The State and Local Tax "Buzz"

As We Wait for Massachusetts, More States Issue "Groupon Sales Tax" Guidance

2012-01-23T18:09:00.001-05:00

Administrative Guidance: Groupons and Sales Tax! Now here's an issue that states are paying close attention to - specifically how discounts offered through internet based "deal-of- the-day" marketing companies, such as Groupon and LivingSocial, impact the sales price subject to sales tax. In this post, I provide an update on Draft Guidance issued by Massachusetts last fall and on additional states that have come forward with administrative guidance in recent months. You probably won't be surprised to find out that the states approaches vary - but more on that in a bit!

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This past September, I wrote post a post entitled “Wondering How Sales Tax Applies to a Groupon? Massachusetts Issues Draft Guidance” in which I gave an overview on a Massachusetts Department of Revenue ("the Department") Draft Directive that had just been issued to address the sales tax implications of third party e-coupons discounts. (See Massachusetts' Working Draft Directive 11-XX, Application of Sales Tax to Sales and Redemption of Third Party Coupons.) As of today, January 23rd, this Draft Directive is still, well, a Draft, and you're probably wondering when Massachusetts will issue its Draft Directive in final form.

But before delving into the status of Draft Directive 11-XX, I'll note that prior to issuing final administrative guidance (e.g., Technical InformationReleases "TIRs" or Directives) the Department typically issues itsguidance as a Working Draft and solicits practitioner and taxpayer commentsthrough a specified date. My experiencein following the issuance of Massachusetts’ administrative guidance is that a finalTIR or Directive is often issued shortly after the comment period closes andgenerally with little to no change from the Working Draft version.

As many of you know, I’m following developments in the third party “deal-of-the-day”(i.e., Groupon, LivingSocial, BuyWithMe) arena very closely – watching and reporting on how various states are treating the “deal-of-the-day”discounts associated with these transactions and in particular, on what amountstates are determining sales tax should be charged on. And as a State Tax consultant based in Massachusetts, I'm particularly interested in theimpact of Massachusetts’ guidance on Massachusetts' businesses who choose to offer a “Groupon”.

Thus, as it had been more than four monthssince the Department issued Draft Directive 11-XX (and well over three monthssince the September 30^th closing of the comment period), I decided to follow-up with the Massachusetts Rules and Regulations Bureau (see Note A below) on the timing of afinal Directive. I was informed (via e-mail) that a major sponsor of these “deals”had requested additional time to comment (the Bureau's e-mail indicated that the Bureau has been reviewing thecomments and the sponsor’s responses to follow-up questions). The Bureau's response also stated that theDepartment is considering further outreach to affected vendors (and restaurantowners) about the administrative burdens in the varying approaches other statesare using. Finally, the Bureau’s response also noted that there is no specifictimetable regarding the issuance of a final Directive on the treatment of “e-coupon”discounts. (See Note B below)

As We Wait for Massachusetts, More States Issue Groupon-Sales Tax Guidance

In the last four months at least five otherstates have issued final guidance on the impact of third party "deal-of-the-day" discounts on sales price. For instance,this past September, both California and New York issued final guidance on what amount merchants should be collecting sales tax on. (See California Publication 388 and New York Technical Services Bulletin, TSB-M-11(16)S . Also see my 11/17/11 AllBusiness.com article “Groupons & Sales Tax – New Guidance for SmallBusiness", in which I detail California’s, NewYork’s and Massachusetts’ treatment.)

Since then three more states have jumped on the “Groupon– Sales Tax” bandwagon, including Kentucky (See December 2011 Kentucky Sales Tax Bulletin),Iowa (see Iowa's Webpage on Groupons– Iowa Sales Tax), and Maine (See Maine Revenue Services Instructional Bulletin No. 39, 1/17/2012)

Given that several states have issued guidancerecently, how does Massachusetts’ Draft guidance compare?

Currently, Massachusetts’ position in DraftDirective 11-XX is that sales tax is due on the full, non-discountedvalue of the product or taxable service obtained through the deal as theDepartment does not consider these e-coupon discounts to be either amanufacturer’s or a retailer's discount. (Under the Massachusetts sales tax regulation on Discounts, Coupons and Rebates - 830 CMR 64H.1.4 - manufacturer's and retailer's discounts are allowed to reduce sales price subject to sales tax.)

This represents one of the most aggressive positions beingtaken by any of the states that have issued guidance thus far as it allows novariation in the amount subject to sales tax based on how a transaction may be structured. (But keep in mind that Massachusettsguidance is still in Draft form, thus subject to change.)

Although three other states have stated that in certainsituations sales tax is due on the full sales price of the transaction, these same states have also stated that in other situations sales tax is due on thediscounted sales price.

New York, for instance, requires that sales tax be charged on the full (non-discounted) value of the transaction if what's beenissued is a “Specific Product or Service” voucher - one where the customer purchases a specific product or service (e.g., one oil change or a specific item) and isn't allowed to redeem the voucher for any other product or service. However, New York allows sales tax to be charged on the discountedvalue of the transaction (what the customer pays for the deal) if what's beenissued is a “Stated Face Value” voucher - one which allows a customer to choose from the retailer’s offerings. (See myAllBusiness.com Groupon article for a detailed discussion of New York’s rule, including an example of how a customer who obtains the exact same item can owe a different amount of tax based on what type of voucher is redeemed and how merchants who allow customers to use a portion of a voucher's value to cover the sales tax due could end up with a financial loss on their offer. )

Though not stated in exactly the same way, Iowa’srule works similarly such that “in most situations, sales tax should be chargedon the full price of the item purchased.” However, Iowa’s guidance adds that “if the certificate states on its face theprice paid by the purchaser to the online buying service, tax is collected onthat amount (i.e., the discounted amount), rather than the full price of the item purchased.” And although Kentucky's guidance works in an opposite manner - where the general rule is that salestax is due on the discounted sales price, Kentucky's rule adds that "an e-voucher must indicate thediscounted price or the local retailer must know and retain documentation ofthe discounted price otherwise sales tax is due on the full-value".

Finally, note that both California's and Maine's guidance allow the discounted value to be the sales tax base. California's rule states that sales tax is due on "the amount paid by the customer for the deal-of-the-day instrument plus any additional cash, credit or other consideration given at the time of redemption". (See examples on page 2 of California Publication 388 and my AllBusiness.com Groupon article for more details.)

Maine's guidance states that "Groupon type" discounts are to be treated in the same manner as a retailer's discount. (See page 4, example 4.C.1 in Maine Revenue Services Instructional Bulletin No. 39. Also see my original Groupon post, "Wondering How Sales Tax Applies to a Groupon? So Are Many of the States", for a discussion on the general rules relating to retailer's and manufacturer's discounts.)

Sylvia’s Summation

As we wait for Massachusetts to issue its final Directive, more and more states have come forward with guidance on how third party "deal-of-the-day"discounts impact sales price subject to sales tax. Although in certain states, the end result is similar, the rules are not identical or uniform across the board, requiring merchants who engage in nationwide or multi-state offers to decipher how each state's rule could impact the same "deal-of-the-day" transaction in different states.

As Massachusetts' Draft position does not allow for any variation on how sales tax should be applied based on the various ways a transaction could be structured and the Draft guidance requires that sales tax be charged on the full, non-discounted, sales price in all instances, Massachusetts' Draft position represents one of the most aggressive positions taken by the states that have issued formal guidance thus far. (However, once again, please keep in mind that Massachusetts' guidance is still in Draft form, and thus subject to change.)

However, my experience in following Massachusetts' developments and the Department's issuance of regulations and other administrative guidance, is that the Department's final guidance is often comprehensive and well-thought through. An example that comes to mind is the issuance of the Department's 75 page Combined Reporting regulation. Although the final regulation was issued long after the comment period closed, the Department spent an inordinate amount of time reviewing the multitude of comments that were submitted and issued a thorough regulation which contains numerous examples addressing the application of Massachusetts' combined reporting rules. (Yes, I'm giving the Department a compliment.)

Thus, my hope is that the Rules and Regulations Bureau is carefully evaluating other states' guidance and thoughtfully considering the practitioner and taxpayer comments it received in response to Draft Directive 11-XX. Given the length of time that has passed since Draft Directive 11-XX was issued, I'm also hopeful that Massachusetts' Final Directive will address that these "deal-of-the-day" transactions may be structured in a variety of different ways and provide more comprehensive guidance than was is provided in the Draft Directive.

Oh course I can't predict what the final Directive will look like, but one thing I can assure you of is that I'll be reporting on it! Stayed tuned!

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For more on Groupon and Sales Tax, see my prior articles/posts:

"Wondering How Sales Tax Applies to a Groupon? So Are Many of the States", The State and Local Tax 'Buzz', June 10, 2011

"Wondering How Sales Tax Applies to a Groupon? Massachusetts Issues Draft Guidance", The State and Local Tax 'Buzz', September 28, 2011

"Groupons & Sales Tax - New Guidance for Small Business", AllBusiness.com, November 17, 2011

Note A: The Rules and Regulations Bureau is the the Legal Division within the Department which interprets the statute and authors regulations and administrative guidance explaining the law. In the above post, I use the term "the Department" and "the Bureau" interchangeably. However, actual administrative guidance is drafted and issued by the Rules and Regulations Bureau.

Note B: Note that the e-mail response I received from the Rules and Regulations Bureau should in no way be construed to be binding upon the Department. Until the Department issues its FINAL Directive on the Application of Sales Tax to Sales and Redemptions of Third Party Coupons, Massachusetts merchants who offer a "Groupon" should follow the Department's Draft guidance and charge sales tax on the full (non-discounted) value of the product or taxable service offered through any third party e-coupon "deal-of-the-day" transaction OR should consult the Massachusetts Rules and Regulations Bureau for guidance specific to their transaction.

The Biggest State Tax Story of 2011: Internet Sales Taxes

2011-12-30T23:20:00.000-05:00

It's the end of 2011 and like many of you I'm reflecting onthis past year - on how life has changed, how the kids have grown, and what thecoming year has in store.

But as a state tax consultant, I'm also reflecting onsome incredible 2011 state tax developments.

This past February, I wrote a post for AllBusiness.com in which I said (if I may quotemyself), "state and local taxes are more important to business ownersthan federal taxes." I added that while this comment may havesurprised a few business owners, "when you consider that there arefifty states, all of which impose at least one type of tax....you're talkingabout some potentially significant compliance requirements."I also noted that "while you may think your business is only subject tothe tax laws of the state that you're located in, states are becoming more andmore aggressive in asserting 'nexus'..." and, in an effort to dealwith some of the most significant state tax budget deficits in recent history,many states were "adopting aggressive and certainly notso-taxpayer-friendly laws."

Looking back now, these comments were a bit of anunderstatement!

Little did I realize the magnitude of state tax developmentsthat were to come in 2011 - and the potential impact these developments would have. And so, I just had to write one last post this year on what could very well be the most significant 2011 state tax development impacting small-medium sized businesses.

Certainly there's been the handful of state specificdevelopments - like Illinois' almost doubling of its corporate and personal tax rates or Michigan revising its "business tax" for the second time in four years and enacting acorporate income tax - significant developments if your business operatesin these states.

But as a whole, there one state tax development that reallystands out as the 2011 most significant state tax development impactingsmall-medium sized businesses.

And that development is none other than the push to passstate and federal legislation that will require out-of-state retailers(primarily on-line retailers) to collect sales tax from customers in states inwhich those out-of-state retailers lack a physical presence.

State 'Amazon Laws' Explode and the Drama Begins

During the first half of year, the focus was the states'continued efforts to enact 'Amazon Laws' - those nexus expanding laws where amere web-link on an in-state website creates "nexus" for out-of-stateretailers. (See my 12/7/11 post, "State Tax Nexus - Triggered By So Much Less Than an Obvious Physical Presence", for more on nexus)

By mid-2011, Arkansas, Connecticut, California, and Illinoishad all passed 'Amazon Laws'. (See my 7/25/11 post, "Are State 'Amazon Laws' the 'New Normal'?" for more about 'Amazon Laws')

And these events were not without drama! For one, Amazonsevered its marketing affiliate contracts in every state that enacted an 'AmazonLaw'. These marketing affiliates - businesses and individuals that earncommissions from Amazon sales that originate from web-links on affiliates'in-state websites - abruptly had this source of income eliminated. For someaffiliates, this loss of revenue was significant! Such was the case forFatWallet.com, an on-line coupon company that relocated its entire operations toneighboring Wisconsin just one month after Illinois passed its 'Amazon Law' inorder to retain what FatWallet's CEO reported to be as much as 40% of theCompany's total revenue.

But things really started getting exciting after Californiaenacted its 'Amazon Law'. (See my 7/31/11 post, "California Enacts Explosive Amazon Law")

The events that followed hadall the drama of the best written soap opera. Even after California's new lawwent into effect, Amazon blatantly thumbed its nose at the new law and refusedto charge its California customers sales tax. Because California's 'Amazon Law'included a provision that nexus was also created when an out-of-state retailerwas "related" to a California Company that performed servicesassociated with the out-of-state's company's products (Amazon had Californiasubsidiaries that met this definition) the Company couldn't escape the"nexus" charge by simply cutting its ties to its California marketingaffiliates.

But Amazon didn't sit still - it immediately filed apetition for its "More Jobs, Not Taxes" referendum, which would allowvoters to decide if the law should be permanently repealed - and the war wagedon.

By the end of September, California's 'Amazon Law' hadbeen temporarily repealed, and Amazon was singing a new tune - sayingthat it would support a Federal "solution".

Congress Introduces Three On-Line Sales Tax Proposals

By the time California's 'Amazon Law" was repealed, thefirst of three federal "solutions" had been proposed. On July 29th,the Main Street Fairness Act was introduced by Senator Dick Durbin (S. 1452)and Representative John Conyers (H.R. 2701). The Main Street Fairness Act wouldgive full-member Streamlined Sales & Use Tax Agreement("SSUTA) states (there are currently 21 of them) the power to requireout-of-state retailers to collect sales tax from customers in their states.(See my 8/10/11 SalesTaxSupport.com post, "Main Street Fairness Act, Is SST the Silver Bullet?" for more on this proposal and the SSUTA)

Just when it appeared as though the Main Street Fairness Actwould die a slow death, a second federal proposal, the Marketplace Equity Act (H.R. 3179)was introduced by Representatives Jackie Speier (D-CA) and Steve Womack (R-AK).Like the first proposal, the Marketplace Equity Act would require out-of-stateretailers to collect sales tax in states in which those retailers did not havenexus, however, this authority would not be based on SSUTA membership but on adifferent set of simplification requirements that states would need to meet.

But neither proposal seemed to offer an ideal solution orappeared to have the level of support needed to pass, and so Congress decidedto propose a third federal "on-line" sales tax bill.The most recent proposal, the Marketplace Fairness Act (S.1832), was introduced on November 9th by Senators Mike Enzi (R-WY), LamarAlexander (R-TN), and Dick Durbin (D-IL) - yes, the same Dick Durbin thatintroduced the Senate version (S. 1452) of the Main Street Fairness Act inJuly.

This final proposal, like the others, would give states theauthority to require out-of-state retailers to collect their states' sales taxregardless of nexus, but as a "hybrid" solution, offered twoalternative sets of simplification requirements that states can adopt toqualify for this authority. States can qualify as full-member SSUTA states orcan adopt the proposal's alternative set of simplification requirements.

Sylvia's Summation

There you have it - the top 2011 state taxdevelopment effecting small-medium sized businesses! Never before has theissue of whether out-of-state retailers should be required to collect sales taxon sales to customers in states in which they lack significant presencereceived this much attention! Will any of the federal proposals pass? Somethink the time is now, others aren't so sure. But what is sure, is that thewheels have been set in motion - states are simply losing too much revenue andefforts to collect significant amounts of use tax just won't happen. (See my11/29/11 AllBusiness.com post, "Busting the Myth of the 'Tax-Free' CyberMonday") But based on a November 30th Judiciary Committee hearingat which e-commerce executives from Amazon, eBay and Overstock testified,there's much that needs to be ironed out before any of the federal proposalscan move forward. Perhaps one of the biggest issues, and one that will greatlyimpact small-medium sized on-line retailers, is that of a "small-sellerexception". During the hearing, Amazon testified that a small-sellerexception needs to be set as low as possible, while eBay argued for a highsmall-seller exception noting that the Small Business Administration'sdefinition of "small" for an e-shopping business is $30 million. Butif you think states are just sitting back and waiting for the U.S. Congress toact, you're wrong. States continue to introduce 'Amazon' legislation. Two"on-line" sales tax bills have recently been introduced by theFlorida legislature, and Governor Rick Scott has already said he'll sign aninternet sales tax bill into law.

So while 2011 has been an incredible year inthe state tax world, stay tuned because I predict 2012 will be even moreexciting!

The State and Local Tax "Buzz" is now on iShade

2011-12-11T22:43:00.001-05:00

The State and Local Tax "Buzz" is now on iShade. What’siShade you ask? iShade is the AccountingProfession Online – a free on-line community where accountants from across thecountry and around the globe can gather, collaborate, interact and continue todevelop themselves both personally and professionally.

On iShade you’ll find tools and resources (whitepapers, survey’s, technical writings, etc.), special interestgroups, access to high quality CPE courses and workshops, the ability to createyour own network by inviting other iShade members to connect, and access to the iShade faculty – a team of some of the brightest, most-respected andsought-after figures in the profession.

You’ll also find an extensive blog section – more thanseventy of the best known accounting/finance/tax focused blogs written by someof the best known bloggers in the profession, such as; Leverage SALT (Brian Strahle), 21^stCentury Taxation (Annette Nellen), The SEC Auditor (Joel Ungar), CPA Success,Legislative Insider (Bill Sheridan), and CPA Trendlines (Rick Telberg), just toname of few.

And now you’ll also find The State and Local Tax “Buzz”within the iShade blogs!

If you’re a frequent visitor or subscriber to TheState and Local Tax “Buzz”, you’ll notice that nothing haschanged. I’ll still be reporting onState and Local Tax ("SALT") developments and providing practical SALT guidance, and allof my blog posts and blog pages will still appear in the “Buzz” unchanged.

If you’re viewing the The State and Local Tax “Buzz” iniShade, you’ll see the exact same blog posts that I publish on the Googleblogger platform. This is because iShade will pull in my published posts and replicate them on iShade the next day.

Keep in mind when viewing my posts in iShade, you’lloccasionally need to link over to The State and Local Tax “Buzz”site to see additional content, such as information in a side-bar text box or in one ofmy blog pages. For the convenience of iShade readers, I’ll note at the end of each post when a visit to The State andLocal Tax “Buzz” is suggested.

I look forward to providing you the "Buzz" on State and Local Taxes - here at The State and Local Tax “Buzz”, and now on iShade too!

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iShade readers: If you're viewing this post in iShade, click here-> The State and Local Tax "Buzz", to visit the "Buzz".

"Buzz" readers: If you're viewing this post in The State and Local Tax "Buzz" and want to learn more about iShade or become a member, click here-> iShade

State Tax Nexus - Triggered By So Much Less Than an Obvious Physical Presence

2011-12-07T23:01:00.001-05:00

Nexus! Now here’s a term that’s been used quite often these days, especially inthe debate about whether internet retailers should be charging sales tax onsales to customers in states in which the e-tailers have no presence.

If you’ve been following the many reports on the “internet salestax” dilemma, you’ve likely seen the term “nexus” often described as simplyhaving an obvious physical presence in a state. I’m sure you’ve seen phrases such as "opening a storefront createsnexus" - end of story!

But "nexus", that “connection” or “tie” that mustexist before a state can impose its tax obligations on out-of-state businesses,can be triggered by many less obviousactivities. If you’re a tax professional,you likely well-versed in state tax nexus and are aware of some of the businessactivities that can create nexus.

But if you’re less familiar with nexus, you may be surprisedto find out that even minimalactivities can subject an unsuspecting business to a state's tax, filing, andreporting requirements.

To queue up the discussion, let's look at a fewdifferent scenarios. Based on whatyou’ve read in the media, ask yourself whether you think the activities describedin each scenario could create state tax nexus for corporate income, sales & use or other business taxes.

Scenario 1: ABC Corporation is a company headquartered inState X. The company has no physical location or resident employees in State A,but has a regional sales manager who resides in neighboring State B. BecauseState A is in the sales manager's territory, he frequently travels to State Ato solicit sales of widgets from existing and prospective customers but has noauthority beyond sales solicitation.

Scenario 2: Assume the same facts as Scenario 1. Inthis scenario, however, the sales manager brings new-product inventorywith him to each sales call and has the authority to sell the product; collector approve payment; and turn purchased items over to his State A customers.

Scenario 3: In this next scenario we again have ABCCorporation, this time selling medical equipment, which is shipped by commoncarrier to ABC’s customers in State B. Because the equipment must be installedand the customer's medical staff must be properly trained to use it, thecompany sends technical personnel from corporate headquarters in State X to thecustomer's location in State B to install the equipment and train the medicalstaff.

Scenario 4: Now assume that ABC Corporation's MarketingVP signs ABC up for a series of trade shows in State C. Several of ABC'ssales and marketing employees travel from State X and spend three weeksattending various trade shows in State C. Although customer leads areestablished during the trade show, no product is sold.

Scenario 5: In the next scenario ABC Corporation is anonline retailer whose entire operations are in State X. All of its sales aremade over the Internet and ABC’s merchandise is shipped by common carrier tocustomers in State D and all over the country. ABC has recently decidedto contract with unrelated "marketing affiliates" in State D. The"marketing affiliate" contract will require affiliates to post abanner on their website which, if clicked, will send customers to ABC'swebsite. Marketing affiliates will earn a commission from each sale thatoriginates from their web-link. However,other than passively directing customer’s to ABC’s website via the web-link,State D marketing affiliates will not be required to actively solicit customersfor ABC.

Scenario 6: Next we have ABC Corporation hiring anengineer who is a resident of State E. Because the engineer resides over 100miles from ABC's corporate headquarters, ABC allows the engineer to telecommutefull-time from his home in State E. As an engineer, this employee never meetswith prospective customers nor does he hold his home out as an office of thecompany. Other than this one telecommuting employee, ABC Company has noconnection to State E.

Scenario 7: How about this one? ABC Corporation is now afinancial services company, again based exclusively in State X. ABC issues creditcards which contain ABC's logo and are used by customers in State F.

