have you read the Wynne case?

By now, you have most likely heard about the U.S. Supreme Court case regarding Wynne. The along awaited verdict. It was close (5-4 vote), but the taxpayer won. There are many publications by several firms and the media talking about the ruling and what it means, not only for taxpayers in Maryland, but other states as well. Regardless of what each firm or publication has said, have you read the case for yourself? I encourage you to do so. Especially state tax practitioners. 

Most of the discussion in the ruling is around the application, existence and authority of the dormant Commerce Clause. The majority supports and utilizes the dormant Commerce Clause to rule in the taxpayer's favor. The minority appears to believe the dormant Commerce Clause has been twisted into something it was not created to be, and thus, the ruling is misled.

The ruling defines the purpose of the 'dormant Commerce Clause' as:

"prohibiting certain state taxation even when Congress has failed to legislate on the subject."

The majority of the Court said the following about the dormant Commerce Clause:

1. The clause "precludes states from discriminating between transactions on the basis of some interstate element."
2. "States may not tax a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the state."
3. "We must consider not the formal language of a tax statute, but rather its practical effect."

Justice Scalia said the following in his dissenting opinion:

1. The "negative Commerce Clause is a judicial fraud."
2. "The clearest sign that the negative Commerce Clause is a judicial fraud is that utterly illogical holding that congressional consent enables States to enact laws that would otherwise constitute impermissible burdens upon interstate commerce."
3. "Neither the Constitution nor our legal traditions offer guidance about how to separate improper state interference with commerce from permissible state taxation or regulation of commerce."
4. "Change is almost the doctrine's natural state as it is the natural state of legislation in a constantly changing national economy."
5. "Balancing the needs of commerce against the needs of state governments. That is a task for legislation, not judges."

The Ruling holds the following keys (that other firms and the media have seemed to latch onto):

1. There is no distinction between a tax on gross receipts or a tax on net income when it comes to the application of the dormant Commerce Clause.
2. There is no distinction between taxing individuals or corporations when it comes to the application of the dormant Commerce Clause.
3. The Maryland taxing regime fails the "internal consistency test" of the dormant Commerce Clause by resulting in double taxation of out of state income and discriminating in favor of intrastate over interstate economic activity.

What do I think?

I think the case is an interesting discussion about the application of the Due Process Clause (the state's sovereign right to tax), and the limitations (or lack thereof) on a state's ability tax from the dormant (negative) Commerce Clause.

I think the case has ramifications for taxpayers across the country, including corporations and individuals. I am sure some lawyers and firms will extend the ruling's verdict to other fact patterns and litigation will ensue. 

I think Quill and P.L. 86-272 may need to be re-examined as a result of this case. 

What do you think?

Read the case and let me know.

don't let state tax 'blind spots' wreck your company

WHAT IS A BLIND SPOT?

According to Wikipedia, a blind spot, also known as a scotoma, is an obscuration of the visual field. A particular blind spot known as the blindspot, or physiological blind spot, or punctum caecum in medical literature, is the place in the visual field that corresponds to the lack of light-detecting photoreceptor cells on the optic disc of the retina where the optic nerve passes through it. Since there are no cells to detect light on the optic disc, a part of the field of vision is not perceived. The brain fills in with surrounding detail and with information from the other eye, so the blind spot is not normally perceived.

Now, that wasn't exactly what I think of when I think of a blind spot.  I usually think of a blind spot when I am driving my car.

In that context, Wikipedia says a blind spot in a vehicle is an area around the vehicle that cannot be directly observed by the driver while at the controls, under existing circumstances. Blind spots exist in a wide range of vehicles: cars, trucks, motorboats and aircraft.

As one is driving an automobile, blind spots are the areas of the road that cannot be seen while looking forward or through either the rear-view or side mirrors. The most common are the rear quarter blind spots, areas towards the rear of the vehicle on both sides. Vehicles in the adjacent lanes of the road that fall into these blind spots may not be visible using only the car's mirrors. Rear quarter blind spots can be:

• checked by turning one's head briefly (risking rear-end collisions),
• eliminated by reducing overlap between side and rear-view mirrors, or
• reduced by installing mirrors with larger fields-of-view.

STATE TAX BLIND SPOTS

Now, what does this have to do with state taxes?  

