Archive for the ‘SALT Update’ category

U.S. Supreme Court Extends Time to File Petitions for Certiorari in Ohio Commercial Activity Tax Case

February 22, 2017

By Jennifer Weidler Karpchuk

By Order dated January 31, 2017, the United States Supreme Court granted Crutchfield Corporation (“Crutchfield”) an extension of time until April 16, 2017 to file a petition for certiorari for what could be a precedential decision if the Court decides to grant it. See Crutchfield Corp. v. Joseph W. Testa, Tax Commissioner of Ohio (U.S. Supreme Court Docket No. 16A774).  During November 2016, the Ohio Supreme Court ruled for the State, upholding its commercial activity tax (“CAT”). See Crutchfield Corp. v. Joseph W. Testa, Tax Commissioner of Ohio, 2016 WL 6775765 (2016). The CAT is a gross receipts tax that replaced Ohio’s corporate income tax. Pursuant to the CAT, a company with more than $500,000 of Ohio sales has nexus with the state such that it is subject to the tax.

Crutchfield appealed from imposition of the CAT upon revenue it earned from sales of electronic products within Ohio. Crutchfield is based outside of Ohio, maintains no employees in Ohio, and maintains no facilities in Ohio. The sole business that Crutchfield conducts in Ohio is via the shipment of goods from outside the state to consumers within the state using the United States Postal Service or common-carrier delivery services. Crutchfield contested the issuance of CAT assessments contending that substantial nexus within a state is a necessary prerequisite to imposing the tax pursuant to the United States Constitution’s dormant Commerce Clause and that Crutchfield lacked substantial nexus with Ohio since it did not maintain a “physical presence” within the state.

Responding, the State advanced two (2) arguments. First, it argued that the Commerce Clause does not impose a physical presence requirement and, thus, the $500,000 sales-receipts threshold set forth by the statute satisfies the Commerce Clause’s requirement of substantial nexus. Second, the State argued that assuming arguendo the Commerce Clause does impose a physical presence standard, Crutchfield’s computerized connections with Ohio consumers involves the presence of tangible personal property in Ohio and the presence of that property on computers located in the state constitutes physical presence. The Ohio Supreme Court found in favor of the State based upon its first argument and therefore it did not address the State’s secondary argument.

At first glance, the Ohio Supreme Court’s decision stands in stark contradiction to the United States Supreme Court’s decision in Quill v. North Dakota, 504 U.S. 298 (1992), which held that for a state to subject a company to a use tax collection obligation, it must have a physical presence in the taxing state. However, the Ohio Supreme Court distinguished Quill in a number of ways. Primarily, the tax at issue in Quill was a sales and use tax, whereas the tax at issue in Crutchfield was a business privilege tax. The Ohio Supreme Court found that Quill’s holding does not apply to business privilege taxes. This is not the first time a court has drawn such a distinction. See Couchot v. State Lottery Comm., 659 N.E.2d 1225 (Ohio 1996) (“There is no indication in Quill that the Supreme Court will extend the physical-presence requirement to cases involving taxation measured by income derived from the state”); Capital One Bank v. Commr. of Revenue, 899 N.E.2d 76 (Mass. 2009) (declining to “expand the [United States Supreme] Court’s reasoning [in Quill] beyond its articulated boundaries” and upholding imposition of tax on out-of-state banks in relation to in-state servicing of credit cards based on the volume of business conducted and profits realized); MBNA Am. Bank, N.A. v. Indiana Dept. of State Revenue, 895 N.E.2d 140 (Ind. Tax 2008) (“Based on [Quill] and a thorough review of relevant case law, this Court finds that the Supreme Court has not extended the physical presence requirement beyond the realm of sales and use taxes”); KFC Corp. v. Iowa Dept. of Revenue, 792 N.W.2d 308 (Iowa 2010) (“We * * * doubt that the United States Supreme Court would extend the ‘physical presence’ rule outside the sales and use context of Quill ”).

The United States Supreme Court has not addressed the physical presence nexus standard issue since its landmark decision in Quill twenty-five (25) years ago. Many argue that the Supreme Court in Quill could not and did not anticipate the internet boom and, with it, the vastly different way that business would be conducted. Since then, the Court has denied certiorari for every case since Quill where nexus was at issue, e.g., Tax Com’r of State v. MBNA America Bank, N.A. 640 S.E.2d 226 (W. Va. 2006), cert. denied, 551 U.S. 1141 (2007); Capital One Bank v. Commissioner of Revenue, 9 N.E.2d 76 (Mass. 2009), cert. denied, 557 U.S. 919 (2009); Geoffrey, Inc. v. South Carolina Tax Com’n, 37 S.E.2d 13 (S.C. 1993), cert. denied, 510 U.S. 992 (1993); Lanco, Inc. v. Director, Div. of Taxation, 908 A.2d 176  (2006), cert. denied, 551 U.S. 1131 (2007); see also, Direct Marketing Ass’n v. Brohl, 135 S.Ct. 1124, 1134-1135 (2015) (Kennedy, J., concurring) (“The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions. Although online businesses may not have a physical presence in some States, the Web has, in many ways, brought the average American closer to most major retailers. A connection to a shopper’s favorite store is a click away—regardless of how close or far the nearest storefront…Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops. As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term. Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill.”). If the United States Supreme Court grants Crutchfield’s petition for certiorari, we might finally receive an answer to Quill’s application in the age of the internet.