Scenario 8: Andfinally, assume that ABC Corporation is now a subsidiary that was formedexclusively for the purpose of holding trademarks and other intangibles. ABC was incorporated in Nevada, but otherwisehas no employees or operations in any other state. XYZ Corporation, a related company withretail stores in several states pays ABC a royalty fee to use the trademarksand intangibles. ABC’s trademarks areused in States L, M, N, O and P.

As you consider whether state tax nexus has been triggeredin any of these scenarios, notice that none of these scenariosinvolve opening a physical location. Inever once mention the opening of storefront, distribution center, or other facilityin any other state.

But yet in everyscenario I've described, ABC Corporation has possibly, and in some cases,definitely, created state tax nexus for at least one type of state tax.

State nexus is a complex concept, but understanding howeasily nexus can be triggered can save a taxpayer many future headaches, aswell as cash, since it's much more costly to deal with delinquent taxes,penalties, and interest than it is to proactively determine a company's statetax obligations.

Can nexus be createdfor one type of tax but not another? Absolutely!

For instance, in the first scenario above, ABC Corporationwould have sales tax nexus but not corporate income tax nexus. This is becausea federal law, Public Law (P.L.) 86-272, prohibits states from imposing a taxbased on net income on out-of-state corporations whose only activity issoliciting orders for sales of tangible personal property, where the sales areapproved and shipped from out of state.

Because P.L. 86-272 only applies to net income based taxes,activities other than those just described, would create nexus for sales,franchise, and other non-income based business taxes.

Beware the NexusQuestionnaire

It's probably comes as no surprise that states are becomemore aggressive and sophisticated in identifying companies with nexus totheir state. States are proactively viewing companies websites, usinginformation obtained through audits of vendors or customers, and reviewing acompany's filings with other state agencies, such as with the Secretary ofState.

If a state has any reason to suspect that a company may havestate tax nexus, a state will almost always send out a nexus questionnaire. Asyou can see from these links to Texas' and Michigan's nexus questionnaire,states are looking at much more than having a physical location. Notice thatthese questionnaires list some of the exact activities I described in thescenarios above.

Sylvia’s Summation

State tax nexus can be triggered by so much less than anobvious physical presence. While the rules vary from state to state, and bytype of tax, activities such as owning or leasing property, soliciting sales,attending trade shows, performing training, deploying employees or hiringcontractors to perform services, contracting with marketing affiliates, andmany more, can trigger nexus for one type of tax or another or for all taxesimposed by a state.* If your company is concerned about state tax nexus issues, seek the advice of a CPA, attorney or tax professional with knowledge of, and experience in, dealing with state tax nexus issues.

*For more on state tax nexus, I invite you to read ""Navigating Nexus," an article I co-authored with my former colleague, Diana DiBello. Navigating Nexus was published in the November 2010 issue of the Journal of Accountancy. In Navigating Nexus, Diana and I discuss the various types of nexus, recent developments in the nexus landscape, and offer suggestions on how to chart a course through the treacherous nexus water.

Congress Introduces a Hybrid Solution: The Marketplace Fairness Act

2011-11-28T23:06:00.000-05:00

Originally published November 28, 2011*

Earlier this month, we saw the introduction of yet another federalon-line sales tax bill. That’s right, on November 9^th, S. 1832, “The Marketplace Fairness Act” wasintroduced in the Senate by Mike Enzi (R-Wy), Lamar Alexander (R-TN), DickDurbin (D-IL) and seven other bi-partisan Senators. By the way, that’s the sameDick Durbin that introduced the Senate version of the Marketplace Fairness Act(S. 1452) this past July.

What this means is that we now have three competing federal bills, allwhich seek to grant States the authority to mandate out-of-state (“remote”)sellers to collect sales tax on sales to in-state customers, regardless ofwhether such remote sellers have sales tax nexus to the state.

To quickly recap, the first of these bills were introducedon July 29^th, when Congressional Democrats in both the U.S. Senateand House of Representatives introduced the Durbin bill (S. 1452), and the Conyers bill (H.R. 2701). Both bills read identically and go by the same “MainStreet Fairness Act” title. Then, on October 12^th H.R. 3179, “The Marketplace Equity Act”,an alternative remote seller collection bill, was introduced by U.S.Representatives Jackie Speier (D-CA) and Steve Womack (R-AK). Although the “MarketplaceEquity Act” was a bi-partisan effort, the legislation was criticized forbeing crafted too quickly and surrendering Quill protection without demandingadequate simplification.

I compared the Mainstreet Fairness Act (“MFSA”)to the Marketplace Equity Act (“MEA”) in my October 31st postandnoted that neither proposal offered an ideal solution or appeared to have thelevel of support needed to pass. The MFSA, which extends its remoteseller collection authority only to Streamlined Sales & Use Tax Agreement (“SSUTA”) full-memberstates, lacked Federal Republican support. The MEA, though abi-partisan effort, was criticized for completely ignoring the efforts of theSSUTA, creating its own simplification requirements and leaving SSUTA states,who had already implemented simplification measures, to have to abide by a newset of rules.

S. 1832, The Marketplace Fairness Act

Some would say that it’s because of these issues that yetanother remote seller collection bill was introduced. TheMarketplaceFairness Act (“MFA”) represents a compromise solution which,like the MSFA, grants remote collection authority to StreamlinedSales Tax (“SST”) full-member states, while also providing aseparate set of simplification requirements, like the MEA, forstates who wish an alternative to the SSUTA’s requirements.

So what exactly does the MFA say?

The MFA provides that SST full memberstates may require remote sellers that do not qualify for the small sellerexception, to collect and remit sales tax on in-state states beginning onfirst day of the calendar quarter that is at least 90 days after enactment ofthe MFA. Because the MFA looks to theprovisions of the SSUTA, the MFAdoesn’t elaborate on the SSUTA’ssimplification requirements in the actual bill. For instance, because the smallseller exception under the current version of the SSUTA provides that businesseswith less than $500,000 in revenue per year are exempt from the remote sellerrequirements, this threshold would apply to states whose remote sellercollection authority under the MFA is based on their status asfull-member SST states.

States that are not SST full-members, butwho adopt and implement the MFA’s alternativesimplification requirements would also be authorized to require remotesellers who do not meet the MFA’s small seller exception (asdefined in the MFA) to collect taxes on sales sourced to theirstates in accordance with the sourcing rules detailed in the MFA.To meet the MFA’s alternative simplification requirements, statesmust provide all of the following:

a single state-level agency to administer all sales and use tax laws, including the collection and administration of all state and applicable local sales and use taxes for all remote seller sales sourced to the state;
a single audit for all state and local taxing jurisdictions within the state;
a single sales and use tax return to be used by remote sellers and by single and consolidated providers and to be filed with the state-level agency;
a uniform sales and use tax base among the state and its local taxing jurisdictions;
adequate software and services to remote sellers and single and consolidated providers that identifies the applicable destination rate, including the state and local sales tax rate, to be applied on sales sourced to the state;
certification procedures for both single and consolidated providers to make software and services available to remote sellers, which include an agreement to hold providers harmless for any errors or omissions as a result of relying on state provided information; and
30 days’ notice to remote sellers and single and consolidated providers of local tax rate changes.

In addition to these provisions, a state’s simplificationmust include a requirement that remote sellers and single and consolidatedproviders collect sales and use taxes under the applicable destination rate(the sum of the state rate and rate for the local jurisdiction into which thesale is made); agree to hold remote sellers using a single or consolidatedprovider harmless for any errors and omissions by that provider; and relieveremote sellers from liability (including penalties and interest) to the stateor locality for collection of the incorrect amount of sales or use tax ifcollection of the improper amount is the result of relying on informationprovided by the state.

States that qualify for remote seller collection authorityunder these alternative simplification requirements are entitled to thisauthority “no earlier than the first day of the calendar quarter that is atleast 6 months after the date the State enacts legislation to implement therequirements.” In essence, a state would first need to pass legislationgiving the state authority to implement the MFA’s alternativesimplification requirements and then, would have a minimum of 6 months to putall of the requirements and provisions in place.

Small Seller Exception Under Alternative SimplificationRequirements

Remote sellers whose annual gross receipts from total remote U.S.sales were $500,000 or less in the preceding calendar year meet the MFA’sdefinition of a small seller and are exempt from remote collectionresponsibilities in states which choose to implement the MFA’salternative simplification requirements. Although the MFA’s smallseller exception is similar to the SSUTA’s $500,000 threshold, because the MFA statesthat the $500,000 threshold includes gross receipts of related “persons”, asdefined in the IRC’s attribution rules under Sec. 276 or 707(b)(1), remotesellers who are part of controlled group of corporations may be less likely toqualify under theMFA’s alternative small seller exception.

Single and Consolidated Providers

One major distinction between the MFA andthe predecessor bills is the introduction of “Single and ConsolidatedProviders”. The MFA defines these “providers” as “any personcertified by a State who has the right and responsibilities for sales and usetax administration, collection, remittance, and audits for transactionsserviced or processed for the sale of goods or services by remote sellers”. Inpractical terms, a consolidated provider could be an Internet retailer whocollects sales tax on behalf of sellers that use its hosting platform.

Sylvia’s Summation

In my opening thoughts, I asked “Has Congress finally gottenit right?” To that thought I add “Is the Marketplace Fairness Act thesilver bullet?”

There’s no question that the issue of whether remoteretailers should collect sales tax is perhaps one of the hottest topics instate taxation today! And while there are equally valid arguments about whetherremote retailers should be required to collect sales tax or not, the collectiveclamor that it’s time to “level the playing field” and close the perceived on-linesales “loophole” is undoubtedly creating a momentum not seen in prior years whensimilar legislation was introduced.

Will this most recent Congressional attempt, which, byretaining the efforts of the Streamlined Sales Tax project and introducing analternative for States who do not wish to become SST states, be the compromisethat passes? MFA co-sponsor, Lamar Alexander, certainlythinks so. He’s been quoted as saying “If I were president of an onlineretailer …… I’d make my plans to start collecting sales taxes wherever I soldthings in the United States.”

But will having three competing bills conferred over in thesame congressional session work against them all? (According to the mostupdated information in www.govtrack.us,a site which tracks the status of U.S. bills, all four bills are in“committee”, the first step in the legislative process. The site notes that themajority of bills and resolutions never make it out of committee.)

And what about the concept of “nexus”? The MarketplaceFairness Act states that it has “no effect on nexus” and that theauthority granted the Act has no impact “in determining whether a seller or anyother person has nexus with any State for any tax purpose other than sales anduse taxes”. In essence, nexus will no longer be required for sales and use taxcollection purposes, but will be required for other state taxes. But does thisopen up the possibility that Congressional efforts could be introduced tocircumvent nexus for other types of taxes? Seems absurd? I believe anything ispossible!

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*The above post is based on Sylvia Dion's SalesTaxSupport.com post, "From Main Street to Marketplace Fairness Acts - Sales Tax 2011", published November 28, 2011. The content from that post has been re-produced in the above post for the benefit of the "Buzz's" readers.

For more about Sylvia's E-Commerce/Internet Sales Tax contributions to the SalesTaxSupport.com blog see side-bar text box.

The Marketplace Equity Act - Congress Introduces a Second Remote Seller Collection Bill

2011-10-31T14:30:00.000-04:00

Originally published October 25, 2011*

Just when we it seemed like the Main Street Fairness legislation introduced this past summer was dying a slow death, a second federal remote seller bill was introduced. That's right, on October 12, 2011, H.R. 3179, entitled the “Marketplace EquityAct of 2011”, was introduced by U.S. Representative Jackie Speier, a CaliforniaDemocrat, and Steve Womack, an Arkansas Republican. Like the Main StreetFairness legislation, S. 1452 and H.R. 2701, introduced on July 29, 2011 by Senator DickDurbin and Representative John Conyers, respectively, the ultimate goal of theMarketplace Equity Act is to grant States the authority to require out-of-stateretailers to collect sales tax on sales to in-state customers. Butdespite this overall common goal, the Marketplace Equity and MainstreetFairness Acts are different.

H.R. 3179, The Marketplace Equity Act

Before delving into how the competing federal on-line salestax bills compare, let’s look at the Marketplace Equity Act (“the Act”) moreclosely. H.R. 3179 is defined as a bill “To improve theStates’ rights to enforce the collection of State sales and use tax laws, andfor other purposes”. The Act would grant States the authority torequire sellers, who do not meet a state’s “Small Seller Exception”, to collectand remit sales tax on sales to in-state customers without regard to theseller’s location.

Specifically, the Act would require states wishing to obtainthe authority to mandate out-of-state (“remote”) retailers to collect and remitsales tax, to implement a simplified system for the administration of remoteseller’s sales and use tax collection responsibilities which would meet thefollowing minimum requirements:

A state would be required to define and establish a “Small Seller Exception”, which would exempt remote sellers with annual U.S. gross revenues of $1 Million or less, or in-state revenues of $100,000 or less, from the state’s remote seller collection requirement. Annual revenues would be based on figures from the preceding calendar year and states would be allowed to establish higher threshold amounts.
A state would be required to provide a remote seller tax return and designate a single revenue authority within the state with which remote sellers are required to file their return. Under this simplification requirement, remote sellers cannot be required to submit any other sales and use tax return or to file sales tax returns more frequently than returns required by non-remote sellers nor would local jurisdictions be allowed to impose a local sales and use tax filing requirement.
A state must also identically define, for remote sellers, products and services subject to tax throughout the state. Exemptions must also be identical throughout the state and cannot include products or services that are not exempt when sold by non-remote sellers.
Finally, a state must require remote sellers to collect sales and use tax under one of the three following rate structures:

1. A singlestate-wide blended rate that includes both the state rate and anapplicable rate for local jurisdictions, as determined by the state;

2. The maximumstate rate, which is the highest rate at which sellers are required tocollect tax by the state, exclusive of local taxes; or

3. The applicabledestination rate, which is the sum of the state rate and any applicablerate for the local jurisdiction into which the sale was made. States choosingthe destination option as the applicable collection rate would be required tomake adequate software available to remote sellers that will substantially easethe burden of collecting at multiple rates, as well as relieve remote sellersfor any tax, interest and penalty for collecting an incorrect sales or use taxamount, if the improper collection was due to relying on information providedby the state.

The Act provides that states which impose a lower sales anduse tax rate on food and/or drugs and medicine, may require remote sellersto collect tax at the lower rates without being in violation of the simplifiedstate rate requirements explained above. Additionally, the rates detailedin 1 and 2 above, can’t exceed the respective average state and local ratesapplicable to non-remote sellers.

The Act also provides that before a state can exercise itsauthority to require non-exempted remote sellers to collect and remit tax, astate fulfilling the simplification requirements must first publish a publicnotice with the title of, and references to, the enacted state remote sellercollection legislation; the law’s remote seller tax collection criteria; the rate(s)that non-exempted remote sellers must charge on in-state taxable sales; theinitial date remote sellers will be required to collect tax; and a reference tocompliance information and the remote seller sales and use tax form. Oncethe Act’s simplification and public notice requirements have been met, a statemay exercise its remote seller collection and remittance authority beginning onthe first day of the calendar quarter that occurs at least six months after thedate that the state published the required public notice.

Comparisons to the Main Street Fairness Legislation

One of the main similarities between the two federalproposals is that neither proposal requires that nexus be established. AsI pointed out in prior posts on the Main Street Fairness legislation, a statemust be a full-member Streamlined Sales and Use Tax Agreement (“SSUTA”)state in order to benefit from the remote seller collection authority grantedby the Main Street legislation. (Note A) The Marketplace Equity Act would similarly grant its authority to states thatmeet the Act’s simplification and other requirements. Like the Main StreetFairness, the Marketplace Equity Act would not impose a national sales tax, assome might believe. Although both the Act and the Main Street Fairnesswould be federally enacted legislation, sales and use tax administration wouldstill fall to the various states and rates would still vary by state.

Though the competing bills seek to impose a collectionrequirement on remote sellers exclusive of whether physical nexus has beencreated, the major difference lies in the Main Street Fairness legislation’stie to the SSUTA and a state’s full-member status. For this reason, amajor difference between the two proposals is that states that would beentitled to remote seller collection authority under the Main Street Fairnesslegislation, would not necessarily be the same states thatwould be entitled to this authority under the Marketplace Equity Act.

Sylvia's Summation

Although on its surface, the Marketplace Place Equity Actappears to make simplification, well, simple, there are some who believe H.R.3179 was not adequately thought through, surrenders Quill protections withoutdemanding sufficient simplification, and was quickly crafted in an effort tocreate a bi-partisan solution as efforts to advance the Main Street Fairnesslegislation in Congress had stalled. According to a recent CCH News & Information Report, the Act was drafted in an effort to build supportamongst Republican House freshman in order to put pressure on the RepublicanHouse leadership to provide “cover” to sympathetic Senate Republicans.

And should the Marketplace Equity Act become law, what wouldthis mean for the Streamlined Sales Tax Project, a government-businessmulti-state collaborative effort that over the last ten years has focused on simplifyingsales tax collection and administration through uniform definitions of terms,uniform exemption certificates and administration, vendor compensation, use ofCertified Service Providers to aid in the reduction of compliance burdens andmore. Would enacting the Marketplace Equity Act eradicate all that has beenaccomplished by the Streamlined Sales Tax Project? Would states that arealready SSUTA member states need to go over and beyond to obtain the benefitsgranted under the Marketplace Equity Act? And what incentive wouldnon-SSUTA member states have to become Streamlined Sales Tax members if remotecollection authority could easily be achieved by instead complying with theMarketplace Equity Act?

And who would guide, review and enforced States efforts tocomply with the Marketplace Equity Act’s requirements? Would aMarketplace Equity Act Governing Board need to be created? Would thisreally be a step back to square one, back to re-creating what the StreamlinedSales Tax Project has already done?

Though I'll admit, the "noise" on enacting an on-line sales tax bill is getting louder, but with two competing bills on the table, does either one really have a chance? One lacks bi-partisan support, while the other on its surface, promotes simplification but perhaps hasn't been though through adequately. Is the Marketplace Equite Act really the simple solution? To borrow a quote from famous director, Marin Scorses, "There's no such thing as simple. Simple is hard".

Note A: For more on the "Main Street Fairness" legislation, see my two prior Main Street posts:

“Main Street Fairness Act. Is SST the Silver Bullet?”, SalesTaxSupport.com, 8/10/11;

“Can the Main Street Fairness Act Stop the Sales-Tax Madness?”, AllBusiness.com, 8/22/11

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*The above post is based on Sylvia Dion's SalesTaxSupport.com post, "The Marketplace Equity Act: The New Competition on the Block", published October 25, 2011. The content from that post has been re-produced in the above post for the benefit of the "Buzz's" readers.

For more about Sylvia's E-Commerce/Internet Sales Tax contributions to the SalesTaxSupport.com blog see the side bar text box.

A Tale of Two State “Amazon Law” Updates

2011-10-17T10:38:00.000-04:00

Originally published October 4, 2011*, State LegislativeDevelopments

“It was the best of times, it was the worst of times, itwas the age of wisdom, it was the age of foolishness, it was the epoch ofbelief, it was the epoch of incredulity, it was the season of Light, it was theseason of Darkness, it was the spring of hope, it was the winter ofdespair,....., in short, the period was so far like the present period, thatsome of its noisiest authorities insisted on its being received, for good orfor evil, in the superlative degree of comparison only.”

And like this quote, from Charles Dicken’s “A Tale of TwoCities”, I bring you today “A Tale of Two State 'Amazon Law' Updates”. One forwhom the battle was too great, who realized it had expected too much, tooquickly; and another just embarking on the dream of internet sales taxcollections. Two states. Within a day of each other, one repeals its “AmazonLaw”, while another introduces “Amazon” legislation.

California’s “Amazon Law” is Temporarily Repealed

Okay, we knew it would probably happen! That'sright, just in case you haven’t heard, California’s Governor Brown signedcompromise legislation, AB 155, into law on September 23, 2011. If you're not familiar with thesedevelopments, I invite you to read my recent prior post “California's "Amazon Law" Drama Continues: An Update on Recent Developments", for the dramatic details that led to the “California-Amazon” compromise.

Although I cover the provisions of AB 155 in that post, I’llsummarize a few key points here:

AB 155 temporarily and retroactively repeals the provisions of ABX 1, California’s “Amazon Law”.
This repeal will remain in effect until either September 15, 2012 or January 1, 2013 depending on whether a federal solution is passed by July 31, 2012, and if passed, depending on whether California elects to implement the federal solution. (I’ve seen many news reports that simply state that sales tax will not be due on internet purchases until September 15, 2012 but fail to mention the possibility that the repeal may last until January 1, 2013.)
This repeal impacts all out-of-state (“remote”) retailers, not just Amazon.com, and gives these on-line retailers a temporary reprieve from collecting sales tax from California purchasers.

Although the press coverage has slowed on the“California-Amazon” saga, the latest reports are that Amazon has officiallyconfirmed that it will indeed begin collecting sales tax no later 2013. This recent Wall Street Journal article, “Amazon to Collect Sales Tax by 2013”, quotes JeffBezos, Amazon’s CEO, as saying that Amazon will begin collecting sales tax by2013. He also confirms that Amazon plans to add facilities in Californiaand that the Company will not challenge the law or close its facilities toavoid its sales tax collection requirement. I suppose for now, we’ll justhave to wait and see what really happens!

Michigan Introduces “Amazon Legislation”

Now with all the time, effort, energy and taxpayer resourcesspent on California’s failed attempt to get its “Amazon Law” in effect andenforceable immediately, you would think other states might think twice aboutintroducing “Amazon” legislation.

Not so, my friends. On September 22^nd, Michiganbecame the latest state to introduce “Amazon” legislation. Michigan H.B. 5004, contains the typical, web-linking nexus languageseen in other "Amazon Laws” and states that a seller "is presumed tobe engaged in the business of making sales at retail of tangible personalproperty in this state if the seller enters into an agreement with 1 or moreresidents of this state under which the resident, for a commission or otherconsideration, directly, or indirectly refers potential customers, whether by alink on an internet website, in-person oral presentation, or otherwise, to theseller, if the cumulative, gross receipts from sales by the seller to customersin this state who are referred to the seller by all residents of this statewith such an agreement with the seller is greater than $10,000 during theimmediately preceding 12 months.”

