On Wednesday, Governor Snyder signed into law Michigan’s new corporate income tax, which will replace the Michigan Business Tax. The new corporate income tax, effective January 1, 2012, uses a single factor (sales) for apportionment purposes and has a flat rate of 6%. However, despite the repeal of the MBT, the new corporate income tax will retain the economic nexus standard of $350,000 in gross receipts, which we have written about previously here. Any business with a physical presence of at least one day in the state would also be required to report the corporate income tax. Unlike the MBT, however, P.L.86-272 applies to the tax and provides some protections, as we have most recently written about here. Internet sellers and direct marketers should consult their tax counsel regarding the significance of the new tax and its impact on their businesses.
In other news, this week, the Louisiana legislature threw its hat into the ring of states proposing click-through nexus laws with H.B. 641. We have written previously about nexus-expanding legislation throughout the country here and here. Although Vermont and Texas legislatures recently passed their own versions of the law, as of this writing, the governor in each state has yet to sign the bill. We will keep you posted as developments arise.
Have a safe and festive Memorial Day, all!
Showing posts with label Income Tax. Show all posts
Showing posts with label Income Tax. Show all posts
Friday, May 27, 2011
Monday, January 31, 2011
A Reminder About The State Tax Implications of Passive Partnership Interests: U.S. Supreme Court Declines To Review State Court Ruling That Mere Partnership Interest Creates Income Tax Nexus
E-commerce companies that have affiliates doing business as (or even just investment interests in) partnerships or other pass-through entities in states in which the e-commerce company has no direct presence should be aware that such partnership interests may be deemed to create income tax nexus for the company. A number of state laws and regulations provide that ownership in a pass-through entity establishes nexus for the owner. See, e.g., 34 TAC Sec. 3.586(c)(13) [Texas]; 830 CMR 63.39.1(8) [Massachusetts]. To date, state tax tribunals have agreed. See, e.g., Shell Gas Gathering Corp. #2, N.Y. Tax Appeals Tribunal, DTA Nos. 821569 and 921570 (Sept. 23, 2010).
Monday, December 20, 2010
Income Tax Nexus in a Digital World
We have written extensively in this blog about nexus for sales tax and gross receipts tax purposes. All but a few states have an income tax. In addition to the Due Process Clause and Commerce Clause standards of nexus, out-of-state companies are protected from income tax of other states by a federal statute, Public Law 86-272, which is found at 15 U.S.C. § 381. P.L. 86-272 provides an exemption only for state income tax and sets forth a fairly clear, but somewhat limited, standard for the exemption.
The exemption applies if a company’s activities in another state include only the solicitation of sales of tangible personal property by an employee, representative, or independent contractor for delivery of inventory located outside the state to residents of the state, if orders are accepted outside the state. The exemption also extends to maintenance by an independent contractor of an office in the state. Thus, while solicitation activities of an out-of state company in a state would create nexus under the Commerce Clause and Due Process Clause standards, if the solicitation is limited to the sale of tangible personal property and, subject to the other limitations in the underscored portions above, the company would be exempt from the state’s income tax.
There have been a number of cases defining solicitation (See, e.g., Wisconsin Department of Revenue v. William Wrigley, Jr., 112 S.Ct. 2447 (1992)). And the MTC has issued guidelines, which many states have adopted, defining protected and unprotected activities under P.L. 86-272. See Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States under Public Law 86-272 (Multistate Tax Commission, Third Revision adopted July 27, 2001).
The cases and guidelines make it clear that if a company solicits the sale of services as well as tangible personal property, the exemption of P.L. 86-272 does not apply. See, e.g., Amway Corp., v. Director of Revenue, 794 S.W.2d 666 (Mo. 1990). Thus, a pertinent issue under P.L. 86-272 is whether the items being sold by an out-of-state company constitute tangible personal property or services.
The exemption applies if a company’s activities in another state include only the solicitation of sales of tangible personal property by an employee, representative, or independent contractor for delivery of inventory located outside the state to residents of the state, if orders are accepted outside the state. The exemption also extends to maintenance by an independent contractor of an office in the state. Thus, while solicitation activities of an out-of state company in a state would create nexus under the Commerce Clause and Due Process Clause standards, if the solicitation is limited to the sale of tangible personal property and, subject to the other limitations in the underscored portions above, the company would be exempt from the state’s income tax.
