As the 2016 presidential election draws near and everyone’s focus is on the candidates, state and local officials turn their thoughts toward how a new administration in Washington, D.C., might affect state budgets for 2017 and subsequent years. How will a new administration’s vision for the country influence spending and tax revenue for the states? Will a new administration make a push to enact legislation to resolve some long-standing state tax issues such as remote sales tax collection (Marketplace Fairness Act of 2015), business entity nexus (Business Activity Tax Simplification Act of 2015) and withholding on nonresident employees (Mobile Workforce State Income Tax Simplification Act of 2015)? The wait will be over Election Day to find out the direction the country will be headed over the next four years.
A recent study by the Pew Charitable Trusts reveals that tax revenues in many states have finally rebounded from the dramatic lows reached after the 2008 recession. However, the recovery has been uneven. Collectively, state tax revenues were 6.5 percent higher in the third quarter of 2016 than in the third quarter of 2008 (adjusted for inflation and seasonal fluctuations). This is hardly robust growth in that it covers a timespan of seven years. Only 29 states reported third-quarter 2015 tax revenue higher than their 2008 third-quarter level using inflation and seasonally adjusted data. For the 21 states that did not surpass their 2008 tax revenue levels, collections in four states were down by 15 percent or more.
The state tax revenue forecast for the remainder of 2016 and into 2017 indicates slow growth with the rate possibly falling off even last year’s modest pace. Many state fiscal directors are predicting softening collections from sales and use taxes and personal income taxes.
All this points to further aggressive tax discovery, enforcement, collection and anti-fraud efforts on the part of state revenue agencies.
Income, franchise and business entity taxes
Market-based sourcing of receipts from services
States continued the trend toward adopting market-based sourcing of income related to revenue from services and intangible assets. Historically, most states used the cost-of-performance method to source receipts from services. As of 2016, 24 states had adopted market-based sourcing rules in various forms. Some states like California and Pennsylvania use both market-based sourcing rules and cost-of-performance rules depending on the type of tax imposed on the entity (personal income tax or corporate income tax).
States vary in the amount of guidance provided on how to apply market-based sourcing rules. California issued substantial regulations and New York issued comprehensive draft regulations on market-based sourcing. Pennsylvania issued a 12-page Information Notice on sourcing sales from services. Even in states where guidance is provided, it can be a struggle to determine where to report a receipt when a seller of services or intangibles does not have access to information on the state where the buyer received the benefit of the services or intangibles. Although the customer billing address or the customer location from which the order was placed can sometimes be used to source receipts from a service or intangible, not all states will accept this reasoning. To properly determine how to source a receipt from services or intangibles, taxpayers should scrutinize all available statutory, regulatory and administrative guidance to ascertain the appropriate methodology for sourcing receipts under market-based sourcing.
States continue to expand the reach of their jurisdiction and the ability to impose taxes on activity within their borders. The issue of nexus continues to generate controversy, especially in light of technological advances in how products and services are brought to market. Unfortunately, no clear guidance exists in the form of judicial precedent or legislative action at the federal level on the amount of economic activity within a given jurisdiction that constitutes substantial nexus for income tax purposes.
In Washington state, a German pharmaceutical company challenged Washington’s “substantial nexus” threshold ($50,000 of in-state property, $50,000 of in-state payroll, $250,000 of in-state receipts or 25 percent of total property, payroll or receipts in state) under the U.S. Constitution. The company claimed it had no physical presence in Washington and only received royalties from sales of its product in the state. The administrative law judge (ALJ) disallowed the company’s petition for correction of the assessment. In denying the petition, the ALJ dismissed the constitutional challenge under the Due Process and Commerce clauses by indicating a nonjudicial body does not have the authority to declare statutes it administers unconstitutional. The ALJ further found no physical presence was required under Washington’s substantial nexus threshold and the company had exceeded the receipts threshold of $250,000. The ALJ held that the US-Germany tax treaty’s nondiscrimination requirement and intent to provide relief from double taxation did not prevent taxation of the royalties because the tax is imposed on both U.S. and non-U.S. businesses. Finally, the company could exclude the income taxed by Washington from its German tax base. (See Det. No. 15-0251, 35 WTD 230 (May 31, 2016).) The case highlights the risk that non-income businesses taxes pose from a nexus standpoint.