But Michigan H.B. 5004 also includes "affiliate nexus"language, further expanding the definition of a “retailer engaged in businessof making sales at retail” to include retailers who are part of a controlledgroup, as defined in I.R.C. 1563(A), that include “affiliates” (controlledgroup members) with facilities and employees in the state that perform varioustypes of services (advertising, delivery, installation, maintenance, etc.)which promote or facilitate a remote retailer’s Michigan sales, or which usetrademarks and similar intangibles in Michigan that are substantially similarto those used by the remote retailer, or which allow the remote retailer’scustomers to pick-up or return on-line purchased merchandise from anaffiliate’s Michigan facility, or which conduct any significant “marketenhancing” activity in Michigan that benefits the remote retailer. Expansiveindeed!

A few more points on Michigan’s “Amazon” legislation; thelegislation contains a “rebuttable” provision, and if passed, Michigan’s“Amazon Law” would go into effect 30 days after the legislation is enacted.

Sylvia's Summation

In conclusion, here’s one more interesting note on theMichigan development. Michigan, unlike California, is a full-memberStreamlined Sales & Use Tax Agreement (“SSUTA”) state. As I've mentioned in my prior posts on the federal MainStreet Fairness legislation, if enacted, the federal MainStreet legislation would grant full-member SSUTA states the legal authority torequire remote retailers (other than those meeting the small seller exception)to charge and collect sales tax. (See Note A) AsI’ve mentioned before, the federal Main Street Legislationwould not impose a national sales tax (as some media reportsimply), and so a federal law could operate in conjunction with independentstate “Amazon Laws”. But if a state is already a SSUTA full-member,having a separate “Amazon Law” might seem redundant. California, on theother hand, would need to apply for and become a SSUTA member in order to enjoythe benefits of the federal Main Street legislation. Sowhy are states continuing on this trend? They need the sales tax revenues – noquestion about that! Perhaps they just can’t sit back and wait for a federalsolution. One thing that is certain, it will be interesting indeed to seehow things play out over the next year! It's sure to be a novel worthyending!

Note A: For more on the "Main Street Fairness" legislation, see my two prior Main Street posts:

“Main Street Fairness Act. Is SST the Silver Bullet?”, SalesTaxSupport.com, 8/10/11;

“Can the Main Street Fairness Act Stop the Sales-Tax Madness?”, AllBusiness.com, 8/22/11

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*The above post is based on Sylvia Dion's SalesTaxSupport.com post, "A Tale of Two States - The "Amazon Law" Saga Continues", published October 4, 2011. The content from that post has been re-produced in the above post for the benefit of the "Buzz's" readers.

For more about Sylvia's E-Commerce/Internet Sales Tax contributions to the SalesTaxSupport.com blog see the side-bar text box.

Wondering How Sales Tax Applies to a Groupon? Massachusetts Issues Draft Guidance

2011-09-28T14:30:00.000-04:00

This past June, I wrote a post entitled “WonderingHow Sales Tax Applies to a Groupon? So Are Many of The States”. If you’re a frequent visitor to The State and Local Tax “Buzz”, myguess is you’ve read this post as it’s become the most popular blog post I’vepublished to date.

As you probably guessed from the title of that post,the key point I highlighted is that much uncertainty has existed regarding thesales tax implications of third-party e-coupon discounts, such as thosemarketing and arranged by companies like Groupon andLivingSocial. Specifically, I addressed whether states allow Groupon typediscounts to impact sales price in the same manner as manufacturer’s orretailer’s discounts, as well as whether the nature of the Groupon typearrangement impacts the amount subject to sales tax as these promotions are notall identical. (In some promotions a consumer purchases a specific productor service, while in others, a consumer has purchased a “cash equivalent” whichmay be tendered as payment when choosing from the participating retailer’sofferings.) In my prior post,I also highlighted that state officials have been taking great interest inthese third party e-coupon programs, but many states had not yet issueddefinitive guidance on how they impact sales price as their current regulationson the taxation of discounted merchandise did not appear to cover the Grouponmodel.

Massachusetts Issues Working Draft Directive 11-XX:

As states begin to address thisissue, we may soon see this uncertainly evaporate. On September 16, 2011,Massachusetts became one of the first states to publicly address the sales taximplications of third party e-coupon discounts. The Department ofRevenue's ("the Department") temporary guidance isarticulated in Working Draft Directive 11-XX, Application of Sales Tax to Sales and Redemption of Third Party Coupons.

This Working Draft Directiveclearly identifies the promotional arrangements to which it applies as those“known under various names in the marketplace including Groupon, LivingSocialand BuyWithMe.” The two issues addressed in Draft Directive11-XX include:

Whether the sale of a third party e-coupon certificate is subject to sales or use tax. That is, whether the sale of the actual e-voucher which may be redeemed (at a future point) at face value for taxable property or meals is subject to sales tax.
What value should be used to determine the amount subject to sales tax when taxable personal property or meals are purchased using a third party e-coupon certificate. Specifically, this second issue deals with the impact of these third party e-coupon discounts on the sales price subject to sales tax.

Regarding the first point, Draft Directive 11-XX confirms that tax is not due upon thesale of the e-coupon certificate, stating that the sale of e-couponcertificates should be treated, for sales tax purposes, in the same manner asgift certificates issued by a vendor. Effectively, this means that atthe point in time when Groupon or other e-coupon vendor charges a customer’scredit card, the transaction is the equivalent of a gift certificate sale evenif the customer is purchasing a specific taxable product or service.

On the second issue, Draft Directive 11-XX first explains Massachusetts' current rule on theimpact of manufacturer’s and retailer’s discounts on sales price as detailed inthe Massachusetts sales tax regulations. The Draft Directive states that whilethe Massachusetts regulation on discounts and coupons allows both manufacturer’sand retailer’s discounts to reduce the sales price subject to tax, theMassachusetts regulation also states that “other types of coupons willnot be treated as cash discounts”. (See 830CMR 64H.1.4 Discounts, Coupons and Rebates)

Draft Directive 11-XX then concludes that a “certificate or couponissued by a third party as described in this Directive does not qualify as amanufacturer’s or retailer’s coupon because it is neither issued by themanufacturer nor the retailer…”, and further adds that “Athird party certificate is therefore not treated as a cash discount thatreduces the taxable sales price.”

To illustrate the application of these rules, Draft Directive 11-XX includes two examples. The first example details ascenario in which a consumer purchases an e-certificate for $20.00 which can beapplied towards a $40.00 restaurant meal (i.e., the consumer will be able tochoose from the restaurant's offering and tender the e-certificate as payment).The Draft Directive states that state and local sales tax will be due on thefull $40.00 value of the meal. In the second scenario, a consumer purchases a$280.00 golf package for $140.00. The package includes non-taxable green feesnormally valued at $200.00 and a taxable golf cart rental fee normally valuedat $80.00. The Draft Directives states that the golf course must collectand remit sales tax on the full $80.00 value of the taxable golf cart rentalfee. Note that while Draft Directive 11-XX is indicative of theDepartment’s position on the treatment of third party e-coupon discounts, it isat this time still a Working Draft Directive and subject tochange.

Additional Commentary

While authoring myprior Groupon post,I reached out to the Massachusetts Rules and Regulations Bureau (thedepartment within the Legal Division which interprets the statute and authorsregulations and administrative guidance) because my research found limitedauthoritative guidance on Massachusetts’ position on e-certificate discounts.The Bureau’s response to my question came to me in the form of a PrivateInformation Letter (“PIL”) (See Note A), which confirmedthat the Department had not issued formal public guidance onGroupon type arrangements, stating that the Bureau had yet to receive a fully documented ruling request as required by the Massachusetts administrativeprovisions. The PIL added that without a formal ruling request detailingthe specifics of these arrangements, the Bureau lacked sufficient informationas to exactly how these promotions work and if they all work in the same way.Despite this statement, the response also stated that the Bureau did notbelieve that Groupon certificates qualified as retailer's or manufacturer'scoupons, which do reduce the taxable sales price in accordance with the Massachusetts salestax rules. The Department's position in the PIL I received is consistentwith the Department's position articulated in DraftDirective 11-XX.

One point in the PIL, whichwas not addressed in DraftDirective 11-XX, was a discussion of “sales price”. The PIL noted that the“sales price” issue was discussed at the May2011 Streamlined Sales Tax Governing Board meeting, and that although aconsensus was not reached during the May meeting, Massachusetts would certainlytake into account any “sales price” conclusion (once reached) even thoughMassachusetts is not currently a streamlined conforming state. (See NoteB)

As I just noted mypreliminary Massachusetts research on this issue uncovered limitedguidance. One document I discovered was another PIL issued by the Bureau inMarch of 2010. That particular PIL describes a scenario which is virtuallyidentical to the scenario described in the first example in Working DraftDirective 11-XX, however, in the March 2010 PIL, the Bureau advises thatsales tax would be due on the discounted amount the customerpaid for the e-certificate, not the full value of the meal received. (See MassachusettsPrivate Information Letter issued to Ben Edelman dated March 30, 2010)

Despite the fact that the theMarch 2010 PIL clearly states that the PIL "provides general guidanceonly" and "is not binding on a taxpayer or theDepartment", this "guidance" has been referenced or cited innumerous articles that have focused on Groupon's Consumer Protection Law "violations"which have included claims that Groupon has been advising merchants toovercollect sales tax. (See "DailyDeal Providers May be Violating Consumer Protection Law", TechCrunch,6/15/2010; "Groupon'slegal risks and hidden gift to merchants", Reuters, 6/16/11 - see alsolink in the Reuter's article to Ben Edelman blogpost "ConsumerProtection in Online Discount Voucher Sales", 6/14/11)

Sylvia's Summation

States are becoming more and moreaware of the need to address the impact of e-coupon discounts on taxable salesprice. Massachusetts has recently articulated it's position in WorkingDraft Directive 11-XX, stating that e-coupons discounts do not reduce theamount subject to sales tax. Keep in mind that until the Department issuesits position in a final Department of Revenue Directive, this guidance istemporary as the Department is currently accepting practitioner and taxpayercomments which may lead the Department to revise this draft guidance. Taxpayersand tax practitioners should also be aware that the media has published storieswhich relied on information in a March 2010 PIL which was not bindingon the Department. Taxpayers considering marketing their products or servicesthrough Groupon, LivingSocial, BuyWithMe or other third party e-coupon marketershould carefully consider the sales tax implications and consult with their taxadvisor in order to understand their responsibility to collect and remit theproper amount of sales tax. (See Note C.)

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Note A: The e-mail responsereceived from the Massachusetts Department of Revenue's (DOR) Rules andRegulations Bureau is what is referred to as an "Information Letter"(as defined in Letter Ruling Regulation, 830 CMR 62C.3.2.) It is intendedto provide general information such as the potential applicability of DORpublic written statements or well-established principles of tax law, but itis not intended to provide authoritative guidance on the applicationof the tax laws to a specific set of facts, therefore, it is not a"ruling" or "letter ruling" that is legally binding on theDOR.
Note B: On 8/15/11, the Massachusetts Joint Committee on Revenue reported favorably on H. 3763, An Act to Promote Sales Tax Fairness for Main Street Retailers, which gives the Commissioner authority to petition the SST Governing Board to allow the Commonwealth to become an associate or full member. This bill was referred to the Joint Committee on Rules, which re-convenes on 11/19/11.
Note C: Other states which have recently issued guidance on the sales tax implications of Groupon type discounts include California (Tax Information Bulletin, September 2011) and New York (TSB-M-11(16)S, 9/16/11). My plan is to author a subsequent post once Massachusetts issues a final directive, which will discuss guidance from every state that has issued final guidance at that point.

State Mandatory Combined Reporting: Complex Formula or 'Loophole' Closer?

2011-09-27T13:11:00.000-04:00

State Mandatory Combined Reporting! You're probablywondering what this obscure state tax concept means and whether itimpacts your company's state corporate taxes. Before jumpinginto today's discussion, here are a few questions to consider.

Is your company a subsidiary or affiliate within a"controlled group" of corporations? Do any of the "controlledgroup" corporations do business in multiple states? Are you consideringselling a majority interest in your company to another corporation which does businessor in multiple states or has subsidiaries with multi-state operations? Is theprospective buyer a vendor, supplier or otherwise integrated with yourcorporation? Have you been advised to reorganize your corporate structure andcreate new legal entities? Will this reorganization involve transferringintangible assets, such as technology, trademarks or patents; to a new legalentity and having related corporations compensate each other for the use ofthose assets?

If you answered yes to any of thesequestions, understanding state mandatory combined reporting is important asthis filing method, employed by many states, could have a significant impacton your company's state corporate tax liability.

A few years ago, state mandatory combined reporting was a"hot button" issue when it was discovered that many largecorporations were significantly reducing their state tax billsby exploiting "creative" restructuring techniques. But, more on thatin a bit!

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Yesterday I published a post on AllBusiness.com (first few paragraphs above) in which I provided an overview on State Mandatory Combined Reporting. My focus for that post, was to take what is one of most complex concepts in state taxation, and provide a 50-foot overview of what it is, why more and more states have turned to mandatory combined reporting as the best method for closing certain "loopholes", and why even Small-Medium sized businesses which are members of controlled groups may be impacted by this complex reporting concept. (See side-bar for more about my AllBusiness.com contributions) Although I sometimes expand upon and reproduce my AllBusiness.com posts in the "Buzz" for the benefit of readers, today I invite you to visit the AllBusiness.com site and read my latest AllBusiness.com post:

State Corporate Taxes and Combined Reporting: Complex Formula, or 'Loophole' Closer?

I'd love to hear your feedback. Do you like seeing an entire post re-produced here in the "Buzz", or do you like exploring new websites making a direct link to the site where my post originated preferable? Let me know what you think.

Hot Topics in State Taxation: The Third Annual Northeast SALT Forum

2011-09-18T23:14:00.000-04:00

"Hot Topics in Sales & Use Tax: What is Changing? How National Sales Tax Trends and Events Impact the Northeast"
"Taxing Online Transactions"
"The Top Ten Relationship Killers: Recurring Scenarios in State Tax and How to Deal with Them Effectively"
"Flow-Through Entities: The Unwritten Rules"
"Business Tax Reform: Raising National Interest Toward a Value Added Tax"

If these topics have peaked your interest, consider attending the Third Annual Northeast State & Local Tax Forum, to be held on November 10, 2011 at the Westford Regency Inn and Conference Center in Westford, Massachusetts, a beautiful, colonial town approximately 1 hour outside of Boston.

This one-day forum, sponsored by the New Hampshire Society of Certified Public Accountants, will feature some of the leading State & Local Tax minds from New England and the nation, including:

Scott Peterson, Executive Director of the Streamlined Sales Tax Governing Board
Harley Duncan, Managing Director, Washington National Tax Office of KPMG, LLP
James (Jim) Eads, Esquire, Director of Public Affairs for Ryan, LLC and former Executive Director of the Federation of Tax Administrators

Plus many more State & Local Tax ("SALT") experts from several of the "Big 4" accounting firms and premier regional and national law firms. These experienced SALT practitioners will address keytechnical and policy issues and provide an annual update on significant SALT developments from across the country, with a particularfocus on New England.

The State & Local Tax Forum was the brainchild of a group of New England SALT leaders who, recognizing that a technically focused, in-depth SALT conference, was not offered in the New England area, decided to create the Northeast State & Local Tax Forum and bring together renown SALT experts to present on the latest "Hot Topics" in State Taxation.

Whether you're a SALT practitioner based in New England or anywhere in the country, you won't want to miss this innovative and thought provoking conference.

I know I'll be there!

More information on the Forum's agenda, speakers, venue and Advisory Committee can be found at this link to the Third Annual Northeast State & Local Tax Forum's brochure. Register for the Forum by detaching and mailing the registration tab found at the bottom of the brochure, or through the New Hampshire Society of CPA's seminar webpage.

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Updates and Additional Information:

Are you a member of another State CPA Society? Per discussions with the New Hampshire Society of CPAs, the sponsoring organization, members of any State CPA Society are entitled to the reduced New Hampshire CPA society rate.
Are you an attorney? Per discussions with the New Hampshire Society of CPAs, the Forum qualifies for both CLE and CPE. Contact the society at (603) 622-1999 for additional questions.
Considering an overnight stay? The Westford Regency Inn & Conference Center has a limited number of discounted rooms available. Contact the Inn at (978) 692-8200 for availability. Additional Westford hotels include the Residence Inn by Marriott, (978) 392-1407 (walking distance - across the street); and the Hampton Inn & Suites, (978) 392-1555 (1 mile away).

California's "Amazon Law" Drama Continues: An Update on Recent Developments

2011-09-16T20:37:00.000-04:00

Following a series of events that rival the drama, suspenseand negotiating seen on prime-time TV, it appears as though California’s“Amazon Law” may soon be no more! At least temporarily, that is! But before discussing the latest developments, let’s go back to where thisdrama began.

If you caught my original post on California’s “Amazon Law”, you’re probably not surprisedby the sequence of events that have transpired as this law was destined forcontroversy right from the start! As if I had crystal ball, my concluding thoughts in that post were, “like a well-written soap-opera, this storyis one that will go on for some time. Don’t touch that dial – you won’twant to miss what happens next in this California “Amazon Law” story.” (See my prior post, “California Enacts Explosive ‘Amazon Law’! ”)

And without a doubt, this drama has lived up itspreview!

What was it about California’s “Amazon Law” (ABX1 28) thatmade it prime for drama? On one hand, California’s law contained the samepresumptive-nexus, “web-linking” language found in the “Amazon Laws” enacted inother states. But ABX1 28 went beyond the typical web-linking language byexpanding the definition of a “retailer engaged in business” in California toinclude retailers that were members of a commonly-controlled/Californiacombined reporting group which also included corporate members that performedin-state services in connection with the tangible personal property to be soldby the out-of-state retailer. (e.g., design, development, fulfillment) Still,it wasn’t so much the language in ABX1 28 that fueled this drama, as what wasat stake for both California and Amazon.

So where did all the drama begin? First, ABX1 28became effective on July 1, 2011, almost as soon as Governor Brown signed itinto law. But even before the ink was dry on Governor Brown’s signature,Amazon had informed its 10,000 plus marketing affiliates (“Amazon Associates”)that it would terminate their contracts and would no longer compensate them forreferrals that came through web-links on their websites. For someCalifornia affiliates, this would translate into a huge loss of revenue, andCalifornia companies, such as Santa-Monica based Savings.com, began exploringthe possibility of relocating elsewhere. (“Savings.com: The California Internet Tax Law and UnintendedConsequences”, SocalTech.com, 6/30/11)

Next came Amazon’s (and Overstock’s) blatant refusal tocomply. Despite the new law’s expansive nexus language and immediateeffective date, both e-tailers thumbed their nose at it and refused to chargetheir California customers sales tax. California tax officials didn’tseem totally surprised. When asked about her thoughts on this development,Betty Yee, a California Board of Equalization member, was quoted as saying“They’re not intending to comply, by all indications. So, we’ll bill them atthe end of this quarter, based on estimates either they provide or we come up withfrom other data sources. Then, if they don’t come forward and pay, we’llconsider other courses of action”. (“Amazon, Overstock thumb nose at California tax”, SFGate,7/3/11)

Then just days after the new law’s effective date, it wasrevealed that Amazon was already planning its next course of action – a voterreferendum which would allow California voters to decide whether the law shouldbe repealed permanently! Amazon was given until September 27^th togather approximately 505,000 signatures – obtaining these would suspend the lawand make it unenforceable until after a ballot vote in June of 2012. Inthe weeks that followed the petition’s approval, Amazon was criticized forgathering signatures literally on the front steps of its brick-and-mortarcompetitors, as well as for pumping in more than $5 million towards its “MoreJobs Not Taxes” referendum. (“Amazon gathering anti-tax-law signatures outside retail stores”,LA Times, 8/6/11. “Amazon ups the ante in Internet sales tax fight”, LA Times,8/23/11)

As it became evident that Amazon’s petition efforts wouldprove successful (reports were that Amazon would have the 500,000 plussignatures well before the September 27^th deadline), andCalifornia began to realize the potential loss of the $200 million that hadbeen anticipated to materialize once Amazon and other on-line retailers wererequired to assume the role of sales tax collectors, tax legislators tookunusual and extreme action. They re-wrote the law under an “urgency”clause. If the urgency bill had passed, it would have trumped Amazon’sefforts towards a voter referendum – but the bill failed, by just five votes,to garner the two-thirds votes required for the bill to pass. (“In California, Amazon Pushes Hard to Kill a Tax”, New YorkTimes, 9/4/11)

But Amazon didn’t just sit back casually and wait for theoutcome. As it had done in other states, Amazon offered a negotiationpackage that included building distribution centers that would employ thousandsof Californians and dropping its referendum efforts in exchange for postponingthe new law’s sales tax collection requirement until 2014. WhenCalifornia’s Democratic legislators weren’t impressed, the offer was rejected.

AB 155 – A Compromise Solution

What happened next emphasizes just how important it was forboth California and Amazon to reach a compromise. In the verylast hour of the 2011 legislative session California legislators, byan overwhelming majority, voted in favor of AB 155, a compromise bill. The highlight of AB 155, which modifies California Revenue and Taxation CodeSec. 6203, is that it temporarily and retroactively repealsthe nexus expanding provisions of ABX1 28! How long this repeal will last– or should I say, how long before Amazon and other remote retailers that meetcertain thresholds have before they are required to start collecting sales tax– depends on several factors; 1) whether federal legislation,such as the Main Street Fairness Act now pending in Congress, is passed,2) when federal legislation is passed, and 3) whether Californiaelects to implement an enacted federal solution. More specifically:

If federal legislation authorizing the states to require a seller to collect taxes on sales of goods to in-state purchasers without regard to the location of the seller is enacted by July 31, 2012, and California does not, by September 14, 2012, elect to implement the federal legislation, the repeal of ABX1 28′s nexus expanding provisions will remain in effect until January 1, 2013.
However, if federal law is not enacted on or before July 31, 2012, the repeal of ABX1 28′s nexus expanding provisions will only remain in effect until September 15, 2012.

What this means is that Amazon could enjoy at least a oneyear reprieve from collecting California sales tax even if the companyre-commissions its in-state marketing affiliates immediately. Anothersignificant change introduced by AB 155 is that it increases the “$500,000 inCalifornia sales in the prior 12 month” threshold in ABX1 28 to $1,000.000. That is, once the repeal of ABX1 28 is lifted, remote retailers will bepresumed to have sales tax nexus by virtue of a commission based web-linkingarrangement if they made total sales of $1,000,000 or more of tangible personalproperty to California customers within the prior twelve months and paid morethan $10,000 in commissions to their California affiliates.