There have been a number of cases defining solicitation (See, e.g., Wisconsin Department of Revenue v. William Wrigley, Jr., 112 S.Ct. 2447 (1992)). And the MTC has issued guidelines, which many states have adopted, defining protected and unprotected activities under P.L. 86-272. See Statement of Information Concerning Practices of Multistate Tax Commission and Signatory States under Public Law 86-272 (Multistate Tax Commission, Third Revision adopted July 27, 2001).
The cases and guidelines make it clear that if a company solicits the sale of services as well as tangible personal property, the exemption of P.L. 86-272 does not apply. See, e.g., Amway Corp., v. Director of Revenue, 794 S.W.2d 666 (Mo. 1990). Thus, a pertinent issue under P.L. 86-272 is whether the items being sold by an out-of-state company constitute tangible personal property or services.
Wednesday, November 24, 2010
The Perils of Responding to Nexus Questionnaires
A company should be very careful in determining whether to respond to the nexus questionnaire and how to respond to the questionnaire. After all, any response is a statement to a government agency, which must be truthful and will be an admission on the part of the company. A response that is inaccurate or a response that is not well thought out is worse than not responding at all. In general, there is no obligation to respond to a nexus questionnaire, so the benefit of responding to a questionnaire may not be significant, yet the potential adverse consequences may be significant.
The problem in responding to a nexus questionnaire is highlighted by a recent case involving Barr Laboratories, in which the Michigan Court of Appeals held that the answers on a nexus questionnaire that indicated that the taxpayer’s employees visited Michigan between two and nine times during the year created a factual issue as to whether or not the company had nexus. See Barr Laboratories, Inc. v. Department of Treasury (Mich. App. 2010). The questionnaire indicated that the employees visited Michigan to solicit sales, but all sales were approved in New York. Apparently that response overstated and mischaracterized Barr Laboratories’ connection to the state. After an assessment by the Michigan Department of the Treasury of about $500,000, Barr Laboratories commenced a suit to abate the assessment. In a summary judgment motion, Barr Laboratories submitted an affidavit of its Vice President of Taxation, which contradicted the responses in the questionnaire. The affidavit stated that the visits to Michigan were only to gather information, and not to solicit sales, and were less frequent than stated in the questionnaire. But the response to the questionnaire precluded Barr Laboratories from prevailing in the summary judgment motion, and the response was probably the basis for the assessment in the first place.
The problem in responding to a nexus questionnaire is highlighted by a recent case involving Barr Laboratories, in which the Michigan Court of Appeals held that the answers on a nexus questionnaire that indicated that the taxpayer’s employees visited Michigan between two and nine times during the year created a factual issue as to whether or not the company had nexus. See Barr Laboratories, Inc. v. Department of Treasury (Mich. App. 2010). The questionnaire indicated that the employees visited Michigan to solicit sales, but all sales were approved in New York. Apparently that response overstated and mischaracterized Barr Laboratories’ connection to the state. After an assessment by the Michigan Department of the Treasury of about $500,000, Barr Laboratories commenced a suit to abate the assessment. In a summary judgment motion, Barr Laboratories submitted an affidavit of its Vice President of Taxation, which contradicted the responses in the questionnaire. The affidavit stated that the visits to Michigan were only to gather information, and not to solicit sales, and were less frequent than stated in the questionnaire. But the response to the questionnaire precluded Barr Laboratories from prevailing in the summary judgment motion, and the response was probably the basis for the assessment in the first place.
Monday, June 21, 2010
California Reinserts Reporting Requirements; Tennessee’s Proposal to Expand Nexus Dies in Committee
We’ve been tracking developments in affiliate nexus legislation and attempts to impose Colorado-style reporting requirements on vendors in other states. Since our last updates (here and here), there have been further developments of note:
California
On May 14, we wrote that the California Assembly nixed proposed affiliate nexus legislation and Colorado-style reporting requirements before passing its bill onto the State’s Senate. As in the Assembly’s version, the current iteration of the bill provides that retailers not required to collect use tax provide readily visible notice on their websites and catalogues that use tax is due from the purchaser. Last week, however, the California Senate amended the bill to reinsert reporting requirements.
