Nationwide Importance Archives | Page 23 of 38

Oklahoma Supreme Court KOs the Constitution

by McDermott Will & Emery, Diann Smith and Stephen P. Kranz | May 5, 2014 | Constitutional Issues, Incentives, Income Tax, Nationwide Importance, Oklahoma, Tax Base

On April 22, the Supreme Court of Oklahoma released its opinion in CDR Systems Corp. v. Oklahoma Tax Commission. Case No. 109,886; 2014 OK 31. The Oklahoma Supreme Court, overturning the decision of the Court of Civil Appeals, held that an Oklahoma statute, which grants a deduction for income from gains that result from the sale of all or substantially all of the assets of an “Oklahoma company,” is constitutional under the Commerce Clause. “Oklahoma company” is defined as an entity that has had its primary headquarters in Oklahoma for at least three uninterrupted years prior to the date of the taxable transaction.

In a 5-4 decision, the Oklahoma Supreme Court determined that there was no discrimination against out-of-state commerce. Even if there was discrimination, the Oklahoma Supreme Court held that the statute does not facially discriminate against interstate commerce, does not have a discriminatory purpose and has no discriminatory effect on interstate commerce. The Oklahoma Supreme Court’s reasoning was based in part on the conclusion that the statute treated all taxpayers the same.

In his dissent, Justice Combs reached the opposite conclusion and wrote that the deduction is unconstitutional because the primary headquarters requirement is based upon the level of business a company conducts in Oklahoma, and therefore it discriminates against out-of-state taxpayers. The dissent concluded that the statute effectively creates a tax on taxpayers with an out-of-state headquarters.

Although the majority ably walked through the existing case precedent on these issues, it misunderstood the practical effect of the statute. First, the majority concluded that the statute did not discriminate against any particular market because all markets are treated the same. This conclusion ignores the fact that under the statute, in-state markets are treated differently than out-of-state markets. The majority stated that “[w]ithout any actual or prospective competition in a single market, there is no negative impact on interstate commerce that results from the application of this deduction and no discrimination against interstate commerce . . . .” (Majority Opinion, p. 14). However, there is competition between in-state companies and out-of-state companies, not just in a single market but in all markets.

In reaching this conclusion, the majority relied upon Gen. Motors Corp. v. Tracy, 519 U.S. 278 (1997), which upheld the constitutionality of a tax that discriminated across markets (in other words, the statute benefited an in-state entity not because the entity was in-state but because it was in a different market and sold different products than an out-of-state entity). The dissent specifically took exception to the majority’s reliance on Gen. Motors, for good reason. The Tracy case does not appear to be applicable here, because the in-state and out-of-state entities are competing in the same markets under the Oklahoma statute.

Second, the majority concluded that the statute did not facially discriminate against interstate commerce because “[t]he degree to which the entity generating the gains participated in out-of-state activity, i.e. interstate commerce, is not relevant to whether the entity qualifies for the deduction” (Majority Opinion, p. 17). The [...]

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Best Practices for State Engagement of Private Unclaimed Property Auditors

by Diann Smith and Stephen P. Kranz | Apr 29, 2014 | Delaware, Nationwide Importance, Unclaimed Property

The U.S. Chamber Institute for Legal Reform has released a report detailing current problems with states using private companies for unclaimed property audits and paying those auditors based on the amount recovered. The report begins with an example of what can go wrong when private auditors are paid on a contingent basis. The nightmare story of what many life insurance companies recently experienced is well worth the read by anyone who thinks that because their company has been diligently complying with unclaimed property laws, there can’t be any risk from an audit.

After reviewing the issues, the U.S. Chamber suggests several, eminently achievable, reforms. These reforms include:

Prohibiting contingency fees;
Requiring all state contracts for private audit services to be subject to an open, competitive bidding process;
Requiring all such contracts to be posted on the unclaimed property administrator’s website; and
No delegation of state authority to private contractor on substantive decision-making, such as legal theories.

The report also offers suggestions that states provide voluntary disclosure programs with certain protections for participating holders.

Practice Note: Over a decade ago, several attorneys with McDermott’s SALT practice, while working at the Counsel On State Taxation (COST), drafted a Holder’s Bill of Rights. While Delaware was one of the main proponents of the concept, it did not get any traction in other states. The current negative impression many holders have regarding third-party contingency fee unclaimed property auditors could have been limited, and perhaps prevented, if states had embraced this idea. It is probably time to consider this concept. If third-party auditors offered such a pledge to holders, audits would be far less adversarial and be completed much faster.

MTC State Transfer Pricing Program Looms on the Horizon

by McDermott Will & Emery, Diann Smith and Stephen P. Kranz | Apr 7, 2014 | Nationwide Importance, Transfer Pricing

More formal, rigorous, and perhaps more frequent, state transfer pricing audits appear to be looming on the horizon, as the Multistate Tax Commission (MTC) is set to launch a design and development project tasked with presenting a preliminary draft program by year’s end, with a final program recommendation due by the MTC’s annual meeting in July 2015. The intent would be to create a dedicated MTC program, including staff, that would assist, as well as train, member states (both combined and separate reporting states) in conducting state transfer pricing audits as an alternative to hiring contracted consultants.

Read the full article.

National Conference of State Legislatures to Tackle Key State Tax Policy Questions

by Arthur R. Rosen, Diann Smith, Jane Wells May and Stephen P. Kranz | Mar 7, 2013 | Constitutional Issues, Nationwide Importance, Procedure

The National Conference of State Legislatures’ (NCSL) Executive Committee Task Force on State and Local Taxation has expanded its scope to include all significant tax policy issues facing the states. As part of its expanded scope, the task force has met with industry representatives to identify tax policy topics that would benefit from the task force’s consideration. Companies with a multi-state presence and concern about state tax policy have found participation in task force meetings beneficial to assisting legislator understanding of complex tax issues.

Read the full article.