Sylvia’s Summation

The compromise solution isn’t a done deal yet. Thesuspense continues as AB 155 is currently on Governor Brown’s desk awaitinghis signature. While he’s publicly voiced his disappointment in the outcome(understandably, given California’s huge deficit and unemployment issues), thegeneral feeling is that he’ll approve the bill by the October 7th deadlinegiven the overwhelming support it has drawn, not just from the Californialegislature, but from Board of Equalization members, such as George Runner, who recently disclosed that not a singleout-of-state e-tailer had registered to collect sales tax since California’s“Amazon Law” was passed, and of course from Amazon, who considers thecompromise bill a “win-win” and has promised to support a federal solution. Buthere’s an interesting note, the pending federal solution currently in Congressis the Main Street Fairness legislation (S. 1452 and H.R. 2701) introduced by Congressional Democrats in July.Although a few Republicans, such as Senators Bob Corker (TN) and Luke Kenly(IN), have voiced their support of the Main Street Fairnesslegislation, no Republican has formally added their name tothe roster of supporters on either bill! Another note is that the Main StreetFairness legislation, even if passed, would only grant the authority to requireout-of-state retailers to charge sales tax to full-member Streamlined Sales & Use Tax Agreement (SSUTA)states. California is not currently one of the 21 SSUTAfull-member states. So at least at this time, the Main Street Fairness legislationwouldn’t apply in California. While these latest developments may havebeen the season finale – one thing is for sure, this drama isn’t done yet!

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The above post, "California's 'Amazon Law' Drama Continues: An Update on Recent Developments", is based on Sylvia Dion's SalesTaxSupport.com post, "Amazon Law (& Order). The California Season Summary...", published 9/14/2011. The content from her SalesTaxSupport.com post has been re-produced in this post for the benefit of the "Buzz's" readers.

See the side-bar for more about Sylvia's E-Commerce/Internet Sales Tax contributions to the SalesTaxSupport.com site.

A Tale of Two "Main Street Fairness" Blog Posts

2011-08-24T16:12:00.000-04:00

Congress has once again introduced federal legislation,which if passed, could require out-of-state retailers to charge and collectsales tax on sales to customers in certain states .

That right, on July 29, 2011, Congressional Democrats inboth the U.S. Senate and House of Representatives introduced“internet sales tax” legislation. In the Senate, S. 1452 was introduced by Senator Richard Durbin (Illinois). A companion bill,H.R. 2701 was introduced in the House by RepresentativeJohn Conyers (Michigan). Both bills are referred to by the same title,the “Main Street Fairness Act”.

By now you’ve certainly heard about the latest Federal“Main Street Fairness” legislation, as reporters, commentators, industrygroups, on-line retailers, bloggers, and just about everyone else has anopinion on it. This isn’t surprising as a major focus of the Main StreetFairness Act is the hotly debated issue of internet sales taxes. But thisisn’t a new debate! The issue of whether sales made over the internetshould be subject to a sales tax collection requirement has been widelydiscussed for at least a decade now, and this isn’t the first time similarlegislation has been introduced. Just over a year ago – on July 1, 2010 –similar legislation was introduced by former House Representative, WilliamDelahunt (H.R. 5660 – also titled the “Main Street FairnessAct”).

Proponents of internet sales tax legislation includebrick-and-mortar retailers whose “physical presence” in their state requiresthem to charge sales tax, and who argue, therefore, that this puts them at a disadvantageagainst certain on-line retailers who are able to sell the same merchandiseto the same customers “tax-free”. (But these salesaren’t “tax-free” at all, as customers may still owe a use tax.) Alsoin support are the state and local governments who lose billions in staterevenue dollars each year to uncollected use taxes. On the other side,on-line retailers have argued for years, that a 1992 U.S. Supreme Courtdecision, Quill Corp. v. North Dakota, does not require them tocharge tax on sales to customers in states in which they lack a physicalpresence. On-line retailers and other opponents have also maintained thatimposing a sales tax collection responsibility creates a disproportionateadministrative burden, especially on small on-line retailers who would need tonavigate a complex system of tax rates in order to properly collect sales taxfrom customers located in thousands of different jurisdictions.

I covered this latest federal-state development, in not onebut two separate blog posts. While both posts are similar in that they both provide an overview ofthe newest “Main Street Fairness” legislation, the two posts are alsodifferent. So instead of re-producingone or the other post (or both) as a “State and Local Tax ‘Buzz’ ” post, Iinvite you to read my two "Main Street Fairness" blog posts at the SalesTaxSupport.comand the AllBusiness.com sites, where these two posts were originally published. Here are direct links to these two posts:

“Main Street Fairness Act. Is SST the Silver Bullet?”,SalesTaxSupport.com, August 10, 2011

“Can the Main Street Fairness Act Stop the Sales-Tax Madness?”, AllBusiness.com, August 22, 2011

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See the side-bar formore about Sylvia's contributions to SalesTaxSupport.com and AllBusiness.com.

California Enacts Explosive “Amazon Law”!

2011-07-31T20:30:00.000-04:00

The Golden State becomes the newest state to enact an"Amazon Law"!

That’s right! On June 29^th, California’s GovernorBrown signed into law, what is quickly becoming the nation’s most explosive“Amazon Law" to date. By now you've certainly heard about thissignificant development in the taxation of internet sales as this story hasreceived California sized coverage.

And like an explosion that’s heard loud and clear,California’s “Amazon Law” has generated one huge reaction after another.

The rumblings started even before the law wasfinalized. Amazon had warned that it would sever its affiliate contractsif Governor Brown signed the "Amazon" legislation. The mega on-lineretailer didn't hesitate to carry out its threat in other states that haveenacted "Amazon Laws", such as Connecticut and Illinois.

But with California being the largest state thus far toenact an "Amazon Law," and the state with the largest number of “affiliates”,some wondered whether Amazon would actually follow through.

Amazon wasted absolutely no time! Even before the inkon Governor Brown's signature had dried, Amazon informed its thousands ofCalifornia marketing affiliates that it would terminate their contracts statingthat it opposed the bill "because it is unconstitutional andcounterproductive." Amazon added that "similar legislationin other states has led to job and income losses, and little, if any, new taxrevenue" and concluded that it deeply regretted that it "must takethis action."

California’s “Amazon Law” became effective almostimmediately - on July 1^st. And staying true to its positionthat the law is unconstitutional, Amazon refused to become a sales taxcollector for the state of California. (See "Amazon, Overstock thumbnose at California tax") Certainly disappointing news toCalifornia, as some estimates claim that Amazon’s sales to California customerscould translate to more than $80 million a year in California sales taxrevenues.

But the drama doesn't end here. Less than two weeks afterthe law become effective, Amazon had a petition for a voter referendum filed onits behalf. The petition was approved by California’s Attorney General, on MondayJuly 18^th. What this means is that if 505,000 signatures areobtained by September 27, 2011, California’s “Amazon Law” is suspended,and therefore unenforceable, until California voters decide onwhether the law should be repealed - voting which likely will not happen untilJune of 2012. (See comment on the referendum by Paul Misener,Amazon.com’s VP of Global Public Policy)

But enough with the Amazon soap-opera! California’s“Amazon Law” has implications for many non-Amazon sized companies. Solet’s explore the provisions of the California’s “Amazon Law”.

An Overview of California ABX1 28

California Assembly Bill No. 28 (ABX1 28) is an expansive nexus law that broadly amends thedefinition of a "retailer engaged in business” for California sales taxcollection purposes.

First, the new law expands the definition of a “retailerdoing engaged in business” in California to include any retailer that entersinto an agreement with a California "person" (resident or business)to compensate the California "person" a commission or othercompensation for referring potential purchasers to the retailer's site whetherby an Internet-based link or Internet website. This provision applies toretailers who, in the prior 12 months, made total sales of tangible personalproperty to California consumers in excess of $500,000 and paidmore than $10,000 in cumulative commissions to their California affiliates.

But ABX1 28 goes beyond the typical web-linking languageby further expanding the definition of a “retailer engaged in business” inCalifornia to include any retailer that is a member of a commonly-controlledgroup and a member of a California combined reporting group that includesanother member of the retailer’s commonly controlled group that, pursuant to anagreement with or in cooperation with the retailer, performs services in thisstate in connection with tangible personal property to be sold by the retailer,including, but not limited to, design and development of tangible personalproperty sold by the retailer, or the solicitation of sales of tangiblepersonal property on behalf of the retailer. In effect, this additionalnexus expanding language means that nexus is attributed to an out-of-stateretailer who is a connected to an in-state corporate parent, subsidiary orbrother/sister corporation (commonly-controlled/California combined groupmember) where the related company performs services, e.g., design,manufacturing, fulfillment, in connection with the tangible personal propertysold by the out-of-state retailer.

ABX1 28 also provides an exception for passive advertising,which it distinguishes from commission based web-linking referrals. Enteringthe state to purchase advertising, including advertisements to be delivered ontelevision, radio, in print or on the Internet does not createa sales tax collection duty provided the advertiser does not directly orindirectly solicit potential California customers. Finally, the new lawis a rebuttal presumptive nexus law, meaning that if the “retailer”can demonstrate that its in-state affiliates did not engage in referrals in thestate on behalf of the retailer that would satisfy the requirements of thecommerce clause of the U.S. Constitution the new law does not apply. (See my7/25/11 post, “Are "Amazon Laws" the "New Normal"? " for more on presumptive nexus)

California's “Amazon” Law Impacts Small andMedium-sized Businesses

While it's obvious that California’s "Amazon” Lawstargets large on-line retailers that lack a physical presence in their state,smaller non-California based retailers that meet the expanded"retailer" definition could find they're now required to charge salestax to California purchasers too. The use of affiliate marketing has grown rapidlyin the last few years, and companies of all sizes use California-basedmarketing affiliates to drive potential customers to their online stores. It'sthese smaller companies, these non-Amazons, that will be negatively impacted asthey now have to deal with charging California sales tax at varying ratesdepending on where in California their customer is located. (Also see California’sSpecial Notice “New Registration Requirements for Out-of-State Retailers”)

Sylvia's Summation

California’s new “Amazon Law" – explosive indeed! Even before the petition for a referendum was filed, there were questionssurrounding the law’s legality as ABX1 28 was passed only by a majority vote inboth houses. These questions arose as amendments made to the California’sConstitution last year, which expanded the types of charges considered to betax increases, might have required a two-thirds vote in both houses as opposedto a simple majority. Nonetheless, like a well-written soap-opera, thisstory is one that will go on for some time. Don’t touch that dial – youwon’t want to miss what happens next in this California “Amazon Law"story.

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The above post, "California Enacts Explosive "Amazon Law"! was written by Sylvia Dion and was also published on July 22,2011 in the E-Commerce / Internet Sales Tax blog of SalesTaxSupport.com, (see side-bar for more about Sylvia's SalesTaxSupport.com blog contributions.) It has been reproduced in its entirety as a "State and Local Tax 'Buzz' " post for the benefit of the "Buzz's" readers. Also see Sylvia's 7/5/2011 AllBusiness.com blog post, "California's 'Amazon Law' Elevates Internet Sales Tax War to New Level".

Are State "Amazon Laws" the "New Normal"?

2011-07-25T23:22:00.000-04:00

The “New Normal”, a phrase coined in 2008 to describethe then-new period of diminished investment returns and slower economic growththat seemed permanent after the financial crisis and recession of the lastdecade. Many have borrowed this term to describe what wasn’t expected ornormal in the past, but now is.

As I closely follow developments in the internet sales taxarea, I’ve often found myself thinking of this phrase and wondering whether“Amazon Laws” are the “new normal”; the expected approach tobe taken by states that seek to tax internet sales.

Amazon Laws and Presumptive Nexus, One in the Same

Before launching into a discussion on the status of these “Amazon Laws”, let’s explore how these laws came about and whythey’re referred to as such.

These laws, which seek to ensure that internet sales aretaxed, have been nicknamed "Amazon Laws" primarily after their mostvisible target, but also because Amazon.com (and Overstock.com) sued theState of New York after it passed the nation's first "AmazonLaw" in 2008. Legally, they're "presumptive nexus" laws; meaningthat if a "taxpayer" engages in the activity described in the law, a presumption ofnexus is deemed to exist. In the case of sales tax nexus, thispresumption permits a state to impose a sales tax collection requirementon an out-of-state seller. Other nicknames for these laws include“web-linking”, “click-through”, and “affiliate" nexus laws.

Why Have States Enacted “Amazon Laws”

If you’re a state tax professional, you’re familiarwith the 1992 U.S. Supreme Court decision that set the boundary for when astate can impose a collection requirement on an out-of-state ('remote")seller. This decision, Quill, involved a Delaware based mail ordercompany, Quill Corporation, and the State of North Dakota. (QuillCorp. v. North Dakota, 504 U.S. 298 (1992). An entirediscussion could be devoted to Quill, but in a nutshell, in this decision theSupreme Court held that in order for a state to impose a sales tax collectionrequirement on a company participating in interstate commerce within thestate's borders, "substantial nexus" must be shown. According to Quill, substantial nexus requires a physicalpresence (e.g., offices, employees) in the state.

As the U.S. Supreme Court has yet to overturn Quill, itremains good law. But fast forward almost twenty years, internet commercehas exploded and states have become frustrated with their inability to impose asales tax collection requirement on remote sellers with no physical presence intheir state and with the resulting loss of sales tax revenue. Rather thanacquiesce to Quill and focus their efforts on use tax enforcement, states haveenacted laws that stretch the nexus envelope by connecting in-state“affiliates” to out-of-state sellers. The basic premise behind these “AmazonLaws” is that a “contract” between a remote seller and an in-state “party” (abusiness or individual) who posts a web-link on their in-state website andreceives a commission for referrals via the web-link to the remote seller’son-line store creates a in-state presence for the remote seller and apresumption of nexus.

The State of the States - Which States HaveIntroduced, Vetoed, and Passed Amazon Legislation

In April of 2008, New York made history when it enacted thenation’s first presumptive nexus law. Since then, "Amazon"legislation has been introduced in almost half the states! In somestates, "Amazon" legislation was passed and vetoed inan earlier year only to see "Amazon" legislation re-introduced ina later year. Here's a recap of the state of the States.

In addition to New York, the following stateshave introduced "Amazon" type legislation sometime during thelast three years: Arkansas, Arizona, California, Colorado, Connecticut,Hawaii, Illinois, Iowa, Louisiana, Maryland, Massachusetts, Minnesota, Mississippi,Missouri, New Mexico, North Carolina, Rhode Island, South Dakota, Tennessee,Texas, Vermont and Virginia.

Of these states, seven states have enacted finalweb-linking, "Amazon Laws" including: New York (2008), NorthCarolina, Rhode Island (both in 2009), Arkansas, California, Connecticut, andIllinois (all in 2011). Also enacted was Colorado's Notification andReporting Law (2010). Although not a true "Amazon Law", it isoften mentioned in this category since its strict notification, reporting andpenalty regime, was seen as a mechanism to increase the collection of internetsales taxes by forcing remote retailers to register as sales tax collectors.

States in which "Amazon" legislation was vetoedinclude Hawaii (vetoed in 2009, re-introduced in 2011), California (vetoed in2009, passed in 2011), Texas (vetoed on 5/31/11, re-introduced as part ofbudget bill). And finally, states which have passed legislation in 2011that are simply awaiting Governor signature to become final include Louisianaand Vermont.

Sylvia's Summation

Those controversial “Amazon Laws”! Some studiesindicate that these laws have failed to generate the anticipated sales taxrevenues or to “level the playing field” between brick-and-mortar and on-lineretailers. Because their largest target, Amazon.com, has consistentlysevered its affiliate contracts in every "Amazon Law" state (exceptNew York), these laws have failed to force the mega-on line retailer toregister as a sales tax collector. They've also reduced corporate and personalincome tax collections as in-state affiliates have lost their Amazon commissionincome stream and have caused entire businesses to relocate to non-Amazon Lawstates. Because their constitutionality is questionable, they invitelitigation, and are currently being challenged in New York, Colorado andIllinois. Yet despite all this, states continue to plow ahead andintroduce "Amazon" legislation. The "New Normal"? Wewill have to wait and see.

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The above post is based on the Sylvia Dion's "Amazon Laws: The New Normal? Internet Sales Tax Law Update" blog post which was published on July 17, 2011 in the E-Commerce / Internet Sales Tax blog of SalesTaxSupport.com, (see side bar for more about Sylvia's SalesTaxSupport.com contributions.) It has been reproduced as a State and Local Tax "Buzz" post for the benefit of the "Buzz's" readers.

The State Franchise Tax: Another Business Tax to Consider

2011-06-25T10:00:00.000-04:00

Practical SALT Guidance: Last week I received an e-mail from a business associate. He's a member of a high-technology finance executive group which includesCFOs, finance VPs, and corporate controllers, many whom workfor high-tech start-ups. Along with his e-mail, he forwarded a fellowmember's question on state franchise taxes. The question stated that thisexecutive's company was incorporated in Delaware, had operations in Alabama,California, and Missouri, and a single employee working in Tennessee.

My colleague, being well aware of my state tax focus,forwarded the question to me, and I enthusiastically answered it.

I'm often asked about state franchise taxes; many companiesdon't understand exactly what a state franchise tax is and when a filing is required. As the executive who posed the question said, "In most smallstart-ups, you need a whole tax department to keep up with the reportingrequirements if the letter of the law were followed in each instance, whichisn't practical for many small companies." And like this executiveyou're probably grappled with whether your company is subject to a state'sfranchise tax.

But what exactly is a state franchise tax? Should your company be filing franchise tax returns?

Despite its name, a franchise tax is not atax on franchisees. A franchise tax is a business tax imposed for the privilegeof doing business in a state. Currently, about half the states imposea franchise tax, either in conjunction with, or in lieu of, an income tax.

Being incorporated in or meeting a state's definition of"doing business" in a state will generally require a franchise taxfiling. In tax-speak, we say that a taxpayer's activities in a state havecreated "nexus" for franchise tax purposes. While having anobvious physical presence in a state, such as owning or leasing a physicallocation or having employees who perform their job responsibilities in thestate, would certainly create franchise tax nexus, some less obvious activitiescould also be construed as "doing business". Hiring independentcontractors to fulfill a contract or perform a service, having in-state spotinventory for the convenience of customers even if the bulk of an order isfilled from out of state, soliciting sales even if the solicitation is byindependent sales representatives or agents, or entering a state to purchase,place or display advertising are all examples of activities that could beconsidered "doing business" for franchise tax purposes.

A franchise tax filing may be due even if a company has yetto begin any activity in a state if the company has filed for a Certificate ofAuthority with the Secretary of State. (Yet another, separate filing requirement.)

And although whatconstitutes "doing business" for franchise tax purposes can vary fromstate to state, as a general rule, if a company has sales tax nexus (isrequired to charge and remit sales tax), the company should be filing afranchise tax return. Finally, while it seems almost certain that even minimalactivity will create a franchise tax filing responsibility, because thefranchise tax is based on an "apportioned" capital, net worth orother non-income base, the amount of franchise tax that might ultimately be duecould be nominal.

Oh, and the question posed by the technology executive? Well, as you probably guessed, I advised him that the company had afranchise tax obligation in all five states.

Final Comments and Additional Resources:

Interested in a more in-depth discussion on state tax nexus? Here's link to "Navigating Nexus", an articlepublished in the November 2011 issue of the Journal of Accountancy. In thisarticle, my co-author and I discuss nexus for all types of business taxes andprovide a road map for addressing nexus concerns.

A state's franchise tax is generally administered by aState's Department of Revenue or Taxation. For more information aboutyour particular state's franchise tax filing requirements, visit your state'swebsite. You can link to your state's revenue agency website by visitingthe Federation of Tax Administrators state tax agency webpage.

In some states, the franchise tax is imposed only oncorporations, while in other states several types of legal entities may besubject to the franchise tax. For example, the Texas franchise tax isimposed on virtually all types of legal entities, including Subchapter C and Scorporations, partnerships, Limited Liability Companies, trusts, professional associations,etc. Be sure to check whether your entity needs to file.

Finally, though I've provided a quick overview on thisoft-overlooked business tax, state taxes can be complex! So, as I always say,be sure to consult your CPA, tax advisor, or state tax consultant.

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The above post, "The State Franchise Tax: Another Business Tax to Consider", was authored by Sylvia F. Dion,and also appeared in the June 23, 2011 issue of the Business Tax Advisorblog of AllBusiness.com (see side bar for more about her AllBusiness.composts.) It has been expanded upon and reproduced as a State and Local Tax "Buzz"post for the benefit of the "Buzz's" readers.

E-Commerce/Internet Sales Tax, An Important Topic for Today's Business

2011-06-24T09:43:00.006-04:00

Taxes on E-Commerce! Now this is an area that is really exploding! My guess is that by now you've heard all about the controversial "Amazon Laws", laws which have been enacted or are currently being legislated in several states. But just in case you've missed all the excitement, these presumptive nexus laws (what they're really called) have been passed by numerous states to require on-line retailers who lack a physical presence in their state, to collect sales tax on internet sales made to in-state purchasers. The news stories are everywhere, and generally focus on Amazon.com's resistance to comply with these new laws. By the way, these presumptive nexus laws were nicknamed "Amazon Laws" after their largest target, and also because Amazon.com (and Overstock.com) sued the State of New York after it passed the nation's first presumptive nexus law in 2008.

Which states have passed an Amazon Law, which states are repealing them, how Amazon is reacting to their passage, how these laws are impacting internet marketers and small and medium sized businesses, other approaches states are taking to circumvent nexus, the constitutionality of these Amazon Laws; these are all relevant and exciting topics to discuss. And if you've seen the results of my last poll question, "What SALT Topic Do You Want to Know More About", you know that the majority of survey participants (60%) said they wanted to know more about Sales Tax "Amazon Laws". (See side bar for poll questions and results) As I said, there's so much happening in the e-Commerce / Internet Tax area.

I've recently been asked to become the e-Commerce / Internet Tax contributor to a multi-contributor blog that is slated to be launched in the next few weeks by SalesTaxSupport.com. If you're not familiar with SalesTaxSupport.com, it's a free sales tax information website for small-medium business users. SalesTaxSupport.com works with State Department of Revenue offices across the country, as well as sales tax accountants, SALT practitioners, attorneys and software/solution providers to source helpful sales & use tax content. I'm very excited to be joining this collaboration and look forward to providing The State and Local Tax "Buzz" readers with links directly to my SalesTaxSupport.com contributions and similar posts. You can find out more about SalesTaxSupport.com by clicking on any of the links I've provided in this post.

