax Department will issue to the purchaser either:

  • Form AU-197.1, Purchaser’s and/or Escrow Agent’s Release – Bulk Sale: This will be issued only if  the seller does not have any unpaid sales taxes and an additional review or audit is not necessary; or
  • Form AU-196.2, Notice of Claim to Purchaser: This will be issued if the seller owes unpaid sales tax, is scheduled for a review, or is under audit.

 As set forth in the recent technical bulletin,  a “purchaser who receives Form AU-197.1 from the Tax Department will not be held liable for any unpaid sales tax owed by the seller.”

Most importantly, as indicated in TB-70 , “[a] purchaser who receives Form AU-196.2 should not pay the seller until the Tax Department completes its review of the seller’s sales tax account.”

Absent the timely filing Form AU-196.10 and receiving Form AU-197.1 back from the State, the purchaser may have successor liability arising from the purchase.

 

Guidance, Clarification or Warning?

The examples the state provides lists relatively innocuous transactions, even those that may be otherwise exempt from sales tax, as still possibly giving rise to a “bulk sale.”

In the excerpt below, pay attention to the state’s  clarification  of what transfers will fall under the “bulk sale” sales tax disclosure requirements.  Essentially, this bulletin highlights transactions that in the past may have been glossed over by the state as possibly not within the realm of “bulk sale” sales tax disclosure. They are now squarely in the state’s crosshairs.

The following is taken directly from TB-70 and demonstrates some of the transactions they consider as a bulk sale trigger:

  • A restaurant that is closing sells all of its fixtures and equipment to a person opening up a new restaurant.
  • Corporation C, which is required to collect sales tax, transfers all of its business assets to Corporation D in exchange for stock in Corporation D.
  • Corporation E, which is required to collect sales tax, sells its entire inventory to Corporation F, which intends to resell the inventory.
  • Mr. Smith, a person required to collect sales tax, makes a gift of all of his business assets to another person.

 “Caveat Emptor” –Bulk Sales Is Not Limited to Just “Buyers”

Is TB-70 simply guidance by the state or is it a warning that the State has a renewed interest in bulk sales tax filings and successor liability?   Any party to a transfer of business assets not ordinarily transferred in the course of one’s business should heed “Caveat Emptor – Buyer Beware.” 

A careful review of the state’s examples indicates that even the formation of a joint venture entity, LLC, partnership or corporation, could be viewed as a “bulk sale” by New York State resulting in exposing you to personal liability for the sales tax of one or more of your co-joint venture parties. For this reason, it’s crucial that “buyers” or transferees seek timely tax advice on all business asset transfers.

 

 

Data Mining and Multistate Taxpayers – Welcome to the 21st Century

Posted in Nexus, Sales and Use Tax

datamining1As budget demands for more revenue intensifies, states are employing sophisticated technology to boost tax dollars –a move which has significant implications for multistate taxpayers. 

States are increasingly using data mining software to examine current taxpayers, discover new taxpayers, verify taxpayer data, and identify taxpayer inconsistencies.  Coupled with the states’ adoption of aggressive nexus initiatives, every business – even those that historically have not filed in more than one state –  should be aware that this data mining intelligence is out there and could end up targeting them.  

New York State’s Case Identification Selection System

About a decade ago, New York State implemented an enhanced compliance system called Case Identification Selection System.   CISS is a state-of-the-art data mining and intelligence process that enhances New York State’s ability to identify fraud, compare taxpayer data and prioritize its efforts to maximize revenue.  According to a New York State Department of Taxation and Finance Press Release, CISS “has saved New York State taxpayers more $2 billion” since its inception.  The Federation of Tax Administrators awarded New York State Department of Taxation and Finance its Leadership Award for the State’s implementation of CISS.  It has even been highlighted in  IBM’s Smarter Planet Leadership Series in a piece titled “New York State Tax: How predictive modeling improves tax revenues and citizen equity.”  In this series on CISS, IBM points to it as an example of how New York State Tax “got smarter”  about bringing more revenue to the state.

Success Breeds Imitation

Equally important, multistate taxpayers should be aware that state departments of revenue share their success stories.  Data intelligence and revenue enhancement successes in one state may become the blueprint for other states to follow and implement.  In this Reuters article, New Jersey Director of Tax Michael Bryan praised CISS’s highly successful data mining and tax audit enhancement initiative: “New York has had a great success with this,” he noted. And in unofficial discussions we’ve had with state examiners, we know that at least one other state’s department of revenue has made an extensive investment in data mining and intelligence.

“Knowledge is Power”

Multistate taxpayers should be increasingly aware that States’ Departments of Revenue have begun and will continue to employ highly sophisticated data mining and intelligence in virtually all aspects of tax compliance, including tax examinations.  Equally important, multistate taxpayers should not rely on past state tax exams procedures or successes as an indicator of what future state tax inquiries or examinations will entail.

The take away – as simply stated by Thomas Jefferson – is that “Knowledge is power.” These words ring as true today as when Thomas Jefferson stated them in 1820.  Multistate taxpayers should take notice that state departments of revenue  appear to have taken our Founding Father’s words to heart.  So should all multistate taxpayers and their advisors.