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.”

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.

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

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.

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.

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

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. 

In a continuing effort to clarify certain Texas Margins Tax issues, the Texas Comptroller of Public Accounts (Comptroller) issued Tax Policy News in July 2010, which provides additional guidance on the Texas Margins Tax costs of goods sold computation; apportionment; and margin tax recovery fees. Texas statutes and regulations do not provide significant guidance on how these provisions should be applied. 

Regarding the costs of goods sold deduction, the Comptroller clarified that this deduction may only be taken by taxpayers that produce “goods,” i.e., real property, tangible personal property, and specifically enumerated services related to video and radio programming. To the extent a taxpayer sells “mixed transactions”—transactions containing elements of both a “good” and a service—the taxpayer may only subtract as costs of goods sold those costs “in relation to” the good. However, a taxpayer may nonetheless deduct as costs of goods sold up to 4% of its back-office (“indirect or administrative overhead”) costs allocable to “the acquisition or production of goods.”

Continue Reading Texas Margins Tax Roundup: Comptroller Provides Additional Margins Tax Guidance

The U.S. District Court (E.D. Pa.) remanded a case to Pennsylvania’s state courts in a suit challenging a local improvement district’s assessment scheme on the grounds that the federal courts lacked jurisdiction over the action based upon the Tax Injunction Act (TIA). Nigro v. City of Philadelphia, No. 10-987 (E.D. Pa. Aug. 25, 2010). The TIA generally prohibits federal courts from entertaining cases regarding state and local “taxes” if the parties have a “plain, speedy and efficient remedy” available in state court. Taxing jurisdictions frequently raise the TIA as a basis for dismissing cases filed by taxpayers in federal court. However, in this case, after the taxpayer filed suit in state court, the City removed it to federal court and the taxpayer was seeking to have the case remanded back to state court pursuant to the TIA.

Continue Reading City of Philadelphia Loses TIA Challenge

When the going gets tough, the tax collector gets creative—or so it would seem, given two recent developments that border on the bizarre.

Amateur bloggers are suddenly discovering that, unbeknownst to them, they have been running a business—and the City of Philadelphia wants its cut. The City has informed a number of bloggers that they owe $300 for business privilege licenses, as well as wage tax, business privilege tax, and of course taxes on any profits their sites bring in. The concept seems logical when applied to high-trafficked, well-known blogs, but the application of the business license tax—due to the provision that a license is required whether or not the business actually makes a profit—has angered some people who blog for fun, not profit, and earn only negligible amounts of cash in the process. One Philadelphian was required to purchase a license and pay tax on a blog that had made $11 in two years, another for a blog that made $50 in three. The City’s argument is that selling advertising space in hopes of profit qualifies a blog as a business, regardless of whether it succeeds and even if the author views the blog as merely a hobby. But one can reasonably question the propriety of forcing bloggers to pay the City $300 for the privilege of earning $11.

Similarly, New York State is using its imagination to help ease Albany’s financial pain. The State has recently begun to enforce an obscure provision that levies the State sales tax on “sliced or prepared bagels (with cream cheese or other toppings).” The tax also applies to any bagel eaten in a store, even if the bagel maintains its bodily integrity and stays topping-free. The tax does not, however, apply to unprepared bagels purchased to go. Thus far, only Bruegger’s Bagels (a national chain that operates in upstate New York) has received an audit, but there may be more to come. Meanwhile, franchise owners and customers alike are a little baffled. That the tax applies to sliced bagels but not to other sliced bread products is perplexing. To help mitigate this problem, at least one franchise owner has posted signs in his stores explaining that the new tax is a result of a government mandate, not a decision by Bruegger’s to charge for slicing services. The sign also hints at the owner’s frustration with Albany, informing customers that the stores “apologize for this change and share in your frustration on this additional tax.”

So to slice, or not to slice? Whether it is worth incurring the additional charge is up to the New York consumer; just don’t blog about it in Philly.