Have You Noticed My Blog Roll? Other Tax Blogs to Visit

2011-06-15T21:38:00.007-04:00

Okay, not necessarily a State and Local Tax update, but hopefully valuable information non-the-less.

If you've read my "About the State and Local Tax 'Buzz' " page, you know that one of my goals for the "Buzz" blog is to provide helpful links and relevant information; I would like for this blog to be more of a State and Local Tax Resource, not just a typical blog. For those of you that are fellow bloggers, you know the effort involved in constantly maintaining and updating your blog. Yes, it can time consuming! But I love writing! I love being a State and Local Tax professional! And I love sharing the latest developments in State Taxes and helping others understand how these developments may impact their business.

On my right side-bar, you'll see a variety of information, including social media "share" icons (to allow you to share the blog), general information about and links to other sites I write for, my last 10 twitter updates, a little bit about myself, etc. Also in this right side-bar section is "My Blog List", a listing of various other blogs I follow. Whether you're a subscriber to the "The State Tax and Local Tax 'Buzz' " or just happened to make your way to the "Buzz" today, I invite you to review the blogs I've listed in "My Blog List". I'm following some great blogs, including the "TaxGirl" blog, written by Kelly Phillips Erb, who shares her humorous take on taxes for Forbes.com; "SALT Online", an excellent technical SALT blog produced by the SALT group at Sutherland, Ashbill and Brennan; fellow Texan Kay Bell's "Don't Mess With Taxes" blog, another lively tax blog covering a variety of tax issues; "Sales Tax Insight" blog, an excellent sales tax specific blog produced by Bellatoris Consulting; "Escheatable"blog, which focuses on unclaimed property issues - an important state tax topic that doesn't received adequate coverage; "TaxConnex Sales Tax" blog", which focuses on sales tax outsourcing solutions; "BNA State Tax" blog, another excellent technically focused blog produced by the premier tax research firm, BNA; "Dow Lohnes Price Tax" blog which focuses on a variety of state tax issues, and the "SalesTaxSupport" blog where I cover e-Commerce and Internet Sales Tax issues.

These are just a few of the excellent tax blogs on my blog list, there are more on the list, plus many more I have yet to discover. Do you, your firm, or your company have a blog which covers state tax issues? I'd love to hear about your blog and add it to my blog list. Primarily, I'm interesting in added more blogs that cover any area of State and Local Tax, e.g., income/franchise, sales & use tax, credits & incentives, state employment tax, abandoned/unclaimed property. As I mentioned before, one goal for the "Buzz" is that it becomes a resource filled, not just with new developments, but additional SALT resources.

Again, I encourage you to visit the blog sites I've listed. Notice that I've included a "snipet" of the most recent post in each blog to help readers identify which blogs peak their interest. And again, if you have SALT blog you'd like to have listed in my blog roll, please let me know by e-mailing directly at sylviadion@verizon.net or posting the link in a comment to this post. (Because I moderate all comments before posting, your blog may not be listed immediately.)

I look forward hearing about your blog!

Wondering How Sales Tax Applies to a Groupon? So Are Many of The States!

2011-06-10T22:47:00.005-04:00

Groupon, LivingSocial; those increasingly popular internet based social coupon programs. If you're a business launching a new product or service or just looking to increase your customer base, you've probably contemplated promoting your business through one of these programs. With Groupon being named one of the "fastest growing companies in Web history" by Forbes.com, it's certainly tempting to jump on this fast moving train. Why shouldn't your business benefit from this successful business model?

Your analysis has probably included looking through the Groupon, LivingSocial or other e-coupon program websites. You’ve probably read the success stories, as well as the reports criticizing these e-coupon programs as nothing more than expensive advertising.

But here's another issue to consider in your analysis. If the product or service on which you'll offer a discount is subject to sales tax, on what value should sales tax be calculated? Should sales tax be charged on the full value of the product or service? Or should sales tax be charged on the discounted value?

Before launching into how sales taxes might apply to a Groupon, here's a quick overview of how these programs work. If you're a Groupon or LivingSocial subscriber, you're familiar with the concept. Subscribers receive a "Daily Deal" e-mail in which discounted products and/or services are offered. Subscribers have a specified amount of time to “buy” into a deal. If a minimum number of people choose to "buy" before the offer expires, the deal becomes effective, or as Groupon says, "the deal is on." (I understand that LivingSocial differs slightly from Groupon in that a minimum number of buyers aren't necessary for a LivingSocial deal to go through.) For the retailer offering the Groupon, the "discount" is lost revenue; money spent that will hopefully bring in new business. The retailer also incurs a service fee which Groupon retains from the amount it receives from customers who pay Groupon directly via a credit card. Neither Groupon nor LivingSocial collect sales taxes on the transaction. (Groupon's Merchant Self-Service Agreement states that the merchant "shall be responsible for paying all sales and use taxes" due.)

But how does sales tax apply to a Groupon? What exactly is a Groupon? Is it a retailer's discount, a manufacturer's discount, a gift card equivalent or some type of hybrid? How a particular state views a Groupon could impact the amount of sales tax the state expects to be collected. In general, states treat a retailer's discount, such as one where a retailer creates its own coupon, as a "cash discount allowed and taken". Because the retailer incurs an economic loss, sales tax is calculated on the discounted sales price. In comparison, when a retailer applies a manufacturer's discount to a sale, most states require that sales tax be charged on the full sales price since ultimately the retailer will be reimbursed the discount amount by the manufacturer or another third party.

In some Groupon transactions, the consumer is pre-paying for a specific item or service, e.g., a specific piece of jewelry or a carpet cleaning service, while in others the consumer is buying a voucher that be used to purchase from the retailer’s offerings. In the former, an actual sale of the product or service has occurred (even if possession doesn’t take place until a later date), while the latter operates like a gift card as what has been purchased is a cash equivalent that will be used to purchase "something" but whether that "something" is taxable or not isn't known just yet. Some of my fellow SALT colleagues have suggested that a Groupon is neither a retailer's or manufacturer's discount or a gift card equivalent, but some type of hybrid, and have noted that it's difficult to apply existing law to a hybrid.

So where do the states stand on this issue? According to a recent article in Forbes.com, California, Florida and Illinois expect retailers to collect sales tax on the full (non-discounted) value of the product or service even though the retailer ultimately ends up with much less than the full sales price after taking into account the discount and Groupon's service fee. The article says that Texas, on the other hand, allows sales tax to be calculated on the discounted value, the amount actually paid, which implies that Texas is more apt to treat a Groupon like a retailer's discount. (See "Social Confusion: How Do Sales Taxes Apply to a Groupon?", by Janet Novak, Forbes.com, 2/18/11)

While authoring this piece, I alsoreached out to my own state, Massachusetts, after my research found limitedguidance. (See Note B below) In my query to the Massachusetts Rules andRegulations Bureau (the department within the Legal Division which interprets thestatute and authors regulations and administrative guidance explaining thelaw), I noted that the existing law and guidance do not appear to address howsales tax applies specifically to Groupon type arrangements. The Bureau's e-mail response tomy inquiry (See Note A below), confirmed that indeed, the Bureau had not issued guidance on Groupon type arrangements, stating that they haveyet to receive a fully documented ruling request as required by theMassachusetts administrativeprovisions. Their response added that without a formal rulingrequest detailing the specifics of these arrangements, the Rules andRegulations Bureau lacked sufficient information as to exactly how thesepromotions work and if they all work in the same way. Interestingly, despite this statement, the response alsostated that the Bureau does not believe that Groupon certificates qualify as retailer's or manufacturer's coupons, which do reduce the taxable sales price inaccordance with the Massachusetts salestax rules.

But what about the remaining states that impose a sales tax? Well, you can bet that Groupons are on the radar of many revenue hungry states. But despite an elevated interest in how participating retailers are handling sales tax, some state officials, such as Jeannine Koranda, a spokesperson for the Kansas Department of Revenue, agree that "it's an area where a lot of states are finding that technology is outpacing their laws." (See "Kansas Department of Revenue monitoring sales tax collections by retailers using Groupon", by Christine Metz, LJWorld.com, 2/27/11) Brad Malone of New York's Department of Taxation and Finance, voices a similar concern in the Forbes article, stating that the current New York regulations on the taxation of discounted merchandise do not seem to cover the Groupon model. And, as just noted, Massachusettshas yet to state an official position on how the Massachusetts sales tax ruleson discounts apply to Groupon type arrangements.

Sylvia's Summation: I said earlier that how sales tax applies to a Groupon should be part of the analysis of whether a Groupon makes sense for your business. This is where I'd normally caution readers to consult their tax advisor, SALT consultant, CPA, or their particular State Tax Department. But the states' positions on this issue are largely undefined at this point, making this a question that most states can't offer an absolute answer to. In some ways this dilemma is a "doomed if you don't" or "doomed if you do". A retailer who collects sales tax on the discounted value might end up under collecting tax and be required to cough up the additional sales tax (on audit) if his state takes the position that the full value should've been taxed. But collecting sales tax on the full value could leave the retailer with disgruntled customers who might not appreciate that their sales tax bill is higher than they expected, especially if they're in a high sales tax state. Not a positive thing when you're trying to bring in new customers. As your friendly state tax blogger, I'll keep you posted as developments unfold in this newest e-commerce state tax dilemma. In the meantime, let me know your thoughts. Have you used a Groupon lately? Did the retailer charge you tax on the discounted or full price? Did the retailer allow you to apply your Groupon voucher towards the sales tax?

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The above is based on my 5/31/11 AllBusiness.com post, "Wondering How Sales Tax Applies to a Groupon? So Are Many of the States", which I wrote as a contribution to the Business Tax Advisor blog of AllBusiness.com (see side bar for more on my AllBusiness.com posts). It has been expanded upon (specifically, the entire commentary on Massachusetts) and re-produced a State and Local Tax "Buzz" post for the benefit of the "Buzz's" readers.

Twitter's San Francisco Payroll Tax 'Deal' and Why Stock Option Compensation Matters

2011-04-30T22:18:00.027-04:00

Last week, San Francisco’s Board of Supervisors voted to approve the Mid-Market Payroll Tax Exclusion, legislation which will give Twitter a tax “break” for moving into San Francisco's Mid-Market neighborhood, an area of the city with a less than stellar reputation and one which San Francisco hopes to revitalize.

How will this exemption work for Twitter and why was it so important for Twitter to secure it?

This legislation, which came after months of discussion between Twitter, San Francisco’s mayor, and the city’s Board of Supervisors, was a response to Twitter’s announcement that it was evaluating whether to stay (and expand) in San Francisco or relocate outside of the city. Moving out of San Francisco, Twitter had determined, could save the company a substantial amount especially if the Company were to go public. Key to Twitter’s decision, was the impact of San Francisco’s Payroll Expense Tax. This tax is imposed on all companies with payroll in excess of $250,000, and is calculated at 1.5% of a company’s payroll expense, which, in addition to salaries, wages and similar forms of compensation, includes the compensation element from stock option transactions. Incidentally, the Payroll Expense Tax, which was originally enacted in the 1970’s, was modified in 2008 to include gains on stock option exercises by non-employees. This was a response to what had become a common practice (especially by high-tech start-ups) of awarding stock options to consultants, investment bankers, and other non-employees, either as payment for services or to “sweeten” their portion of the deal by giving these non-employees a piece of equity. And although an entire discussion on stock options, and other forms of equity compensation is a great topic for a future post (and one I plan to cover), for today I’ll give a high-level summary of how “compensation” from stock options transactions is triggered and why the exemption was so important to Twitter.

How Stock Option Exercises Create Compensation

There are two types of stock options, Incentive Stock Options (ISO’s), and Non-qualified Stock Options (NQSO’s). One reason the distinction is important is for determining whether and when exercising an option creates compensation. For NQSO’s (generally awarded to rank-and-file employees and non-employees) compensation is triggered on the date an option is exercised and is calculated as the difference between the market value of the stock on the date of exercise and the “strike” price (the price the employee must pay to exercise as determined by the option grant). IRS rules require that this "bargain element" be reported as W-2 compensation for employees or on Form 1099 for non-employees. ISO’s, which receive beneficial treatment but must meet stricter IRS rules in order to retain their ISO treatment, do not generally trigger compensation when they are exercised. Compensation is triggered only if there is a “disqualifying disposition” of the stock acquired through the ISO exercise, which occurs when the stock is sold or disposed of within 1 year from the date of exercise or 2 years from the date of grant. When a "disqualifying disposition" of an ISO share occurs, the "bargain element" is treated as compensation.

The Payroll Tax "Deal", How Will Twitter Benefit

Now, it's pretty common knowledge that Twitter plans to go public. Once this happens, the amount of compensation from NQSO exercises and ISO disqualifying dispositions will likely be HUGE! Understandably, Twitter had much to gain from the passage of the Mid-Market Payroll Tax Exclusion. So what exactly, was included in the "Twitter deal"? Will Twitter be totally exempt from paying the city’s Payroll Expense Tax. First of all, before benefitting from the exemption, Twitter must relocate to a zone in the Central Market Street and Tenderloin Area (see Twitter’s blogpost announcing their 2012 move). Secondly, the exclusion will only apply for a six year period and will only exclude “new payroll”. That is, during the six year period that the exclusion remains in effect, Twitter will still pay a tax based on it's base year payroll expense.

Sylvia's Summation: There you have it, the “Twitter tax break”. But this exclusion isn't just for Twitter, it's available to any company that relocates to the Mid-Market area. Already there's been talk that Zynga and Yelp, two more pre-IPO companies, are interested in getting the same tax break. And, while the media’s focus has been on yet another corporate taxpayer getting an underserved tax break, tax “deals” occur all over the country all the time, aren’t just for big or well-known companies, and often include “clawback” provisions.

The above post, "Twitter's San Francisco Payroll Tax 'Deal' and Why Stock Option Compensation Matters" was authored by Sylvia F. Dion, and also appeared in the April 30, 2011 issue of the Business Tax Advisor blog of AllBusiness.com (see side bar for more about her AllBusiness.com posts.) It has been reproduced in part as a State and Local Tax "Buzz" posts for the benefit of the "Buzz's" readers.

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Massachusetts Cities and Towns Given Authority to Enact Local Amnesty

2011-03-29T18:16:00.038-04:00

Local Tax Developments, Massachusetts City and Town Amnesty: In July of 2010, the Massachusetts legislature passed H. 4877, the Municipal Relief Act, which granted Massachusetts cities and towns the authority to adopt and implement a temporary municipal amnesty program during the state’s fiscal year ending June 30, 2011.

State Tax Amnesty, An Overview

Tax amnesty programs have been big news at the state level for during the last few years. During 2009 through the end of 2010, more than half of the states (plus the city of Philadelphia and the District of Columbia) legislated and implemented some type of amnesty program. (See my August 23, 2010 “Buzz” post, “State Tax Amnesty: An Opportunity for Taxpayers to Pay Delinquent State Taxes, What Taxpayers Need to Know”) Massachusetts, in particular, enacted and held amnesties in both 2009 and 2010. The Commonwealth’s three month 2009 amnesty was geared specifically towards individuals with outstanding individual liabilities. In 2010, Massachusetts implemented a second amnesty which focused on business taxpayers with certain categories of outstanding business liabilities. (See my April 1, 2010 “Buzz” post, “Massachusetts Limited Amnesty Program for Taxpayers with Existing Business Tax Liabilities Begins April 1, 2010”) According to the Department of Revenue’s 2010 amnesty report, the Commonwealth collected $32.6 million in outstanding liabilities in the three month period from April 1, through June 30, 2010; almost $13 million more than was projected to be collected. During the last two years, State amnesties have proven to be a successful method to raise much needed revenues quickly. Therefore, it’s not surprising that municipal governments are now being given the same opportunities to collect local tax delinquencies and raise municipal revenues quickly too.

Massachusetts Municipal Tax Amnesty Guidelines

The Massachusetts Municipal Tax Amnesty will work similarly to the state program in that it must be enacted by the municipality's legislative body. This body will also be responsible for policy decisions about the scope of its city or town amnesty program. In general, a municipal program can’t waive payment of the actual unpaid local taxes but can provide for a waiver of all or a uniform percentage of interest, collection costs and penalties owed on the specified delinquent taxes. Per the municipality’s choice, the local amnesty can apply to both real and personal property delinquencies, motor vehicle excise and/or boat excise tax delinquencies. The enacting municipalities also have a lot of leeway on how to structure their particular amnesty. For instance, they can choose to have the amnesty apply to only certain categories of delinquencies (of those listed), can decide which years will be covered under the amnesty, etc. However, the one aspect that must be consistent is that the application of the waiver of accrued interest, collection costs and penalties must be the same percentage for all types of the tax liabilities included in the program.

Amnesties are generally a win-win for both the government and the taxpayer. Although taxpayers will still be liable for the actual tax or excise they owe, the opportunity to have interest, collection costs and penalties waived can be significant as sometimes these “other costs” can amount to even more than the actual liability itself, as can occur when a liability has been outstanding for many years. Participating in an amnesty and paying back taxes also alleviates the significant consequences that could occur if the local government decides to pursue a delinquent taxpayer, e.g., liens on property and even civil or criminal prosecution. On the downside, amnesties generally only run for short time period. For instance, the City of Dedham just completed its Municipal Amnesty program, which applied only to real estate tax delinquencies and ran only for the two month period from January 1 through February 28, 2011. As any municipal amnesty program must be completed by June 30, 2011, any city or town that enacts a program now will be limited to no more than three months. Taxpayers may not have enough time to fully evaluate whether they want to participate in a municipal amnesty program, or worse, may not have the funds to pay their outstanding liability by the close of the amnesty. It is also extremely unusual for a state or local government to allow a delinquent taxpayer to enter into an installment plan to pay off an amnesty liability as a primary goal of most amnesties is to quickly raise revenues.

Sylvia's Summation

Taxpayers with outstanding local tax delinquencies may want to considering coming forward during a municipal amnesty period. Taxpayers should first confirm with their city or town officials whether their municipality will be enacting an amnesty and which local taxes or excise fees will be covered. Taxpayers with significant local delinquencies should consult their CPA or personal tax advisor to completely understand the requirements and benefits of their municipal amnesty program.

Additional Resources and Other Information

Massachusetts DOR Informational Guideline Release (IGR) 10-208, "Municipal Tax Amnesty Program"
Article, "Amnesty Offered on Late Taxes, In Forgiving Towns Hope for a Win-Win" March 27, 2011 (see my quotes in this Boston Globe article by Johanna Seltz)
Massachusetts H. 4877, An Act Relative to Municipal Relief

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"Multistate Tax Considerations for S Corporations", An Article from the Journal of Accountancy

2011-03-15T18:14:00.003-04:00

Practical SALT Considerations, Article Link: This article, published in the February 2011 issue of the Journal of Accountancy, provides a excellent, concise overview of multi-state issues faced by S Corporations and their shareholders. Note that many of the same multi-state issues discussed in this article also apply to other entities structured as flow through entities, such as partnerships and limited liability companies. Read the entire article at: Multistate Tax Considerations for S Corporations

Commentary: In addition to being a full-time State & Local Tax consultant, I'm a part-time tax writer. Not only do I author posts for the "Buzz", I'm a regular contributor to the "Business Tax Advisor" blog of AllBusiness.com. (See side bar "Read My Monthly Posts at AllBusiness.com"). I've also co-authored articles on State & Local Tax issues and developments (see my "Publications and Presentations" tab), will periodically write for other websites and am often called upon to provide comments to journalists reporting on tax issues. My role of journalist and reporter requires me to research, read and scrutinize an inordinate amount of information. I often come across articles and contributions that are excellent, informative and accurate. I also often come across writings that are slanted, inaccurate, and so misleading that they are sadly humorous. I've recently decided to start sharing links to some of the best (and worst) State & Local tax articles and writings that I encounter. Look for these periodically links, along with my short intro or additional explanation.

Voluntary Disclosure Programs: Another Avenue for Resolving State Tax Delinquencies

2011-02-15T20:09:00.067-05:00

Practical SALT Guidance, State Tax Controversy Options: In the past, I’ve written about and explained State Tax Amnesty programs. (See my August 23, 2010 "Buzz" post, "State Tax Amnesty: An Opportunity for Taxpayers to Pay Delinquent Taxes, What Taxpayers Need to Know") State tax amnesties have been very popular in the last few years as a means to quickly raise badly needed state revenues within a short period. Not surprisingly, state tax amnesties have historically occurred in response to recessionary periods. As in explained in my State Tax Amnesty post, a state tax amnesty is a limited-time program approved by a state’s legislature and administered by a state’s Department of Revenue. During an amnesty period, taxpayers can come forward voluntarily and satisfy their delinquent tax obligations in exchange for certain benefits, such as an abatement of penalties and possibly interest.

But what if you determine that you or your business owes state taxes and your state’s amnesty program has already passed?

Unless your state legislature has introduced or passed a bill approving a future amnesty, it’s nearly impossible to predict when your state will institute another amnesty. State tax amnesty programs generally do not occur according to any specific schedule and it could be several years before another amnesty is available. In 2010, the City of Philadelphia announced its first tax amnesty in nearly 25 years! Both Illinois’ and Florida’s 2010 amnesties came seven years after their previous ones. And waiting for the next amnesty to come along isn’t the best idea, as the longer you sit on an unresolved state tax delinquency, the worse the consequences of not resolving it may become. As I also explained in my State Tax Amnesty post, the requirements to participate in a state amnesty vary from state to state. Therefore, even if an amnesty program will be available in your state in the near future, it’s possible that you or your business might not be eligible to participate.

However, there is another avenue available to taxpayers to assist them in resolving their state tax delinquencies. A state’s Voluntary Disclosure Program.

These programs, which are generally administered by a voluntary disclosure unit or designated group within a state's Department of Revenue, exist in virtually every state and are generally on-going (available all the time). The main objective of a voluntary disclosure program is very similar to that of an amnesty program; these programs encourages delinquent taxpayers to come forward and file and pay their delinquent state taxes. Participating in a voluntary disclosure program generally requires a taxpayer who meets the eligibility requirements to enter into a Voluntary Disclosure Agreement (“VDA”) with the state. In exchange for the taxpayer’s voluntary disclosure, the state agrees to grant the taxpayer certain benefits and protections. Note that the level of formality of the programs varies from state to state. For instance, while many states do issue a formal binding agreement (an actual legal contract) which is signed by a state official and the taxpayer, other states simply send out a letter communicating to the taxpayer they have been accepted into the program and listing what the taxpayer must provide and by when.