In a decision reaching a contrary result, the Virginia Tax Commissioner held that a company engaged in providing customized software subscriptions through cloud computing services did not have corporate income tax nexus with Virginia. The taxpayer obtained the basic software from a third-party development company that modified the software to the specifications of its clients. The taxpayer resold the customized software on a subscription basis to its customers. All transactions with the developer and its customers were conducted through cloud computing services. The taxpayer requested the commissioner rule on whether having a Virginia client would cause nexus for corporate income tax purposes. In finding that the taxpayer did not have Virginia corporate income tax nexus, the commissioner determined the activities conducted in Virginia by the taxpayer were not unprotected and were more than de minimis under P.L. 86-272. (See Virginia Public Document Ruling No. 16-135 (Va. Dep’t of Revenue, June 24, 2016).) The ruling was notable in several other respects. It highlights the fact that Virginia applies an income tax nexus standard normally reserved for companies that sell tangible personal property, i.e., P.L. 86-272, to other types of businesses like licensing software. In addition, the commissioner’s decision clarifies the increasingly confusing treatment of cloud computing services among the various states.
Single-factor sales apportionment and factor presence standards
Even though it seems to be a recurring theme in state taxation trends for the last several years, the move toward single-factor sales apportionment continues in 2016 with Connecticut (effective Jan. 1, 2016), Delaware (phased in over four years), Louisiana (effective Jan. 1, 2016) and North Carolina (phased in over three years) joining the states that implemented single-factor sales apportionment.
Bright-line nexus standards, similar to the California and the Multistate Tax Commission model statutes, remain a “hot item.” In 2015, Tennessee enacted factor presence standards for tax years beginning on or after Jan. 1, 2016. Alabama also passed a bright-line nexus threshold that took effect this year that includes both income and sales tax.
Taxing nonresidents: telecommuters
Employees who work from home in a state where the employing company doesn’t otherwise have a presence or other business activity can create a nexus issue for the employing company. Under P.L. 86-272, a protected activity for a seller of tangible personal property is the employment of a resident individual working from a home office whose only activity in the state is the solicitation of sales. Nexus issues arise when individuals engaged in otherwise protected activities start to expand their duties and take on administrative functions for the employing company or other back-office-type operations. Additionally, for companies that are service providers and do not have protection under P.L. 86-272, employing an individual who telecommutes from a state where the company does business will cause a nexus issue regardless of the type of activity engaged in by the telecommuting employee.
A New Jersey Tax Court decision held that an employee who telecommuted from her residence in New Jersey was sufficient to create nexus for an out-of-state corporation. The employee performed her assignments in New Jersey, communicated with her employer and supervisor from New Jersey, and made her work product available to her employer and supervisor and the employer’s customers in New Jersey. Although her employer maintained an office for her in another state, she traveled there for business purposes only twice a year. On all other workdays, she performed her duties in New Jersey. The employer withheld New Jersey income tax from the employee’s wages and had property in the state in the form of a laptop that the employee used for her assignments. The court ruled that the employee’s daily activities in the state were sufficient to satisfy the nexus requirement of the Commerce Clause. (See Telebright Corp., Inc. v. Division of Taxation, N.J. Tax Ct., Dkt. No. 011066-2008, March 24, 2010.)
More recently, in a ruling issued by the Virginia Tax Commissioner, an S corporation located outside Virginia was found to have nexus in Virginia based upon the activity of an in-state employee working from home. The taxpayer employed a Virginia resident who worked from a home office performing bookkeeping, accounting, human resource, payroll and customer support Based upon the employee’s activities in Virginia, the commissioner found that the taxpayer had nexus in Virginia. (See Virginia Pub. Doc. No. 16-15 (March 3, 2016).)
