August 8, 2012
In a recent decision by the District of Columbia’s Office of Administrative Hearings, a food distributor defeated an attempt by the District of Columbia’s Office of Tax and Revenue to impose corporate franchise tax and ball park fees for tax years 2000 to 2009. The distributor argued that it did not conduct business in the District within the meaning of the District’s tax laws and therefore the District lacked authority to tax it. This case serves as a reminder that before a state (or the District) can impose its income tax on a business, the state’s (or the District’s) applicable tax law must first authorize it. This is the third major taxpayer win in the last two years before the new Office of Administrative Hearings.
Click here to read the full article on nixonpeabody.com.
For more information regarding state and federal business income tax, please contact your regular Nixon Peabody attorney or:
By Kenneth H. Silverberg
The anxiously-awaited decision of the NJ Supreme Court in Whirlpool Properties, Inc. was issued yesterday. Taxpayers won half a loaf, but they clearly got the smaller half. Still, most multistate corporations that paid New Jersey income tax between 2002 and 2008 are now entitled to a partial refund.
The Whirlpool decision points out that the throwout rule increased New Jersey’s share of a corporation’s income in two situations:
- when sales are made to a state that has no income tax; and
- when sales are made to a state in which the corporation has too little business activity to have tax nexus (“nowhere sales”).
The analysis of constitutionality is very different in these two situations. The court concluded that another state’s decision to have no corporate income tax does not entitle New Jersey or any other state to tax a greater share of worldwide income. That, the justices believe, interferes with the sovereignty of another state, is unrelated to the extent of the corporation’s New Jersey activity, and therefore violates the Commerce Clause.
However, in the second category, nowhere sales throwouts, the justices stated that New Jersey obviously contributed more to making the sale in question than did the no-nexus destination state. Therefore increasing the New Jersey sales factor may not lead to a fair outcome in every case, but the “systematic distortion would not render the result facially unconstitutional.”
The justices suggested that Whirlpool’s litigation strategy may have been its undoing. They note that some other taxpayer who elects to challenge the throwout by stating it was unconstitutional as applied to them might have gotten a different result. However, Whirlpool and its counsel elected to challenge the throwout as unconstitutional on its face. Such a challenge is easier to litigate, because the argument can be made with hypothetical facts rather than the real facts of the case. However, the burden of proof facing the taxpayer is more strict – to succeed in a “facial” challenge, the taxpayer must prove that there is no possible set of circumstances in which the tax passes muster. Here, Whirlpool failed to do that.
So what about your refund claim? If you made a lot of sales to Nevada customers between 2002 and 2008, you’ll get a nice refund. But if most of your refund claim is based on nowhere sales, the Whirlpool decision doesn’t do much good for you. Unless you’re willing to litigate it yourself and claim the throwout was unconstitutional as applied to your particular facts.
The full text of the decision can be downloaded at http://www.nixonpeabody.com/linked_media/publications/whirlpool.pdf.
By Scott M. Susko and Kenneth H. Silverberg
Any business that holds "unclaimed" or "abandoned" property--including double payments for services rendered, unapplied or misapplied cash, uncashed checks--could face state liability for the value of the property they improperly hold, plus interest and penalties. Attorneys in Nixon Peabody's State and Local Tax ("SALT") Practice are experienced in addressing these liabilities and are available to help your business.
Rare is the circumstance where a state taxing authority feels compelled to blog about a nexus case. In its July 23, 2009 post entitled "Another Point of View on Town Fair Tire", the Massachusetts Department of Revenue (DOR) blogged:
"To say there has been more heat than light generated in the ongoing news coverage of the Town Fair Tire sales tax case would be an understatement ... In truth, the Town Fair Tire dispute is a narrow case testing whether Massachusetts has the right to compel the tire company, which also has stores in Massachusetts and is thus subject to Massachusetts rules, regulations and laws, to collect sales tax on tires installed [in New Hampshire] on vehicles bearing Massachusetts license plates and registrations."
If this case is so narrow, why would the DOR focus its resource-constrained efforts on a case with a liability of approximately $108,000 on the original assessment that included tax, interest and penalties? The Boston Globe dubbed the case "Taxachusetts" versus the "‘Live Free or Die’ pride of New Hampshire." Kevin W. Brown, general counsel of the Massachusetts DOR, was quoted in this same news article as saying the case attempts to address a difficult and protracted problem that seeks to protect Massachusetts retailers. According to the story, some economists have estimated this to be somewhere between a $130m and $410m annual problem for Massachusetts.