Stewart Weintraub Receives Lifetime Achievement Award from The Legal Intelligencer

June 9, 2014

SW at TLI web crop

Chamberlain Hrdlicka tax attorney honored by ALM Media publication

PHILADELPHIA (June 2014) – The Philadelphia office of Chamberlain, Hrdlicka, White, Williams & Aughtry is proud to announce that shareholder Stewart M. Weintraub has been honored with a Lifetime Achievement Award from The Legal Intelligencer, a publication of ALM Media. Presented at a celebratory dinner on May 29, 2014, the award honors a select number of Pennsylvania’s most influential lawyers and jurists.

The Legal Intelligencer selected individuals who have helped to shape the law in Pennsylvania, whether through their work on the bench, their prowess in a courtroom or their dedication to assisting those in need of legal services. The attorney must have had a distinct impact on the legal profession in the state and must still be practicing law.

A well-known and respected state and local tax attorney, Weintraub has been a leader in both the Pennsylvania and the national legal community for more than 40 years.

“I want to thank The Legal Intelligencer and ALM for this recognition,” Weintraub said. “I could not do what I do without the help and support of my family and my firm. I am honored that one of the legal community’s leading publications believes the work I do day to day is considered so meritorious that it should be recognized.”

Since being admitted to the Pennsylvania bar in 1971, Weintraub has focused his practice upon state and local taxation. From audits through trials and appeals to the appellate courts, Weintraub represents clients in all aspects of state and local tax compliance and litigation. His practice also includes helping clients’ plan and structure transactions so that all state and local tax obligations are minimized.

Weintraub began his career with the City of Philadelphia Law Department where he rose to be chief of tax litigation and where he served as chief counsel of former Mayor William Green’s Tax Reform Commission. In 2003, Weintraub was appointed to serve as a member of a new voter-approved Tax Reform Commission. He also has held leadership positions for the American Bar Association and the Philadelphia Bar Association and has chaired or co-chaired the state and local tax committee for the Greater Philadelphia Chamber of Commerce since 1983. Now in private practice, Weintraub has been a shareholder at Chamberlain Hrdlicka since 2010.

About Chamberlain Hrdlicka – Chamberlain Hrdlicka is a diversified business law firm with offices in Houston, Atlanta, Philadelphia, Denver and San Antonio. The firm represents both public and private companies as well as individuals and family-owned businesses across the nation. In addition to tax planning and tax controversy, the firm offers corporate, securities and finance, employment law and employee benefits, energy law, estate planning and administration, intellectual property, international and immigration law, commercial and business litigation, real estate and construction law.

Weekly Blog Update for Week of 2/3/2012 – Arizona Hits with Bill; Florida, Tennessee and Vermont Consider New “Amazon” Legislation; Expedia Not Subject to Philadelphia Hotel Tax; Scholastic Subject to Tennessee Sales and use tax; Connecticut and Oklahoma to Issue Refunds as Debit Cards …and more

February 6, 2012

 by Jennifer Weidler


Arizona Hits with $53 Million Bill for Allegedly Uncollected Taxes

The Arizona Department of Revenue issued a bill to alleging that it owes $53 million in uncollected taxes in the state. has announced its belief that the assessment is without merit and its intent to defend against the assessment.



Arkansas Expands Definition of Developmental Disability

Arkansas has expanded the definition of “developmental disability” for the 2011 Individual Income Tax Forms and Instruction Booklet to include two (2) new disabilities: (1) spina bifida; and (2) Down syndrome.  These two disabilities will now qualify for developmental disability services.  This conforms the forms and booklets to changes made by Act 68, which formally added the two disabilities to those conditions that qualify for developmental disability services.



Colorado DOR Issues Publication Explaining Withholding Obligations

The Colorado Department of Revenue has issued a publication, which seeks to explain requirements and procedures for employers required to withhold taxes.  Primarily, if Colorado tax is withheld, taxpayers are required to have a Colorado 1099 or W-2G withholding account.  Taxpayers must then remit the tax.  For further information on Colorado’s withholding requirements, see the publication.



Connecticut to Issue Tax Refunds in Form of Debit Cards

Following the lead of states like Oklahoma, Louisiana and South Carolina, the Connecticut Department of Revenue has announced its intention to issue personal income tax refunds in the form of debit cards to taxpayers who do not use direct deposit.  JP Morgan Chase will administer the debit card program and taxpayers will need to call Chase in order to activate their cards.  Taxpayers may use the debit card at ATMs, banks and credit unions displaying the VISA logo, and gas stations and retail locations that accept VISA.  Notably, if the taxpayer does not activate the debit card within 365 days, the debit card account will be closed and the available balance will be returned to the Connecticut Department of Revenue.  Moreover, if the debit card is activated and a balance remains on the card after the twelfth consecutive month of inactivity, Chase will charge an inactivity fee of $1 per month.



The District of Columbia Announces Changes for Tax Filing Season

The District of Columbia has announced changes for this tax filing season.  Among the changes, the estimated tax payment that a businessmust make has changed from 100% to 110% of the prior year’s taxes.  Additionally, the District of Columbia will no longer mail individual income tax packages.  Instead, taxpayers can obtain the forms and instructions online or in paper form at various District agencies or public libraries.



