Michigan Gears Up for 2011 Amnesty

Posted by Sutherland SALT on October 26, 2010

In what was beginning to seem like an unlikely event, the Michigan Legislature finally passed a nearly year-old bill that will allow for a limited amnesty period, from May 15, 2011, to June 30, 2011. While the Senate passed the original amnesty bill in 2009, there was no further movement of the bill until September 2010, when the House and Senate finally agreed that the bill could help close Michigan’s $484 million budget gap—without raising taxes. Governor Jennifer Granholm approved Senate Bill 884 on October 5. The amnesty program is projected to bring in $61.8 million of additional revenue.

Unlike other recent amnesty programs, Michigan’s program is relatively simple. Taxpayers that participate in the program will receive a waiver of all penalties (civil and criminal) for taxes paid through the program. The Bill does not state whether taxpayers will be required to waive their right to seek a refund of liabilities paid under the program. Nor does it indicate whether post-amnesty penalties will apply to taxpayers who do not participate in the program. In order to qualify for Michigan’s amnesty program, taxpayers must file a written request for a waiver on a form provided by the Department, and meet the following requirements:

  • Have an outstanding Michigan tax liability (except for taxes due after the close of the 2009 calendar year). The Bill does not specify the types of taxes eligible for the amnesty program;
  • File any unfiled or amended returns; and
  • Pay all outstanding tax and interest.

Additionally, some taxpayers are ineligible to participate, such as:

  • Those eligible to enter into a voluntary disclosure agreement under § 30c for the tax at issue.  Under § 205.30c of Act 122 of 1941, a non-filer who either: (1) has a filing responsibility under nexus standards issued by the department after December 31, 1997; or (2) has a reasonable basis to contest liability, as determined by the state treasurer, for a tax or fee, is eligible to enter into a voluntary disclosure agreement.
  • Those whose tax is attributable to income derived from a criminal act, if the taxpayer is under criminal investigation or involved in a civil action or criminal prosecution for that tax, or if the taxpayer has been convicted of a felony under this act (Act 198 of 2010) or the Internal Revenue Code of 1986.

The Department of Treasury is expected to provide further details on Michigan’s amnesty program as the amnesty period approaches. In addition, the Department is required to provide “reasonable notice” to taxpayers who might be eligible to participate in the program at least 30 days prior to the start of the amnesty period. Thus, as 2011 moves into full swing, taxpayers with outstanding Michigan tax liabilities may be receiving notice of their eligibility to participate in the amnesty program.

Connecticut Issues Guidance on New "Factor Presence" Nexus Standard

Posted by Sutherland SALT on October 20, 2010

The Connecticut Department of Revenue recently issued an Informational Publication (Publication) on September 23, 2010, to provide guidance on its new “economic nexus” standard, effective for tax years beginning on or after January 1, 2010. Connecticut’s new economic nexus standard states that:

Any company that derives income from sources within this state, or that has a substantial economic presence within this state, evidenced by a purposeful direction of business toward this state, examined in light of the frequency, quantity and systematic nature of a company’s economic contacts with this state, without regard to physical presence…shall be liable for the tax… Conn. Stat. L. 2009 § 90 (emphasis added).

The Publication:

  • Sets forth those activities that will constitute “substantial economic presence” and will result in a corporation being subject to Connecticut corporate income tax.
  • Provides that the substantial economic presence in Connecticut must be attributable to the purposeful direction of business activities toward the state, and those activities are evaluated “based on the frequency, quantity, and systematic nature of the business’s economic contacts in Connecticut.”
  • Provides a bright-line test for determining when these activities will result in substantial economic presence: when the company has receipts from business activities of $500,000 or more attributable to Connecticut sources during a taxable year. Even if a company has less than $500,000 in receipts, the Commissioner may still assert that a company has a filing and tax payment obligation if it has nexus with the state through some other means. 
  • Addresses when the use of an intangible in the state will result in a Connecticut tax liability pursuant to the new economic nexus standard.  The use of an intangible will result in Connecticut tax liability if:
  1.  
    1. The intangible property generates, or is otherwise a source of, gross receipts within the state for the corporation, including through a license or franchise;
    2. The activity through which the corporation obtains such gross receipts from its intangible property is purposeful (e.g., a contract with an in-state company); and
    3. The corporation’s presence within the state, as indicated by its intangible property and its activities with respect to that property, result in it having $500,000 or more of receipts attributable to Connecticut sources during a taxable year To determine if a taxpayer has $500,000 or more of receipts from the use or sale of intangibles in the state, Connecticut’s existing market-sourcing rules must be used. Under these rules, receipts from intangibles are sourced to Connecticut if the receipts are from: rentals and royalties from properties situated within the state; royalties from the use of patents or copyrights within the state; net gains from the sale or other disposition of intangible assets managed or controlled within the state; and all other receipts earned within the state.
  • The Publication further provides that passive investment income derived from Connecticut is not considered in subjecting a company to economic nexus.   

