In this article, McDermott partner Arthur R. Rosen interviews Art Rosen, whom he claims to “know quite well,” about vexing state tax litigation. One instance that he found troubling came after he and two other taxpayer representatives presented their explanation of a case during a settlement hearing, only to have a Department of Revenue representative respond that they weren’t there to discuss the issues!
On January 21, Governor Cuomo delivered his State of the State address, along with proposing the new budget. The budget has a number of new tax proposals. One of those proposals would have a significant impact on e-commerce companies. Part X of the budget proposal amends the sales tax statutes to require marketplace providers to collect and remit sales tax on sales to New York customers. A marketplace provider is a person who, pursuant to an agreement with a seller, “facilitates a sale, occupancy, or admission” by the seller. A person can be a marketplace provider if they facilitate the sale, or are an affiliate of a person facilitating the sale. For purposes of this definition, affiliate companies are companies that have common ownership of 5 percent.
“Facilitates a sale, occupancy, or admission” means:
(1) such person, or an affiliated person, collects the receipts, rent or amusement charge paid by a customer, occupant or patron to a marketplace seller; and
(2) such person performs either of the following activities:
(A) provides the forum in which, or by means of which, the sale takes place or the offer of occupancy or admission is accepted, including a shop, store or booth, or an internet website, catalog or a similar forum; or
(B) arranges for the exchange of information or messages between the customer, occupant or patron, as the case may be, and the marketplace seller.
A marketplace provider meeting these requirements would be required to collect as if the marketplace provider were the vendor.
Under current law, a seller is required to collect and remit tax on sales made to New York customers. Under the budget proposal, a seller would no longer be required to collect if the marketplace provider provides a collection certificate to the seller. (The Division of Taxation is required to develop procedures to administer the certificate). If a marketplace provider does not provide a collection certificate, but does use language approved by the Division of Taxation and Finance in a publicly-available agreement, that will have the same effect as the provision of a collection certificate.
The imposition under the proposal is directly on the marketplace provider. There does not appear to currently be any provision that would allow a seller in a marketplace to collect instead of the marketplace provider, if the seller so desired.
Marketplace providers are relieved of liability if the information provided to them by the seller is incorrect. However, there is no provision in the bill requiring the marketplace sellers to provide any information to the marketplace provider.
The law does not change existing nexus or ‘doing business’ requirements. It appears that a marketplace provider would be required to collect only if the marketplace provider has nexus with New York under the Commerce Clause.
This proposal would have a significant effect on e-commerce companies, and could have an impact reminiscent of the impact of the click-through statutes. Companies that sell through a [...]
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On December 5, 2014, the New York Department of Taxation and Finance (Department) released TSB-M-14(5)C, (7)I, (17)S. This (relatively short) bulletin sets forth the treatment of convertible virtual currency for sales, corporation and personal income tax purposes. The bulletin follows on a notice released by the Internal Revenue Service (IRS) in March of this year, Notice 2014-21.
The IRS Notice indicates that, for federal tax purposes, the IRS will treat virtual currency as property, and will not treat it as currency for purposes of foreign currency gains or losses. Taxpayers must convert virtual currency into U.S. dollars when determining whether there has been a gain or loss on transactions involving the currency. When receiving virtual currency as payment, either for goods and services or as compensation, the virtual currency is converted into U.S. dollars (based on the fair market value of the virtual currency at the time of receipt) to determine the value of the payment.
The IRS Notice only relates to “convertible virtual currency.” Virtual currency is defined as a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” Convertible virtual currency is virtual currency that “has an equivalent value in real currency, or that acts as a substitute for real currency.”
The Department’s bulletin also addresses only convertible virtual currency, and uses a definition identical to the IRS definition. The Department indicates that it will follow the federal treatment of virtual currency for purposes of the corporation tax and personal income tax.
For sales and use tax purposes, the bulletin states that convertible virtual currency is intangible property and therefore not subject to tax. Thus, the transfer of virtual currency itself is not subject to tax. However, the exchange of virtual currency for products and services will be treated as a barter transaction, and the amount of tax due is calculated based on the fair market value of the virtual currency at the time of the exchange.