For taxpayers, the overall primary benefit to entering into a VDA is that it provides an opportunity to resolve outstanding tax delinquencies fully and completely under beneficial terms. Although the exact benefits offered under the various voluntary disclosure programs vary from state to state and taxpayer to taxpayer, in general, the most significant benefits include a limited “look-back” period and a waiver of all applicable penalties. The “look-back” period refers to the number of prior years or periods a taxpayer will be required to report and pay tax on. For example, a three or four year look-back period is common for income tax and sales & use tax voluntary disclosures (although sales & use tax look-back periods are often expressed in months, e.g., 36 or 48 months instead of 3 or 4 years). A taxpayer who has tax delinquencies which relate to years prior to the a state's VD lookback period would be relieved from filing (and paying the associated tax) for all those prior years. This could represent a significant cash savings to a taxpayer who owes back taxes for many years.

Another significant benefit offered through most voluntary disclosure programs is a full abatement of penalties. Receiving an abatement of penalties can also add up to significant cash savings, as accrued penalties can be substantial when tax liabilities remain unpaid for many years. Interest on unpaid taxes, however, is almost always required by the various state statutes and generally isn't abated. (Texas is an example of one state that offers a waiver of interest, as long as the voluntary disclosure does not involve a trustee type tax, e.g., sales tax.)

In addition to the limited look-back period and the abatement of penalties (and possibly interest), one of the most significant benefits of resolving tax delinquencies through the state’s voluntary disclosure program is the ability to request participation in the program on an anonymous basis through a taxpayer representative (a CPA, Attorney, or Tax Advisor) and to negotiate preferred terms before the taxpayer’s identity is disclosed to the state.

The first step in the voluntary disclosure process in most states involves a phone call or a letter to the voluntary disclosure unit or designated contact. Because most states do not require the actual name of the taxpayer during the initial communication with the state, a taxpayer’s representative can ferret out whether the taxpayer will meets the program’s eligibility requirements and might even be able to obtain a general idea of the benefits the taxpayer might receive.

Despite the many benefits of voluntary disclosure, here are a few potential disadvantages or pitfalls to keep in mind. One of the main reasons a state offers voluntary disclosure, in addition to collecting undisclosed taxes that might have never been recovered by the state or that might have only been recovered through extensive collection efforts, is that the program brings new taxpayers onto the state’s tax rolls. This is because a typical eligibility requirement of many voluntary disclosure programs is that the taxpayer is voluntarily disclosing taxes that the taxpayer is not already registered for. (Here again, there are always exceptions to the general rule. Minnesota is one example of a state that allows voluntary disclosure even for registered taxpayers through its Track B program.) To complicate matters, a state may require that the taxpayer either come forward for every type of state tax (income, sale & use, etc.) that the taxpayer owes or that the taxpayer make an affirmative statement that they do not owe other types of tax. However, a taxpayer might not even realize that he owes other state taxes. This is because the various state “nexus” rules are complicated and a taxpayer may not realize that his activities in a state may have created a filing obligation and tax liability. Additionally, once a state has accepted the taxpayer’s request to participate in the voluntary disclosure program and has prepared the VDA for signature, the state may require completion of additional documents such as a nexus questionnaire, registration forms, or other documents. The responses on these other forms may be scrutinized by the state, and could, inadvertently subject the taxpayer to other taxes. Unfortunately, a taxpayer could end up owing other state taxes which they would need to file and pay outside of the protection offered through a VDA. Finally, some states, in particular those with structured programs, require that the various steps in the voluntary disclosure process be completed within short time-frames. For instance, once a taxpayer has come forward, been accepted into the program, and disclosed their identity, they may only have 30 or 60 days to prepare and file all delinquent returns and pay all monies owed to the state. Because the taxpayer has entered into a legal contract with the state, failing to comply with all the requirements of a VDA within the state’s timeframe could cause the VDA to become null and void, thereby extinguishing all the benefits and protections to the taxpayer.

Sylvia's Summation

Similar to a state tax amnesty program, a state voluntary disclosure program allows delinquent taxpayers an avenue to come forward voluntarily and pay delinquent taxes. These programs are available in practically every state, but many of the specifics, such as the requirements to participate, the benefits of participating, the process to fulfill, and the time line for completing the process vary from state to state. Even within the same state, the benefits could vary from taxpayer to taxpayer as the voluntary disclosure process allows negotiation to occur. Finally, unlike tax amnesty programs, which only occur periodically, voluntary disclosure are on-going and allow taxpayers an opportunity to resolve their delinquencies on an anonymous basis through a taxpayer representative. If you or your business are concerned about unresolved state tax delinquencies, a discussion with your CPA, attorney or tax advisor regarding your state’s voluntary disclosure program could prove to be very beneficial. I also have extensive experience in assisting companies in resolving their state tax delinquencies through the voluntary disclosure process.

Additional Resources

The Multistate Tax Commission’s (MTC) Multi-state Voluntary Disclosure Program: Taxpayers (or their representatives) can utilize the services of the MTC to complete the voluntary disclosure process. This can be particularly helpful when a taxpayer discovers that he owes state taxes in a numerous state. Visit the MTC website for more information.

“Navigating Nexus”, Journal of Accountancy, November 2010 issue: In this article, my co-author and I provide an extensive overview of state nexus, including what activities may create nexus in a state, and what businesses need to consider.

“Contacting Your State Tax Department; Quick Links for State Tax Forms, News and Information”, AllBusiness.com blogpost, September 8, 2010. This post contains a weblink to the Department of Revenue (Taxation) for all fifty states and the District of Columbia. Find out more about your particular state’s voluntary disclosure program by visiting your state’s Department of Revenue website.

The above post, "Voluntary Disclosure Programs: Another Avenue for Resolving State Tax Delinquencies" was authored by Sylvia F. Dion, and also appeared in the January 30, 2011 issue of the Business Tax Advisor blog of AllBusiness.com (see side bar for more about her AllBusiness.com posts.) It has been reproduced in part as a State and Local Tax "Buzz" posts for the benefit of the "Buzz's" readers.

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Massachusetts Department of Revenue Offers an Opportunity to Withdraw “Binding” 2009 Worldwide or Affiliated Group Election

2011-01-30T17:59:00.017-05:00

Administrative Guidance, Filing Elections: On January 20, 2011, the Massachusetts Department of Revenue (“the Department”) issued Department of Revenue Directive 11-1: Limited Time Allowance for Withdrawal of Election Made in Connection with 2009 Combined Report, in response to the Department’s belief that some Massachusetts combined groups may have erroneously made either a worldwide or Massachusetts affiliated group election on their 2009 Massachusetts combined report. Directive 11-1 is significant in that it allows any Massachusetts combined group that made either election an opportunity to withdraw their election by March 15, 2011, provided they complete their withdrawal in a timely manner and in accordance with the procedures laid out in Directive 11-1.

Brief Overview of Worldwide and Massachusetts Affiliated Group Elections

Under the Massachusetts combined reporting law, which become effective for tax years beginning on or after January 1, 2009, unitary groups subject to combination have the option of making one of two mutually exclusive filing elections to determine their Massachusetts taxpayer group. A taxpayer group may make an election to file either on a worldwide basis, or may elect to “limit” its “water’s-edge” group by making the Massachusetts affiliated group election. Absent an election, a Massachusetts unitary group must file on the default “water’s-edge” basis, which includes members that:

are incorporated or formed in any of the 50 United States, the District of Columbia, or in a U.S. territory or possession;
are incorporated or formed anywhere and that have property, payroll, and sales factors within the United States that average at least 20%; or
earn more than 20% of their income, directly or indirectly, from intangible property or service-related activities, the costs of which generally are deductible for federal income tax purposes, whether currently or over a period of time, against the business income of other members of the group.

A combined group which makes a Massachusetts affiliated group election is required to include in its Massachusetts combined group, any corporation which meets the 50% voting control required for Massachusetts combination, regardless of whether such corporation is engaged in unitary business operations with other combined group members, and any corporation that meets the water-edge definition above. Because Massachusetts uses a lower 50% voting control (as opposed to the IRS’ 80% voting control or value) affiliation requirement and includes foreign entities that meet the “water’s-edge” definition regardless of which of the three filing methods is chosen, it is very possible for a Massachusetts affiliated group to include corporations which might not be included in the same taxpayer’s federal consolidated group. Additionally, the Massachusetts combined reporting law statutorily excludes certain types of corporations, such as Massachusetts Security Corporations and captive insurance companies, from inclusion in any combined group even if these corporations are unitary and meet the 50% control requirement. Therefore statutorily "excluded" corporations can never be members of any Massachusetts affiliated group even if they might otherwise be members of the same federal consolidated group.

Both the worldwide election and the Massachusetts affiliated group election must be made on an original, timely filed return by the principal reporting corporation in the first taxable year in which the group wishes the election to be effective and remains in effect for the next nine taxable years. Either election can be made in any taxable year which begins on or after January 1, 2009.

Combined Reporting Transition Issues

When Massachusetts adopted mandatory combined reporting in 2008 it represented a significant shift from Massachusetts’ historical separate reporting structure. The new law contained complex, and in some areas ambiguous, rules. For instance, the combined reporting law uses a Finnigan-style (but not a true Finnigan) apportionment, requires that corporations subject to different apportionment rules or tax rates be included in the same combined report if they meet the rules for combination, and contains complex rules relating to the use of and adjustments to pre-combination net operating losses. Anyone who has reviewed the 75 page combined reporting regulation that interprets the statute will likely agree that Massachusetts’ “new” combined reporting law is indeed complex. It was not surprising, therefore, that the 2009 taxable year, the first year of implementation, proved to be challenging.

Recognizing that taxpayers would likely be challenged in the first year of filing, the Department announced in Directive 10-1, that it would grant a seven month extension, one month longer than its normal six month extension, for any combined group taxpayer subject to filing Form 355U. However, as the October 15th deadline approached, the Department acknowledged in taxpayer and practitioner forums, that taxpayers where still struggling with implementation and tax return software issues.

Directive 11-1 represents the Department’s latest response to first year implementation issues, specifically to the Department’s concern, based on communications with taxpayers and taxpayer representatives, that some Massachusetts combined groups had erroneously made one of the two available elections on their 2009 combined report. The Directive states that "the Department believes that some taxpayers inadvertently made one of the two elections because taxpayers: (1) mistakenly believed that they were required to pick either the affiliated group election or the worldwide election; (2) in the instance of the combined groups that made the Massachusetts affiliated group election, they did not understand the consequences of making the affiliated group election; and/or (3) were forced involuntarily to make one of the two elections by the tax software they were using." (Note, the Department also disclosed in a subsequent practitioner forum, that a disproportionate number, more than 30%, of combined reports filed had elected affiliated group status.)

The Directive further acknowledges that Question 2 and Question 3 of the 2009 Form 355U were potentially misleading. Specifically, Question 2, which read “Are you making or subject to an affiliated group election?” and Question 3, which read “Are your making or subject to a worldwide election?”, may have lead some taxpayers to believe the they were required to make an affirmative selection in either box 2 or 3 since the 2009 Form 355U failed to include a question or box that would specifically indicate a preference that neither election apply. Additionally, as all combined groups were required to file their 2009 combined report electronically, tax software glitches may have forced certain taxpayers to choose one of the two elections in order to complete their filing.

Procedure for Withdrawing Either Election

Any combined group which filed its 2009 combined report in a timely manner on or before January 31, 2011, and which made an election to file on a worldwide basis by checking box 2 on Form 355U or on an affiliated group basis, by checking box 3 on Form 355U, may file an on-line application to withdraw its election. The on-line application, which is available through the Department’s Webfile for Business, must be filed no later than March 15, 2011 by the combined group’s principal reporting corporation. There is no requirement that a combined group filing the on-line application justify their withdrawal by offering an explanation for their prior erroneous election.

Additionally, in the event that the withdrawal causes a change in the combined group’s 2009 Massachusetts tax liability, additional action is required as follows:

Where the withdrawal of the election results in an increase in the combined group’s 2009 tax liability, the taxpayer is also required to electronically file an amended 2009 combined report and remit any additional tax plus statutory interest. Penalties that might have otherwise been due on the underpayment of the tax liability, are not due and will not be assessed.
Alternatively, if the withdrawal of the election results in a decrease in the combined group’s 2009 tax liability and the taxpayer is due a refund, the combined group must manually file a completed Form CA-6, Application for Abatement/Amended Return, requesting the refund.

In either situation, the taxpayer must file its electronic amended return, or its manual claim for refund, by March 15, 2011. Failing to file the on-line withdrawal application, an amended Form 355U or Form CA-6 by March 15, 2011 will cause the withdrawal request to not be recognized. The Directive states that any taxpayer who has difficulty filing a combined report (including the requisite amended report) should contact the Department’s Customer Service Bureau at (617) 887-MDOR (6367).

Finally, as the withdrawal does not constitute a revocation or termination of an election, the combined reporting rules regarding the length of time required before a new election can be made do not apply. Therefore a combined group that withdraws its affiliated group or worldwide election in accordance with Directive 11-1, may make either election on its 2010 combined report or in any subsequent taxable year report.

Sylvia's Summation

More than two years ago, my former colleagues and I, in reporting on the Massachusetts combined reporting law, prophesized that the “new” law, which represented “a dramatic change to the Massachusetts corporate taxation scheme, would produce significant uncertainty for taxpayers that historically have not been concerned with the combined unitary approach in Massachusetts.” As evidenced by the Department’s 75 page combined reporting regulation and the latest transition issue, fully understanding and implementing Massachusetts’ combined reporting law may take more time.

I do commend the Department’s actions, however, in first recognizing and acknowledging that taxpayers may have inadvertently made one of the two elections and in secondly providing a procedure to withdraw their 2009 election with minimal consequences. Finally, because the Department is not requiring a reason or justification for the withdrawal, Directive 11-1 presents an opportunity for any combined group that made either election on its timely filed 2009 combined report to re-evaluate their election. Careful consideration should be made prior to making either election, since once made, both elections remain in effect for a full ten year period. Additionally, the affiliated group election, in particular, imposes additional conditions such as the requirement that all combined group income be treated as apportionable, even if such income would otherwise be allocable. Finally, taxpayers may also have better information now (as opposed to when they filed their 2009 combined reports) regarding the long-term impact of their election and, therefore, may want to evaluate whether to withdraw their election, even if their election was intentional and not inadvertent.

For more on Massachusetts’ combined reporting law, Directive 11-1, and the Massachusetts Form 355U, see the following:

Article: “An Analysis of Massachusetts’ Combined Reporting Tax Law: Regime Creates Dubious Discretion, Promises Uncertainty”, BNA Tax Management Multistate Tax Report, by Sylvia Dion, Giles Sutton and Jamie Yesnowitz, September 26, 2008

Article: “Massachusetts Issues Proposed Regulation on Combined Reporting”, Journal of State Taxation, by Sylvia Dion, Giles Sutton and Jamie Yesnowitz, March - April 2009 edition

Massachusetts’ Combined Reporting Regulation: 830 CMR 63.32B.2 Combined Reporting Income

DOR Directive 10-5: Further Guidance Regarding the Application of the Combined Reporting Regulation, 830 CMR 63.32B.2

DOR Directive 11-1: Limited Time Allowance for Withdrawal of Election Made in Connection with 2009 Combined Report

The DOR’s Webfile for Business webpage.

Massachusetts Form 355U, Income Excise for Taxpayers Subject to Combined Reporting

Instructions to Massachusetts Form 355U Instructions

Interested in learning more about the Massachusetts combined reporting law? Look for my upcoming Massachusetts Combined Reporting Law series in which I'll explain several aspects of the law in separate posts.

News Flash: Illinois Enacts Significant Tax Rate Increases

2011-01-25T21:33:00.053-05:00

Legislative Update: As states continue to grapple with revenue shortfalls, at least one state has taken radical, and not so taxpayer friendly, steps to help repair its ailing fiscal situation. On January, 13, 2011, Illinois Governor Patrick Quinn approved legislation that contains several provisions that aim to stop the budget shortfall gap from widening and which are estimated to increase Illinois’ revenues by approximately $6.8 billion per year. Illinois Public Act (“P.A.”) 96-1496, the Taxpayer Accountability and Budget Stabilization Act, immediately and significantly increases both the corporate and personal income tax rates. For subchapter C corporations with Illinois Net Operating Losses (INOLs), the sting from the corporate tax increase will be even more strongly felt as P.A. 96-1496 also calls for a three year suspension of certain INOLs. Finally, in what appears to be an effort to place part of the burden of reducing the Illinois deficit on the legislature, the new law will impose a four year limit on the level of state spending increases.

Corporate Tax Rate Increase

Under the new law, the Illinois corporate tax rate has been increased to 7% for all taxable years that a fall between January 1, 2011 and December 31, 2014. This represents almost a 50% percent increase from the 4.8% corporate rate that was effect through the end of 2010. The 7% corporate rate will remain in effect until December 31, 2014, is scheduled to decrease to 5.25% on January 1, 2015, and will revert to its pre-2011 rate of 4.8% on January 1, 2025. Note that the Illinois corporate tax rate is in addition to the Illinois personal property replacement tax (“PPRT”) rate which remains at 2.5%. (The PPRT is essentially a personal property tax imposed on corporations at the state level.) In summary, a corporation subject to the Illinois corporate tax will be subject to the following rates:

For taxable years that fall between 1/1/11 and 12/31/14, corporations will be subject to a combined rate of 9.5% (7% corporate income tax rate plus the 2.5% PPR tax rate).
For taxable years beginning of or after 1/1/15 through 12/31/24, corporations will be subject to combined rate of 7.75% (5.25% corporate income tax rate plus the 2.5% PPR tax rate).
For taxable years beginning of or after 1/1/24, the corporate rate is expected to revert to its current combined rate of 7.3% (4.8% corporate income tax rate plus the 2.5% PPR tax rate).

Personal Income Tax Rate Increase

Illinois residents and other individuals subject to the Illinois personal income tax are also likely to have a higher tax bill for the next few years. The new law increases the personal income tax rate from its current rate of 3% to 5% for taxable years that a fall between January 1, 2011 and December 31, 2014. Like the corporate tax rate, the reduction in the individual tax rate back to its pre-1/1/11 rate will occur slowly, with the first reduction from 5% to 3.75% occurring on January 1, 2015, and a second reduction to 3% on January 1, 2025. Note that the changes in the Illinois personal income tax rate also apply to trusts and estates.

One final, and possibly positive, note on the tax rate increases is that the new law incorporates a provision which will allow both the corporate and personal rates to revert to their pre-Act rates sooner than scheduled. This would occur if the legislature exceeds the limits that have been set by the new law on general spending increases. (A spending increase limit has been set for each of the four years from 2012 through 2015.)

Temporary Suspension of Illinois Net Operating Losses (INOLs)

As I mentioned above, corporations with INOLs will feel the sting of the corporate rate increase even more as the new law imposes a three year suspension on the use of INOLs. Under the new law, C corporations are prohibited from using their INOLs in 2011, 2012, or 2013 to offset their Illinois taxable income. This is especially bad news for corporations who had previously generated losses and were beginning to turn profitable. On the positive side, suspended INOLs are not lost, as once their use is reinstated, the carryforward period will be extended by the number of years the INOLs are suspended.

Sylvia's Summation

Illinois taxpayers are undoubtedly seeing red, as the state enacts not-so-taxpayer friendly measures to help it get out of “the red”. Yes, desperate times require desperate measures, and this is certainly what we are witnessing in Illinois. As many states across the county are experiencing budget gaps in the billions, it may be the case that tax rate increases, though unpopular, may be necessary to help mend the structural deficits that exists. It will be interesting to see if other states follow suit. At a minimum, 2011 promises to be an interesting year in the state and local tax arena.

For more on the Illinois Tax Changes see the following:

The Illinois Taxpayer Accountability and Budget Stabilization Act, Public Act (“P.A.”) 96-1496

The Illinois Department of Revenue Informational Bulletin (which provides further guidance on the impact of the rate increases on withholding, estimated payments and the impact on fiscal year taxpayers)

The Illinois Department of Revenue website for transition issue updates and additional guidance.

State of Washington Amnesty Begins Next Month

2011-01-15T23:11:00.004-05:00

If you caught my prior post on state tax amnesty programs, you may recall that these periodic, limited-time programs are an opportunity for delinquent taxpayers to come forward voluntarily and resolve their state tax delinquencies by reporting and paying the associated tax on their unreported or underreported tax liabilities. (See my August 23, 2010 "Buzz" post, “State Tax Amnesty: An Opportunity for Taxpayers to Pay Delinquent State Taxes, What Taxpayers Need to Know”)

The state of Washington is the most recent state to jump on the amnesty bandwagon by announcing its first ever amnesty. Washington’s amnesty program, which applies to the business and occupation (B&O) tax, general retail sales and use tax, additional sales and use tax on motor vehicle sales and leases, and several other categories of Washington taxes, begins on February 1st and will run until April 30, 2011. Washington’s amnesty provides for a full penalty and interest waiver as long as all required tax returns and the associated taxes are paid in full by April 30th. Note that although the program runs through April 30th, a completed Amnesty Application must be submitted by April 18th.

Excluded from participating are individuals and businesses who have been assessed a penalty by the Washington Department of Revenue for evasion or misuse of a reseller permit or resale certificate, who are in bankruptcy and where the payment of the tax would violate federal bankruptcy laws, or who have been prosecuted for failing to pay or collect the proper amount of any tax.

For more on the State of Washington amnesty, see Washington’s amnesty website, the 2011 Amnesty Questions and Answers, and the Amnesty Application.