Florida Legislature Considering Revenue-Neutral Legislation Aimed at and Online Retailers

The Florida Senate is currently considering legislation, SB 7206, which would provide for click-through nexus provisions aimed at requiring and like online out-of-state retailers to collect sales taxes.  Pursuant to the legislation, remote sellers would be required to collect state sales taxes if they engage in at least $10,000 in annual sales through in-state affiliates that receive a commission.  As we previously reported, has offered to bring thousands of jobs to the state in exchange for a two (2) year state tax break.



New York Issues Information for Tax Return Preparers

The New York Department of Taxation and Finance issued a publication, which provides important information for tax return preparers for tax year 2011.  The publication addressed numerous issues, such as: electronic filing mandate; return due dates; signature requirements; penalties; and consumer rights regarding tax preparers.



City of Akron, Ohio Offering Tax Amnesty Program to Businesses

The city of Akron, Ohio has announced that it will offer a tax amnesty program for businesses that have failed to report and pay net profit and wage taxes for tax years through 2010.  The program is slated to run from March 5 through May 4, 2012.



Oklahoma to Issue Tax Refunds in Form of Debit Cards

Following the lead of states like Connecticut, Louisiana and South Carolina, the Oklahoma Tax Commission announced its intention to issue personal income tax refunds in the form of debit cards to taxpayers who do not use direct deposit.  The Commission has published a list of frequently asked questions for taxpayers.



Commonwealth Court Holds Expedia Not Subject to Philadelphia Hotel Tax

The Pennsylvania Commonwealth Court (“Commonwealth Court”) affirmed the decisions of the Philadelphia County Common Pleas Court and the City of Philadelphia Tax Review Board (“TRB”), finding Expedia, Inc. (“Expedia”) was not an operator of a hotel and was not subject to the City of Philadelphia’s (“City”) Hotel Room Rental Tax (“Hotel Tax”).  For more detailed information, see our prior coverage of this case.


Pennsylvania Tax Update Reminds Taxpayers Estimated Coupon Packets and Fiduciary Return Booklets Will No Longer Be Mailed

Pennsylvania Tax Update 159 advises taxpayers that the Department of Revenue will no longer mail Estimated Payment Coupon Packets (REV-857-I) or the Pennsylvania Fiduciary Income Tax Return Booklet (PA-41).  Instead, forms and instructions will be available on the Department’s website.  The change is expected to result in a significant cost savings for the Commonwealth.


Pennsylvania Extends Nexus Compliance Deadline to September 1, 2012

On January 27, 2012, the Pennsylvania Department of Revenue announced its decision to issue a one-time extension of the nexus compliance deadline.  Remote sellers with a physical presence in the Commonwealth must be licensed and begin collecting sales tax as of September 1, 2012.  The original compliance deadline had been February 1st, but it became apparent that the original date was impractical.  Those businesses that do not register by the new September 1st deadline will face a variety of enforcement strategies, including: audits, assessments, liens, and/or referral to a collection agency or the Office of the Attorney General.


Pennsylvania Adds Use Tax Line to State Personal Income Tax Return

In an attempt to encourage compliance with the use tax reporting requirements, the Pennsylvania Department of Revenue added a use tax line (Line 25) to the 2011 PA-40 (Pennsylvania Personal Income Tax Return), thereby simplifying the use tax reporting process.  The Pennsylvania Tax Update explained that when sales tax is not collected by a seller on a taxable item or service, it is the responsibility of the purchaser to report and remit use tax to the state.



Tennessee Court Holds Naval Captain Responsible for Tennessee Use Tax on Personal Aircraft

A Tennessee trail court held that a naval captain, who purchased an airplane in Texas during 2007, was required to pay Tennessee use tax on the aircraft when he was reassigned to a naval base in the state. (See, McIntyre v. Farr, Dkt. No. 09-2145-III).  Tennessee laws provide no exemption from use tax for military personnel who, on military orders, are relocated to the state.


Governor Urges Tennessee Legislature to Adopt “Amazon” Law, Exempting the Online Retailor from Sales Tax Collection

During his State of the State address, the Tennessee Governor urged lawmakers to approve legislation under HB 2370 that would exempt from collecting state sales taxes.  In exchange for the exemption, would agree to set up two (2) distribution centers in the state.  Pursuant to the legislation, the online retailor would be exempt from collecting Tennessee state taxes until January 1, 2014.


Tennessee Court of Appeals Holds Out-of-State Book Distributor Subject to Sales and Use Taxes Because of Substantial Nexus Through Local Schools and Teachers

The Tennessee Court of Appeals held that an out-of-state book distributor, Scholastic Book Clubs, Inc., was subject to Tennessee sales and use taxes because the distributor had substantial nexus with the state.  The court found the substantial nexus to be present through the local schools and teachers who participated in Scholastic’s program, holding that those teachers acted as agents for the company.  It found that Scholastic’s utilized teachers to effectuate its sales, creating a de factor marketing and distribution mechanism, and therefore Scholastic had nexus with the state. For more detailed information, see our prior coverage of this case.



Vermont Bill Would Create August Sales Tax Holiday

Vermont is considering a Bill, S250, which would create a sales tax holiday.  The proposal is an attempt to help the state recover from the devastation caused by last year’s Tropical Storm Irene.  Among other things, the tax holiday would waive the state’s 6% sales and use tax for general purchases of up to $2,000 apiece.  The tax holiday would take place on August 28, 2012, the one-year anniversary of Irene.