The Department should be applauded for issuing guidance on virtual currency. It appears that these types of currencies will be used more and more in the future, and may present difficult tax issues.
However, the Department’s guidance is incomplete. There are a couple of unanswered questions that taxpayers will still need to ponder.
First, the definition of convertible virtual currency is somewhat broad and unclear. The Department and the IRS define “convertible” virtual currency as currency that has an “equivalent” value in real currency, but equivalent is not defined in either the IRS Notice or the bulletin. Many digital products and services use virtual currency or points that cannot be legally exchanged for currency to reward users, and the IRS and the Department should be clearer about the tax treatment of those currencies.
Second, although the Department will follow the federal treatment for characterization and income recognition purposes, the bulletin does not discuss apportionment. This is likely a very small issue at this point in time, but the Department will, [...]
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We thought our Inside SALT readers would enjoy a little diversion during the busy holiday season, so as a thank you to all of our readers and subscribers, we are pleased to present our first-ever Inside SALT Crossword Puzzle Contest. We hope you’ll enjoy testing your knowledge of key state and local tax developments this year. To enter, please download and print the puzzle by clicking on the image below. After you complete the puzzle, please send it as a PDF file to skranz@mwe.com no later than December 31, 2014, at 11:59 pm EST. The first eligible entrant to submit a complete and correct puzzle wins a $200 Amazon gift card. The Contest is open to registered Inside SALT email subscribers from the United States and District of Columbia who are age of majority or older. (To become a subscriber, please enter your email address in the box on the right side of your screen.) Contest ends at at 11:59 pm EST on December 31, 2014. Participation is subject to the Official Rules. For complete details, click here to view the Official Rules.) This Contest is void outside the U.S. and D.C. and where prohibited, restricted or taxed. Please also share your feedback about what topics you would like to hear more about in the comments section below. We look forward to hearing from you and to bringing you timely SALT updates and analysis in the coming year! 
This is the sixth article in a series on the composition of the sales factor and the potential tax saving opportunities hidden within state statutes and regulations. As more states shift to a single or more heavily weighted sales factor, it is important for taxpayers to understand the intricacies of the sales factor and the opportunities that exist in computing it. This article will focus on issues that could arise and opportunities that may be available for conduit receipts.
As it heads into the final weeks of its session, Congress is considering various bills that would restrict or expand states’ taxing authority. Almost every business in the country would be affected by at least some of these bills. While some of these bills have progressed further than others, any could become law—particularly if bundled into legislation that Congress must, as a practical and political matter, pass before the session ends. Businesses thus have an opportunity to ask their Senators and Representatives to take action to rein in some of the problems with state and local taxes.
On Friday, November 14, 2014, an administrative law judge (ALJ) issued three identical orders granting the taxpayer’s motion for summary judgment in Hess v. OTR, Shell v. OTR and ExxonMobil v. OTR. In these orders, the ALJ determined that based on an early ruling that the challenged methodology was fatally flawed, the Office of Tax and Revenue was barred from re-litigating the issue in the current cases under the doctrine of non-mutual collateral estoppel.
Transfer Pricing Implications
The transfer pricing litigation in D.C. has been a frustrating road for taxpayers because the flaws in the methodology OTR applied have been apparent from the outset. The first case to be litigated was Microsoft v. OTR, OAH Case. No. 2010-OTR-00012 (May 1, 2012). In this case, an ALJ ruled that the methodology the District used was fatally flawed because the methodology failed to (i) separate controlled from uncontrolled transactions and (ii) individually analyze different product lines and different functions. As a result, the ALJ concluded that the analysis was flawed, arbitrary and unreasonable. OTR initially appealed the Microsoft order to the D.C. Court of Appeals, only to withdraw shortly after by filing a motion to dismiss its own petition for review.
When Microsoft was decided in 2012, it appeared that the faulty transfer pricing methods used by the District had been permanently debunked. Nevertheless, OTR renewed the contract for the business performing the transfer pricing audits and did not materially modify the assessment methods. As a result, taxpayers continued receiving assessments from the OTR based on the same methodology previously ruled invalid in Microsoft. At least 10 taxpayers have challenged these assessments post-Microsoft, and the orders issued Friday are the first of these challenges to be resolved by the Office of Administrative Hearings (OAH).