Multistate Tax Compact apportionment controversy
The Multistate Tax Compact apportionment controversy appears to have ended. After taxpayer losses in cases involving elective use of the Multistate Tax Compact’s three-factor apportionment in Minnesota, Oregon and Texas, litigation continued in California and Michigan. The U.S. Supreme Court has probably thrown the last shovelful of dirt on the grave of this multistate taxpayer relief campaign by refusing to hear a taxpayer appeal from an adverse state court decision.
The California Supreme Court rendered a final decision in Gillette v. Franchise Tax Board that held the Multistate Tax Compact’s elective apportionment provision was not permitted under California law. The court further held the taxpayer was not entitled to elect between the compact’s equally weighted three-factor formula and the statutory single-factor sales formula allowed under California law. More recently, on Oct. 11, 2016, the U.S. Supreme Court denied a Petition for Writ of Certiorari in the Gillette case effectively ending litigation in the case.
The Michigan Supreme Court denied an application for leave to appeal in Gillette Commercial Operations v. Department of Treasury. This likely terminates the Michigan Multistate Tax Compact apportionment controversy.
The takeaway seems to be that agreements among states with respect to tax matters cannot override implicit policies, explicit legislative tax enactments or state sovereign power to set their own tax policy. This is apparently true even when such policies, law and powers are put in place retroactively.
State transfer pricing
In May 2015, the Multistate Tax Commission proposed and approved the Arm’s-Length Adjustment Services (ALAS) program with a targeted implementation date of July 1, 2015. The impetus for ALAS was to provide training to state revenue officials with the idea of beginning transfer-pricing audits in the near future. Shortly after approving the ALAS program, the commission implemented a four-year charter period for the participating states, which were at the time Alabama, Iowa, Kentucky, New Jersey, North Carolina and Pennsylvania. Although the federal government and the European Economic Community have begun to move forward with their program to rein in perceived international tax avoidance (base erosion profit shifting), the Multistate Tax Commission and states are not content to await the results of the program.
The commission delayed the implementation date of ALAS, but recently indicated its intent to move forward with the program. Anecdotally, it has been said that much of the interest in ALAS comes from states that do not employ some form of mandatory unitary combined reporting. The hope is to generate additional interest among states that require unitary combination by focusing attention on transfer-pricing issues related to transactions with foreign affiliates.
Another aspect of possible attention is information sharing among participating states. There is a question of whether to include third-party transfer-pricing consultants in an information-sharing program. The commission hopes to get an agreement in place to start information sharing by the end of 2016. There has also been some discussion within the commission’s transfer-pricing group of rebranding the ALAS program, perhaps adopting a more compelling moniker.
Despite the perceived need for the program by the participating states, many have not been able to come up with the budget to support the program. Delays in the implementation of the ALAS program seem inevitable based upon the issues that need to be addressed in order to fund the program and provide a consistent and comprehensive process among the states in its application.
Some recent court decisions addressed transfer-pricing issues at the state level. The Indiana Department of Revenue was defeated in an attempt to disregard the transfer prices used by a national retailer of sporting apparel. In Columbia Sportswear USA Corporation v. Indiana Department of State Revenue, Ind. Tax. Ct., No. 49T10-1104-TA-00032 (Dec. 18, 2015), the taxpayer challenged an assessment of tax for the years 2005, 2006 and 2007. The Department of Revenue alleged that intercompany transactions between Columbia and its affiliated entities distorted Columbia’s Indiana source income. In ruling for the taxpayer, the Indiana Tax Court found that the department is not permitted to adjust Columbia’s taxable income under Indiana Code section 6-3-2-2(l) (the state’s alternative apportionment statute). The court stated to “conclude that Indiana Code section 6-3-2-2(l) authorizes the Department to make changes outside the context of allocation and apportionment would be like trying to pound a square peg into a round hole.” Additionally, the Tax Court held that Columbia’s transfer-pricing studies established that Columbia’s intercompany transactions were conducted at arm’s-length and that the adjustments made by the Indiana Department of Revenue were unreasonable because it attributed more than 99 percent of the gross income of the consolidated group to Columbia.