“Factor presence” tests—like Connecticut’s—have been growing in popularity since the Multistate Tax Commission approved a model regulation on October 17, 2002, which provides for such a standard. Washington state enacted a similar factor presence test earlier this year with respect to its Business & Occupation Tax, and a similar standard in California for corporate income tax purposes becomes effective January 1, 2011. However, the factor presence nexus standard is not without controversy, and legal challenges to these standards likely are on the horizon.

Concern Over New Jersey Software Regulation

Posted by Sutherland SALT on October 20, 2010

The New Jersey Division of Taxation is revisiting a proposed regulation that would provide new rules governing the sale of software and related services. While the draft regulation has not been formally published for public comment, the Division is working with interested parties to accept comments prior to the draft’s publication.

The draft would amend existing definitions and add new definitions to N.J. Admin. Code §18:24-25.1, and replace the existing §18:24-25.6, entitled “Treatment of maintenance contracts and software-related services,” with new §18:24-25.6, entitled “Treatment of software-related services and software maintenance contracts.” These changes are significant because New Jersey taxes the enumerated services of installation and services to tangible personal property; but does not tax downloaded prewritten computer software when sold to a business user. New Jersey’s position is that these services are taxable, even when performed on electronically delivered, prewritten computer software.

Although New Jersey amended its definition of tangible personal property to include prewritten computer software on October 1, 2005, to conform to the Streamlined Sales and Use Tax Agreement (SSUTA), businesses presumed that because the State had also adopted a statutory exemption for prewritten computer software when sold to a business user, that all associated services (e.g., installation, configuration, and customization) would continue to be exempt. However, the Division’s policy is that because prewritten computer software is expressly included in the definition of tangible personal property, the Division can tax the services performed on the software, regardless of how it was delivered. Taxpayers who receive electronic delivery of software in New Jersey should evaluate the regulation’s implications for those purchases.

Would You Like Tax With That?

Posted by Sutherland SALT on October 15, 2010

West Virginians (and hungry road-trippers passing through the state) may soon face a new tax on their drive-through purchases. The West Virginia Department of Transportation has proposed charging an additional five percent tax on food and beverages purchased at drive-through windows, in addition to the six percent customers already pay.

The proposal is one of many suggestions by the state’s transportation department to bring in money for the state road fund. Advocates say the tax is necessary to repair and maintain miles of neglected roads although the connection between drive-through food and road repair is tenuous at best. Other suggestions include levying a one percent surcharge on car insurance premiums. The Department of Highways estimates that the drive-through tax could bring in $50 million a year, and proponents argue that it would encourage healthier eating habits.

There is no indication, however, that the Legislature will support the idea. Customers and business owners are likely to oppose it as well – customers because of the higher prices (and general antipathy toward “sin” taxes), and business owners because of the potential hit to their sales. For instance, customers who would otherwise have made a quick stop for a cup of coffee on the road might be discouraged by the higher price. Moreover, some critics have pointed out that most of the revenue for the state road fund comes from gas taxes – which drive-through customers are already paying.

For his part, West Virginia Governor Joe Manchin is not on board. He released a statement on September 14 saying, “I want to be clear that these are suggestions that I strongly oppose and do not in any way support as a means to generate revenue for the state road fund.”

IRS Subject to APA???

Posted by Sutherland SALT on October 12, 2010

The U.S. Court of Appeals for the District of Columbia, sitting en banc on September 29, raised serious questions in a suit seeking refund of telephone excise taxes paid to the Internal Revenue Service (IRS). A decision on the arguments raised could have far-reaching consequences for the IRS, potentially requiring it to conform to the Administrative Procedure Act (APA) when issuing guidance.