The taxpayers in the Hess/Shell/ExxonMobil cases all challenged the substantive validity of the assessment methodology and argued that the Microsoft decision should be controlling. OTR asserted that the doctrine of non-mutual collateral estoppel did not apply to the government and, even if it did, the elements were not met in this case. The ALJ disagreed with OTR’s analysis and found “the failure to apply [non-mutual collateral estoppel] would allow [DC] to keep issuing proposed assessments to taxpayers using the same flawed Chainbridge analysis, with the hope that some taxpayers won’t have the wherewithal to challenge the assessment and will find it economically advantageous to simply pay rather than fight.”
The three orders issued on Friday should provide a definitive signal to OTR that the method is flawed as a matter of law and cannot be validly used to assess D.C. taxpayers going forward. These decisions are essentially decisions on the merits for the pending cases and, assuming no appeal is filed, D.C. should face sanctions if it continues to pursue assessments using the methodology at issue in these cases.
Broad Implications
Perhaps more importantly than the narrow (but important) transfer pricing issue in these decisions, OAH has made is clear that non-mutual collateral estoppel can be applied against OTR [...]
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Failing to attend last week’s Uniform Law Commission’s (ULC’s) Drafting Committee meeting to revise the 1995 Uniform Unclaimed Property Act (the Act) was worse than missing the 2012 Extravakranza. On November 7 and 8, 2014, the Who’s Who of the Abandoned and Unclaimed Property world (AUP for insiders needing abbreviations for texting) met in Washington, D.C. for a two-day marathon to modernize state unclaimed property law. The chair of the committee noted that several thousand pages of comments had been received so far and that attendance at the meeting was greater than any other issue the ULC pursued other than the Uniform Commercial Code.
The attendees hailed from a wide variety of stakeholders including: representatives from more than 20 states; major third-party auditors including several representatives of Kelmar; numerous trade associations including representatives of the securities and the life insurance industries, and general business associations such as the Council on State Taxation and the U.S. Chamber of Commerce. Several representatives from the state of Delaware were in attendance; Delaware is a state that has historically not adopted any of the Uniform Acts and is considered one of the most aggressive states in interpreting its unclaimed property laws to the detriment of holders.
As to the Act itself, no policy or language is set in stone at this point, but the Drafting Committee took votes on numerous issues in order to give the reporter (the person responsible for actually drafting potential language for the Act) guidance. The votes by the Drafting Committee were a mixed bag from a holder’s perspective, and a lot could still change before the final Act is adopted. Unfortunately, but not surprisingly, the Committee rejected banning states from using contract auditors as well as rejected banning states from using contingency fees to pay such auditors. The Committee also voted to allow both estimation and sampling in unclaimed property audits (though there was some confusion demonstrated by the Committee’s discussions and questions regarding the difference between these two). The Committee left discretion with the reporter regarding the inclusion of guidelines and limitations on use of such audit techniques. The Committee also rejected exempting from remittance low balance property – a proposal supported by the American Bar Association and a proposal that would be an administrative benefit to holders.
The Committee voted to change the interest provision on holders for unremitted balances from offering a flat rate option to solely a floating interest rate pegged to a T-bill + standard. Currently some states have interest rates of 12 percent and 18 percent. The National Association of Unclaimed Property Administrators lobbied to leave the interest rate up to the individual states because every state has different investment profiles. This was ultimately a losing argument as it was noted that if any state is currently getting 12 percent or 18 percent on its investments, everyone wanted to know what that state was doing so they could do the same. The Committee also voted to include, for discussion purposes only, a draft [...]
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With both Halloween and the Multistate Tax Commission (MTC) Income Tax Audit selection nearing, taxpayers should prepare themselves for the possibility of being spooked in the near future. On Thursday, October 30, from 2-4 pm EST, the MTC Audit Committee—including representatives from the 22 states participating in the upcoming round of joint income tax audits—will be holding a teleconference that will begin with a public comment period. Because of the inevitable disclosure of confidential taxpayer information, the bulk of this meeting—including selecting the various companies to audit—will take place during the second half of the agenda and be closed to the general public. Just because a company has completed an audit in the past does not mean this season will be all treats. The authors have noticed that companies previously audited by the MTC can remain on the list of targets and are often repeat selections.
