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Unclaimed Property Hunger Games: States Seek Supreme Court Review in ‘Official Check’ Dispute

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Jun 10, 2016 | Alabama, Arizona, Arkansas, Audits, Colorado, Constitutional Issues, Idaho, Indiana, Kansas, Kentucky, Louisiana, Michigan, Montana, Nationwide Importance, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, Procedure, South Carolina, Texas, Unclaimed Property, Utah, West Virginia

Background

As detailed in our blog last month, MoneyGram Payment Systems, Inc. (MoneyGram) is stuck in between a rock and a hard place as states continue to duel with Delaware over the proper classification of (and priority rules applicable to) MoneyGram’s escheat liability for uncashed “official checks.” The dispute hinges on whether the official checks are properly classified as third-party bank checks (as Delaware directed MoneyGram to remit them as) or are more similar to “money orders” (as alleged by Pennsylvania, Wisconsin and numerous other states participating in a recent audit of the official checks by third-party auditor TSG). If classified as third-party bank checks, the official checks would be subject to the federal common law priority rules set forth in Texas v. New Jersey, 379 U.S. 674 (1965) and escheat to MoneyGram’s state of incorporation (Delaware) since the company’s books and records do not indicate the apparent owner’s last known address under the first priority rule. However, if the official checks are classified as more akin to money orders under the federal Disposition of Abandoned Money Orders and Traveler’s Checks Act of 1974 (Act), as determined by TSG and demanded by Pennsylvania, Wisconsin and the other states, they would be subject to the special statutory priority rules enacted by Congress in response the Supreme Court of the United States’ Pennsylvania v. New York decision and escheat to the state where they were purchased. See 12 U.S.C. § 2503(1) (providing that where any sum is payable on a money order on which a business association is directly liable, the state in which the money order was purchased shall be entitled exclusively to escheat or take custody of the sum payable on such instrument).

In addition to the suit filed by the Pennsylvania Treasury Department seeking more than $10 million from Delaware covered in our prior blog, the Wisconsin Department of Revenue recently filed a similar complaint in federal district court in Wisconsin, alleging Delaware owes the state in excess of $13 million. Other states participating in the TSG audit (such as Arkansas, Colorado and Texas) also recently made demands to MoneyGram and Delaware.

It is interesting to note that in 2015, Minnesota (MoneyGram’s former state of incorporation) turned over in excess of $200,000 to Pennsylvania upon its demand for amounts previously remitted to Minnesota for MoneyGram official checks. Apparently not only do the states in which the transaction occurred disagree with but even a former state of incorporation took the majority path. (more…)

Massachusetts’ First Really Good Amnesty Program Since 2002

by Richard C. Call and Scott M. Susko | May 5, 2016 | Audits, Interest and Penalties, Massachusetts, Procedure

The Massachusetts Department of Revenue (Department) is widely promoting a new amnesty program with significant taxpayer benefits. Our experience with Massachusetts amnesty suggests that this is the broadest program offered by the Department since 2002.

Individual and business taxpayers may participate in the program for taxes due on or before December 31, 2015. To participate in the program, taxpayers must complete an amnesty return online and submit payment for the full amount of tax and interest electronically by Tuesday, May 31, 2016.

The amnesty program, which waives most types of penalties, offers three special features for taxpayers to consider.

Taxpayers in Audit Can Participate

First, unlike many other state amnesty programs, the current Massachusetts program is available to taxpayers who are under audit. The Department’s auditors have been notifying taxpayers of the program, and Department personnel have confirmed with us that taxpayers under audit are eligible for the program. Department personnel have asked that taxpayers who wish to participate in the program simply notify their auditor.

Refunds Permitted

Second, unlike many other amnesty programs, taxpayers who participate in the Massachusetts program do not lose appeal rights or otherwise forfeit their right of refund for amounts that are disputed in the audit or that they later conclude were mistakenly paid under amnesty. A recent Technical Information Release provides that participation in the amnesty program and the payment of any tax and interest “does not constitute a forfeiture of statutory rights of appeal or an admission that the tax paid is the correct amount of liability due.”

Non-Filers Can Participate

Third, for the first time since 2002, non-filers may participate in the amnesty program. Participating taxpayers will receive a three-year limited look-back period.

Taxpayers with eligible liabilities should seriously consider whether to participate in the program.

New Jersey Issues Guidance on BEIP Grant Conversion

by Scott M. Susko | Apr 28, 2016 | Incentives, Income Tax, New Jersey, Procedure

This month the New Jersey Economic Development Authority (the Authority) provided businesses with guidance, in the form of Frequently Asked Questions, on how to elect to have their unpaid Business Employment Incentive Program (the Program or BEIP) grants converted into tax credits pursuant to N.J. Rev. Stat. § 34:1B-129.