Vermont Introduces New “Amazon” Law

On January 31,Bill H.639, a replica of the California-style “Amazon” law, was introduced to the legislature.  The Bill would require remote sellers, such as, to collect and remit state sales tax on Vermont purchases.  Currently, Vermont maintains an “Amazon” law similar to New York, but with a twist.  The current Vermont “Amazon” law requires out-of-state sellers with in-state affiliates to collect sales taxes from Vermont purchasers only after fifteen (15) or more states have adopted requirements that are the same or substantially similar to its own “Amazon” law.  The new Bill seeks to repeal the current “Amazon” law’s language relating to the 15-state requirement and instead implement language similar to California’s AB 155.  However, pursuant to the Bill, if Federal sales tax streamlining legislation requiring tax collection on remote sales is not implemented before July 31, 2012, Vermont would require collection of the state sales tax from remote sellers beginning September 1, 2013.



Washington Releases 2012 Tax Exemption Study

The Washington Department of revenue has issued its2012 Tax Exemption Study, presenting a detailed list of tax exemptions for state and local taxes, including exemptions relating to: property tax; excise tax; business and occupation tax; public utility tax; and sales and use tax.



Wisconsin Warns Taxpayers about Tax Services Providing “Quick Money” and “Instant Tax Refunds”

The Wisconsin Department of Revenue has issued a warning to taxpayers thinking of availing themselves of tax services that advertise “instant tax refunds” or “quick money.”  The Department has urged taxpayers to reconsider doing so, since these quick refunds are essentially just loans that will ultimately cost the taxpayer in fees and interest.

Pennsylvania Commonwealth Court Holds Expedia Not Subject to Philadelphia Hotel Tax

February 6, 2012

  by Stewart Weintraub and Jennifer Weidler

On February 2, 2012, the Pennsylvania Commonwealth Court (“Commonwealth Court”) affirmed the decisions of the Philadelphia County Common Pleas Court and the City of Philadelphia Tax Review Board (“TRB”),finding Expedia, Inc. (“Expedia”)was not an operator of a hotel and was not subject to the City of Philadelphia’s (“City”) Hotel Room Rental Tax (“Hotel Tax”).

Expedia is an online travel company that allows travelers to make reservations for hotel rooms, flights, rental cars, events and other travel arrangements through its website.  With respect to hotels, Expedia operates through contracts with various hotels in many cities throughout the United States and abroad, including the City.  The contracts between Expedia and the hotels allow Expedia to book room reservations for travelers at the hotels.  The contracted room rate billed to Expedia by the hotels is a discounted net rate.  The room rate quoted by Expedia to the traveler includes the discounted room rate, a facilitation fee, service fees and a tax recovery charge representing an estimate of the City’s Hotel Tax (and other hotel taxes,if applicable) based upon the net rate charged for the room by the hotel.  The hotel calculates the City’s Hotel Tax based solely upon the net room rate, not inclusive of any extra fees.

During 2007, the City attempted to assert the Hotel Tax upon Expedia for the actual rate that it charges to the traveler, inclusive of its fees.  The assessment brought by the City alleged an amount due of $1,053,447.40 for unpaid Hotel Tax for the period from 2001 through 2005, inclusive of interest and penalties.  Expedia appealed the assessment to the TRB, alleging that: (1) it was not subject to the Hotel Tax because it was not a hotel operator; (2) that the fees it charged and retained were not subject to the Hotel Tax; and (3) that the imposition of the Hotel Tax was prohibited by the Commerce Clause of the United States Constitution.[1]

The TRB held in favor of Expedia, reasoning that Expedia was not a hotel “operator” as defined by the Philadelphia Code, that it could not, independent of hotel management, reserve and rent hotel rooms and that its only activities were to provide information about hotel availability, amenities, and rates to potential travelers and collect payment from the travelers.  Thereafter, the City appealed to the Common Pleas Court, which denied the City’s appeal and affirmed the TRB’s decision.  Subsequently, the City appealed to the Commonwealth Court.

The Commonwealth Court affirmed the TRB decision, finding in favor of Expedia.  On appeal,the City first argued that the TRB committed legal error in concluding that only a hotel can be an “operator” under the Philadelphia Code.  The Commonwealth Court examined the Philadelphia Code’s definition of “operator” as it relates to the Hotel Tax.  The Philadelphia Code defines “operator” as:

Any individual, partnership, non-profit or profit-making association or corporation or other person or group of persons who maintain, operate, manage, own, have custody of, or otherwise possess the right to rent or lease overnight accommodations in any hotel to the public for consideration. § 19-2401(7).

 The Commonwealth Court reasoned that the above definition clearly infers ownership or control of the premises and in the case at hand, the hotel, not Expedia, controls access to the hotel rooms, the right to rent those rooms and any accompanying amenities.

The City next argued that the TRB erred by misinterpreting the Philadelphia Code to hold that a taxable rental “transaction” only occurs at the traveler’s point of arrival at the hotel.  Section 19-2401(14) of the Philadelphia Code defines “transaction” as the “activity involving the obtaining by a transient or patron of the use or occupancy of a hotel room.”  Section 19-2401(6) defines “occupancy” to include “use or possession or the right to the use or possession…of any room in a hotel.”  The City’s argument necessarily failed because Expedia does not provide its customers with the use or possession of a room or the right to the use or possession of a room.  Moreover, the hotel ultimately receives the consideration for the room rental, not Expedia, since Expedia remits to the hotel the quoted room rate along with the applicable Hotel Tax.  Thus, the Commonwealth Court found that Expedia could not be subject to the Hotel Tax based upon the full amount of its fees charged to travelers and, therefore, affirmed the TRB decision.