The methodology employed in performing transfer-pricing studies is at the forefront of the litigation involving the “Chainbridge” cases being litigated in Washington, D.C. Three oil companies, Exxon Mobil, Shell Oil and Hess Oil, were assessed additional corporation franchise tax by the Office of Tax and Revenue (OTR) for the 2007 to 2009 tax years. The assessments issued to the oil companies were based upon a controversial transfer-pricing approach known as the “Chainbridge” method. (The methodology is a transfer-pricing analysis conducted by Chainbridge Software, a third-party vendor retained by the District of Columbia to assist with audits of large multinational corporations.)
The taxpayers successfully argued at the Office of Administrative Hearings (OAH) that the OTR could not rely on the Chainbridge methodology based upon the decision in Microsoft Corporation, Inc. v. Office of Tax and Revenue. Subsequently, the District of Columbia’s Court of Appeals overturned the finding by the OAH. The appeals court remanded the case to the OAH for further consideration. (See District of Columbia Office of Tax and Appeals v. ExxonMobil Oil Corporation, et al., District of Columbia Court of Appeals,Nos. 14-AA-1401, 14-AA-1403 & 14-AA-1404, June 30, 2016.) These cases serve as a “warning shot” to taxpayers with complex multistate or multinational operations where transfer-pricing exposure may exist. Attention should be focused on the state tax aspects as well as the international ones.
State attacks on nonprofit status
The nonprofit status of hospitals has recently come under attack. As the medical profession changes in terms of the size of hospitals and how medical services are delivered, the structure of large hospital organizations has changed. Historically, hospitals were operated as standalone facilities with medical personnel as employees. Today’s hospitals are large multifacility organizations that provide not only traditional medical care, but also related goods and services through clinics, surgical centers, durable medical equipment stores, pharmacies and captive medical practices. Many of the related entities and services are organized and operated as for-profit entities so the lines between the nonprofit operations of the hospital and for-profit entities owned by the hospital become blurred.
This has led some states to challenge the nonprofit status of the mega hospitals. These challenges have initially come in the form of questioning exemptions for property taxes. In Illinois, the Carle Foundation (Carle) owns four parcels of land, operating a hospital on two of the parcels, a care center on the third parcel and a power plant that services the other parcels on the fourth parcel. Illinois law provides a property tax exemption for nonprofit hospitals. Under state law, if the hospital provides services to low-income or underserved individuals equal in value to the estimated property tax liability, then the hospital is to be given an exemption for the property. Carle was denied an exemption for the four parcels and sought a declaratory judgment that the exemption for nonprofit hospitals applied to its property. The trial court granted the property tax exemption for the four parcels. The defendant, Cunningham Township, appealed the decision. The Illinois Appellate Court analyzed the exemption for nonprofit hospitals under Illinois law and determined that it was unconstitutional since it did not require exclusive use of the property for a charitable purpose. Therefore, the exemption was not available to the Carle Foundation. (See Carle Foundation v. Cunningham Twp., Nos. 4-14-0795, 4-14-0845 (Ill. App. Ct. Jan. 5, 2016).)
In New Jersey, a qualified nonprofit hospital was ineligible for a New Jersey property tax exemption because it operated and used the subject property for profit-making purposes in violation of the profit test enumerated in Paper Mill Playhouse v. Millburn Township, 95 NJ 503 (1984). The New Jersey Tax Court presented the following reasons for ruling that AHS Hospital Corp. (AHS) was ineligible for a property tax exemption. First, AHS permitted exempt hospital property to be used in “for-profit” activities. Second, AHS subsidized the operations of the various related and unrelated for-profit entities through working capital loans, capital loans and recruitment loans. AHS also did not meet the not-for-profit test because it could not support the reasonableness of the compensation paid to its executives and, further, the methodology used to compensate its physician group’s involved profit sharing. The New Jersey Tax Court held that “with the sole exceptions of the auditorium, fitness center, and the visitor’s garage, which met the profit test, the hospital’s claim for a property tax exemption was denied based on the court’s finding that the subject property was being used substantially for profit.” (See AHS Hospital Corp. v. Town of Morristown, New Jersey Tax Court, Nos. 010900-2007, 010901-2007, and 000406-2008, June 25, 2015.)
