2016 midyear state and local tax update - Other tax developments

Fantasy sports gaming has recently become the Wild West of state tax and regulatory policies. Unquestionably, the money that changes hands in sports fantasy gaming is of enormous magnitude. Some states have policies that make it illegal to operate an internet gambling venture within their borders. Others have made little or no effort to impede or regulate it. Fewer states still have formulated policies that deal with withholding tax on prize money, possible sales/use tax on information/cloud computing, nexus for the companies that operate these ventures, gambling-related excise or occupation taxes, and licenses.

Indiana enacted legislation in March 2016 that authorizes fantasy sport gaming in the state (SB 339). The law provides for license fees to be paid by operators of these businesses but does not specify how they are otherwise to be taxed. Massachusetts also put rules in place governing fantasy sports gambling in March 2016; however, no license fees are imposed. It appears that the main tax-related burden for operators is to notify participants of their responsibility to pay Massachusetts tax on their winnings. On the other hand, Tennessee has enacted a 6 percent privilege tax on adjusted revenues of fantasy sports operators. Colorado and Michigan are also examining these issues for fantasy sports gaming.

Revenue concerns are still sparking interest in non-income business entity taxes. In Oregon, a public ballot initiative has been launched which would impose a 2.5 percent tax on the in-state gross receipts on corporations. The rate applies to receipts in excess of $25 million and must be paid in addition to a minimum tax of $30,001. It is estimated the new taxing schedule will raise more than $5 billion during the 2017-19 biennium to be used to fund education, healthcare, and senior citizen services. Note that the due date of the initial Nevada Commerce Tax returns is approaching. This first return covering the period from July 1, 2015, through June 30, 2016, must be filed by Aug. 15, 2016, with a 30-day extension being available. The tax applies to businesses with Nevada gross receipts of more than $4 million.

The specter of qui tam actions looms over retailers doing business in Florida, Illinois, and New York where third parties can launch lawsuits under state “false claim” acts. Generally, these actions have been brought by law firms seeking a contingent award based on the amount of erroneously reported tax plus damages. A particular target has been instances where retailers have collected sales tax on a potentially exempt charge, e.g., freight in Illinois, or have not collected tax on a good or service that is allegedly taxable. Sprint Nextel Corporation is facing a $400 million qui tam assessment in New York related to its decision not to collect sales tax on flat rate telecommunication plans that bundled intra- and interstate calls. The company has petitioned the US Supreme Court to take up this issue after receiving an adverse decision from the New York Supreme Court in early May 2016. Retailers should be on their guard in states that allow qui tam actions to be brought on tax issues. A recent BNA analysis indicates the number of such states is small but the potential in these states for multiple nuisance lawsuits seeking settlements or potentially large damage awards cannot be overlooked.

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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.