Notably, there was a single dissentingopinion.  The dissent stated it would have held that the Hotel Tax should be imposed upon the consideration Expedia received from the travelers, not the amount that it pays its hotels. The dissent believed that Expedia fit within the definition of an “operator,” since he interpreted the contractual language between Expedia and the hotels to mean that Expedia has the right to a number of rooms to rent to its customers.The same or similar issues have been presented by numerous state or local taxing authorities throughout the United States.  While a few courts, for various and different reasons, sustained the taxing jurisdictions claims, the vast majority of jurisdictions ruled that Expedia is not subject to state and local hotel room rental taxes.

[1] Stewart M. Weintraub, Esquire, represented Expedia at the Tax Review Board and subsequently assisted with the appeals to the Philadelphia County Common Pleas Court as well as to the Pennsylvania Commonwealth Court.

Pennsylvania Considering Legislation that Would Amend Corporate Tax and Abolish Delaware Holding Company Loophole

January 31, 2012

  by Stewart Weintraub and Jennifer Weidler

Pennsylvania is now attempting to join the list of states which have challenged the use of the so-called Delaware Loophole.  In the past, other states have challenged the Delaware Loophole by litigation or by legislation.  The legislative remedies involved enacting either combined reporting or disallowing the deduction for the royalty payments.  OnWednesday January 25th, House Bill 2150, Printer’s No. 3019 (“Bill 2150”), was introduced into the Pennsylvania Legislature.  If enacted,Bill 2150 would amend the Pennsylvania Corporate Net Income Tax and address, among other thing, theso-called Delaware Loophole by disallowing the deduction that the parent operating corporation claims for the royalty payments made to its Delaware Holding Company (“DHC”). (more…)

NCSL Opposes Contingent-fee Audits, Passes Resolution

October 25, 2011

  by Stewart Weintraub and Jennifer Weidler

As a means of increasing corporate tax collections, some states have turned to contingent-fee audit contractors – sometimes referred to as “bounty hunters.”  These bounty hunter firms are compensated based upon a percentage of the amount of tax assessed, creating an incentive for the firms to not only aggressively audit taxpayers, but to stretch interpretations of the law to and beyond the limits.  Having an economic interest in the assessments resulting from the bounty hunter audits, creates an inherent conflict of interest.

Not surprisingly, corporate taxpayers oppose the use of contingent-fee audits because the bounty hunters have a financial stake in the outcome of the audit, thereby creating an unfair and antagonistic aura.  Questions about a lack of transparency, confidentiality of taxpayer information and inflated assessments – with almost inevitable consequential legal fees – are some of the concerns surrounding contingent-fee audits.  For instance, a class action suit involving Alabama taxpayers, brought against the largest contingency-fee auditing firm in the state, is currently pending in state court.  The complaint alleges violations of the Alabama Taxpayers’ Bill of Rights and Uniform Revenue Procedures Act for, among other issues, entering into contingency-fee audit agreements with local governments and compensating its employees and independent contractors through incentive bonuses based on tax collections or assessments.[1]  For further detailed coverage on the status of this case, click here.

However, due to their need to raise revenue, cash-strapped states support the use of contingent-fee audits, backed by the private audit firms profiting from the agreements.  Other states have even gone a step further, drafting legislation mandating that the state’s taxing authority investigate the use of outside audit firms to perform certain audit functions.  Moreover, some states have entered into contracts with bounty hunter firms that ignore a taxpayer’s books and records, and instead focus on estimating a taxpayer’s potential liability by examining financial statements and other publicly available data.

Responding to these issues, the National Conference of State Legislatures (“NCSL”) recently approved a resolution opposing contingent-fee taxpayer audits.  Additionally, the resolution opposes the use of third-party auditors that do not use a taxpayer’s books and records when conducting the audit.  The resolution is a step in the right direction for corporations fighting the implementation of contingent-fee audits, but it has yet to be seen what the states’ reactions will be, if any, to the NCSL resolution.


[1] Alabama Code § 40-2A-6 prohibits the use of contingent fee auditors and hearing officers, but it does not apply to unclaimed property audits.

Washington Case Involving Retroactive Refund Amendment Spurs COST Amicus Brief

October 18, 2011

  by Stewart Weintraub and Jennifer Weidler

The Washington Supreme Court is currently considering the legality of the state legislature’s attempt to create a statutory amendment barring the granting of twenty-four (24) years of tax refund claims.  Tesoro Refining & Marketing Co., No. 39417-1-II (Wash. Ct. App. Dec. 21, 2010).  Tesoro Refining and Marketing Company (“Tesoro”) is a manufacturer of bunker fuels.   Prior to 2009, Washington law permitted companies that manufacture and sell a qualifying fuel (e.g. bunker fuel) to deduct the amount derived from the sale of the fuel against its manufacturing business and occupation (B&O) tax liability.  Tesoro failed to take the deduction on its originally filed returns and later filed a claim for refund.  The Washington Department of Revenue (“Department”) denied the refund claims, asserting that the deduction applied only to wholesaler and retailer B&O tax, not to manufacturer B&O tax.  Tesoro appealed to the Washington Superior Court.  During 2009, while the appeal was pending, the Washington legislature amended the statute to limit the applicability of the B&O tax deduction to retailers and wholesalers both prospectively and retroactively.  The Superior Court granted summary judgment to the Department and Tesoro appealed.