Most states exempt entities organized as nonprofit corporations from corporate income tax. In light of the cases challenging the nonprofit status of hospitals and real estate tax exemptions, it may only be a matter of time before the states begin to challenge the nonprofit status of hospitals for corporate income tax and other tax purposes.
Sales and use taxes
Nexus and the physical presence test
Nexus issues stay in the sales and use tax spotlight as states continue to push the envelope on what activities create a filing and collection responsibility. States have shown an increasing willingness to challenge the physical presence standard laid out in Quill more than 20 years ago. Taking their cue from the U.S. Supreme Court’s opinion in the Direct Marketing Association case, they argue that the physical presence test is outdated. They maintain the standard does not appropriately capture the modern-day online retailer sales tax landscape and should be overturned.
To this end, two states enacted legislation imposing sales tax collection and remittance duties on out-of-state businesses based on economic nexus, i.e., sales alone, without physical presence. The targets, of course, are online retailers whose sales could generate an estimated $25 billion in additional sales tax revenue if they are brought within state-taxing authority.
Under a new law, Alabama requires remote retailers with more than $250,000 of in-state annual sales to collect and remit sales tax. The Department of Revenue publicly asserted that Alabama is capturing about 80 percent of online sales tax due to its voluntary registration initiative and aggressive discovery efforts. Alabama has invited legal challenges to its economic nexus statute, and taxpayer appeals are working their way through the appellate system.
South Dakota enacted legislation requiring remote retailers with annual in-state sales exceeding $100,000 or 200 separate transactions to collect and remit sales tax. South Dakota admitted the online sales tax statute violates federal law and is not pursuing enforcement pending resolution of the nexus issue in the courts
Wyoming is considering a bill similar to those in Alabama and South Dakota. The state’s Joint Interim Revenue Committee voted unanimously in September to direct its Legislative Service Office to draft an online sales tax bill that will be considered in the 2017 general session of the legislature scheduled to convene Jan. 10, 2017.
Colorado won a victory in its battle with the Direct Marketing Association over its onerous out-of-state seller notification requirements. The dispute originally worked its way up to the U.S. Supreme Court, which determined the notification requirements did not involve a state tax per se and, therefore, the federal Tax Injunction Act did not bar a U.S. court from hearing the DMA’s challenge prior to it being litigated in Colorado state court. This seemed like a win for remote retailers until a federal appeals court on remand held that the Colorado notification law did impose an unconstitutional burden on interstate commerce. As a result, the DMA filed a writ of certiorari with the U.S. Supreme Court to re-hear the case on the merits of the interstate commerce challenge.
Louisiana followed Colorado’s lead in requiring remote sellers to report information for online or catalog sales made to residents in the state. The goal is to impose information reporting costs of such magnitude that out-of-state businesses will throw in the towel and register for sales tax even when nexus does not exist. The data collected will also facilitate use tax assessments against in-state residents that fail to self-assess tax on the reported purchases.
National developments affecting sales and use taxes
Three proposals to impose sales tax on online retailers are still pending in Congress. Most recently, Rep. Robert Goodlatte introduced the Online Sales Simplification Act of 2016. The act purports to use a more streamlined system to collect and remit sales tax on remote sales. However, its approach is a confusing hybrid of rules that apply in both the seller’s state and the buyer’s state. Online retailers would follow the rules of their home state to determine what is taxable. The rate of the destination state would be applied unless the buyer’s state has chosen not to participate in the program. In the latter case, the rate of the seller’s state would be imposed. Remote retailers must remit the act’s sales tax collections to their home state revenue agencies. The tax agencies will forward the sales tax to a national clearinghouse for distribution to the appropriate state. However, the “devil is in the details” and the fact that a clearinghouse agency will be needed to allocate sales tax collections among the states has many businesses deeply skeptical of the legislation.
