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Sales Tax

Illinois Appellate Court Affirms Dismissal of State Tax Qui Tam Lawsuit

by Mary Kay McCalla Martire | Apr 14, 2015 | False Claims Act, Illinois, Sales Tax

On March 31, 2015, the Illinois Appellate Court issued an opinion affirming the dismissal of a qui tam lawsuit filed by a law firm acting as a whistleblower on behalf of the State of Illinois against QVC, Inc., under the Illinois False Claims Act. The opinion affirmed an important precedent previously set by the court regarding the standard for dismissal of such claims when the State moves for dismissal, and established favorable precedent for retailers by holding that use tax voluntarily paid after the filing of a qui tam action does not qualify as “proceeds” of the action within the meaning of the Illinois False Claims Act.

Read the full article.

Inside the New York Budget Bill: Sales Tax Provisions

by McDermott Will & Emery | Apr 3, 2015 | Incentives, New York, Sales Tax

The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the Budget Bill) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax.

This post is the seventh in a series analyzing the New York Budget Bill, and summarizes the sales tax provisions in the Budget Bill.

Dodd-Frank Act Relief Provisions

The Budget Bill includes provisions that provide relief from potential sales and use tax implications arising from compliance with certain requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as Dodd-Frank). Under Dodd-Frank, large financial services organizations must develop and implement resolution plans allowing for an orderly wind-down of their banking and broker/dealer operations in the event of an adverse financial event, such as another financial crisis. The affected financial services organizations and their regulators have agreed in principle to plans where front-office and back-office assets and operations would be segregated into separate legal entities. As a result, many affected financial services organizations are implementing plans whereby back-office functions are being placed into separate bankruptcy remote legal entities as a way to ensure that an orderly wind-down of the affected entities could occur, with the back-office functions remaining available to all potentially affected entities.

Without the relief provided by the Budget Bill, the Dodd-Frank-mandated reorganizations could have resulted in increased New York sales tax compliance burdens and increased New York sales tax liabilities, both upon the reorganization itself and on an ongoing basis. Many transactions that formerly occurred between different units within the same legal entity (and hence were not subject to sales tax) will have to occur between different legal entities after the restructurings and thus will be taxable. To prevent this increase in sales tax burdens and liabilities, an exemption was inserted into the Budget Bill that will apply to sales of property or services that are entered into or conducted as a result of the resolution planning required by Dodd-Frank, so that the affected companies are not subject to sales or use tax on transactions that occur solely as a result of their compliance with a federal law that has been put in place to make the global financial systems safer.

The exemption provided by the Budget Bill is tied to the status of the buyer and the seller as a “covered company” or “material company” as defined in section 243.2(l) of the Code of Federal Regulations, which is one of the sections implementing the Dodd-Frank Act. Under the exemption, sales of tangible personal property or services among related parties are exempt from the New York sales and use tax if the vendor and the purchaser are referenced as either a “covered company” or a “material entity” in a resolution plan (or the vendor and the purchaser are separate legal entities pursuant to a divestiture authorized by the Dodd-Frank [...]

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Inside the New York Budget Bill: Proposed Sales Tax Amendments

by Emily Townsend | Mar 25, 2015 | New York, Sales Tax, Transaction Taxes

Governor Andrew Cuomo’s 2015-2016 New York State Executive Budget Bill (Budget Bill) contains several important revenue measures, including, but not limited to, technical corrections to the 2014 overhaul of New York State’s Corporate Franchise Tax, conformity of the New York City General Corporation Tax to the revised New York State Corporate Franchise Tax, and several significant changes to New York’s sales and use tax statutes. This article will address the Budget Bill’s proposed sales and use tax changes. Several of these changes, while touted by Governor Cuomo as “closing certain sales and use tax avoidance strategies” are much broader and, if enacted, will have a significant impact on the sales and use tax liabilities resulting from routine corporate and partnership formations and reorganizations.