Retailer had no duty to collect Massachusetts sales tax for out-of-state purchases by Massachusetts residents
In Town Fair Tire Centers, Inc. v. Commissioner of Revenue, SJC-10360, 8/25/2009, the Supreme Judicial Court of Massachusetts held that a store located in New Hampshire did not have to collect Massachusetts sales tax from customers who bought goods in New Hampshire but had a Massachusetts address, driver’s license or telephone number. The Court interpreted the relevant Massachusetts statute, G. L. c. 64I, §4, to impose sales tax liability only once the property was actually stored, used or consumed in Massachusetts. Since the customers who bought tires in New Hampshire did not use them in Massachusetts before leaving the store, the store had no obligation to collect Massachusetts sales tax. The Court held that the Commissioner may not presume that Massachusetts customers would use the tires in Massachusetts, because the sales tax statute does not explicitly allow such a presumption.
The decision rests on statutory interpretation and not on constitutional grounds, and the Court emphasized that the Massachusetts Legislature could amend the statute to impose a sales tax in similar circumstances in the future. In fact, the Court pointed out that several other states already impose sales tax in cases when the vendor knows that the purchaser is a resident of the taxing state. Given the current budget shortfalls, we may see Massachusetts and other states enact similar statutes to force out-of-state vendors to collect sales tax on purchases by in-state residents.
New Hampshire’s Response
New Hampshire Governor John Lynch proposed legislation to protect New Hampshire’s businesses from having to collect sales taxes on behalf of Massachusetts. From the release announcing his proposed legislation, Governor Lynch said, "We have chosen not to have a sales tax here in New Hampshire, and we are not about to let Massachusetts – or any state – impose its sales tax on our businesses for items purchased in New Hampshire stores." The final version of the legislation proposed by Governor Lynch that took effect in July of 2009 provided that business owners cannot be compelled to disclose private customer information and that unless the consumer gives information on his own, there is a "presumption" that New Hampshire is where the purchased goods will be used.
The IDC Research case in Massachusetts is another signal from state tax authorities of increased audit enforcement on transfer pricing issues. Although the facts of the case are narrow, the decision is important for two reasons: (1) the taxpayer won without a contemporaneous transfer pricing study; and (2) this if first reported decision in Massachusetts looking to IRC Code Section 482 for intercompany pricing guidance.
By Scott Novick
On August 13, 2009, the U.S. Court of Appeals for the First Circuit issued its highly anticipated en banc decision in United States v. Textron (2009 U.S. App. LEXIS 18103 (1st Cir. 2009)), with a 3-2 majority holding that the work product privilege does not attach to Textron’s tax accrual work papers because they had not been prepared “for use in” possible litigation. While the decision is controversial and may be appealed to the U.S. Supreme Court, there are practical steps that companies should undertake now in light of Textron’s immediate impact on the uneven landscape of privilege.
Synopsis Of Case
The tax accrual work papers requested by IRS examiners included: (i) a spreadsheet summarizing Textron’s uncertain tax positions, including a risk-factor estimating Textron’s chances of prevailing on each issue in litigation and the amount reserved therefore; and (ii) notes and memoranda prepared by Textron’s in-house tax attorneys expressing their opinions as to which items should be noted on the spreadsheet and the risk factor associated with each such item. The U.S. District Court denied the Government’s summons enforcement action under the work product doctrine. A three-judge panel of the First Circuit affirmed that decision. The panel opinion was, however, subsequently vacated, and the case was reheard en banc. On rehearing, a 3-2 majority reversed the District Court’s decision, reasoning that the work papers were prepared to support financial filings and gain auditor approval, rather than for use in possible litigation.
What You Can Do Now to Protect your Company
The lack of work product protection for tax accrual work papers can have detrimental consequences to the bottom line. Although the IRS currently adheres to a policy of restraint by requesting only those tax accrual workpapers that concern “listed transactions” (the IRS determined Textron had invested in SILO transactions), in preparing for an uncertain future, tax departments can and should adopt certain internal procedures to provide as much protection as possible against such requests. To the extent practical, these procedures should include:
- Limiting tax accrual work papers to numerical analysis with minimal supporting narrative.
- Requesting assistance of outside tax counsel in preparing any opinions or supporting narratives about the specific issues identified in the tax accrual work papers.
- Keeping legal opinions separate from the corresponding work papers and under the control of in-house counsel.
- If in-house counsel act in a dual capacity (litigation assessment and financial statement preparation) in your company, ensure that they maintain a separate file cabinet for legal opinions and memoranda, whether prepared internally or by outside tax counsel.