Welcome to the Second Year of The State and Local Tax "Buzz"

2011-01-01T11:08:00.020-05:00

Happy New Year! And welcome to the second year of The State and Local Tax “Buzz”. I’m looking forward to continued blogging and providing my readers with updates on State and Local Tax (“SALT”) developments and other practical SALT advice. (For more about my blog, see my page “About The State and Local Tax ‘Buzz’ ” ) New in the “Buzz” this year are social media buttons at the bottom of each post allowing readers to share individual posts. (You'll find them right below the "Posted by Sylvia F. Dion, MPA, CPA") I’ve also edited my blogger template so that every time you click on any weblink, the link will open as a new page. (Previously, clicking on a link caused readers to navigate away from the “Buzz”. Also see my sidebar “When Good Links Go Bad”) Periodically, you’ll also see an link to an “interesting” news story or article. I do an inordinate amount of research when writing on any topic, and am often surprised to see how the media provides slanted, and even worse, misleading, information when reporting on state tax developments. Some of these stories are just too outrageous to ignore, so look for more links to these with my additionally commentary, of course. Which leads me to point out another blog element added this year; "Reactions" buttons (right below the labels section). Readers can now click one or more boxes if they found the post to be informative, interesting, funny, outrageous or in need of an update. Finally, you’ll occasionally see a post written by a guest contributor; generally a former colleague or other tax professional with whom I’ve worked. If you’re a tax professional and share my passion for writing about SALT developments and issues, and would like to contribute a post, please send me an e-mail at sylviadion@verizon.net.

Federal Bonus Depreciation - A Potential Drain on State Revenues, States Expected to "Decouple"

2010-11-20T18:02:00.004-05:00

On September 27, 2010, President Obama signed the Small Business Jobs and Credit Act of 2010 (“Jobs and Credit Act”) into law. (See my AllBusiness.com October 4, 2010 post, “Small Business Jobs and Credit Act of 2010 Includes Beneficial Tax Provisions to Fuel Business Growth”, in which I explained several of the tax provisions that were part of the Jobs and Credit Act. One of the most significant tax provisions included in the Jobs and Credit Act was the extension of the fifty percent (50%) first-year special depreciation allowance provision, commonly referred to as “bonus depreciation”. The Jobs and Credit Act extended the first-year bonus depreciation provision, which had expired at the end of 2009, through December 31, 2010 and made the provision retroactive to January 1, 2010. The Jobs and Credit Act also extended the bonus depreciation provision through 2011 for property with a 10 year or longer recovery period, such as certain long-lived assets and transportation property. (The bonus depreciation provision along with the increase in the Section 179 expensing deduction, are arguably, the two most significant tax provisions in the Jobs and Credit Act as these provisions together have the potential to create significant federal tax deductions for taxpayers who make capital investments in qualifying property.)

History of Federal Bonus Depreciation: Just in case you’re wondering, bonus depreciation has been around for a few years. It first became viable as part of the Job Creation and Worker Assistance Act of 2002. Initially, the deduction was limited to 30% of the cost of “qualifying property” purchased between September 10, 2001 and September 10, 2004, and placed in service before January 1, 2005. The bonus depreciation limitation was increased from 30% to 50% for assets purchased after May 5, 2003 and before January 1, 2005 with the enactment of the Jobs and Growth Tax Relief Reconciliation Act of 2003. Following a three year period (1/1/05 through 12/31/07) during which the provision was not in effect, the 50% first-year bonus depreciation deduction was reinstated as part of the 2008 Economic Stimulus Act. The 2008 Act applied to “qualifying property” placed in service after December 31, 2007 and before January 1, 2009. The following year, 2009, the 50% bonus depreciation deduction was extended through the end of 2009 by the American Recovery and Reinvestment Act of 2009. Finally, in 2010, the first-year federal bonus depreciation that had expired at the end of 2009 was once again extended through December 31, 2010 and made retroactive to January 1, 2010 with the Small Business Jobs and Credit Act of 2010.

State Conformity to the Federal Bonus Depreciation Provision: Although the federal tax law has allowed a first-year bonus depreciation deduction of up to 30%, and later 50%, during most of the years since 2002, many states do not allow the same generous first-year depreciation deduction to enter into their state’s taxable income calculation. Although a taxpayer may be able to significantly decrease his federal tax liability by claiming bonus depreciation on purchases of “qualifying property”, the same benefit might not be available on a taxpayer’s state tax return.

I’ll illustrate with a high-level explanation of how this works for state corporate tax computation purposes.
In general, when a corporation calculates its state taxable income, its starting point is the corporation's federal taxable income. (Depending on the state, this would be either line 28, before federal net operating loss, or line 30, after federal net operating loss, on federal Form 1120.) This amount is then increased or decreased by amounts which represent income or expense items which are treated differently for state tax purposes than they are for federal tax purposes. (This is similar to the concept of how some income/expense items are treated differently for financial accounting purposes, versus how these same items are required to be reported on a taxpayer’s return by the Internal Revenue Code.) Those states that do not allow federal bonus depreciation to decrease state taxable income require that a taxpayer “add-back” the federal bonus depreciation deduction to arrive at state taxable income. Some states require that only a portion of the first-year bonus depreciation be added back, with some additional modifications. Minnesota, for instance, allows taxpayers to deduct 20% (instead of 50%) of the federal bonus depreciation in the first year, with the remaining 80% deducted evenly over the next five years. However, this does not mean that a state which disallows federal bonus depreciation completely disallows any type of state depreciation deduction. The state will still allow the same asset to be depreciated over the asset’s useful (i.e., depreciable) life for state tax computation purposes; but at a much less aggressive rate. For instance, a state may follow the regular federal depreciation method for that asset, which may allow for some acceleration (more depreciation taken in the earlier years). Or, a state may allow or require another depreciation method, such as straight-line (evenly) over the asset’s life. At the end of the day, or should I say, at the end of the asset’s useful life, the total depreciable cost of an asset will have been deducted on both the corporation’s federal and state corporate income tax return.

But if the total amount of depreciation deducted over the asset’s life is the same for federal and state tax purposes, why is it then, that some states disallow the federal bonus depreciation deduction in the first year? Firstly, states disallow the federal bonus depreciation deduction, either because the state has explicitly “decoupled” from the federal bonus depreciation provision, or because the state does not follow the most updated version of the Internal Revenue Code (“IRC”). An example of the latter would be a state that follows the IRC as of a fixed date in an earlier year. For instance, a particular state’s law may conform to the IRC as of December 31, 2000. Since federal bonus depreciation did not exist on December 31, 2000, that particular state would not follow the current federal rules. Other state’s might enact conforming legislation to adopt the most recent federal tax law changes, but might specifically “decouple” from the bonus depreciation provision. Even states who have what is known as “rolling conformity”, which means that the state law is written in such a manner that state law immediately conforms to any new federal tax law changes, might choose to “decouple” from the federal bonus depreciation provision. In general, states haven’t been eager to fully embrace the generous federal bonus depreciation deduction as they are ill prepared to deal with the negative impact on state revenues. With many states experiencing huge deficits in the last few years, it seems likely that many states may choose not to conform to the latest bonus depreciation extension allowed under the Jobs and Credit Act, even if they adopt the other provisions in the Act. (For more insight on how bonus depreciation has impacted state revenues, see “Bonus Depreciation, Bonus Headaches”, published in Forbes.com on 3/5/08, and, “New Federal Law Could Worsen State Budget Problems, States Can Protect Revenues by Decoupling”, published by the Center on Budget Policy and Priorities on 2/28/08)
You’re probably wondering where your particular state stands on federal bonus depreciation conformity. Some states such as Massachusetts and Illinois have “rolling conformity”, which means that their state law is typically written to incorporate any new federal tax law changes. But as noted above, even states with “rolling conformity” can choose to pass decoupling legislation. Certain other states that do not have “rolling conformity”, such as Indiana and West Virginia, will frequently pass conforming legislation that adopts the newest changes to the IRC. And other states, such as California and Texas, do not regularly update their conformity, which means they do not follow current year or even recent year federal changes. If you want to get an idea of where your state stands on federal bonus depreciation conformity, search your state’s Department of Revenue (Taxation) website. You can easily get to your state’s taxation department by visiting my September 3, 2010 AllBusiness.com post “Contacting Your State Tax Department; Quick Links for State Tax Forms, News and Information”. In that post, I included a web-link to the Department of Revenue (Taxation) website for all fifty states. Once you’re in the state’s website, a few suggested search terms to try would be “bonus depreciation” or “IRC conformity” (try these terms with and without quotes). This should lead you to some guidance, such as a state issued directive, a form, or some other document that will give some indication of your state’s position.

Commentary: While taxpayers have the ability to substantially decrease their 2010 (and possibly 2011) federal tax liability by taking advantage of the 50% first-year federal bonus depreciation deduction that was reinstated as part of the Jobs and Credit Act, taxpayers will not necessarily receive the same benefit on their state tax returns. This is because states either do not follow a current version of the IRC, or have explicitly chosen to “decoupled” from this provision of the federal law, thus disallowing this deduction from entering into the calculation of state taxable income. With states still recovering from their fiscal woes of these last two years, it seems likely that many states will decouple from the latest bonus depreciation extension. It is also very important to note, that although the focus of this post is on bonus depreciation, the same can be said of the Section 179 expense deduction provision. That is, although states are more likely to decouple from the bonus depreciation provision than they are the Section 179 expensing provision, there are also many states that do not allow or have decoupled from federal Section 179. As always, it is important for readers to consult their own CPA or tax advisor to gain a complete understanding of how these tax provisions apply to their specific tax situation.

The above post was authored by Sylvia F. Dion, and initially published in Allbusiness.com. on November 8, 2010. It has been reproduced, with a few modifications, as a post for The State and Local Tax “Buzz” for the benefit of readers of this blog. For more on my contributions to AllBusiness.com, see sidebar Read My Monthly Posts at AllBusiness.com.

Navigating Nexus, Published in the November 2010 Issue of the Journal of Accountancy

2010-11-02T09:18:00.001-04:00

Nexus, nexus, nexus, aahhhh, NEXUS! The mere word can send a chill down the spine of a taxpayer who suspects its activities in a state may have created that sufficient “connection” or “tie” to subject him to a state’s income or other business tax, or to be subject to a state’s sales tax collection requirement.

Yes indeed, "nexus can be a hidden danger for a company with a multistate presence".

I invite you to read "Navigating Nexus", an article co-authored by me and my colleague, Diana DiBello. Navigating Nexus was published in the November 2010 issue of the Journal of Accountancy. In Navigating Nexus, Diana and I discuss the various types of nexus, recent developments in the nexus landscape, and offer suggestions on how to chart a course through the treacherous nexus water.

About my co-author: Diana DiBello, is the Director of Product Development for SpeedTax, a provider of sales and use tax compliance software solutions.

Small Business Jobs and Credit Act of 2010 Includes Beneficial Tax Provisions to Fuel Business Growth | Business Tax Advisor

2010-10-05T10:36:00.007-04:00

I invite you to read my October 4, 2010 AllBusiness.com post, Small Business Jobs and Credit Act of 2010 Includes Beneficial Tax Provisions to Fuel Business Growth Business Tax Advisor.

In this post, I summarize several of the federal tax provisions that were enacted as part of H.R. 5297, The Small Business Jobs and Credit Act of 2010. This recently enacted federal legislation contains several significant tax provisions which aim to encourage investment, promote entrepreneurship and provide small business relief, such as the increase in the Section 179 expense deduction and the extension of federal bonus depreciation. Although these new provisions may benefit a taxpayer's federal tax position, the same benefits may not be realized for state tax purposes, as many states have "decoupled" from certain federal provisions, such as bonus depreciation. Look for a future post as I discuss the impact of The Small Business Jobs and Credit Act on state taxability.

State Tax Amnesty: An Opportunity for Taxpayers to Pay Delinquent State Taxes, What Taxpayers Need to Know

2010-08-23T16:41:00.007-04:00

State Tax Amnesty Programs; it seems like every month one state or another announces a tax amnesty program. This perception isn’t far from reality as approximately thirteen states announced and completed tax amnesty programs in 2009. The amnesty trend continued in 2010 with at least fourteen more states (Florida, Kansas, Kentucky, Illinois, Indiana, Maine, Massachusetts, Minnesota, Nevada, New Mexico, New York, North Carolina, Pennsylvania, Tennessee), one city (Philadelphia) and the District of Columbia announcing some form of a state tax amnesty program. And while some of the 2010 state tax amnesty programs have come and gone, others are in progress right now, and still others are set to begin in the near future.

But what exactly is a state tax amnesty, how do these programs help taxpayers resolve state tax delinquencies (unreported or underreported taxes), what are the advantages and disadvantages of participating in a state tax amnesty, and are they all created equal.

A state tax amnesty is a limited-time program approved by a state’s legislature and administered by a state’s Department of Revenue, which provides taxpayers an opportunity to can come forward voluntarily and satisfy their delinquent tax obligations in exchange for certain benefits, such as an abatement of penalties and of all or a portion of interest. When tax liabilities remain unpaid for years, the amount of penalty and interest that has accrued can be substantial, and over time, could possibly exceed the tax liability to which they relate. Therefore, penalty and interest abatements help taxpayers retain cash they might otherwise have had to pay. Filing delinquent taxes during an amnesty also allows taxpayers to come forward with minimal scrutiny as “eligible” taxpayers generally need only follow the amnesty “process”, which generally means simply filing all required forms and returns and paying all taxes by the amnesty’s deadline. (Note, however, that these filings made during an amnesty period could still be chosen for audit at a later date.) Of course, filing under amnesty also alleviates the potential negative consequences (notices, assessments, penalties, interest, liens on property, civil or even criminal investigation) that could result if a taxpayer’s delinquencies are discovered by the state first.

Despite the benefits of participating in a state's amnesty program, there are potential negatives that taxpayers need to consider. For instance, a taxpayer coming forward during an amnesty period may be required to file and pay delinquent taxes for as far back as the taxpayer’s liability extends. You’ve likely heard the term “statute of limitations”, which, for tax law purposes, refers to the maximum amount of time after the filing of a return or the payment of a tax that the federal or a state government can assess or collect an additional tax, or a taxpayer can file an amended return or a claim for refund. When a taxpayer has never filed in a state, the statute of limitations never begins to “run”. Therefore, in order to be fully compliant a taxpayer may be required to file (and pay the associated tax) for as many years as the taxpayer is delinquent. Additionally, taxpayers filing under amnesty shouldn’t expect that they can negotiate for better terms, as this typically isn’t allowed in an amnesty situation. (However, a state’s Voluntary Disclosure Program, which I’ll discuss in a future post, does offer negotiation potential to delinquent taxpayers.) Another possible drawback applies to taxpayers who have outstanding tax assessments (notices). A requirement of participation faced by these particular taxpayers could be that they pay the full amount of the tax owed to the state even if they do not agree with the assessment. Having to pay the full amount of a disputed assessment could present an even larger negative as an amnesty program may require that taxpayers expressly waive their right to claim a refund or protest an amount paid under amnesty. Taxpayers who are already in the process of protesting an assessment, either through the state’s administrative process or in state court, might also be required to formally withdraw their protest, or dismiss any administrative or judicial proceedings. Some recent amnesty programs have also included a negative incentive in the form of an “amnesty penalty” which is imposed on taxpayers with outstanding assessments who choose not to participate in the current amnesty program. Thus, a taxpayer who disagrees with a tax assessment, chooses to protest it and is unsuccessful may find himself owning the original assessment, interest, re-instated penalties, and the additional amnesty penalty. Because amnesties are only offered periodically and run for a limited, specified time, taxpayers may find that they do not have sufficient time to fully evaluate the pros and cons of participation, or to generate the funds needed to fully cover the tax due.

Although the state legislature approves an amnesty, the specifics of the program, such as, the eligibility requirements for participation and the specific procedures that must be followed, are generally left to the Department of Revenue to decide and administer. But since all state amnesty programs are not created equal, the specifics of an amnesty program can vary widely from state to state. For instance, a state may offer a general amnesty program, which means that it covers many types of taxes (personal income, corporate income, sales and use, etc), or a state may offer a specific amnesty program, one which is targeted at a specific type of tax or category of taxpayers. Most amnesty programs prohibit taxpayers under criminal investigation for tax law violations from participating, but may be open to taxpayers under civil investigation. Some amnesty programs may prohibit taxpayers who have been chosen for audit from participating, but others may include special provisions that allow these taxpayers to participate. As noted above, some amnesty programs require taxpayers to waive their appeal or refund rights, while others allow taxpayers to retain these significant rights.

Sylvia's Summation: The amnesty train is charging full steam ahead and doesn’t appear to be stopping anytime soon. This isn’t surprising as states are in desperate need of a revenue shot in the arm, and amnesty programs have provided that much needed remedy to their fiscal ailments in recent years. Amnesty programs, such as New Jersey’s 2009 program, which brought in a whopping $725 million (the most ever collected through an amnesty program), have made other states hungry for similar outcomes. So despite the criticisms of these programs, including that amnesty programs reward “deadbeat” taxpayers with penalty and interest waivers or that they encourage non-compliance as taxpayers with outstanding liabilities might decide to just wait for the next amnesty to come along, these programs will continue, at least for a while. In addition to current programs in Florida (7/1/ - 9/30/10), Nevada (7/1 - 9/30/10) New Mexico (6/7 - 9/30/10), and the District of Columbia (8/2 – 9/30/10), programs will begin soon in Kansas (9/1 - 10/15/10), Maine (9/1 - 11/30/10) and Illinois (10/1 – 11/8/2010). Look for a future post as I cover these and any new amnesty programs.

The above post is an excerpt from “State Tax Amnesty: An Opportunity for Taxpayers to Pay Delinquent Taxes, What Taxpayers Need to Know” authored by Sylvia F. Dion for the August 21, 2010 post of her “Business Tax Advisor” blog for AllBusiness.com.

The Main Street Fairness Act: Explaining Internet Sales Taxes

2010-07-25T22:57:00.027-04:00

Legislative Update: On July 1, 2010, House Bill (H.B.) 5660, was introduced in Congress by Massachusetts representative, William Delahunt. The Bill, named the "Main Street Fairness Act" states that its purpose is to “promote simplification and fairness in the administration and collection of sales and use taxes, and for other purposes.”

My guess is by now, you’ve likely heard about the Main Street Fairness Act, as reporters, commentators, industry groups, legalists, retailers, bloggers, your mother, and just about everyone else, has an opinion on it. This isn’t surprising as a major focus of the Main Street Fairness Act is the hotly debated issue of internet sales taxes. This isn’t a new debate, as the issue of whether sales made over the internet should be subject to sales tax has been widely discussed for at least decade now, and it isn’t the first time similar legislation has been introduced. Proponents of an internet sales tax include brick-and-mortar retailers whose “physical presence” in their state requires them to charge sales tax, and who argue, therefore, that this puts them at a disadvantage against certain on-line retailers who are able to sell the same merchandise to the same customers “tax-free”. Also in support of this legislation are the state and local tax governments who lose billions in state revenue dollars each year to uncollected sales and use taxes. It should come as no surprise that opponents of the Act include the biggest of the big on-line retailers, such as Amazon.com and eBay. These and other on-line retailers have argued for years, that a 1992 U.S. Supreme Court decision, Quill Corp. v. North Dakota, does not require them to charge and collect tax on sales to customers in states in which the on-line retailers lack “substantial nexus” (more on this in a minute). These retailers have also long argued that imposing a sales tax collection responsibility on them would create a disproportionate administrative burden, especially on small on-line retailers who would need to navigate a complex system of tax rates in order to properly collect sales tax from customers located in thousands of different jurisdictions. (see eBay’s Policy Paper on this topic)

Brief Summary of the Main Street Fairness Bill If you think the Bill is a way to “stick it to the big guys” and force them to pay more in taxes, you’re wrong. The internet sales tax isn’t a tax expense to the on-line retailer; it isn’t a means to force mega on-line retailers like Amazon.com to pay “their fair share” of taxes. The focus of the Bill is to require on-line retailers to charge and collect sales tax from you, the consumer, and remit the tax they collect to the state or local government to which that tax belongs.
So, here’s a brief overview of some of the key points of the Main Street Fairness Bill. The Bill, which states that its purpose is “to promote simplification and fairness in the administration and collection of sales and use taxes”, is based on several key findings, including that sales transactions should be taxed equally, regardless of how they are transacted (in person, over the phone, or on-line), that Congress has the power to facilitate equal taxation and make this law based on the 1992 Supreme Court decision, Quill Corp. v. North Dakota, and that states that voluntarily and adequately simplify their tax systems should have the authority to require sellers to collect sales tax regardless of where the seller is located. The Bill gives Streamlined Sales and Use Tax Act Agreement (“SSUTA”) member states, the authority to require sellers to charge and remit sales tax on sales to customers in those member states. In a nutshell, if this legislation passes, these particular states will have the legal right to require on-line retailers to charge sales tax on internet sales made to customers in their state. As of July 2010, full SSUTA members states include Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Oklahoma, Rhode Island, South Dakota, Vermont, Washington, West Virginia, Wisconsin, and Wyoming. Although this sounds like a sweeping change, keep in mind the requirement to charge and remit sales tax would only apply to sales to customers in the SSUTA member states, only after specific events have occurred and only after several operational processes have been put into place. If you'd like to know more details about the Bill, click on this link to H.B. 5660.

