On November 16th and 17th, 2020, the Multistate Tax Commission’s (“MTC”) Nexus and Audit Committees met to consider several topics.  The biggest developments from these meetings are that: (1) the Nexus Committee shared their proposed, revised draft of its Uniform Sales and Use Tax Exemption/Resale Certificate – Multijurisdiction, which reflects the Wayfair decision and recent economic nexus laws; and (2) the Audit Committee approved revisions to their income tax audit manual.

Nexus Committee

During this meeting, the Nexus Committee discussed: (1) updates regarding Wayfair implementation, marketplace facilitator laws, and nexus law developments since its July 28, 2020 meeting; (2) tracking of voluntary disclosure case status and tax payments; and, most importantly, (3) updates to the Uniform Sales and Use Tax Resale Certificate – Multijurisdiction Form to reflect the Wayfair decision and the states’ subsequent economic nexus laws.

The primary role of the Nexus Committee is the oversight of the National Nexus Program, which provides a forum for 38 participating states to exchange information and manage a multistate voluntary disclosure program.  The Committee heard a presentation from the Director, noting that taxpayer participation in the voluntary disclosure program has soared after Wayfair.  The MTC received 208 voluntary disclosure applications in 2019 and expect to receive more than 300 by the end of 2020, which represents close to a 50% increase.

The Nexus Committee also discussed updates to the MTC’s Uniform Sales & Use Tax Exemption/Resale Certificate – Multijurisdiction form, which it has made available to taxpayers for decades.  It is a simple form that a seller registered in one state may use to claim the resale or ingredient/component part exemption when purchasing inventory tax-free from a supplier located in another state.  The seller would not be required to register in the other state if it did not have nexus.  A seller registered in multiple states can use this form to claim the exemption on a multistate basis.  37 states allow sellers to use this uniform certificate, albeit often with additional requirements.

The MTC is now updating the form to reflect the Wayfair decision and states’ new sales and use tax economic nexus laws.  The proposed draft of the revised form can be found here.  The MTC is requesting responses and revisions from the participating states by November 30th, 2020.  Any states that request to be removed or do not respond will be removed from the revised form.

Audit Committee

The Audit Committee met to approve edits to its income tax audit manual and multistate statute of limitations waiver extension. The Audit Committee oversees the MTC’s joint audits where MTC staff audit taxpayers on behalf of multiple states.  The program currently has 19 income tax audits and 29 sales tax audits in progress.

The MTC’s income tax audit manual is a 133-page document that details every aspect of an MTC audit—from the pre-audit stage through the transmittal of a completed audit report to the participating states.  It also provides a high-level discussion of state income tax concepts. It is not intended, however, to be a restatement of the laws of every state.  The audit manual was last updated in 2013.  Some of the approved changes relate to process, such as what happens when a taxpayer refuses to sign a waiver.   Other changes were made to sections of the manual that discuss concepts, like clarifying how Joyce applies when conducting a nexus investigation and the addition of throw-out.   A complete copy of the approved manual can be found here.

During the November 17th D.C. Council meetings, the Council marked-up the False Claims Amendment Act of 2020 and passed it on first reading by an 8-5 vote. The bill now moves to second – and final – reading as soon as December 1st.  If passed, the bill would expand the D.C. False Claims Act to tax matters above specified thresholds.  Opposition to the bill will need to sway two votes in order to defeat it on second reading.

The bill was criticized by multiple Councilmembers, who made the following points:

  • D.C. already has a framework to address tax abuses: the Office of the Chief Financial Officer and the tax fraud hotline, which allows people to report tax abuses.
  • Predatory private parties may bring frivolous lawsuits against D.C. taxpayers, as they did in Illinois.
  • The D.C. OCFO opposes the bill and the Multistate Tax Commission opposes applying state False Claims Acts to tax matters.  In particular, the OCFO is also concerned about the extent to which it can share tax information with those bringing claims.

Second reading in the Council will be held as early as December 1st.  If passed on second reading, the bill will then be sent to the Mayor to be approved or vetoed.  Like other D.C. bills, the bill will then be transmitted to Congress for a 30-day period of passive review.

For more information about combating this False Claims Act expansion, please contact the Eversheds Sutherland SALT Team.

