In this podcast, our state tax team discusses a matter where New Jersey upheld an assessment addressed to the wrong taxpayer and routed to the wrong location.
At the conclusion of a state tax audit resulting in an assessment, one of the first questions to consider is: “How much time do we have to do something about this?” Likely, there is a reference to a deadline of some sort somewhere around the middle of page 2 of the assessment notice. Those deadlines are often 30, 60, or 90 days.
In this edition of A Pinch of SALT, using baseball as a theme, Eversheds Sutherland attorneys Open Weaver Banks and Charles Capouet describe variations in state administrative appeal processes and considerations taxpayers should be aware of once they receive an assessment or similar notification from a state taxing authority.
Louisiana will offer a tax amnesty from November 16, 2015 to December 15, 2015. Taxpayers that agree to pay delinquent taxes will receive a waiver of 33% of penalties and 17% of interest. The 2015 program applies to taxes due prior to January 1, 2015, for which the Louisiana Department of Revenue has issued an individual or business a proposed assessment, a notice of assessment, a bill, a notice, or a demand for payment no later than May 31, 2015. The 2015 program will be the last amnesty program until at least 2025 and taxpayers that do not participate in it may face increased penalties.
View the full Legal Alert.
The Wisconsin Tax Appeals Commission overturned a $2.4 million assessment against an intellectual property (IP) holding company, ruling that the company’s income-producing activities for Wisconsin sales factor purposes – IP licensing and related activities – occurred entirely outside of the state. The taxpayer, a wholly owned subsidiary of the California-based shoe company Skechers USA, Inc. (Skechers), owned all of Skechers’ domestic IP and licensed that IP to Skechers and to unaffiliated third parties across the United States in exchange for a royalty. The taxpayer also engaged in the design, development and marketing of “Skechers” brand footwear from outside of Wisconsin. Despite the taxpayer’s lack of employees, representatives, and real or tangible personal property in the state, the Department of Revenue issued an assessment against the taxpayer based on its parent company’s wholesale sales of shoes bearing and incorporating the “Skechers” IP in the state. The Commission did not address whether the taxpayer had taxable nexus in Wisconsin and rejected the Department’s market-based approach for sourcing the taxpayer’s royalty income, finding that the sale of shoes was Skechers’ income-producing activity, not the taxpayer’s. Given that the taxpayer’s licensing activities occurred entirely outside of the state, the Commission concluded that its Wisconsin sales factor was zero. As a consequence of the ruling, several other cases held in abeyance will now move forward to determine whether the Department properly denied Skechers’ deductions for the royalty payments made to its subsidiary. Skechers USA, Inc. II v. Wisconsin Department of Revenue, No. 10-I-173 WI (July 31, 2015).
The Tennessee Supreme Court held that the Tennessee Department of Commerce and Insurance (Department) improperly imposed retaliatory taxes on Pennsylvania-domiciled insurance companies doing business in Tennessee, because Pennsylvania workers’ compensation assessments were not imposed on Tennessee insurance companies, but rather on the insurance companies’ policyholders. Tennessee Code § 56-4-218 authorizes the state to impose a retaliatory tax when another state imposes taxes or obligations on Tennessee insurance companies doing business in that state that exceed the taxes or obligations Tennessee imposes on that state’s insurance companies doing business in Tennessee. Here, Pennsylvania imposed assessments to support three workers’ compensation funds. The statutes authorizing these assessments state that they are imposed on insurers. However, a more recent statute states that the assessments “shall no longer be imposed on insurers,” and instead requires insurers to merely collect the assessments from policyholders. The court determined that this later statute implicitly repealed the original statutes and that the assessments are therefore not imposed on insurance companies directly. Because the assessments are imposed on policyholders rather than insurance companies, Tennessee is not authorized to impose a retaliatory tax on Pennsylvania insurance companies. The court also rejected the Department’s argument that a related regulation, which provides that insurance companies remain responsible for collecting and remitting the total assessment amounts even if policyholders fail to pay, imposes a direct burden on insurance companies. The regulation imposes only a responsibility to “collect and timely remit” payments and does not impose any penalties or fines on insurance companies when policyholders fail to pay, the court concluded. Several New York-domiciled insurance companies filed similar tax refund claims, which the Tennessee Court of Appeals also denied. The Tennessee Supreme Court denied review of the New York cases, stating that the New York statutes differed significantly from the Pennsylvania statutes. Chartis Cas. Co. et al. v. State, No. M2013-00885-SC-R11-CV (Tenn. Oct. 2, 2015).
In a closely followed case, a Florida district court of appeal held that a proposed assessment is not an assessment for statute of limitations purposes. The Florida Department of Revenue generally has three years to “determine and assess” any tax, penalty or interest due. The Department has long believed that issuing a notice of proposed assessment prior to the expiration of the three-year period satisfies the statute. After conducting a sales and use tax audit, the Department issued a notice of proposed assessment approximately two months before the expiration of the agreed-upon, extended statute of limitations period. The notice indicated that the proposed assessment would become a final assessment after 60 days unless the taxpayer submitted an informal protest. The taxpayer did not submit an informal protest but instead filed a complaint against the Department challenging the validity of the assessment on the grounds that it did not become final prior to the expiration of the statute of limitations. Although the statutory term “assess” was not defined in the general statute of limitations, the court looked to a separate provision in the tax statutes that tolls the “statute of limitations upon the issuance of final assessments” if the taxpayer follows certain informal conference procedures. In finding the Department failed to issue a timely assessment, the court concluded that the legislature could have used the broader term “assessments” if it believed that a proposed assessment was an assessment for statute of limitations purposes. Separately, the taxpayer and the Department had agreed to extend the statute of limitations period for the tax periods under audit to March 31, 2011. The district court of appeal rejected the trial court’s conclusion that the written agreement extended the statute of limitations period with respect to the first sales and use tax period to March 31, 2011, and the statute of limitations for each subsequent period by another month thereafter. Thus, the agreed-upon date applied to all of the tax periods under audit. Verizon Bus. Purchasing, LLC v. State of Fla., Dep’t of Revenue, No. 1D14-3213, 2015 WL 3622356 (Fla. 1st DCA June 11, 2015).