Reversing the lower court’s decision, the Washington Court of Appeals held that pursuant to the plain language of the pre-2009 B&O tax statute, no restriction existed for the applicability of the deduction.    As such, the Department could not alter the plain language of the statute to resolve an ambiguity that did not exist on its face.  Furthermore, the court found the retroactive application of the 2009 amendment violated Tesoro’s due process rights because it impermissibly attempted to look back twenty-four (24) years.

An appeal was filed with the Washington Supreme Court.  The Council On State Taxation (“COST”) filed an amicus brief urging the Washington Supreme Court to uphold the decision of the Washington Court of Appeals.  COST argues that the twenty-four (24) year period of retroactivity greatly exceeds that which has previously been permitted by the United States Supreme Court.  Furthermore, COST argues that the retroactive amendment is a violation of the due process clause and is an unconstitutional “bait and switch” tactic.

Notably, this is not the first time a state attempted to retroactively deny refunds.  Since May 2010, the U.S. Supreme Court declined to review three (3) state tax cases involving similar retroactivity issues. See Asworth LLC v. Kentucky Department of Revenue, Finance and Administration Cabinet, U.S. No. 10-662 cert. denied (Jan. 24, 2011); Ford Motor Credit Co. v. Michigan Dept. of Treas., U.S., No. 10-481, cert. denied (Jan. 18, 2011); and Johnson Controls, Inc. v. Miller, U.S. No. 09-981, cert. denied. (May 24, 2010).

Johnson Controls was a Kentucky case in which the state courts upheld legislation that retroactively disallowed a corporate income tax refund.  COST filed an amicus brief supporting Johnson Controls’ petition for certiorari to the U.S. Supreme Court.  COST urged the Court to hear the case, arguing, somewhat prophetically, that numerous states would be inclined to follow suit and enact similar retroactive refund legislation, which deprives taxpayers of their due process rights.

Subsequently, the U.S. Supreme Court denied certiorari in Ford Motor Credit Co., in which Ford Motor Credit Co. claimed that a Michigan sales tax law that retroactively barred refund suits related to bad debt deductions violated the Due Process Clause of the U.S. Constitution.  COST again filed an amicus brief supporting Ford Motor Credit Co.’s petition for certiorari to the U.S. Supreme Court.

Most recently, the United States Supreme Court denied certiorari in another Kentucky case, Asworth, which involved a claim for a corporate income tax refund, plus interest.  However, prior to the resolution of the case, the Kentucky legislature amended a law, which retroactively changed the date for the accrual of interest on a refund claim, thereby effectively extinguishing the taxpayer’s claim to the interest.  The Kentucky courts denied the claim that the amended retroactive law violated the taxpayer’s due process rights, and for that reason – as well as for other additional grounds not applicable to this discussion –  denied Asworth’s claim.

Because of the state of the economy, it would not be surprising if more states enacted similar legislation attempting to curtail the payment of refunds otherwise due.  With the United States Supreme Court’s continuous denial of certiorari, taxpayers’ pleas for relief have largely gone unheard.  While Tesoro has, for the time being, found court approval for its position, many other taxpayers are left without recourse when a state retroactively amends its statutes denying a refund.

Michigan Supreme Court Debates Legality of Pension Tax

September 14, 2011

  by Stewart Weintraub and Jennifer Weidler

This past week, Michigan senior citizens packed into the Michigan Supreme Court to hear oral arguments over the legality of a proposed change that would impose a tax upon their public pensions.  Notably, this is not the first time that Michigan was involved with litigation concerning its taxation of pension plans.  During the late 1980s, the U.S. Supreme Court decided a case involving the Michigan Income Tax Act (“Act”).  The Act provided an exemption from taxation for all retirement benefits paid by the State or its political subdivisions, but subjected to tax retirement benefits paid by other employers, including the Federal government. See Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989).  The Court concluded that the Act violated the principles of intergovernmental tax immunity by favoring retired state and local government employees but not retired federal employees.

In dicta, the Court noted that: “A tax exemption truly intended to account for differences in retirement benefits would not discriminate on the basis of the source of those benefits, as Michigan’s statute does; rather, it would discriminate on the basis of the amount of benefits received by individual retirees.”  The Michigan Legislature appears to have grasped onto this idea, revamping its state business and income tax system and adopting 2011 PA 38 (“Amendment”).  Subsequent to the decision in Davis, all pension income for public retirees was exempt from income tax.  As a result of the Amendment, the previous exemption for state pension income would be limited based upon age and household resources.  With regard to age, the amendment creates three (3) classes of pension recipient taxpayers:

  1. Class 1: Taxpayers 67 years of age or older during 2012.  These individual’s public pension distributions will remain completely exempt.  Their private pension exemptions will be capped at $45,120/$92,240 (single filer/joint filer).
  2. Class 2: Taxpayers age 60 through 66 during 2012.  For these taxpayers, their public and private pension exemptions will be capped at $20,000/$40,000 (single filer/joint filer).  Upon a taxpayer’s attainment of age 67, the pension exemption for this Class becomes a general income exemption and no pension or income exemption will be granted if the taxpayer’s total household income exceeds $75,000/$150,000 (single filer/joint filer).
  3. Class 3: Taxpayers age 59 or younger during 2012.  Initially these taxpayers will receive no pension exemption.  Upon attainment of age 67, this Class will receive an income exemption subject to the same cap as Class 2 taxpayers.