The Texas Comptroller adopted an Administrative Law Judge’s decision affirming a sales and use tax assessment on a Texas-based marketing and advertising agency for “invoices for the time to create digital artwork.” According to the Comptroller, the artwork that the advertising agency “delivered to the third‑party printers was either finished art or preliminary art that became physically incorporated into finished art for advertising.” Therefore, the sales were taxable sales of tangible personal property, instead of nontaxable preliminary art.  Additionally, the Comptroller concluded that it was irrelevant whether the agency was involved in printing the artwork; the sales tax is due on creating the tangible personal property in Texas, not on printing the artwork in Texas.

In a rapidly escalating matter of concern to all District business taxpayers, the D.C. Council again will consider B23-35, the D.C. False Claims Amendment Act of 2020, which would expand the D.C. False Claims Act to tax matters above specified thresholds. The Council will review the committee mark-up tomorrow, November 17th. First reading would likely occur later in the day and, if approved, second (and final) reading could then occur during the first week of December. The bill would then be sent to the Mayor for consideration. The Council considered the bill early this year, but it faded from attention as COVID emerged.

The prior draft committee print barred application of the D.C. False Claims Act to tax matters unless: (1) the defendant’s District taxable income, District sales, or District revenue was at least $1 million for any of the taxable years subject to the action; and (2) the damages pleaded totaled at least $350,000. Taxpayers that exceed those thresholds, and ultimately found to have violated the Act, would then be subject to treble damages if B23-35 were adopted. Current District law excludes from the Act, “claims, records, or statements made pursuant to those portions of Title 47 of the District of Columbia Official Code that refer or relate to taxation.” D.C. Code Ann. § 2-381.02.

For more information about combating this False Claims Act expansion, please contact the Eversheds Sutherland SALT Team.

In this episode we discuss, “A Call for Clarity – New York Appeals Deadlines,” an article featured in Tax Notes and written by Ted Friedman, Counsel, Michael Hilkin, Counsel, and Peter Hull.

Two of these authors, Michael Hilkin and Peter Hull, join host Chris Lee, an Associate in the Atlanta Office, to discuss the state of procedural affairs in New York regarding COVID-19 and their call on Governor Andrew Cuomo (D) to provide clarity to taxpayers by issuing an executive order confirming that his prior executive orders tolling statutes of limitations apply to proceedings before both the state and city tax appeals agencies.

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In Determination 18-0255, the Washington Department of Revenue determined that a marketplace seller established substantial nexus in Washington for business and occupation tax purposes by participating in the marketplace facilitator’s “digital reassignment” process.  This process allows the facilitator to ship to the marketplace seller’s customers a competitor’s equivalent product if the marketplace seller’s product is not available at a nearby fulfillment center, while also transferring back ownership of one unit of the marketplace seller’s product in another fulfillment center to that competitor to refill the competitor’s inventory.  The Department concluded that this digital reassignment process resulted in the marketplace seller owning inventory in Washington fulfillment centers at various points in time and establishing physical presence in state.

The Indiana Department of Revenue has updated Information Bulletin No. 89, providing guidance for remote sellers and marketplace facilitators regarding the state’s sales tax physical presence standards. The updated guidance, which is effective July 1, 2020, explains the applicable factors for remote sellers and marketplace facilitators to consider when determining whether they have physical presence in the state. It also notes that remote sellers and marketplace facilitators that do not have physical presence in the state still must determine whether they meet the state’s economic nexus thresholds.

Last week, California voters passed Proposition 22 – which considers app-based drivers for rideshare and delivery companies to be independent contractors – and San Francisco voters passed Proposition L – which imposes an additional tax on businesses where compensation for executives significantly exceeds the median compensation of San Francisco employees. These ballot measures could have substantial financial impacts on employers with workers in the Golden State. The measures also raise important questions that businesses should consider regarding the classification of their workers as employees or independent contractors for purposes of applying San Francisco’s new CEO Tax under Proposition L.

Read our full Legal Alert here.

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This Week’s Question: Name the unusual sourcing case from last July where a state attorney general argued that a department of revenue’s position was incorrect.

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $20 UBER Eats gift card.

Answers will be posted on Saturdays in our SALT Weekly Digest. Be sure to check back then!