Unique Complexities
The MTC audit process is not without its share of traps for the unwary. First and foremost is the effort a taxpayer must expend in managing a multistate audit. Issues such as differing statute of limitations, the effects of federal Revenue Agent’s Reports (RAR) and net operating loss (NOL) differences on limitations periods, timing of protests, and tax confidentiality become of heightened importance when one auditor is reviewing a taxpayer for multiple states. Audited taxpayers should also keep in mind that the MTC does not issue the actual deficiency notices – these must come from the states. As a result there may be certain areas such as credits or refunds that the MTC does not review and must be raised directly with a participating state.
On the substantive side, a primary area of inquiry of an MTC audit has been and is likely to continue to be inter-company transactions. Historically MTC audits have taken a variety of approaches to disallow a taxpayer’s intercompany structure, including collapsing separate affiliates, applying the sham transaction doctrine, or using aggressive addback concepts. Another similar concern for taxpayers audited by the MTC is the increased likelihood of transfer pricing issues being raised. This comes in the wake of the creation of the MTC Arm’s-Length Adjustment Service (ALAS) this summer, led by former Montana Department of Revenue Director Dan Bucks. The group recently held a transfer pricing summit at which it designed the MTC services to include third-party economic consultants at every stage. The MTC transfer pricing services are expected to be implemented in mid-2015—just in time for companies selected for an MTC Income Tax Audit to be the test subjects. Notably, of the nine states committing seed money to the development of a multistate transfer pricing audit service, five (Alabama, Hawaii, Kentucky, New Jersey and the District of Columbia) are participating in the MTC Income Tax Joint Audit Program. It is not clear whether the two MTC-sponsored audit programs will be intertwined; however, the option was proposed this past summer and remains a possibility as we approach the upcoming audit selections.
Finally, it remains to [...]
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On September 23, District of Columbia Council Chairman Mendelson introduced the Promoting Economic Growth and Job Creation Through Technology Act of 2014 (Bill 20-0945 , hereinafter the “Act”) at the request of Mayor Vincent Gray. This marks the second time that the Council has considered the introduced language; it was originally included as part of the Technology Sector Enhancement Act of 2012 (Bill 19-747), but was deleted prior to enactment. The Act would add a new provision to the D.C. Code (§ 47-1817.07a) to impose a lower tax rate on capital gains from the sale of an investment in a Qualified High Technology Company (QHTC) beginning in 2015. The rate would be 3 percent as compared with the current rate of 9.975 percent for business taxpayers. Notably the proposed provision is limited in scope and only applies when the following three elements are satisfied:
As introduced, the proposed tax is explicitly applied “notwithstanding” any provision of the income tax statutes.
Good Thought, Poor Drafting
The intent of this legislation is clear, but the practical application is not. As a threshold matter, the second element requires the investment to be “in common of preferred stock or options,” which by definition excludes partnerships and limited liability companies since only corporations can issue stock. On its face, the language of the bill appears to be limited to investments in a QHTC organized as a corporation, despite the fact that other entities are eligible for QHTC status under D.C. law. Therefore, limited partners and members investing in pass-through QHTC’s appear to fall outside the scope of the proposed legislation.
Second, by imposing a different rate on only a certain type of income and by taxing the gains notwithstanding any other provision of the income tax statute, the proposal fails to account for basic tax calculations necessary to arrive at taxable income in the District for a business taxpayer. For example, the allocation and apportionment provisions would seem to be negated both practically and legally. What part of a multistate taxpayer’s gain from a QHTC is subject to the 3 percent rate? Is it all of the gain; an apportioned part of the gain – and if so, based on whose apportionment percentage? What if the gain would have been categorized as non-business income and the taxpayer is a non-resident? The answer is certainly not obvious from the legislation. Similarly, how do a taxpayer’s losses, both in the current year and carried over, affect the amount of gain available to tax? Can all of the losses be used against other types of income first? Can the losses be used at all against the QHTC gain?
Third, how is a taxpayer [...]
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