The other proposals to impose sales tax on online retailers before Congress like the 2015 Marketplace Fairness Act (S. 698) and the Remote Transactions Parity Act (H.R. 2775) have made little progress in the past.
The Streamlined Sales and Use Tax Agreement movement is seemingly stalled. No new states joined its ranks during 2016. The lack of headway in getting remote seller tax legislation through Congress and the proliferation of other state solutions to the issue like click-through nexus, out-of-state seller notification requirements and bright-line nexus are major reasons for this. Approximately 18 states now have some version of click-through nexus in place.
In February, the U.S. Senate passed Conference Report 114-376 to accompany H.R. 644, the Trade Facilitation and Trade Enforcement Act of 2015. Together, these make permanent the ban on state and local taxation of internet access. Before becoming permanent, the ban of state and local taxation on internet services was enacted by the Internet Tax Freedom Act and was extended multiple times. The new act delays the phaseout of the grandfather provision until June 30, 2020, giving those states that still tax internet access (Hawaii, New Mexico, Ohio, South Dakota, Texas and Wisconsin) time to transition to other sources of revenue.
Computer software and digital goods
The taxation of software and cloud computing remains a key sales and use tax concern. Gartner, Inc., an information technology research and advisory company, anticipates worldwide spending on information technology to reach nearly $3.5 billion in 2016. A study by Goldman Sachs forecasts a 21 percent increase in 2016 global Software as a Service (SaaS) sales. Most states that impose a sales and use tax include prewritten (canned) software sold in tangible form, e.g., CD, in their tax base. Thirty-two states tax software delivered in electronic form. However, proper planning can minimize sales and use tax costs. Downloaded software in select states like California is nontaxable. Unbundling software contracts to separately state nontaxable elements such as training or custom interfaces is another strategy to accomplish this. SaaS is treated as nontaxable in states like Florida, Iowa, Michigan and Minnesota. Where possible, businesses should purchase a cloud version of new software instead of having the program installed on their server for use in these states.
Starting Jan. 1, 2016, the City of Chicago began applying its nonpossessory lease transaction tax of 5.25 percent to SaaS and other cloud computing applications used within its borders. Prior to that, the tax was 9 percent. However, digital goods, such as music downloads and internet movie services, are still subject to the 9 percent city amusement tax. Businesses and individuals should pay close attention to these new levies and begin developing a compliance strategy as soon as possible.
Effective Aug. 1, 2016, Pennsylvania extended its sales and use tax to products delivered to a customer electronically, digitally or by streaming, unless the transaction is otherwise exempt. This includes videos, such as movies, streaming services, music, other audio, e-books and any otherwise taxable printed matter.
With state and local units of government stepping up their discovery and audit activities, businesses are increasingly at risk for large sales and/or use tax assessments. One way to prepare for and defend against such assessments is to have formal sales and use tax compliance policies in place. Such policies should lay out who in the organization is responsible for key decisions in areas like nexus, the accrual of use tax, the retention of records and the issuance of exemption certificates. They should be in written form and contain sufficient detail to ensure that the business’s compliance is accurate and consistent over time. If a company is deficient in one or more of these dimensions, it should consider performing a sales and use tax policy and procedures review, using internal resources or retaining a state and local tax consultant to do the analysis. Adopting best practices for sales and use tax can reduce costs in the long run and remove unwanted financial risk.
Multistate retailers should weigh having a nexus study to map out the company’s sales footprint. Identifying potential exposure and remediating it through tax amnesty and voluntary disclosure programs is an effective way of safeguarding the value of the business. If you are buying or selling the business, an exposure study can be critical to making the correct pricing decision.