Read the full article.

Louisiana Supreme Court Upholds Bundling Portable Toilet Leases and Cleaning Services, but Not Sure About True Object of Resulting Transactions

by McDermott Will & Emery | Mar 16, 2015 | Local Tax, Louisiana, Sales Tax, Tax Base, Transaction Taxes

If you are ever waiting in line for portable toilet facilities at the St. Patty’s Day Parade and in need of something to think about, consider the property and service you are about to use: Is it the lease of tangible personal property, the provision of a cleaning and waste removal service, or both? The Supreme Court of Louisiana grappled with this fundamental sales and use tax issue in Pot-O-Gold Rentals, LLC v. City of Baton Rouge, No. 2014-C-2154 (La. Jan. 16, 2015). Approaching the provision of toilets and services as a single transaction and finding the true object to be unclear, the court interpreted the taxing statute narrowly and ruled in favor of the taxpayer. Underlying the opinion is an unusually broad, all-or-nothing bundling approach to the taxability of goods and services provided together.

The City of Baton Rouge taxes the lease of tangible personal property but does not tax the provision of cleaning services. The taxpayer provided both: a customer could lease portable toilets, could purchase toilet cleaning services, or could lease toilets and purchase cleaning services together. There was no question that services alone were nontaxable or that the lease of toilets alone was taxable. The issue was how tax should apply when toilets and cleaning services were provided together. The taxpayer had collected tax on the charges for the toilets but had not collected tax on charges for services in such transactions.

Baton Rouge assessed sales tax on the services where toilets also had been provided. The taxpayer challenged the assessment and won summary judgment in its favor, with the trial court allowing the splitting of the transaction into taxable and nontaxable components. The Court of Appeals reversed, No. 2013 CA 1323 (La. Ct. App. 1st Cir. Sept. 17, 2014), holding that the cleaning service and toilet lease components of combined contracts could not be split and addressed separately. That court then applied the true object test to determine that the entire bundled transaction should be treated as a taxable lease.

The Supreme Court reversed in a per curiam opinion, taking the bundled approach of the Court of Appeals but reaching the opposite conclusion on taxability. The Supreme Court observed that it was unclear whether providing tangible personal property in connection with waste removal services constituted the provision of a nontaxable service, comparing the Louisiana Department of Revenue’s Revenue Rulings 06-012 (Aug. 23, 2006) (providing dumpsters with trash removal service is nontaxable) and 06-013 (Sept. 19, 2006) (providing portable toilets with cleaning services is taxable). Given that the true object of such a transaction was “debatable,” the canon of reading a taxing statute narrowly against the state and in favor of the taxpayer applied: The transaction was nontaxable.

Underlying both the Supreme Court and Court of Appeals opinions was a very broad, all-or-nothing approach to taxability. Where many states would view this type of transaction as a taxable lease of property coupled with nontaxable cleaning services that were not “necessary to complete [...]

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Illinois Retailers Beware: Class Action Complaint Filed Against Grocer for Collecting Illinois Sales Tax on Manufacturers’ Coupons Lacking Specific Language

by Catherine A. Battin | Mar 5, 2015 | Illinois, Sales Tax, Tax Base

A class action complaint was filed in federal court last week against the operator of a grocery chain, alleging failure to deduct manufacturers’ coupons from the tax base on which sales tax was calculated and collected from customers. This latest attack on a retailer relies on an interpretation of a Department of Revenue regulation that, if correct, would be overly burdensome on Illinois retailers. Other Illinois retailers that accept manufacturers’ coupons may be at risk of being sued in similar actions or may be forced to change their practices.