Additionally, the Amendment creates personal exemption phaseouts based upon total household resources.  There is a phaseout of the exemption where total household resources exceed $75,000/$150,000 (single filer/joint filer).  Furthermore, personal exemptions are completely disallowed where total household resources exceed $100,000/$200,000 (single filer/joint filer).

In order to obtain an advisory opinion addressing the legality of the Amendment, Michigan Governor Rick Snyder invoked Article III, section 8 of the Michigan Constitution, requesting that the Michigan Supreme Court issue an opinion regarding the constitutionality of the Amendment.  During June the court granted the request, but issued the following four (4) questions to the parties for response:

  1. Whether reducing the statutory exemption for public pension income violates the constitutional provision stipulating that the “accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions…shall not be diminished or impaired”;
  2. Whether eliminating the statutory tax exemptions for pension income results in the impairment of contractual obligation in violation of the Michigan and U.S. constitutions;
  3. Whether using total household resources as a measure for phasing out exemptions creates a graduated income tax in violation of Michigan Constitution Article IX, section 7; and
  4. Whether basing eligibility for exemptions on a taxpayer’s date of birth violates the equal protection clauses of the Michigan and U.S. constitutions.

Proponents of the Amendment argue that the state constitution did not create a permanent tax exemption from public pension income nor did it create a contractual right to a perpetual tax exemption.  Furthermore, proponents argue that the provisions relating to a graduated income tax were solely meant to prohibit the state from adopting a federal-like graduated income tax; as long as the rate of taxation on taxable income is constant, there is no violation.  Finally, proponents claim that the Amendment should be upheld because there is a rational basis for the birth date classifications in that younger people are better able to adjust to and absorb changes that may negatively affect their income stream in retirement.

Opponents of the Amendment argue that the Amendment would reduce the pension income that public sector employees have already earned, violating the state constitution.  Furthermore, opponents claim that the Amendment would violate public worker’s constitutional right not to have their contracts impaired.  Additionally, opponents argue that the Amendment creates a graduated income tax by taxing retirees differently based on income level in violation of the constitution.  Finally, opponents argue that the applicable standard for evaluating the Amendment is strict scrutiny, not rational basis, and that the Amendment violates the equal protection clause because it attaches the right of Michigan taxpayers to receive an exemption to their date of birth and marital status. Conversely, opponents claim that there is no rational basis for the distinction.

This past week, the seven Michigan Supreme Court justices debated the issues with attorneys from both sides during oral arguments, which lasted for over an hour.  However, the line of questioning and arguments focused on the question of whether the Amendment creates an unconstitutional graduated income tax.  While proponent’s claim that there is no violation of the prohibition against a graduated income as long as the rate of taxation on taxable income is constant, this proposition stands in direct contradiction to established Pennsylvania case law examining an analogous issue.  First, in Kelley v. Kalodner, 320 Pa. 180 (1935), the statute in question established a graduated income tax in which the court scrutinized the use of exemptions from tax based upon income.  The court held that:

There can be no doubt that these exemptions were inserted for the purpose of putting the burden of the tax upon those most able to bear it, but it results in taxing those whose incomes arise above a stated figure merely because the legislature believes their incomes are sufficiently great to be taxed. It is obvious that the application of the tax is not uniform.

For the next 36 years Pennsylvania did not impose an income tax.  Then during 1971, the Pennsylvania General Assembly enacted a new income tax.  As enacted, the tax was imposed at a flat rate of tax upon taxpayers based upon Federal adjusted gross income as modified for Pennsylvania adjustments.  Enactment of the tax was immediately challenged.  The Pennsylvania Supreme Court found that although the Tax Reform Code of 1971 purported to impose a flat 3.5% tax upon “taxable income,” the concept of “taxable income” already reflected the federal personal exemptions for the taxpayer and his/her qualified dependents.  Thus, the court found that the same elements of nonuniformity were built-in to the Tax Reform Code of 1971 as existed in Kelley, and therefore violated uniformity even though a uniform rate was imposed.  Thus, Pennsylvania case law appears to be in contradiction to the arguments advanced by proponents of the Amendment with regard to the graduated tax.  See Amidon v. Kane, 279 A2d 53 (Pa. 1971).

The Amendment is expected to generate approximately $225 million during 2012 and $343 million during 2013.  Thus, if the tax is struck down, the state’s budget will have a gaping hole.  Not surprisingly, the Michigan Chamber of Commerce and the business community, which would benefit from a $1.8 billion tax cut the pension tax helps to provide, are some of the proponents of the Amendment.  If the Court upholds the constitutionality of the Amendment, it would go into effect on January 1, 2012.

Weekly SALT News Update

August 29, 2011

Texas Supreme Court Rules “Pole Tax” Does Not Violate First Amendment

In a unanimous decision Texas Supreme Court rules stripper “pole tax” does not violate First Amendment. The decision reverses a 2-1 Third Court of Appeals decision, which had held the tax violated the First Amendment in upholding the trial court’s ruling. The decision remands the case to the trial court, where three arguments remain, all based on challenges to the tax under the Texas Constitution.

New Jersey Appeals Court Upholds Tax Court Finding No Unitary Nature of Limited Partnership

New Jersey Appellate Division holds limited partner of limited partnership was not subject to Corporation Business Tax because limited partner was not unitary with limited partnership and limited partner had no independent nexus with NJ. The decision upholds the lower court’s decision. The decision is discussed in greater detail at this blog post.