Under the Program, New Jersey awarded qualifying businesses cash grants for hiring new employees in the state for a term of up to 10 years. Since the Program’s inception in 1996, the Authority has executed 499 BEIP agreements valued at nearly $1.6 billion. However, since 2013, the New Jersey legislature has not funded the Program, and thus many businesses have not received grant payments owed by the state.

In January, Governor Christie signed P.L. 2015, c. 194 into law, permitting the voluntary conversion of outstanding BEIP grants into tax credits. The option to convert a BEIP grant to a tax credit is New Jersey’s attempt to provide relief to those businesses that have been awarded grants but have not received grant payments. The law, unfortunately, was short on details.

Businesses that wish to take advantage of the grant conversion must elect to convert the grant into a tax credit by July 11, 2016. Once the election is made, it is irrevocable.

Because a business cannot predict with any certainty whether the New Jersey legislature will fund the Program in future years, a business has to decide whether to opt to convert its grant. If a business does not elect to convert its grant, it risks losing all of its unpaid BEIP grants. On the other hand, if a business makes the election and the Program is funded in future years, the business will have no choice but to receive tax credits even though a cash payment might be more valuable to the business.

If a business elects to convert its grant commitments to tax credits, the credits will be issued over a period of years as set forth in the statute. This delayed payment means that the business will suffer an additional loss of money owed by New Jersey on account of the time value of money. The statute provides that the BEIP tax credit must be used in the designated years and may not be carried forward. The credit is a priority credit and should be applied before all other credits. Accordingly, it is important to consider whether the other credits claimed by a business are refundable when deciding whether to make the election and calculating the potential benefit of conversion.

In anticipation of the July 11, 2016, deadline for businesses to opt to convert their grant into a tax credit, the Authority has provided guidance on how to make the election. This guidance, as mentioned above, is informal and not a regulation. The guidance provides that to make the election, a business must submit an executed Amendment to Agreement. The form Amendments to Agreement for different tax types are available on the Authority’s website. Once a business opts to convert [...]

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Massachusetts Court Holds Department of Revenue’s Guidance to Be Unreasonable

by Richard C. Call and Scott M. Susko | Apr 22, 2016 | Incentives, Income Tax, Massachusetts, Procedure

Northeastern University, the Trustees of Boston University, Wellesley College and 131 Willow Avenue, LLC prevailed in their appeal of the Massachusetts Department of Revenue’s (the Department) rejection of their Brownfields tax credit applications in Massachusetts Superior Court. 131 Willow Avenue, LLC v. Comm’r of Revenue, 2015 WL 6447310 (2015). The taxpayers argued, and the court agreed, that the Department improperly denied their applications based on the unlawful use of Directive 13-4 issued by the commissioner of revenue (the Commissioner). At issue was the validity of Directive 13-4’s prohibition on nonprofit and transfer Brownfields tax credit applicants from receiving or transferring credits based on documentation submitted in a taxable year that commenced before the effective date of a 2006 amendment expanding the Brownfields tax credit statute to include nonprofit organizations and allow for credit transfers. The court held that the directive was “unreasonable and [the Department’s] denial of the applications based on that directive was unlawful.” (more…)

Michigan Department of Treasury’s New Acquiescence Policy: A Model for Other States

by McDermott Will & Emery | Apr 20, 2016 | Local Tax, Michigan, Procedure

On February 16, 2016, the Michigan Department of Treasury announced its new acquiescence policy with respect to certain court decisions affecting state tax policy. The Treasury’s acquiescence policy is similar to the Internal Revenue Service’s (IRS) policy of announcing whether it will follow the holdings in certain adverse, non-precedential cases.

In Michigan, while published decisions of the Michigan Court of Appeals and all decisions of the Michigan Supreme Court are binding on both the Treasury and taxpayers, unpublished decisions of the Court of Appeals and decisions of the Court of Claims and the Michigan Tax Tribunal are binding only on the parties to the case and only with respect to the years and issues in litigation. Nonetheless, the Treasury has determined that a particular decision, while not binding, may constitute “persuasive authority in similar cases.” The Treasury may therefore decide to follow a non-precedential decision that is adverse to the Treasury in other cases, a policy known as acquiescence. Beginning with its May 2016 quarterly newsletter, the Treasury will publish a list of final (i.e., unappealed), non-binding, adverse decisions, and announce its acquiescence or non-acquiescence with respect to each. The Treasury points out that an indication of acquiescence does not necessarily mean that the Treasury approves of the reasoning used by the court in its decision. (more…)