By Ken Silverberg
The attached Tax Information Release 2009-03 describes a program just launched by Hawaii to formally parallel the IRS's offshore account initiative. Although everyone making the disclosures to the IRS is well advised to follow up with their respective state income tax authorities, most taxpayers have probably put that on the back burner. Hawaii is in the throes of a deep budget crisis, and apparently doesn't want to wait for the IRS information-sharing data. Their program establishes the state's September 23 deadline for notification.
We're surprised more states have not already done something like this, and predict others will do so as the IRS deadline approaches.
In Comm’r of Revenue v. Comcast Corp., SJC-10209 (March 3, 2009), the Massachusetts Supreme Judicial Court extended work product protection to documents prepared by an accounting firm because of existing or expected litigation. Anticipating that a certain stock sale transaction could have significant tax consequences, Comcast’s in-house counsel engaged the help of Arthur Andersen, who prepared a memo discussing the pros and cons of various planning opportunities for structuring the sale, and the attendant litigation risks. When Comcast was later audited by the Department of Revenue, Comcast withheld these documents claiming that they were protected by the work product doctrine. The Department of Revenue, however, argued that these documents were not prepared in order to assist with litigation, and were therefore not protected. Applying a test developed by the U.S. Court of Appeals for the Second Circuit in United States v. Adlman, 134 F.3d 1194 (2d Cir.1998), the MSJC found that documents are considered "prepared in anticipation of litigation" if they are prepared "because of" existing or expected litigation, even if their purpose is not to "assist in" litigation. It, therefore, held that the documents prepared by Arthur Anderson were in fact protected by the work product doctrine, affirming the decision of the trial court.
By Scott Susko
The New York "Empire Zone" Program is the State's chief economic development tool. Businesses located in Empire Zones can qualify for certain state tax breaks if they make capital investment or job creation commitments. Recently, the State has sent letters to all current recipients of Empire Zone benefits.
Types of Letters Being Sent
There are two types of letters being sent:
Letter indicating that a business continues to qualify
Letter indicating that Empire Zone benefits are in jeopardy
If you are a participant of the Empire Zone Program, you may currently be in danger of losing the benefits associated with the Program.
If you need help in defending the economic development benefits you have received from the Program, Nixon Peabody tax lawyers are available to assist.
Partner, Public Finance & Global Tax Group
Partner, Global Tax Group
Associate, Global Tax Group
Associate, Global Tax Group
On March 23rd, the Georgia Supreme Court ruled that the City of Atlanta does not have to exhaust administrative remedies before it can bring legal action against online travel companies (or "OTCs") for what the City alleges is the systematic underpayment of hotel occupancy taxes. See Atlanta v. Hotels.com LP, Ga., No. S08G05683/23/09). Although focused on procedural issues, this is the first case of its kind to reach a State's highest court.
OTCs currently pay hotel occupancy taxes on the wholesale price of their hotel room purchases. The hotels remit this tax collected from OTCs to the appropriate taxing authorities. Local taxing authorities from around the country are alleging in various lawsuits that OTCs operate as online retailers of hotel rooms and, as such, should collect and remit local tax on the price paid by OTC customers. OTCs argue they are not subject to the hotel occupancy tax because they do not physically operate any hotels. To date, OTCs have argued in virtually all of the cases brought by localities that, prior to filing lawsuits for the alleged underpayment of occupancy taxes, the localities were required to first exhaust administrative remedies, including an assessment of the taxes due. Courts in a number of jurisdictions (e.g., Los Angeles, San Diego, and Philadelphia) have agreed, and dismissed the cases on the grounds that the cities failed to exhaust those remedies.
However, the Georgia Supreme Court held that the City should not be required to submit to the administrative process until the threshold legal issue of applicability of the hotel tax ordinance has been resolved. This holding was predicated on the theory that the "exhaustion" doctrine does not apply where the threshold issue goes directly to the jurisdiction or power of the administrative agency. In particular, the Georgia Supreme Court did not view the City's declaratory judgment claim as an interference in the administrative process. Rather, the Court believed the claim was intended simply to determine whether the administrative process is relevant (i.e., whether the hotel tax ordinance, and its attendant administrative process, apply herein) and, if so, to pave the way for its implementation.
The dissent challenged the majority's holding on the belief that taxability can be addressed in the context of administrative procedures, since issues regarding taxability and the amount of taxes due are the hallmark of tax collection cases in general.