Why Is It That On-Line Retailers Aren’t Required to Charge Sales Tax In order for a state to impose a sales tax collection requirement on an out-of-state retailer, the retailer must have a sufficiently significant “connection” or “tie” to the state, in other words, “substantial nexus” must exist.Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Briefly, Quill was a Delaware based seller of office equipment and supplies whose customers in North Dakota made purchases of Quill merchandise through the company’s catalog. Quill did not charge or collect a sales tax on sales made to its North Dakota customers. As a result the North Dakota Commissioner of Revenue attempted to assess Quill for the use tax (essentially the sales tax) due on purchases made by Quill’s North Dakota customers. Quill responded that since the company had no physical operations or employees in the state, it did not have that sufficient “connection” or “nexus” to North Dakota that would permit the State to require Quill to collect this tax. Ultimately, the case made its way all the way up to the U.S. Supreme Court which held in favor of Quill, stating that when a company participates in interstate commerce within the borders of a state, that company must have “substantial nexus” (achieved through physical presence, e.g., offices, employees) to the state in order for the state to require collection of sales or use tax for purchases made by in-state customers. Quill is still good law today, at least for now, and it is this holding that has allowed on-line (and catalog) retailers to avoid charging sales tax in states in which those retailers have no physical presence. Another significant statement the Supreme Court made in Quill is that Congress has the power to change the law. But states have long waited for Congress to act, and in the meantime, have enacted laws that go beyond the traditional physical nexus concept in an effort to bring more revenues into their state.
The concept of substantial nexus is based on a 1992 landmark Supreme Court decision,

The Internet Tax Freedom Act of 1998 Does NOT Prohibit the Taxation of On-line PurchasesI believe many people are under the false impression that the 1998 Internet Tax Freedom Act is the reason why purchases made over the internet aren’t always subject to sales tax. I believe this since I am very often asked this very question, which goes something like this, “Isn’t there some type of internet law that prevents internet sales from being subject to sales tax?” No! This is not what the Internet Tax Freedom Act is about. To clarify, the 1998 Internet Freedom Act was passed in order to promote and preserve the commercial, educational and information potential of the Internet. Under this Act, federal, state and local governments are prohibited from imposing a tax on internet access, imposing discriminatory internet only taxes (e.g., a tax on e-mail), and imposing multiple taxes on electronic commerce. The Internet Tax Freedom Act specifically does not exempt sales made over the internet from sales tax, nor does is repeal any state sales or use tax. It only mentions that sales made over the internet are to be taxed (if they are taxable) at the same rate as non-internet sales. The provisions of the Internet Tax Freedom Act have been extended several times since the Act’s original enactment, and will remain in effect until at least November of 2014.
Purchases Made Through the Internet are NOT Tax FreePerhaps one of the biggest misconceptions regarding internet purchases is that these purchases are being made “tax free”. Here’s a statement we’ve all heard (and maybe have even made ourselves), “I’ll just buy it on the internet and save on sales tax”. The reality is, if you’ve purchased merchandise on-line which is considered taxable in the state in which you reside, and the on-line retailer did not charge a sales tax on the transaction, a tax is still owed to the state, and you, the purchaser, the ultimate consumer, are now the party that is are responsible for the remitting use tax (i.e., sales tax) to your state. The only consumers who truly are able to make purchases over the internet “tax free” are those that are residents of, or businesses that are located in, one of the four states that do not impose a sales tax; New Hampshire, Montana, Oregon and Alaska.

I’m Supposed to a Pay a “Use” Tax? I’ve Never Heard This Before! Tell Me MorePerhaps you’ve heard the term “use tax”, and wondered what this refers to. The sales tax and the use tax are analogous, essentially the same tax. When the tax is charged by a retailer at the time of sale, it is referred to as a sales tax. The sales tax is a “trustee tax”, which means that the retailer is merely collecting it on behalf of the state, but it is not a liability of the retailer. When the tax is not charged on the actual sales transaction, the tax that is due is referred to as a use tax, which is an actual liability of the final user or consumer. Generally, a purchaser will pay the same exact amount of tax whether it’s charged as a sales tax, or paid directly to the state as a use tax. Now that you realize that you may owe a use tax on all the “tax free” purchases you’ve made, here are some general guidelines on where to report the use tax. If you’re a resident of a state that imposes a personal income tax, your annual use tax is most likely reported on and paid with your state personal income tax return. (See line 33 of Mass. Form 1) States without a personal income tax will generally have a separate form for reporting a personal use tax liability. (See Florida Form DR-15MO) If your businesses is registered for sales tax purposes in a state (i.e., you’re already charging and collecting sales tax), any business use tax owed (on purchases made by the businesses) is reported on that state’s sales & use tax return. (See line 5 of Mass. Form ST-9) Most states also have a separate form for businesses that do not have a sales tax collection responsibility, but make purchases on which use tax is owed. (See Mass. Form ST-10)I Keep Hearing About these “Amazon Laws”. Is the Main Street Fairness Act Just Another “Amazon Law?”The short answer is “no”, the Main Street Fairness Act is not just another “Amazon Law”, even though both the proposed Main Street legislation and the state “Amazon Laws” have a similar goal: to require the collection of sales tax by on-line vendors who do not have a physical presence in a state. The so called “Amazon Laws” (nicknamed after their most visible target and also because Amazon challenged this law in the New York State court system) are an example of how states are becoming more aggressive in their interpretation and administration of the state tax laws and are enacting laws which stretch the concept of nexus. These “Amazon Laws”, which exist in some variation in New York, Rhode Island, North Carolina and Colorado, are primarily directed at on-line retailers who contract with and compensate “affiliates” (residents or businesses which are not necessarily a part of their own company or organization) for customer referrals back to their website. Using New York’s law as an example, a typical scenario would involve an out-of-state retailer contracting with a New York based “affiliate” who posts a link to the out-of-state seller’s website and who receives a commission whenever its customers link from the New York company’s website to the out-of-state retailer’s website in order to make purchases. Now, assume you’re a retailer based in Oklahoma, who just so happens to have several customers in New York who purchase your product on-line through your company’s website. All your business is transacted over the internet, you have no physical presence in New York, you never send your employees to New York for business reasons, and you don’t contract with New York “affiliates” in an effort to secure more sales. The New York Amazon law would not apply to your on-line business, and you would not be required to charge sales tax on sales to your New York customers. But under a law such as the Main Street Fairness act, this same on-line retailer could ultimately be required to charge sales tax on its internet sales to customers in SSUTA member states.

Conclusion So, there you have it, almost everything you’d want to know about the taxation of internet sales. Whether the Main Street Fairness Act passes remains to be seen, and if it does, it will be interesting to see what the final form of the law looks like. Keep in mind, that the Bill in only in proposed form, and needs to move through the entire legislative process before becoming final law. Even if the Main Street Fairness Act ultimately passes, It will take some time before all the processes are in place and before every internet sale is subject to sales tax.

The above post, "The Main Street Fairness Act: Explaining Internet Taxes" was authored by Sylvia F. Dion, and also appeared in the July 24, 2010 issue of the Allbusiness.com "Business Tax Advisor" blog.

Florida Amnesty Begins July 1st: Another State Jumps on the Amnesty Bandwagon

2010-07-01T16:56:00.057-04:00

SALT Alert: As the trend in State Tax Amnesties continues, we have yet another state that has instituted a tax amnesty program. In response to Florida H.B. 5301, the Florida Department of Revenue (“the Department”) has developed and implemented a one-time tax amnesty program which runs from July 1 through September 30, 2010. Florida’s amnesty applies to certain tax liabilities of “eligible” taxpayers that were due prior to July 1, 2010. As an incentive to report and pay tax liabilities that have been assessed, or that are currently unknown to the Department, the Florida amnesty program allows for a full penalty waiver and an interest waiver of up to 50%. Although the general provisions of the amnesty require that all amounts due be paid by the September 30th deadline, the amnesty includes a provision for an installment type plan for taxpayers that cannot pay their full amnesty balance by the close of the amnesty.

Taxes Covered and Eligible Taxpayers
Florida’s tax amnesty applies to virtually all state and local option taxes administered by the Department, with the most significant being the corporate income and emergency excise tax, sales and use tax, communications services tax, and intangibles tax.

Taxpayers who are currently under any phase of a criminal investigation, or who have entered a Florida correctional system program, including state prison, probation or other similar program, regarding a Florida revenue law are not eligible to participate in the amnesty. Additionally, the liability for which the taxpayer wishes to come forward must not already be covered by a settlement or installment payment agreement.

Taxpayers under a civil investigation, however, are eligible to participate in the amnesty, as are taxpayers who are under examination, inquiry or audit, regardless of whether the amount due to the Department has been issued as a proposed assessment, bill, notice or demand for payment.

Finally, taxpayers must complete a 2010 Tax Amnesty Agreement, Form DR-100000, to fully secure their eligibility and enable them to participate.

Interest Waiver Depends on Category of Eligibility
Taxpayers coming forward with liabilities which the Department has no knowledge of are entitled to a 50% waiver of interest. Taxpayers who are otherwise eligible as described above, but whose liabilities are known to the Department, as evidenced by a notice of examination, inquiry or audit, or by the issuance of a proposed assessment, bill, notice or demand for payment, are entitled to a 25% interest waiver.

A special provision applies to taxpayers who have received a notice of intent to audit where the audit has not yet commenced. Such taxpayers may apply to the have their audit converted to Florida’s certified audit program. Liabilities determined under this program are entitled to either the penalty OR 25% interest waiver, but not both.

Administrative Actions
As noted above, eligible taxpayer’s wishing to participate must complete a Tax Amnesty Agreement, Form 100000, by the amnesty deadline of September 30, 2010. Only one Tax Amnesty Agreement is required even if the taxpayer is coming forward for more than one type of tax. Although filing a paper form is acceptable, filing on-line via the Department’s website instantly provides the taxpayer with an amnesty agreement number confirming this required action. Agreements submitted by a taxpayer representative must be accompanied by a Florida Power of Attorney, Form DR-835. In general, all returns and payments must be filed and remitted before midnight on September 30, 2010. However, taxpayers who are not able to remit their full amnesty liability by the close of the amnesty period have the option of contacting their local service center to enter into a stipulated payment agreement. Under this agreement, a taxpayer must remit at least 12.5% of the total liability by the amnesty deadline with the remaining balance being paid in no more than seven monthly installments, during which time interest continues to accrue. A taxpayer who enters into a stipulated payment agreement must adhere to the provisions timely and completely, otherwise the agreement may be compromised and the taxpayer will owe the remaining amount due, any imposed fees, and the penalty and interest that had been waived or discounted under amnesty.

Taxpayers with assessments that are the subject of a pending informal protest, or whose judicial or administrative proceedings have yet to begin are required to formally withdraw their protest, or dismiss any administrative or judicial proceedings. Additionally, all participating taxpayers are required to expressly waive any right to claim a refund or to protest or initiate an administrative or judicial proceeding to review any denial of a refund claim for any refund of tax or interest paid under the amnesty program. Refunds or credits issued on amounts paid under amnesty will only occur in those instances where the Department determines that an amount has been paid in error.

Sylvia’s Summation
Once again, we have another state that has jumped on the amnesty bandwagon as a means to expeditiously raise revenues and bring taxpayers into compliance. Florida's amnesty provides the typical amnesty benefits of a full penalty waiver and a waiver of a portion of the interest. Some distinguishing features of Florida's amnesty include a reduced penalty waiver for taxpayers who have received assessments, been notified by the Department or are in controversy; the opportunity for taxpayers with pending audits to expedite the audit process through participation in Florida's certified audit program; and a pro-taxpayer installment type plan for taxpayers unable to pay their full amnesty balance by the close of the amnesty.

The Department has created several excellent, comprehensive documents to fully explain the amnesty, including a Tax Information Publication, a Fact Sheet, a Frequently Asked Questions (FAQ) and a Press Release. Additionally, as Florida's amnesty is in effect for a full three months, taxpayers should have sufficient time to evaluate the advantages, and for those in controversy, the potential disadvantages, of participating; as well as sufficient time to fulfill the amnesty requirements. Finally, although Florida does not impose an individual income tax, Florida's amnesty documents clearly communicate that the amnesty applies to individuals, in particular, to individuals with unremitted use tax liabilities for purchases made through the internet.

There's Something About Purva: My Positive Experience with a GenY Colleague | Business Tax Advisor

2010-06-30T23:59:00.004-04:00

I invite you to read my June 30, 2010 AllBusiness.com blog post, There's Something About Purva: My Positive Experience with a GenY Colleague Business Tax Advisor

This post was part of AllBusiness.com's Special Report on the Next Generation of Leaders, the Millennials. Contributors were asked to diverge from their usual subject (in my case, taxes) and write about the Millennial Generation, or Generation Y. In this post I write about what it is like to be "boomer" working alongside Generation Y, and my positive experience with a very special "Millennial", Purva Sanariya. I hope you enjoy my post. I also encourage you to read some of the other articles and posts that were part of this Special Report, which can be found at: http://http//www.allbusiness.com/company-activities-management/company-structures-ownership/14540111-1.html

Nexus! What Is It? Do You Have It? Is it Painful? (part 1 of 2 part series) | Business Tax Advisor

2010-06-10T09:56:00.003-04:00

I invite you read my June 9, 2010 AllBusiness.com post, Nexus! What Is It? Do You Have It? Is it Painful? (part 1 of 2 part series) Business Tax Advisor.

In this post, I discuss nexus for sales tax purposes. See my text box to the left for more about AllBusiness.com and my "Business Tax Advisor" blog on the AllBusiness.com website.

Massachusetts Follows IRS' Lead: Massachusetts Taxpayers in Federally Designated Disaster Areas Receive Additional Time to File and Pay

2010-04-10T17:10:00.030-04:00

SALT Alert: If you are a resident of, or have business operations in, Massachusetts you are probably aware by now that President Obama recently declared certain counties in Massachusetts federal disaster areas due to severe storms and flooding that plagued these counties for several weeks in March. The Massachusetts counties that are designated as federal disaster areas include the counties of Bristol, Essex, Middlesex, Norfolk, Plymouth, Suffolk and Worcester. As a resident of one of these counties, I can attest to those of you who reside elsewhere, that indeed, the storms and flooding were relentless. My own backyard resembled a swimming pool for much of March and into April, and I know of several homes, and even entire neighborhoods, in my town that sustained significant flood damage. So, I suppose before launching into a discussion of today’s topic, I should say “thank you, Mr. President” for recognizing that yes, indeed, we were negatively impacted by the severe storms and flooding, “thank you, IRS” for granting those of us who reside in one of the designated counties additional time to file our federal tax returns, “thank you, Governor Patrick” for following the President’s lead, and finally, “thank you, Massachusetts Department of Revenue” for following the IRS’ lead and providing us a similar extension of time to file certain Massachusetts returns. But this isn’t the Oscars, and the purpose of my discussion today isn’t just to say “thank you”, but to provide a more in-depth explanation of the specifics of the “disaster area” extension as it applies to certain Massachusetts returns and payments.

Tax Filings and Payments to which May 11th Extension Applies and Exclusions
On April 2, 2010, following the President’s and Governor’s declaration, the Massachusetts Department of Revenue (“the Department”) issued Technical Information Release (“TIR”) 10-7, Extension of Time for Certain Tax Filings and Payments for Taxpayers Affected by March 2010 Severe Storms and Flooding, in which the Department announced that it would grant an automatic extension of time until May 11, 2010 for certain tax filings and payments. The guidance in TIR 10-7 is largely consistent with similar guidance articulated in an IRS Release issued on March 31, 2010. In summary, the Massachusetts extension applies to most tax returns and tax payments (including estimated tax payments) that either have an original or extended due date occurring between March 12, 2010 and May 10, 2010. The extension applies primarily to the April 15th deadline for filing 2009 individual income tax returns and making individual income tax and estimated tax payments. However, the extension is not limited to individual taxpayers. Businesses and non-profit corporations with a January 31st tax year-end who are subject to the Massachusetts corporate excise (income) tax or who file unrelated business income tax returns are also entitled to the automatic May 11th extension. Also entitled to the May 11th extension are estates and trusts, partnerships, and S corporations that file Massachusetts tax returns. Finally, individuals and businesses who are subject to filing a Massachusetts use tax return (either Massachusetts Form ST-10 or ST-11), are also entitled to the May 11th extension for purposes of both filing their use tax return and making the payment due with the return.

The automatic extension does not apply, however, to trustee tax returns and payments, including sales or use tax returns and payments, meals tax returns and payments, room occupancy tax returns and payments, and employer and other withholding tax returns and payments. Note that the distinction between the use tax, for which the May 11th extension applies, and the sale & use tax, for which the extension does not apply, is that the use tax is a business tax (a liability of the filer), whereas the sales tax is a trustee tax (one which is collected by the vendor on behalf of the state and remitted to the state). Another important exception to the extension applies to taxpayers who previously filed their returns, but have yet to remit payment for the tax liability due with their returns. It appears that those taxpayers will still be required to remit, by April 15th, any remaining tax liability shown as due on the previously filed return.

Extensions Beyond May 11th
May 11th is also the deadline for filing for an automatic extension of time to file for those individuals and businesses who wish to extend the filing of their returns beyond this extended date. It is important to note that taxpayers who request an additional time to file beyond May 11th will not receive additional time beyond what they would have received absent the disaster relief provision. For example, individual taxpayers who would normally be required to file by April 15th and who file an extension request by May 11th will only have until October 15, 2010 to file their final returns. Although interest and penalties will not accrue for any taxes that would have been due by April 15th but are remitted on or before May 11th, any taxpayer that does not meet the May 11th due date will owe interest and penalties dating back to the original tax return or tax payment due date. Finally, keep in mind that an extension is only for the filing of the final return, not for the payment of any tax liability expected to be due.

Affected Taxpayers and Procedure
The TIR defines “affected taxpayers” as individuals who live, and businesses whose principal place of business is located, in any of the counties with federal disaster designation. Certain other individuals and businesses, such as those whose tax records are located in any of these counties may also qualify as “affected taxpayers”, as well as residents of states contiguous to Massachusetts who are subject to filing a Massachusetts non-resident return and reside in federally declared disaster areas (e.g., residents of certain Rhode Island counties, see TIR 10-7 for additional guidance). Affected taxpayers do not need to take any action on April 15th. The Department’s computer systems will automatically identify taxpayers located in the covered disaster areas and apply automatic filing and payment relief for returns filed electronically. Taxpayers who are not able to or choose not to file electronically, should include the notation “2010 FLOODING” written in red ink at the top of their returns or forms. Any affected taxpayer who files and pays by the extended deadline and still receives late filing or payment penalties should contact the Department’s Customer Service Bureau.

Sylvia's Summation
As is the case with any administrative pronouncement, the TIR intends to provide an overview and address the main questions taxpayers may have but cannot address every situation or concern. For more information, please see the following:

IRS Press Release, MA-2010-15, Massachusetts Severe Storm and Flooding Victims Have Until May 11 to File Their Tax Returns, issued March 31, 2010

TIR 10-7: Extension of Time for Certain Tax Filings and Payments for Taxpayers Affected by March 2010 Severe Storms and Flooding, issued April 2, 2010

Commonly asked questions about the tax filing extension to May 11

Massachusetts Limited Amnesty Program for Taxpayers with Existing Business Tax Liabilities Begins April 1, 2010

2010-04-01T21:35:00.015-04:00

SALT Alert: On March 12, 2010, the Massachusetts Department of Revenue (“the Department”) issued Technical Information Release (“TIR”) 10-5, Limited Amnesty For Taxpayers With Existing Business Tax Liabilities, in which the Department announced the details of a limited amnesty program which goes into effect today, April 1, 2010. This two month limited amnesty program will run for 60 days, and thus is set to expire on June 1, 2010. Similar to general amnesty programs that have been in effect in other states, the Massachusetts limited amnesty program grants a waiver of all applicable penalties to “Eligible Taxpayers” who pay the full amnesty liability by the close of the amnesty period. However, unlike other general amnesty programs, participation in Massachusetts’ limited amnesty program is available only to specific “Eligible Taxpayers” who are offered the opportunity to participate in the amnesty program.

Definition of an Eligible Taxpayer, Eligible Tax Type and Excluded Taxpayers
Under the provisions of the amnesty, and as described in the TIR, an “Eligible Taxpayer” is a taxpayer who has been issued a “Tax Amnesty Notice”, and (1) has an unpaid and previously self-assessed tax liability for an “Eligible Tax Type”, (2) has previously been assessed a tax liability for an “Eligible Tax Type” and is properly disputing the unpaid liability, or (3) is delinquent in paying the liability.

The Amnesty Program applies to liabilities of "Eligible Tax Types" for taxable periods ending on or before December 31, 2009. The TIR lists several categories of business and trustee type taxes as “Eligible Tax Types”. Of those business tax liabilities that meet the definition of an “Eligible Tax Type”, the most significant include sales & use tax, sales tax on telecommunications, materialman sales tax, meals tax, withholding income tax and pass-through withholding tax. Noticeably absent from the definition of an "Eligible Tax Type" is the Massachusetts corporate excise tax (the tax on corporate income). Thus, taxpayers with outstanding corporate excise tax (income tax) assessments are prohibited from participating in the current amnesty.

Also specifically excluded from participating in the amnesty are taxpayers who were the subject of tax-related criminal investigations or prosecutions prior to the start date of the amnesty period. Additionally, taxpayers who have reached a settlement through the Department’s Litigation Bureau, Office of Appeals or Offer-in-Settlement Unit, and who have a signed settlement agreement, are not eligible for the tax amnesty for the periods covered by the amnesty. Further taxpayers who have paid all tax and interest due relating to any outstanding assessment but who, at the start of the Amnesty Period, still owe or are properly disputing penalties with regard to that assessment are not eligible for the tax periods covered by the assessment.

Procedure
As stated above, eligible taxpayers will be offered the opportunity to participate upon receipt of an Amnesty Tax Notice. The Department’s Press Release of March 26, 2010, which further elaborates on the amnesty, indicates that nearly 36,000 taxpayers are expected to receive the amnesty tax offer. The offer will include a taxpayer specific Amnesty Tax Coupon which will include the dollar amount of the Amnesty Balance Due. In accordance with the amnesty provisions, this Amnesty Balance Due should include only the tax and interest with respect to previously filed returns or assessments. Excluded from the Amnesty Balance Due are all potentially applicable penalties, as well as that portion of interest that was previously assessed on any penalty. In order to comply with the provisions of the amnesty, eligible taxpayers are required to pay the full amount of the Amnesty Balance Due, even if the taxpayer does not agree with balance as shown on the Amnesty Tax Coupon. Failure to pay the full amount may subject the taxpayer to an additional amnesty penalty of up to $500, which will be added to and become part of any outstanding balance which remains unpaid after the close of the amnesty period. Payment of the full Amnesty Balance Due will not constitute a forfeiture of statutory rights of appeal or an admission of liability for the disputed assessment. The Department’s website discusses various methods for remitting payment, including electronically through the Department’s Web Services for Business application.

Sylvia's Summation
For the second time in a two year period, the Massachusetts Legislature has granted the Commissioner authority to establish and administer a two month amnesty to encourage the payment of delinquent tax obligations to the Commonwealth. A similar limited amnesty program was in effected in the Spring of 2009 for individual taxpayers who received a similar amnesty tax offer. Yet, to date, the Commissioner has not granted amnesty to perhaps the most significant taxpayer group in the Commonwealth, taxpayers with outstanding corporate excise tax assessments.

For eligible taxpayers who receive the amnesty offer, the amnesty provides an opportunity to become current on their outstanding eligible tax type liabilities and receive the benefit of complete penalty waiver while retaining their statutory rights of appeal.

For more information, see Massachusetts Department of Revenue Technical Information Release 10-5, issued March 12, 2010, the Department’s Press Release dated March 26, 2010, and the Department's Amnesty Frequently Asked Questions (FAQ's)