Massachusetts Department of Revenue Introduces Pilot Voluntary Disclosure Program

by Richard C. Call and Scott M. Susko | Feb 8, 2016 | Audits, Income Tax, Local Tax, Massachusetts, Procedure, Sales Tax

The Massachusetts Department of Revenue (the Department) released a draft administrative procedure introducing a pilot Voluntary Disclosure Program (the Program) for the settlement of uncertain tax issues for business taxpayers on January 19. The Department introduced this Program in response to a suggestion made by Scott Susko, an author of this article, and another practitioner, both of whom serve as taxpayer professional representatives on the Department’s Advisory Council. We commend the Department for reacting to this suggestion in such a proactive manner.

The Program will provide “a process through which uncertain tax issues may be resolved on an expedited basis, generally within four months” (All quotations in this post are from the Department’s draft administrative procedure).

We think this Program will be particularly helpful to public companies in resolving issues related to their financial statement reserves.

The Program defines an “uncertain tax issue” as an issue “for which there is no clear statutory guidance or controlling case law, and which has not been addressed by the Department in a regulation, letter ruling, or other public written statement,” and “for which a taxpayer would be required to maintain a reserve in accordance with ASC 740: Accounting for Uncertainty in Income Taxes (formerly Fin 48).” The issue also “must not have been addressed as part of a prior audit of the taxpayer, a prior application for abatement or amended return filed by the taxpayer, or a prior ruling request made by the taxpayer.”

To qualify for the Program, “any potential tax liability attributable to the uncertain tax issue(s) must be $100,000 or more, exclusive of interest and penalties.” A taxpayer that is under audit or has received notice of an impending audit is not eligible for the Program. The Department has the “discretion to determine that the Program is not appropriate for specific cases.”

The Department “will consider settlement of an uncertain tax issue(s) where: (1) the taxpayer has presented its position on the issue(s) and the Department agrees that the tax treatment of the issue(s) is uncertain; and (2) the taxpayer has fully disclosed and documented the issue(s) and the facts associated with that issue(s).”

A taxpayer may initiate the process by submitting an anonymous letter to the Department, which will respond to the taxpayer within 30 days. If the Department accepts the taxpayer into the Program, the taxpayer may submit an application, including a settlement proposal and identifying the taxpayer, within 45 days of receiving the Department’s acceptance letter.

The Department will waive penalties related to the uncertain tax issue for a taxpayer that reaches an agreement with the Department pursuant to the Program, as well as for a taxpayer that does not reach an agreement with the Department “provided the taxpayer acted in good faith.”

The Department requested practitioner comments on the draft administrative procedure by February 1, and MWE submitted two technical comments.

Our first comment was that following the initial evaluation, the Department should issue to the taxpayer a one-page technical position explaining whether it does or [...]

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California Supreme Court Denies BOE Petition for Review in Lucent Technologies

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jan 26, 2016 | Audits, California, Nationwide Importance, Procedure, Sales Tax, Tax Base, Transaction Taxes

Last week, the California Supreme Court denied the State Board of Equalization’s (BOE’s) petition for review in Lucent Technologies, Inc. v. State Bd. of Equalization, No. S230657 (petition for review denied Jan. 20, 2016). This comes just months after the California Court of Appeals held against the BOE and ordered it to pay Lucent’s $25 million sales tax refund. As explained in more detail below, the denial finalizes the favorable precedent of the Court of Appeals in Nortel Networks Inc. v. State Bd. of Equalization, 191 Cal. App. 4th 1259, 119 Cal. Rptr. 3d 905 (2011)—representing a monumental victory for a broad range of taxpayers in California and opening the door for significant refund opportunities. Moreover, the California Supreme Court’s denial affirms the Court of Appeals decision that the BOE’s position was not substantially justified and the taxpayer was entitled to reasonable litigation costs of over $2.6 million.

Background

Lucent and AT&T (collectively Lucent) are and were global suppliers of products and services supporting, among other things, landline and wireless telephone services, the internet, and other public and private data, voice and multimedia communications networks using terrestrial and wireless technologies. Lucent manufactured and sold switching equipment (switches) to their telephone customers, which allowed the customers to provide telephone calling and other services to the end customers. The switches required software, provided on storage media, to operate. Lucent designed the software (both switch-specific and generic) that runs the switches they sell, which was copyrighted because it is an original work of authorship that has been fixed onto tapes. The software also embodies, implements and enables at least one of 18 different patents held by Lucent.