The Illinois sales tax, the Retailers’ Occupation Tax, is a tax on a retailer’s gross receipts. Store coupons, where a retailer does not receive reimbursement from another party, constitute a reduction in a retailer’s gross receipts and therefore reduce the tax owed. 86 Ill. Admin. Code 130.2125(b)(1). Manufacturers’ coupons, on the other hand, involve reimbursement to a retailer from a third party. This reimbursement constitutes taxable gross receipts. 86 Ill. Admin. Code 130.2025(b)(2). As such, manufacturers’ coupons do not decrease the amount of Retailers’ Occupation Tax owed by the retailer.

An Illinois retailer collects Use Tax from its customer as reimbursement for its Retailers’ Occupation Tax. See 35 ILCS 105/3-45; 86 Ill. Admin. Code 130.101(d). The difficulty with manufacturers’ coupons is that the customer has not paid the entire amount of the retailer’s receipts on which Retailers’ Occupation Tax is due. The Department’s regulation addresses the issue by calling for the customer to assume liability for Use Tax in the fine print of the coupon:

Technically, the coupon issuer … owes the corresponding Use Tax on the value of the coupon. However, in many cases, the coupon issuer incorporates language into the coupon that requires the bearer … to assume this Use Tax liability. 86 Ill. Admin. Code 130.2025(b)(2).

The theory of the complaint is that the coupon did not contain this language shifting the Use Tax liability, and therefore it was improper of the retailer to collect tax on the coupon amount. If the class action attorneys’ theory is correct, store clerks would be expected to carefully read the fine print of each and every coupon that customers present. Surely, the Department of Revenue could not have intended such a result. The complaint seeks compensatory damages, punitive damages of at least 1 percent of the revenue from Illinois stores during years in which violations occurred, and fees and costs. Other retailers may risk similar suits and should consider seeking clarity from the Department of Revenue.

SCOTUS: Colorado Notice and Reporting Challenge Not Barred by the Tax Injunction Act

by Arthur R. Rosen, Eric D. Carstens and Stephen P. Kranz | Mar 3, 2015 | Colorado, Constitutional Issues, Nationwide Importance, Procedure, Sales Tax, Transaction Taxes

The United States Supreme Court released a unanimous decision today holding that the Tax Injunction Act (TIA), 28 U.S.C. § 1391, does not bar suit in federal court to enjoin the enforcement of Colorado notice and reporting requirements imposed on noncollecting out-of-state retailers. See Direct Marketing Ass’n v. Brohl, No. 13-1032, 575 U.S. ___ (March 3, 2015), available here. These requirements, enacted in 2010, require retailers to (1) notify Colorado purchasers that tax is due on their purchases; (2) send annual notices to Colorado customers who purchased more than $500 in goods in the preceding year, “reminding” these purchasers of their obligation to pay sales tax to the state; and (3) report information on Colorado purchasers to the state’s tax authorities. See Colo. Rev. Stat. § 39-21-112(3.5). The TIA provides that federal district courts “shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law.”

The Court’s Opinion

The Court held that although the notice and reporting requirements are part of Colorado’s overall assessment and collection process, none of the requirements constitute an “assessment,” “levy,” or “collection” within the meaning of the TIA. Specifically, the Court looked to the Internal Revenue Code (IRC) to determine that the terms are “discrete phrases of the taxation process that do not include informational notice or private reports of information relevant to tax liability.” See Slip Op. at 5-8 (noting that no “assessment” or “collection” within the meaning of the IRC occurs until there is a recording of the amount the taxpayer owes the Government, which the notice and reporting requirements precede). Justice Thomas, who authored the opinion, concluded that “[t]he TIA is keyed to the acts of assessment, levy, and collection themselves, and enforcement of the notice and reporting requirements is none of these.” Id. at 9.

The Court rejected the Tenth Circuit’s reliance on (and expansive interpretation of) the term “restrain” in the TIA. Justice Thomas explained that such a broad reading of the statute would “defeat the precision” of the specifically enumerated terms and allow courts to expand the TIA beyond its statutory meaning to “virtually any court action related to any phase of taxation.” Id. at 11. Instead, he assigned the same meaning to “restrain” that it has in equity for TIA purposes, which is consistent with its roots and the Anti-Injunction Act (the TIA’s federal counterpart). Therefore, the Court concluded that “a suit cannot be understood to ‘restrain’ the ‘assessment, levy or collection’ of a state tax if it merely inhibits those activities.” Id. at 12.