Missouri Denies Sale for Resale Exemption for Guest Houses

Worlds of Fun  (“WOF”) operated cabins and cottages that it rented to guests on a nightly basis. It claimed a sale for resale exemption on tangible personal property that it provided to the guests in the quarters, such as benches, beds and mattresses. The Administrative Hearing Commission denied the exemption on the basis that insufficient control was transferred to the guests. A similar case regarding toiletries is currently pending before the Texas Third Court of Appeals, for which the trial court denied the sale for resale exemption.

California Governor Asks Legislature for Mandatory Single-Factor Formula

The California governor asks the Legislature for a mandatory single-factor formula for state income tax based on sales in California. The hope is that such a change would incentivize business to maintain corporate headquarters in the state.

Pennsylvania Reissues Ruling on Computer “Help” Services

The Pennsylvania Department of Revenue has reissued SUT-6-014, which clarified those “help” services that are subject to sales tax. Where the taxpayer’s employees are not under the control of the customer, the services rendered are not taxable as a “help supply” service.  61 Pa. Code § 60.4.

Arizona Appeals Rules No Need to Exhaust Administrative Remedies

The Arizona Court of Appeals reversed a lower court decision, and ruled that a direct appeal to the tax court is permitted in connection with a tangible personal property valuation.

New Mexico Accepts CPA’s Negligence to Waive Penalty

A taxpayer who had not filed for the New Mexico gross receipts tax was granted a waiver from the payment of penalty based on the representation that such non-filing was the result of advice provided by a CPA.

Allcat Replies to Texas Attorney General in Challenge to Texas Franchise Tax

Allcat has filed its reply to the Texas Attorney General in connection with its challenge that the Texas Franchise Tax (also known as the “margin tax”) is unconstitutional. Allcat argued that limited discovery was appropriate at the Supreme Court level, that the Uniform Declaratory Judgment Act does apply, and requested more time to brief the case.

New York Rules Estimated Audit Proper with Partial Records

The New York Division of Tax Appeals has ruled that due to only partial records being provided in a protracted audit of a taxpayer, that it was appropriate to estimate the sales tax due.

Texas Supreme Court Requests Briefing of Sale for Resale Case 

The Texas Supreme Court has requested briefing in connection with a claim for the sale for resale exemption for prizes sold in “claw” machines.

New York Rules Not Able to Estimate Tax Refund

The New York Division of Tax Appeals has ruled that a taxpayer cannot use estimate to calculate refund or credit amount for sales and use tax.

Indiana Tax Court Rules for Miller Brewing on Apportionment

Miller Brewing avoids income tax on Indiana sales if third party picks up at plant. Court says irrelevant that tax avoided in all states as a result of decision.

Georgia Considers Tax Court

A Georgia legislative subcommittee considered the creation of a tax court on August 24, 2011.

Weekly SALT News Update

August 22, 2011

Tax Foundation Report Opines Texas Margin Tax Not a Model Act

A recent Tax Foundation report concludes that the Texas margin tax – untried when enacted in 2006 – collected less revenue than expected, caused significant confusion and compliance costs, resulted in litigation and controversy, and should not be tried in other states.

Tennessee and New York Opine Electronic Goods Not Subject to Sales Tax

Tennessee provided a written opinion that paper shop drawings would be subject to sales tax, but not a digital (paperless) version of the same. New York authorities similarly concluded that the sale of an electronic PDF would not be subject to sales tax, while a printed version of the PDF would be.

New Jersey Issues Apportionment Guidance

In the wake of the new apportionment guidelines set forth by the New Jersey Legislature, New Jersey authorities have outlined the manner for the phase-in of the single factor formula in replacement of the three-factor allocation formula for the Corporation Business Tax. For privilege periods beginning on or after January 1, 2012 but before January 1, 2013, the sales fraction will account for 70% of the allocation, and the property and payroll fractions will each account for 15% of the allocation. The following year will be 90% sales, and the next will be 100% sales fraction.

Louisiana Appeals Court Finds Sale of BP Refinery in Normal Course of Business

BP prevailed in its motion for partial summary judgment, arguing that its sale of a refinery in Louisiana should be classified as apportionable income, taxed proportionate to all the states in which BP does business, as opposed to allocable income and thus taxed only by Louisiana. Because BP was able to show that it regularly sold refineries, the Louisiana appeals court found that such sale was deemed to be part of its regular course of business, and thus the income to be taxed proportionate to its income in all states in which it does business.

Virginia Opines In-state Employees Do Not Constitute Nexus If No In-state Projects

Virginia tax authorities have opined that because the only link between an out-of-state company and Virginia was the presence of two employees who lived in Virginia but did not work on any in-state projects, there was not a sufficient contact to constitute nexus for income tax purposes.

Texas Comptroller Rules Any Filed Method Can Be Used for New Group

Previously, when a Texas Comptroller auditor determined that separate companies needed to amend their filings to report as one consolidated group, the auditor would insist that the only proper methodology would be that methodology used by the reporting entity. The Texas Comptroller has reversed this practice, and opined that the resulting entity can file using any methodology that had been previously filed by the combined entities.

Texas Comptroller Reverses on Software License As Tangible Personal Property

Previously, the Texas Comptroller had issued audits in which it would not treat a license of software as a sale of tangible personal property. As a result, taxpayers who licensed software could not receive the full benefit of the cost of goods sold methodology. This decision has been reversed, and the Texas Comptroller now agrees with taxpayers that the license of software does constitute a sale of tangible personal property for franchise tax purposes.