The case involves 26 U.S.C. § 4251, a three percent excise tax on long-distance phone calls for which the charges varied based only on transmission time, which five circuit courts declared invalid in 2005 and 2006. In May 2006, the IRS declared that it would no longer impose the tax and would allow taxpayers to claim refunds for excise taxes. The guidelines for claiming the refund, which were outlined in Notice 2006-50, required taxpayers to affirmatively request the refund on their 2006 federal tax return and precluded other administrative remedies.

A number of taxpayers filed suit to overturn the Notice, claiming that it represented final agency action that “arbitrarily, unreasonably, and unlawfully limits restitution of the funds unlawfully exacted.” In re Long-Distance Tel. Serv. Fed. Excise Tax Refund Litig., 501 F.Supp.2d 34, 38-39 (D.D.C. 2007). Taxpayers protested the fact that they were not allowed to seek refunds in any other manner than that set forth in the Notice. This, they argued, constituted “final agency action” subject to judicial review under the APA, and that the Notice was laden with mandatory language and created new obligations for taxpayers in violation of the rules of administrative procedure.

The IRS argued in Cohen v. United States, No. 08-5088 (D.C. Cir. Aug. 7, 2009), that the decision of whether or not to process refund requests was entirely up to the IRS’s discretion and that its methods were unreviewable under the APA. The IRS also insisted that the guidelines set forth in the Notice did not preclude other administrative action. The Court disagreed, noting that the taxpayers had no other remedy at law than to challenge the Notice on the grounds that it violated the APA. In response to the government’s contention that the Anti-Injunction Act (AIA) precluded the suit, taxpayers said the statute was inapplicable because the IRS had already collected the tax. The AIA only affects lawsuits while the agency is in the process of assessing or collecting a tax.

Gilbert Rothenberg, acting deputy assistant attorney general to the Justice Department Tax Division, pointed out during the en banc hearing that Congress had established procedures taxpayers must follow to obtain a refund—procedures the taxpayers had ignored in this case—and that the statute of limitations was in fact still open. It would be unprecedented, he said, for a court to find that it had jurisdiction to hear a case challenging compliance with the APA when a taxpayer had not first used the appropriate refund process. But the judges questioned how the IRS could be immune from the APA and criticized the terms of the Notice.

If the court finds that the IRS failed to adequately adhere to the APA in constructing the procedures in the Notice, the consequences could be significant. A ruling for the taxpayers could require the IRS to follow formal notice-and-comment procedures when formulating guidance—such as Revenue Rulings, Revenue Procedures, and Notices—that have the effect or force of law.

Supreme Court Grants Cert in Two Jurisdiction Cases - Will the Long Arm Get Longer?

Posted by Sutherland SALT on October 11, 2010

On September 28, 2010, the United States Supreme Court granted certiorari in two important Due Process Clause cases dealing with the assertion of personal jurisdiction against foreign corporations:

  • In Goodyear Luxembourg Tires v. Brown, the Court will consider “whether a foreign corporation is subject to general personal jurisdiction, on causes of action not arising out of or related to any contacts between it and the forum state, merely because other entities distribute in the forum state products placed in the stream of commerce by the defendant.”
  • In J. McIntyre Machinery Ltd. v. Nicastro, the Court will consider a related  question: whether a state may be permitted to exercise specific jurisdiction over a foreign manufacturer under the stream-of-commerce theory “solely because the manufacturer targets the United States market for the sale of its product and the product is purchased by a forum state consumer.”

Although there are no direct state tax implications in these two cases, they will raise issues among corporations engaging in electronic commerce and are concerned about being subject to tax in every state. If the Court rules that jurisdiction was properly asserted in either of these cases, businesses, and particularly those engaged in electronic commerce, will be faced with the daunting prospect of being haled into court anywhere in the United States with no connection to the forum state beyond selling items on a third-party website. So much for purposeful availment!