Under the amended bill, the “[State Board of Equalization] may require the filing of reports” by any person having possession or custody of information relating to sales of tangible personal property (“TPP”) subject to the tax. § 7055(a) (as proposed) (emphasis added). It is unclear to whom, exactly, this possible reporting requirement applies, but the reports “shall be filed when the board requires” and must include names and addresses of purchasers of TPP, the sales price of the TPP, the date of the sale and “such other information as the board may require.”
California
On May 14, we wrote that the California Assembly nixed proposed affiliate nexus legislation and Colorado-style reporting requirements before passing its bill onto the State’s Senate. As in the Assembly’s version, the current iteration of the bill provides that retailers not required to collect use tax provide readily visible notice on their websites and catalogues that use tax is due from the purchaser. Last week, however, the California Senate amended the bill to reinsert reporting requirements.
Under the amended bill, the “[State Board of Equalization] may require the filing of reports” by any person having possession or custody of information relating to sales of tangible personal property (“TPP”) subject to the tax. § 7055(a) (as proposed) (emphasis added). It is unclear to whom, exactly, this possible reporting requirement applies, but the reports “shall be filed when the board requires” and must include names and addresses of purchasers of TPP, the sales price of the TPP, the date of the sale and “such other information as the board may require.”
Wednesday, June 9, 2010
Maine Voters Repeal Tax Legislation
Although some votes remain to be counted, it now seems clear that Maine voters have repealed tax legislation in a statewide referendum held yesterday. In a quirk of Maine law, under the State’s Constitution, voters are able to act as a fourth branch of the State’s government by introducing “people’s veto referenda” to repeal previously enacted legislation.
Last Spring, the State enacted tax reform legislation that lowered income tax rates and expanded the sales and use tax to new goods and services, while increasing the meals and lodging tax. The effective date of the legislation was stayed pending yesterday’s vote on the referendum. With over 70% of precincts now reporting in, the referendum seeking repeal of the new law is projected to win approval, and thus it appears none of the provisions of the new law will become effective. Tax professionals can hold off updating their Maine tax research for now…
Last Spring, the State enacted tax reform legislation that lowered income tax rates and expanded the sales and use tax to new goods and services, while increasing the meals and lodging tax. The effective date of the legislation was stayed pending yesterday’s vote on the referendum. With over 70% of precincts now reporting in, the referendum seeking repeal of the new law is projected to win approval, and thus it appears none of the provisions of the new law will become effective. Tax professionals can hold off updating their Maine tax research for now…
Thursday, May 27, 2010
Supreme Court Declines To Review Retroactive Ban On Refund Claims
So you think a state cannot change its tax laws after the fact to validate an erroneous legal interpretation by its revenue department that caused massive over-reporting of tax? Think again. Indeed, we were reminded earlier this week that, at least in some circumstances, states can retroactively adjust the rules to foreclose even pending claims for tax relief.
The United States Supreme Court on May 24 declined to review a decision by the Kentucky Supreme Court in Miller v. Johnson Controls, Inc., 296 S.W.3d 392 (Ky. 2009). In Miller, the Kentucky Court upheld a state statute enacted in 2000 that retroactively barred refund claims by a group of corporate taxpayers who complied with a policy adopted by the Kentucky Revenue Cabinet, challenged the policy as unlawful, and got it invalidated back in 1994 (by the Kentucky Supreme Court, no less).
Here’s the background: In 1988, the Revenue Cabinet interpreted Kentucky law as prohibiting the filing of unitary income tax returns by corporate taxpayers, and instead required each corporation to file a separate return. The inability to file unitary returns resulted in substantially higher Kentucky taxes for a number of corporations. After the Kentucky Supreme Court ruled in 1994 that unitary returns were allowed under Kentucky law, the taxpayers amended their earlier returns, and sought refunds for the excess tax paid during the earlier years.
The United States Supreme Court on May 24 declined to review a decision by the Kentucky Supreme Court in Miller v. Johnson Controls, Inc., 296 S.W.3d 392 (Ky. 2009). In Miller, the Kentucky Court upheld a state statute enacted in 2000 that retroactively barred refund claims by a group of corporate taxpayers who complied with a policy adopted by the Kentucky Revenue Cabinet, challenged the policy as unlawful, and got it invalidated back in 1994 (by the Kentucky Supreme Court, no less).