The Court’s decision took “no position on whether a suit such as this one might nevertheless be barred under the ‘comity doctrine,’” under which federal courts – as a matter of discretion, not jurisdiction – refrain from “interfering with the fiscal operations of the state governments in all cases where the Federal rights of persons could otherwise be preserved unimpaired.” Id. at 13. The Court left it to the Tenth Circuit on remand [...]

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Inside the New York Budget Bill: 30-Day Amendments

by McDermott Will & Emery | Feb 23, 2015 | New York, Sales Tax

On Friday, February 20, 2015, Governor Andrew Cuomo’s office released the 30-Day Amendments to the 2015–2016 New York State Executive Budget Legislation (Budget Bill). This year, instead of the usual set of corrections and minor changes to the Budget Bill, the 30-Day Amendments focused primarily on the governor’s five-point ethics reform plan, with only very few corrections and minor changes included with respect to the Revenue Bill. Those few corrections and changes focused on credits and incentives (e.g., technical corrections and clarifications to the New York State School Tax Relief (STAR) Program, the real property tax credit, the Brownfield Cleanup Program, and the credit for alternative fuel and electric vehicles) leaving any changes to the proposed sales tax provisions, corporate franchise tax technical correction provisions and New York City conformity provisions to the legislative process. Please see our On the Subject related to the Budget Bill’s proposed significant changes to New York’s sales and use tax statutes.

Inside the New York Budget Bill: Proposed Sales Tax Amendments

by McDermott Will & Emery | Feb 16, 2015 | New York, Sales Tax

Governor Andrew Cuomo’s 2015–2016 New York State Executive Budget Bill proposes several significant changes to New York’s sales and use tax statutes. Several of these changes, while touted by the governor as “closing certain sales and use tax avoidance strategies,” are much broader and, if enacted, will have a significant impact on the sales and use tax liabilities resulting from routine corporate and partnership formations and reorganizations.

Read the full article.

Arizona’s 2015 TPT Amendments Have 99 Problems, but Origin Sourcing ain’t One

by McDermott Will & Emery, Diann Smith and Stephen P. Kranz | Jan 29, 2015 | Arizona, Constitutional Issues, Nexus, Sales Tax, Transaction Taxes

Actually, there are really only two issues, but they are big issues.

Arizona’s Transaction Privilege Tax has always been an anomaly in the traditional state sales tax system. Contrary to some commentators, however, the recent amendments do not, and could not, impose an origin tax on Arizona retailers for remote sales delivered out-of-state. That is not to say that these amendments are benign. Oddly, the amendments provide incentives for Arizona residents shipping items out-of-state to purchase these items over the internet rather than visit Arizona retailers in person. Furthermore, these amendments create complexities for Arizona vendors shipping to foreign jurisdictions. Finally, these amendments create additional administrative problems for retailers that are difficult to address with existing software and invite double taxation problems that should not exist in a transaction tax world.

Background: Arizona Transaction Privilege and Use Tax

For retail sales, Arizona, like most states, has two complementary transaction-based taxes, but each tax is imposed on a different entity. The first tax, the Transaction Privilege Tax (TPT), is imposed directly on the retailer. Ariz. Rev. Stat. § 42-5001.13. A retailer will be subject to the TPT on the gross proceeds from a sale if “the location where the sale is made” is Arizona. Ariz. Rev. Stat. § 42-5034.A.9. A retailer subject to the TPT is allowed but not required to collect the amount of TPT it owes from its customers. Ariz. Admin. Code §§ 15-5-2002, 15-5-2210.