Well, I believe most, if not all, companies have state tax blind spots.  These blind spots may include:

1. nexus (taxable presence) in states in which the business is not filing income tax returns or collecting sales tax
2. using the incorrect apportionment formula, including the wrong items or amounts in apportionment factors or using the wrong method to apportion different types of income (tangible, intangible, service, etc.)
3. including the wrong entities in a combined or consolidated state income tax return due to incorrect unitary group analysis
4. classifying business income as nonbusiness income (or vice versa)
5. misapplying P.L. 86-272 protection (i.e., business is not operating within limits of protection or business is applying P.L. 86-272 protection to the wrong type of tax)
6. misapplying sales and use tax exemptions
7. not self-assessing and remitting use tax on purchases of taxable items
8. assuming the business is selling is a nontaxable service, when it is actually selling tangible property
9. assuming the business is selling intangible property, when it is actually selling tangible property
10. not adding back related-party expenses on the business' state income tax return when required
11. adding back related-party expenses on the business' state income tax return when NOT required
12. when acquiring or merging entities, failing to perform state and local tax due diligence to uncover liabilities and determine a tax-efficient way to combine the entities (before and after the acquisition/merger)
13. failing to comply with state bulk-sale notification requirements
14. filing a separate return when a combined group return should be filed
15. allowing a FIN 48 reserve for state uncertain tax positions to grow year after year without attempting to reduce uncertainty

And the list goes on and on and on.

YOUR COMPANY / YOUR STATE TAX BLIND SPOTS

In regards to your company's state tax "blind spots," it usually depends on the stage your company is in and the size of your business.

As your business grows and changes, it is vital that your business examines its state tax "blind spots" before a "wreck" (audit assessment, nexus questionnaire, etc.) occurs.

Do you know what your state tax 'blind spots' are?

Do you need to install a warning system?

"dissociation" dead for Washington B&O tax?

A taxpayer loses the dissociation argument in a Washington Business & Occupation (B&O) Tax case. The Washington Court of Appeals held Washington's statutes and regulations subject both categories (streams) of the taxpayer's Washington bound sales to the B&O tax. The court also held the application of the B&O tax is consistent with the commerce clause. (see Avnet Inc. v. State of Washington, April 28, 2015)

The taxpayer shipped all of its products from distribution centers outside Washington. During the time period at issue, the taxpayer maintained an office in Washington. The taxpayer excluded two categories of Washington bound sales described as "National Sales" and "Third Party Drop-Shipped Sales." The "National Sales" category involved transactions where the taxpayer's customer places an order from a location outside Washington with the taxpayers office outside Washington, but directs the taxpayer to ship the products to Washington.  The drop-shipped category involves a customer located outside Washington placing an order with the taxpayer's office outside Washington, but directs the taxpayer to ship products to a third party located in Washington. Nothing in the record indicated that the taxpayer's Washington office participated in soliciting or filling orders, investing customer credit, or providing technical support to the end users in the specific sales at issue in the case.

The case discusses the interpretation and application of Washington's statutes and regulations regarding when the B&O tax applies to a sale. The case discusses WAC Rule 193 in the context of the taxpayer's argument that sales "not significantly associated in any way with  the taxpayer's activities in Washington" could be excluded from the B&O tax (dissociation). The court reasoned that Rule 193 was interpretive and can not provide a greater exemption than that provided by B&O statutes. The court held the taxpayer's claim must be determined according to constitutional arguments.

The taxpayer conceded that it has nexus in Washington. The dispute centers around whether the commerce clause allows the taxpayer to "dissociate" its Washington bound national and drop-shipped sales by showing that its instate personnel played no significant role in those transactions. Previous court cases, including those in Washington, held dissociation to be a viable position. However, the court asserted, agreeing with the Department, that subsequent precedent has shown a progressive broadening of the types of activities that may establish substantial nexus. Those precedents, according to the court, show that a state need not demonstrate a direct connection between a taxpayer's nexus-creating activities and particular sales into the state in order to tax those sales.

Take Away

If you or your clients have utilized dissociation to keep specific Washington bound sales from taxation, it is time to review that position and determine the prudent path forward.

this week's top 10 developments include: nexus, alternative apportionment, amnesty, transfer pricing and more

Rulings, court cases, and proposed legislation change the landscape of multistate taxation every day. It is impossible to follow all of it. I attempt to keep you aware of the items that may have a significant impact on a broad range of taxpayers. If you are following a major issue in your state that isn't listed below, and would like me to highlight it on this blog, please contact me.