Here’s the background: In 1988, the Revenue Cabinet interpreted Kentucky law as prohibiting the filing of unitary income tax returns by corporate taxpayers, and instead required each corporation to file a separate return. The inability to file unitary returns resulted in substantially higher Kentucky taxes for a number of corporations. After the Kentucky Supreme Court ruled in 1994 that unitary returns were allowed under Kentucky law, the taxpayers amended their earlier returns, and sought refunds for the excess tax paid during the earlier years.
Wednesday, May 12, 2010
Colorado Jumps On The Economic Nexus Bandwagon
Increasingly, eCommerce vendors face potential exposure to state corporate income and similar taxes (such as certain franchise, gross receipts and business activity taxes) in jurisdictions where they have no physical presence, based on the doctrine of so-called “economic nexus.” Judicial decisions from a number of jurisdictions, such as New Jersey and West Virginia, and recently enacted tax laws, such as the Ohio Commercial Activity Tax (“CAT”) and the Michigan Business Tax (“MBT”), are based on the notion that an out-of-state company may be subject to a state’s corporate tax laws based solely on having significant “economic activity” related to or directed at the state. The issue of whether the doctrine (and each of its different incarnations) is consistent with the limits on state taxing power imposed by the Commerce Clause of the United States Constitution remains unsettled. Remote sellers have raised objections and challenges to many of these laws. However, for now, at least, under laws such as the CAT and MBT, an out-of-state company that makes total sales to customers in the state that exceed a certain prescribed threshold, even without any offices, employees, or property in the state, will be deemed to have “bright line” nexus with the state for corporate tax purposes.
The latest state to jump on the “economic nexus” bandwagon is Colorado. What is unusual about Colorado’s new standard, however, is that it derives not from a legislative enactment or decision of Colorado’s courts, but rather from a new administrative regulation, Colorado Code of Regulations §39-22-301.1 (effective April 30, 2010), promulgated by the Colorado Department of Revenue. Under the guise of (re-)interpreting the statutory definition of “doing business” in the state, the Colorado DOR adopted a so-called “factor presence” standard of nexus for corporate income tax purposes which sets certain minimum levels for Colorado payroll ($50,000), property ($50,000) and, most importantly, for eCommerce businesses and Internet sellers, sales ($500,000), over which a company will deemed to be subject to Colorado corporate income tax. While the establishment of such payroll and property thresholds may relieve certain companies with very limited physical presence in Colorado from having to report Colorado income tax, the determination that vendors having Colorado sales over $500,000 subjects them to Colorado income tax purports to extend significantly Colorado’s taxing power to many out-of-state direct marketers.
While it seems likely that the regulation will, like similar laws in other states, be challenged on constitutional grounds, direct marketers should weigh their options in consultation with counsel and based on their own particular circumstances. When considered together with Colorado’s new law requiring out-of-state retailers to report the names and addresses of their purchasers to the Department of Revenue for use tax purposes (see our March 11 post), it appears that Colorado lawmakers are prepared to test (or even outright disregard) the time-honored principles of the Commerce Clause. Stay tuned.
The latest state to jump on the “economic nexus” bandwagon is Colorado. What is unusual about Colorado’s new standard, however, is that it derives not from a legislative enactment or decision of Colorado’s courts, but rather from a new administrative regulation, Colorado Code of Regulations §39-22-301.1 (effective April 30, 2010), promulgated by the Colorado Department of Revenue. Under the guise of (re-)interpreting the statutory definition of “doing business” in the state, the Colorado DOR adopted a so-called “factor presence” standard of nexus for corporate income tax purposes which sets certain minimum levels for Colorado payroll ($50,000), property ($50,000) and, most importantly, for eCommerce businesses and Internet sellers, sales ($500,000), over which a company will deemed to be subject to Colorado corporate income tax. While the establishment of such payroll and property thresholds may relieve certain companies with very limited physical presence in Colorado from having to report Colorado income tax, the determination that vendors having Colorado sales over $500,000 subjects them to Colorado income tax purports to extend significantly Colorado’s taxing power to many out-of-state direct marketers.