The Maine Board of Tax Appeals determined that a non-itemized installation charge was subject to the service provider tax (SPT) when a portion of the charge included the installation of telecommunications equipment. The taxpayer, an Internet service provider, invoiced customers a single “installation charge” for various services, which included connecting a wireless radio to the customer’s router with an Ethernet cable. According to Maine statutory provisions, the “installation, maintenance or repair of telecommunications equipment” is a service subject to the SPT. Given that telecommunications equipment is statutorily defined to include all transmission media that are used or capable of being used in the provision of two-way interactive communications, the board determined that the taxpayer was providing a taxable service. The board also rejected the taxpayer’s argument that the assessment was overstated because it was based on the value of both taxable and nontaxable services. Because the taxpayer did not separately state charges for nontaxable services on the invoice, the board concluded that it had failed to carry its burden of proof. [Corporate Taxpayer] v. Maine Revenue Servs., Docket No. BTA-2013-11 (Me. Bd. Tax App. May 2, 2014).
The Mississippi Supreme Court denied the taxpayer’s motion for rehearing in Equifax, Inc. v. Mississippi Dep’t of Revenue, a case on which we previously reported. The denial leaves undisturbed its June holding, reversing the Mississippi Court of Appeals’ decision, which held the taxpayer bears the burden of proving that an alternative apportionment method proposed by the State is arbitrary and unreasonable. The decision, in effect, appears to grant the Mississippi Department of Revenue unlimited power to impose alternative apportionment methods and to obligate taxpayers to defend against the impropriety of such methods. The court made two minor revisions to its original decisions. Those changes, however, have no significant impact on the court’s burden of proof holding. Nor do the changes impact the court’s holding that, essentially, Mississippi taxpayers no longer are afforded a de novo judicial review of tax assessments, even though a Mississippi statute, as interpreted by a prior Mississippi Supreme Court decision (W.C. Fore v. Dep’t of Revenue, 90 So. 3d 572 (Miss. 2012)), appeared to afford taxpayers exactly that—a right to a trial de novo and a full evidentiary judicial hearing on the substantive issues underlying a tax assessment. Equifax v. Dep’t of Revenue, No. 2010-CT-01857-SCT, reh’g den., op’n mod., 2013 Miss. LEXIS 604 (Miss. Nov. 21, 2013).
A California appellate court held that an ice cream maker’s property tax appeal involving an alleged failure to make an external obsolescence adjustment was subject to the “substantial evidence” standard of review. The taxpayer asserted that certain production equipment used in its novelty product lines was underutilized as a result of low market demand for those novelty products. The primary issue before the court was whether the failure to include an adjustment for external obsolescence was an error in the valuation method and thus a question of law to be reviewed de novo, or whether it was simply a matter of appraisal judgment and thus an issue of fact subject to the substantial evidence standard. The court concluded that the substantial evidence standard applied because the question was whether the assessment appeals board could conclude, based on the evidence presented, that the taxpayer failed to meet its burden of proving its entitlement to an external obsolescence adjustment based on underutilization. In affirming the judgment of the superior court upholding the assessment, the appellate court found that the taxpayer did not establish that it met the requirements for an underutilization adjustment because it did not show that the claimed underutilization was beyond the control of a prudent operator that was recognized in the market. Dreyer’s Grand Ice Cream, Inc. v. Cnty. of Kern, Case No. F064154 (Cal. Ct. App. July 22, 2013) (unpublished).
The Tennessee Department of Revenue announced that the existing opportunity to compromise prior year liabilities related to the disallowance of certain intangible expense deductions will be closing on September 30, 2013. For several years, Tennessee has been issuing wide-scale assessments—using the Department’s discretionary authority—to taxpayers that deducted intangible expenses paid to related parties. The mass compromise program was first announced in November 2011. See Tenn. Important Notice No. 11-17. While not set forth in the notices, the terms of the compromise typically consist of a 25% disallowance of the intangible expense deduction with interest due on any additional tax that may result from the disallowance. A waiver of penalties associated with a failure to disclose the deduction must generally be requested separately. According to the most recent notice, “the Department will not continue to recommend compromises on the same terms if contacted by the taxpayer after September 30, 2013.” Taxpayers with existing assessments or potential exposure related to this issue should consider whether to request participation in the compromise program in advance of the September 30 deadline. Tenn. Important Notice No. 13-06 (June 2013).
The add-back statute has been amended, effective for tax periods ending on or after July 1, 2012, to require pre-approval from the Commissioner before a taxpayer may deduct specified intangible expenses, subject to certain safe harbors that do not require pre-approval. See Tenn. Code Ann. § 67-4-2006(b)(2)(N).