The second tax, the Arizona Use Tax, complements and backstops the TPT. The Use Tax is imposed on the use, storage or consumption in the State of tangible personal property purchased from an out-of-state retailer. Ariz. Rev. Stat. § 42-5155. Generally, the purchaser is liable for payment of Use Tax to the State, but a retailer is required to collect Use Tax from a purchaser if the retailer meets the constitutional nexus provisions. Ariz. Rev. Stat. §§ 42-5155, 42-5160. Use Tax is imposed only on transactions where TPT has not been imposed, i.e., a transaction is subject to either TPT or Use Tax, but not both. Ariz. Rev. Stat. § 42-5159.A.1.

The State and its courts have been clear that, while the location of the transfer of title or possession is relevant to the inquiry as to where the sale is made, it is the totality of the retailer’s business activities that identifies the location that may tax the proceeds. Exactly where that line is drawn, however, is not as clear. The Arizona Department of Revenue (DOR) has taken the position that, unless an exemption applies, a seller is subject to the tax if a purchaser buys a product at a store, even if the purchaser does not take possession in the state, and the product is shipped to a location outside of the state. The DOR is apparently taking the position either that the title transfers in the store, which cannot always be the case (a retailer could easily specify that title transfers to the customer outside the store, particularly if the retailer [...]

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Rate Reduction for D.C. QHTC Capital Gains to Begin… in 2019

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Jan 23, 2015 | Allocation/Apportionment, District of Columbia, Sales Tax

Investors keeping a close eye on pending legislation (the Promoting Economic Growth and Job Creation Through Technology Act of 2014, Bill 20-0945) promoting investments in D.C. Qualified High Technology Companies (QHTC) will be happy to know it passed—but not without a serious caveat. While the bill was originally set to allow investors to cash in their investments after being held continuously for a 24-month period, the enrolled Act (D.C. Act 20-514) was amended to make the rate reduction applicable January 1, 2019 (at the earliest).

Background

In September 2014, the D.C. Council began reviewing a proposal from Mayor Gray that would lower the tax rate to 3 percent for capital gains from the sale or exchange of eligible investments in QHTCs, as previously discussed by the authors here. As introduced, the bill was set to be applicable immediately; however, all that changed when an amendment was made on December 2 that restricts applicability of the Act to the latter of:

January 1, 2019 to the extent it reduces revenues below the financial plan; or
Upon implementation of the provisions in § 47-181(c)(17).

As noted in the engrossed amendment, this was done to “ensure that the tax cuts . . . codified by the 2015 Budget Support Act (BSA) take precedence.” These cuts, previously discussed by the authors here and here, include the implementation of a single sales factor, a reduction in the business franchise tax rate for both incorporated and unincorporated businesses, and switch from cost of performance sourcing to market-based sourcing for sale of intangibles and services.

The Act was quickly passed on December 22 with the amendment language included and a heavy dose of uncertainty regarding when the reduced rate will apply (if at all), since it is tied to the financial plan and BSA. Practically, this leaves potential investors with the green light to begin purchasing interests in QHTCs, since the Act is effective now, yet leaves these same investors with uncertainty about the applicability of the reduced rate.

Practical Questions Unresolved

The enrolled Act retains the same questionable provisions that were originally present upon its introduction, raised by the authors here. Specifically the language provides that the Act applies “notwithstanding any other provision” of the income tax statute and only to “investments in common or preferred stock.” The common or preferred stock provisions appear to arbitrarily exclude investments in pass-through entities, despite the fact that they are classified as QHTCs, disallowing investors that otherwise would be able to take advantage of the rate reduction. In addition, the Act lacks clarity regarding the practical application of basic tax calculations, such as allocation and apportionment. The Act seems to stand for the proposition that the investments should be set apart from the rest of the income of an investor, but to what extent? Absent regulations or guidance from the Office of Tax and Revenue (OTR), taxpayers [...]

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