Between January 1, 1995, and September 30, 2000, Lucent entered into contracts with nine different telephone companies to: (1) sell them one or more switches; (2) provide the instructions on how to install and run those switches; (3) develop and produce a copy of the software necessary to operate those switches; and (4) grant the companies the right to copy the software onto their switch’s hard drive and thereafter to use the software (which necessarily results in the software being copied into the switch’s operating memory). Lucent gave the telephone companies the software by sending them magnetic tapes or CDs containing the software. Lucent’s placement of the software onto the tapes or discs, like the addition of any data to such physical media, physically altered those media. The telephone companies paid Lucent over $300 million for a copy of the software and for the licenses to copy and use that software on their switches.

The BOE assessed sales tax on the full amount of the licensing fees paid under the contracts between Lucent and its telephone company customers. Lucent paid the assessment and sued the BOE for a sales tax refund attributable to the software and licenses to copy and use that software at the trial court. The parties filed cross-motions for summary judgment on Lucent’s refund claims, and the Los Angeles [...]

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Michigan Backs Off Cloud Tax, Refund Opportunities Available

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jan 14, 2016 | Audits, Michigan, Nationwide Importance, Procedure, Sales Tax, Tax Base, Transaction Taxes

After refusing to back down on the issue for years, the Michigan Department of Treasury (Department) issued guidance last week to taxpayers announcing a change in its policy on the sales and use taxation of remotely accessed prewritten computer software. This comes after years of litigating the issue in the Michigan courts, most recently with the precedential taxpayer victory in Auto-Owners Ins. Co. v. Dep’t of Treasury, No. 321505 (Mich. Ct. App. Oct. 27, 2015), in which the Michigan Court of Appeals held that remote access to software did not constitute delivery of tangible personal property. See our prior coverage here. The Department has announced it will apply Auto-Owners (and the numerous other favorable decisions) retroactively and thus allow for refunds for all open tax years. This is a huge victory for taxpayers; however, those that paid the tax (both purchasers and providers alike) must act promptly to coordinate and request a refund prior to the period of limitations expiring.

Implications

In issuing this guidance, the Department specifically adopts the Michigan Court of Appeals interpretation of “delivered by any means” (as required to be considered taxable prewritten computer software). Going forward, the “mere transfer of information and data that was processed using the software of the third-party businesses does not constitute ‘delivery by any means’” and is not prewritten software subject to sales and use tax. See Auto-Owners, at 7. Not only has the Department admitted defeat with respect to the delivery definition, but it also appears to have acquiesced to taxpayers’ arguments with respect to the true object test (or “incidental to services” test in Michigan). This test was first announced by the Michigan Supreme Court in Catalina Marketing, and provides that a court must objectively analyze the entire transaction using six factors and determine whether the transaction is “principally” the transfer of tangible personal property or the transfer of services with a transfer of tangible personal property that is incidental to the service.[1] In last week’s guidance, the Department states that if only a portion of a software program is electronically delivered to a customer, the “incidental to service” test will be applied to determine whether the transaction constitutes the rendition of a nontaxable service rather than the sale of tangible personal property. However, if a software program is electronically downloaded in its entirety, it remains taxable. This guidance comes in the wake of Department and the taxpayer in Thomson Reuters, Inc. v. Dep’t of Treasury stipulating to the dismissal of a Supreme Court case involving the same issues that had been appealed by the Department. In light of these developments, it appears that the Department has given up all ongoing litigation over cloud services.

Immediate Action Required for Refunds

Taxpayers who paid sales or use tax on cloud based services are entitled to receive a refund for all open periods. In Michigan, the period of limitations for filing a refund [...]

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Delaware Court Denies Most of Defendants’ Motion to Dismiss Unclaimed Property Gift Card False Claims Action

by Diann Smith and Stephen P. Kranz | Dec 1, 2015 | Audits, Delaware, False Claims Act, Nationwide Importance, Procedure, Unclaimed Property

Two years ago, a former employee of Card Fact, LLC (subsequently purchased by Card Compliant), a company providing gift card issuance and management services to retailers, filed a false claims action in Delaware alleging that his former company and its retailer clients concocted a scheme to avoid remitting unclaimed gift card funds to Delaware. Last week, the judge in the case issued a memorandum opinion on the defendants’ Motion to Dismiss. State of Delaware ex rel. French v. Card Compliant LLC, et al., C.A. No.: N13C-06-289 FSS [CCLD] (Del Sup. Ct. Nov. 23, 2015). While the opinion is likely disappointing to most of the defendants, it should not be read as a final victory for the state. There is still much to be decided in the case, as this was just a motion to dismiss and not a decision as to whether the plaintiffs will ultimately prevail.

