The Securities and Exchange Commission (SEC) has demonstrated an increased scrutiny of tax accounting by issuing two fines in the last seven months. Most recently, the SEC fined a taxpayer $200,000 for failure to have the proper controls in place to ensure accurate accounting related to compliance with states’ sales and use tax laws. As previously reported in the September 2010 issue of the SALT Shaker, the SEC fined a taxpayer for alleged improper accounting related to tax reserve manipulation.

Continue Reading SEC Fines Company for Failure to Collect and Remit State Sales Tax

pet of the month2.jpgAudrey is the delightful miniature Yorkshire Terrier of Atlanta associate Miranda Davis. Audrey joined Miranda’s family when she was barely two months old, and her family cannot believe she will be 10 this year! Despite her years (and size—only 6 pounds), Audrey loves a good wrestling match and to play with her toys. But apparently not all squeaky toys are created equal—Audrey will only play with toys she is in the mood to play with, and frequently turns her nose up at toys Miranda selects for her. pet of the month.jpgAudrey’s other favorite activity is napping in the sun.

As you might have guessed, Audrey is not your typical lap dog. She will sit on someone’s lap, but only if it is her idea. And although she is stubborn, she is even more precious—it is hard to resist her sweet face and big brown eyes. Watch out—she loves to give kisses when you aren’t looking!

Taxpayers have just begun to struggle with the application of states’ related party addback provisions. On January 31, 2011, the Massachusetts Appellate Tax Board (ATB) issued its decision in the first Massachusetts case that addressed the application of the related party addback provision to an intercompany interest and royalty expense. Kimberly-Clark Corp. et al. v. Comm’r of Revenue, Mass. App. Tax Bd., Dkt. No. C282754 (Jan. 31, 2011). In Kimberly-Clark, the ATB addressed the deductibility of interest expense related to the company’s cash management system and royalties related to intellectual property.

The Massachusetts Department of Revenue (Department) assessed the taxpayer based on a denial of the interest expense deduction for pre-addback and addback tax years. The ATB upheld the Department’s denial of the expense deduction because it determined that, based on the preponderance of the evidence, the taxpayer’s cash management system loans did not constitute bona fide debt. The ATB determined that the loans were not debt because the taxpayer had no expectation that the cash advances would be repaid, and there were no security, default, or collateral provisions.

Continue Reading Kimberly-Clark Gets No “Huggies” from Massachusetts Appellate Tax Board

The New Jersey Tax Court sent a strong message to the New Jersey Division of Taxation that the Legislature—and not the Division—sets the bounds of state taxation. IBM Corp. v. Dir., Div. of Taxation, No. 011630-2008 (N.J. Tax Ct. Jan. 26, 2011). The Division issued Notices of Assessment associated with the add back of extraterritorial income deducted in the computation of federal taxable income pursuant to I.R.C. § 114(e).

The Division issued Notices of Assessment to IBM Corp. (IBM) and Crestron Electronics, Inc. (Crestron) that adjusted their income to include extraterritorial income in New Jersey taxable income. IBM and Crestron argued that New Jersey taxable income was directly linked to federal taxable income as reported on line 28 of the federal tax return—which did not include the extraterritorial income. Further, while New Jersey makes certain adjustments to the federal taxable income amount, none of the adjustments relate to the inclusion of extraterritorial income. The Tax Court held that the Division’s erroneous reading of the state’s taxable income definition and the Division’s expansive reading of its own regulation, did not justify the Division’s position.

As state tax authorities are becoming increasingly creative in their quest to find more revenue, the decision is a welcome reminder of the limits on statutory authority. Although it is unclear whether the Division of Taxation will appeal, and I.R.C. § 114 has since been repealed, those who included extraterritorial income in their New Jersey tax returns should consider filing refund claims.

New York amended its False Claims Act (FCA) to allow whistleblowers to bring qui tam actions against taxpayers for false claims under New York tax law. If subject to the FCA, a taxpayer could be subject to civil penalties, treble damages, and reimbursement of the plaintiff’s costs including attorney fees. N.Y. STATE FIN. LAW § 189(1)(g), (3).

While the FCA has been in existence in New York since 2007, the recent amendment repeals a statutory preclusion for actions related to the tax law. Under the amendment, a taxpayer is subject to the FCA if it has at least $1 million in income or sales in a tax year and the whistleblower pleads damages in excess of $350,000. Id. § 189(4)(a). This dramatic change occurred quietly because the FCA is in the Finance Law rather than the Tax Law. Interestingly, Eric Schneiderman, New York’s Attorney General, was a chief proponent of the amendment while a member of the New York Senate, and he now has enhanced authority to investigate and commence civil actions under the amended FCA. Id. § 190(1).

Continue Reading Rise of the Tax “Snitch”: How Amendments to New York’s False Claims Act May Ensnare Taxpayers and Practitioners Alike

With the last day for introduction of California legislation ending on February 18, a number of significant bills that could potentially affect California businesses snuck into the fray.

The new tax bills include legislation that provides for “clawbacks” and sunsets of tax incentive legislation, disclosure of some recipients of tax incentives, and the ability of local governments to impose personal and corporate income taxes.

Continue Reading Last Call – New Tax Bills in Play As Last Day to Introduce California Legislation Passes

Proposing to significantly overhaul Georgia’s tax code, including an interesting attempt to eliminate sales tax exemptions for “Holy Bibles” and Girl Scout Cookies, H.B. 385 was introduced on February 24. The 127-page bill is intended to be revenue neutral and largely mirrors the recommendations of the Special Council on Tax Reform and Fairness for Georgians (the Council) (see Sutherland Legal Alert, January 10, 2011 for detailed coverage of the Council’s report). H.B. 385 would eliminate most sales tax exemptions and subject certain services to tax, reduce or eliminate most income tax credits and personal deductions, phase in lower personal and corporate income tax rates, and implement a communications services tax. The bill, introduced by the Special Joint Committee on Georgia Revenue Structure (the Committee), is expected to be amended while still in Committee, but will then require an up or down vote when introduced to both houses of the Legislature.

Continue Reading Get Out Your Dustpan: Georgia Bill Proposes Sweeping Tax Reform

In a recent decision by the Washington Supreme Court, the court found that a taxpayer had nexus in Washington for B&O tax purposes even though the taxpayer’s sole presence in the state consisted only of infrequent visits by sales employees to customers. Lamtec Corp. v. Dep’t of Revenue, Docket No. 83579-9 (Wash. Jan. 20, 2011) (en banc). In holding that Lamtec had B&O nexus in Washington, the court stated that, “to the extent there is a physical presence requirement, it can be satisfied by the presence of activities within the state” (emphasis added).

Lamtec, a manufacturer of insulation and vapor barrier in New Jersey, sold its products wholesale to customers via telephone. Lamtec had no facilities, offices, or employees located in Washington. However, several times a year, Lamtec sales employees visited customers in Washington to provide information regarding Lamtec products. The sales employees did not solicit sales. The Washington Department of Revenue (Department) asserted that Lamtec had nexus in Washington and issued an assessment to Lamtec for the period in which it was not registered.  Lamtec challenged the assessment.

Continue Reading Washington Supreme Court Finds Nexus, Confuses the Rest of Us