Continue Reading

SALT Pet of the Month: Chester

Posted by Sutherland SALT on October 08, 2010

AAChester_smaller.jpgFour years ago this month Sutherland SALT Business Manager Andrea Christman, and her husband Andrew, expanded their family with the adoption of Chester—a “talkative” SALT and pepper miniature schnauzer who loves to be the center of attention. Chester spends his days keeping close Chester.jpgwatch over his Herndon, Virginia neighborhood and, while his bark can be fierce, he attacks only with kisses. Chester’s favorite pastimes are reading with Andrew and watching musicals with Andrea, and he is their constant companion—until a football game comes on, at which time he makes a quick exit to avoid the excitement. Chester’s favorite treat is ice cubes, and he has developed supersonic doggie radar that enables him to detect the opening of the freezer door from any room in the house.

Events in Neighboring Southern States May Foreshadow Changes to Come

Posted by Sutherland SALT on October 05, 2010

Within the last month, Tennessee and North Carolina have replaced the heads of their respective Departments of Revenue. On September 20, Charles Trost was sworn in as the new Tennessee Commissioner of Revenue. Mr. Trost was a partner at a Nashville law firm, and takes over for outgoing Commissioner Reagan Farr. In Tennessee, the Commissioner is appointed by the governor, and there are four months left in the term of the outgoing governor. 

Change is also occurring on the other side of the Appalachian mountains, as Ken Lay (no, not that Ken Lay, the other Ken Lay) is stepping down as North Carolina Secretary of Revenue. Governor Beverly Perdue has appointed outgoing State Senator David Hoyle as the replacement. Mr. Hoyle is the former co-chairman of the North Carolina Senate Finance Committee and has been a significant force in rewriting the tax laws of that state. Governor Perdue’s term will end in 2013. 

These two changes may be the first of many changes for state taxing authorities.  In 2010, 37 states will elect governors. New governors may bring new tax policy. Furthermore, in many states, the governor appoints the head of the state’s taxing authority, so there may be many new Secretaries, Commissioners, and Directors of Revenue. Taxpayers can expect to see some significant changes not only in state law and policy, but also in enforcement and collection practices.

New Jersey Appellate Division Says Praxair Should Have Read the Tea Leaves on Tax Liabilities

Posted by Sutherland SALT on October 04, 2010

On September 1, the Superior Court of New Jersey, Appellate Division, issued its opinion in Praxair Technology, Inc. v. Dir., Div. of Taxation, Case No. A-6262-06T3 (N.J. Super. Ct. App. Div. 2010), which upheld the Director’s imposition of a penalty on Praxair for failing to file a tax return for the 1994, 1995, and 1996 tax years. Praxair took the position that it was not subject to tax under New Jersey tax law because it did not have physical presence in New Jersey. Although the statute remained unchanged, the New Jersey Division of Taxation made a regulatory change in 1996 to add an example that explained that it was the Division’s position that Praxair was subject to the corporate business tax. In addition, the Appellate Division upheld a post-amnesty penalty against Praxair because it failed to take advantage of the 2002 tax amnesty, even though the New Jersey Supreme Court, in 2006, held that economic presence was put into effect in 1996 with the regulatory change.  Lanco, Inc. v. Dir., Div. of Taxation, 908 A.2d 176 (N.J. 2006).

Continue Reading

Networking in New York Gets Pricey

Posted by Sutherland SALT on October 01, 2010

On September 15, 2010, the New York State Tax Commission issued an Advisory Opinion, TSB-A-10(40)S, addressing the taxability of various services offered on a professional networking website. The website enables members to create profiles, search for potential contacts, research business opportunities, and participate in discussion groups, among other things. The Commission held that charges received for premium subscriptions to the website, in-network e-mails, and customer surveys constitute taxable “information service” charges. In contrast, charges collected from employers to post job listings or to participate in online virtual job fairs constitute charges for advertising services that are not subject to sales tax.

Although information services are generally taxable, there is an exception for services that are personal or individual in nature and that may not be substantially incorporated into reports furnished to other persons. The Commission held that the first requirement (personal or individual in nature) was not satisfied because the information came from a source that was not itself confidential. The Commission applied the “common database” test to the second requirement (substantial incorporation) and found that although the data provided to one customer might be slightly different than the data provided to another customer, the information came from the same source and could be used to furnish reports for multiple consumers. Thus, the charges for premium subscriptions, network e-mails, and surveys did not meet the exception.

The Advisory Opinion follows the July 19, 2010, issuance of TSB-M-10(7)S, which provided general guidance regarding services potentially qualifying as information services and the related information services exceptions.