The judge did however make several legal conclusions that are of import to Delaware companies. First, the judge determined that as to gift card liability that was initially incurred by the retailers but subsequently transferred to Card Fact (and its affiliates), the retailers remained the debtors with respect to the card owners, unless the customers consented to the delegation of debt. The judge found that the contractual agreements between the retailers and the Card Fact companies were not controlling. However, the judge did not specifically rule on gift card liabilities that were never transferred from the retailers to Card Fact, but instead were incurred directly by Card Fact after its relationship with the retailers began.

Second, the judge found that for defendants that were not C corporations, the second priority rule was to be applied based on the state of formation, not the principal place of business. This is contrary to most state laws and sets up a direct conflict between the states.

Finally, the judge found that because one of the retailers had previously been audited by Delaware (through Kelmar), it could not be a defendant in this false claims action. The judge dismissed this defendant entirely, even for claims that arose subsequent to the audit conclusion. The judge noted that “[i]f the auditor has given [the retailer] a bye, that is between the escheater and the auditor.” This is very good news for any company that has previously been audited by the state regarding the risk of a false claims action.

Practice Notes

For companies that have been audited by Delaware, the risk of a false claims action has likely been significantly reduced if not eliminated;
Unincorporated entities should investigate the indemnification provisions between their state of formation and state of principal place of business to determine the risk of choosing which state to remit to;
Companies using gift card entities or other liability allocation arrangements should review their disclosures and agreements with customers to verify appropriate consent and understanding regarding which entity holds the actual liability.

Post-DMA, Federal Court of Appeals Broadly Interprets Jurisdictional Limitations of Anti-Injunction Act

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Sep 3, 2015 | Constitutional Issues, Interest and Penalties, Nationwide Importance, Procedure

Earlier this month, the United States Court of Appeals for the D.C. Circuit held in Florida Bankers Ass’n v. U.S. Dep’t of the Treasury, No. 14-5036 (D.C. Cir. Aug. 14, 2015) that the Anti-Injunction Act (AIA, codified at 26 U.S.C. § 7421(a)) barred two state banking associations from challenging Treasury regulations that: (1) required banks to annually report interest paid to certain foreign account-holders, and (2) imposed a penalty on banks that fail to do so. Notwithstanding attempts to reconcile the holding with recent precedent, the majority’s decision directly conflicts with the recent unanimous Supreme Court decision in Direct Mktg. Ass’n v. Brohl, 135 S. Ct. 1124 (March 3, 2015) (DMA), which found that the Tax Injunction Act (TIA, codified at 28 U.S.C. § 1341) did not bar a retail association’s challenge to comparable Colorado notice and reporting requirements (and accompanying penalty) imposed on out-of-state retailers. The TIA is modeled off of, and has consistently been interpreted to apply in the same fashion as its federal companion, the AIA. Given the striking similarities between the two cases, it is hard to reconcile the expansive application of the AIA in Florida Bankers with the narrow analysis of the TIA in DMA.

Majority Opinion

The majority opinion begins by highlighting the fact that the penalty imposed on the banks is technically a “tax” for purposes of the AIA because it is found in a specific section of the Internal Revenue Code (IRC, Ch. 68, Subchapter B) that states as much. See 26 U.S.C. § 6671(a). The majority emphasized that the Supreme Court recently confirmed that these types of penalties are treated as taxes when analyzing the application of the AIA, citing to the Nat’l Fed. of Indep. Bus. v. Sebelius decision. The majority distinguishes DMA on the basis that, unlike the tax-penalty in Chapter 68B of the IRC, the Colorado penalty imposed on out of state retailers that failed to report was not—or at least the parties never argued or suggested that it was—itself a tax. The majority was clear that “[i]f the penalty here were not itself a tax, the Anti-Injunction Act would not bar this suit.” Because the penalty was a “tax”, a favorable ruling for the plaintiffs “would invalidate the reporting requirement and restrain (indeed eliminate) the assessment and collection of the tax paid for not complying with the reporting requirement.” Because of this, the majority held that the banking associations’ challenge to the reporting requirements was barred by the AIA.

Practice Note: The majority relies heavily on the technical tax-penalty distinction in reaching their holding that the AIA applied. In making this distinction, the majority suggests that the label given to a penalty is controlling in determining whether the AIA and TIA apply to shut the door to federal district court. While at first glance it would appear that the holding is limited in scope to federal tax issues, it has the potential to spill over into the state tax world since many states have specifically conformed to [...]

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