Other state developments
Nevada joined the ranks of Ohio and Washington with gross receipts taxes. It now imposes its Commerce Tax on gross revenue of most business entities engaged in a trade or business. It applies if the annual in-state revenue exceeds $4 million. Companies are required to file a return if their revenue is less than $4 million, but will pay $0 in tax. The tax period for purposes of the new tax began July 1, 2015, through June 30, 2016 (regardless of the entity’s federal income tax year). Tax must be remitted using an annual return. The initial Commerce Tax return and payment was due on Aug. 15, 2016.
The tax rate varies based on the type of business the entity is engaged in. Rates range from a low of 0.051 percent for mining and gas industries to a high of 0.331 percent for rail transportation. Unclassified businesses are taxed at 0.128 percent. For companies with multiple activities, the tax rate for the primary business activity is based on the percent of Nevada gross revenue.
As noted above, non-income business taxes pose a special exposure risk because of their low nexus thresholds. P.L. 86-272 protection is not available because this federal standard only applies for state income tax purposes to companies that sell tangible personal property. The state of Washington utilizes a bright-line economic nexus threshold for its business and occupation (B&O) tax on gross receipts. Wholesale businesses are deemed to have a B&O tax filing responsibility if they have one of the following:
- In-state gross income of more than $267,000
- Washington payroll of more than $53,000
- More than $53,000 of in-state property (or)
- Have at least 25 percent of their property, payroll or sales in Washington
For other businesses, as little as one day of physical presence is sufficient to establish a filing obligation. Washington also has a click-through nexus standard for retailers. The click-through provisions are unique in that they apply to both Washington’s sales tax and to its B&O tax on gross receipts.
The flood of tax-related qui tam or “whistleblower” lawsuits targeting businesses has slowed down in some states, including Illinois. In a string of decisions, largely supported by the state’s Department of Revenue, Illinois courts dismissed a large number of qui tam suits involving the sales tax treatment of delivery and other charges. However, the number of such actions in other states shows no signs of diminishing. Whistleblower actions are brought directly in state courts, outside of the normal state audit and appeals process. Large awards are sought by parties not directly affected by the tax practices in question. The suits are launched with the goal of obtaining a settlement from retailers who want to avoid the time and expense of litigating a claim that is likely to be frivolous. With the release of its new regulations on the taxability of freight charges, Illinois finally took steps to halt its deluge of court-clogging qui tam suits. The Illinois Appellate Court has issued two recent opinions holding that businesses that did not collect Illinois sales tax because of legitimate questions concerning nexus were not recklessly disregarding state law. As a result, they could not be held liable under Illinois False Claims Act. (See The People ex rel. Beeler, Schad and Diamond P.C. v. Relax the Back Corporation and State of Illinois ex rel. Schad, Diamond and Shedden P.C. v. National Business Furniture LLC.) Retailers and other businesses should examine their sales and use tax practices carefully in states with whistleblower statutes that extend to tax matters. They could present a serious risk in the form of legal judgments, nuisance lawsuits and higher attorney fees.
Taxpayers with nexus exposure or delinquent tax issues related to Pennsylvania should consider taking advantage of the state’s pending tax amnesty program. The program covers most types of state tax and applies to liabilities from tax periods ending prior to Dec. 31, 2015. Taxpayers granted amnesty will benefit from the waiver of all penalties in connection with past tax liabilities as well as a 50 percent reduction in the interest due on such liabilities. Amnesty applications and filings must be submitted online to the Pennsylvania Department of Revenue by June 19, 2017. Note that assessments and liabilities not resolved through the amnesty program will be subject to a 5 percent nonparticipation penalty after the amnesty expires. It is not clear that seeking a settlement through the state’s regular voluntary disclosure program will be foreclosed during the amnesty program. If not, it could potentially be more advantageous to the extent that the look-back period is limited to only four years.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.