While it seems likely that the regulation will, like similar laws in other states, be challenged on constitutional grounds, direct marketers should weigh their options in consultation with counsel and based on their own particular circumstances. When considered together with Colorado’s new law requiring out-of-state retailers to report the names and addresses of their purchasers to the Department of Revenue for use tax purposes (see our March 11 post), it appears that Colorado lawmakers are prepared to test (or even outright disregard) the time-honored principles of the Commerce Clause. Stay tuned.
Monday, April 19, 2010
Publishers Should Address State Tax Exposure Regarding the New Agency Pricing Model
As discussed in eBooknewser on April 16, and in TechFlash on April 15, Amazon is now allowing some publishers to set their own prices on e-books sold for the Kindle. The agency pricing model creates new responsibilities for some publishers in connection with state tax. Publishers with agency agreements with Apple and Sony, the other main players in the e-book market, also face state tax ramifications stemming from agency pricing agreements.
A publisher becomes a retail seller required to collect and remit sales and use tax on all sales of digital books in each state where digital books are taxable and in which the publisher has nexus. At this point, of the 45 states and the District of Columbia that impose sales tax, only 24 states actually tax digital products. But that number is likely to increase as states search for additional revenue.
A publisher becomes a retail seller required to collect and remit sales and use tax on all sales of digital books in each state where digital books are taxable and in which the publisher has nexus. At this point, of the 45 states and the District of Columbia that impose sales tax, only 24 states actually tax digital products. But that number is likely to increase as states search for additional revenue.
Monday, April 5, 2010
Maine Adopts Finnigan for Determining Sales Sourced to Maine for Corporate Income Tax
Maine is a unitary state for purposes of the corporate income tax. As is true for other states (e.g., California, Illinois and South Carolina), Maine adopted the Joyce approach for sourcing of sales by entities within a unitary group that did not have nexus with Maine under PL 86-272. See Appeal of Joyce, Inc., No. 66-SBE-070 (Cal. SBE, Nov. 23, 1966). This means that Maine-destination sales by an entity without nexus would not be included in the numerator of the sales apportionment factor.
However, in recently adopted legislation, P.L. 2010, c. 571, § GG, which is effective for tax years beginning on or after January 1, 2010, Maine adopted the Finnigan approach, which was first announced by the California Board of Equalization in 1988. See Appeal of Finnigan Corporation, No. 88-SBE-022 (Cal. SBE, Aug. 25, 1988) (Finnigan I); Opin. on Pet. for Rhrg., No. 88-SBE-022-A (Cal. SBE, Jan. 24, 1990) (Finnigan II). Finnigan rejected Joyce and provided that sales by a member of a unitary group to California are included in the numerator of the combined group’s sales apportionment factor even though the entity does not have nexus with California. It is noteworthy that California later renounced the Finnigan approach and has resorted back to the Joyce approach. See Appeal of Huffy Corporation , No. 99-SBE-005 (Cal. SBE, Apr. 22, 1999). See also FTB Reg. 25106.5. What makes this result particularly severe for unitary businesses is that Maine uses only the single apportionment factor of sales.
However, in recently adopted legislation, P.L. 2010, c. 571, § GG, which is effective for tax years beginning on or after January 1, 2010, Maine adopted the Finnigan approach, which was first announced by the California Board of Equalization in 1988. See Appeal of Finnigan Corporation, No. 88-SBE-022 (Cal. SBE, Aug. 25, 1988) (Finnigan I); Opin. on Pet. for Rhrg., No. 88-SBE-022-A (Cal. SBE, Jan. 24, 1990) (Finnigan II). Finnigan rejected Joyce and provided that sales by a member of a unitary group to California are included in the numerator of the combined group’s sales apportionment factor even though the entity does not have nexus with California. It is noteworthy that California later renounced the Finnigan approach and has resorted back to the Joyce approach. See Appeal of Huffy Corporation , No. 99-SBE-005 (Cal. SBE, Apr. 22, 1999). See also FTB Reg. 25106.5. What makes this result particularly severe for unitary businesses is that Maine uses only the single apportionment factor of sales.
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