Here are my top 10 for the week:

1. Tennessee is looking to establish click-through nexus for sales tax and economic nexus for income tax. Legislation moving to Governor (HB 644).
2. South Carolina issued draft guidance on alternative apportionment methods. Open for public comments until May 14th. Conference to be held on May 21st.
3. Maryland enacts favorable Amnesty? See McDermott Will & Emery's Inside SALT post for details.
4. North Dakota enacts law to phase-in single sales factor and repeal some Multistate Tax Commission provisions (SB 2292).
5. Louisiana proposes combined reporting (HB 775).
6. Missouri General Assembly passes bill that would establish market-based sourcing for sales other than sales of tangible personal property (SB 19).  
7. Nevada Senate approves bill to broaden definition of physical presence to cause remote sellers to collect sales tax, including a click-through nexus provision (SB 382).  
8. New York enacts multiple tax law changes as part of 2015-2016 budget (AB 3009).
9. New York enacted legislation makes numerous changes to New York City's taxation of corporations (SB 4610).
10. District of Columbia's transfer pricing enforcement program and combined reporting regime - appropriate? - read McDermott Will & Emery's post for details.

If you would like assistance in determining how any of the above will impact your company or clients, please contact me. Also, please contact me if you would like LEVERAGE SALT, LLC to comment, on your behalf, on the South Carolina draft guidance on alternative apportionment methods.

can you rely on informal guidance?

Each year, Bloomberg BNA compiles a "Survey of State Tax Departments." The survey is obtained by asking specific questions from state revenue departments regarding what may be viewed as 'grey areas' of multistate taxation.

The Bloomberg BNA State Tax Blog posted about how much weight should be given to informal guidance (like the survey) from state tax departments. The post and those that were a part of the discussion referenced in the post, raised great questions and points, such as:

1. How much weight should be given to informal guidance? 
2. The states know their responses will be published, so does that add 'weight' to their response?
3. The states' responses are NOT binding law and are NOT creating law.
4. What accountability do the states have for their responses if taxpayers rely on them?
5. Are the states' responses simply the equivalent of a taxpayer calling the state to obtain guidance? (meaning, it is informal guidance that is not binding and if relied upon, could come back to haunt the taxpayer at a later time)
6. If no other guidance exists (no statute, no regulation, no case, no ruling, etc.), then the survey provides some guidance as to what the state MAY do. Thus, this is probably where the survey is the most useful. 
7. If taxpayers are looking for formal guidance, they should request a letter ruling if the state allows it.

At the end of the day, taxpayers are always trying to obtain certainty regarding their tax issues. Unfortunately, it is not possible to achieve 100% certainty when the facts are complex and the state's rules are grey. Consequently, the taxpayer and adviser generally review all binding authority (statutes, regulations, cases, etc.) and unbinding authority (informal guidance, etc.) to develop support for a tax position. This is why we have the lovely 'levels of assurance' such as the 'realistic possibility of success' (33%), 'substantial authority' (40%), or 'more likely than not' (> 50%).

Depending on the situation, taxpayers are commonly balancing risk and the amount of dollars to spend to chase down this elusive certainty.  Accordingly, taxpayers are trying to attain the most cost-effective and practical solution that reduces risk to an acceptable level. Thus, other factors (business, legal, financial) may determine how much effort is taken to support a specific tax position, resulting in some taxpayers choosing to default to paying more tax to avoid risk.

Is your business struggling to find certainty?

What process do you follow to provide your clients with certainty?

How much weight do you place on informal guidance?

How do you balance risk and the cost of obtaining certainty?

how state taxes impact businesses of ALL sizes

Are you a start-up business?  A mid-sized business? Or a Fortune 500 company?  No matter the size of company, it doesn't really matter when it comes to state and local taxes.  If your company is doing business across state lines, your business is impacted by multistate taxes.

Common questions and issues:

1. Is my company required to register to file returns and pay income taxes?
2. Is my company required to register to collect and remit sales and use taxes?
3. Property taxes?
4. What credits and incentives is my company eligible to obtain?
5. My business operates as an affiliated group of multiple entities.  Does the state require us to file separate returns or one combined return?
6. How are intercompany transactions treated?  Do we have to addback intercompany expense deductions?
7. Is my affiliated group of entities unitary?
8. Does my affiliated group of entities need a transfer pricing study?
9. Are sales of services sourced differently than sales of tangible personal property?
10. What types of sales are included in the apportionment factor?
11. How are sales determined?  Gross sales or net sales?
12. Our company sales a service and a product.  Are we required to collect sales tax?  If so, on the whole charge or part of it? 
13. Our company has foreign (non-U.S.) operations.  How does that impact our state returns?
14. Our company is a foreign based company (non-U.S.) with operations in the U.S. If we don't have a permanent establishment in the U.S., are we still required to file state income tax returns?
15. How will changing the ownership and/or organization structure of our affiliated group of companies impact our state tax filing requirements? 
16. Do we owe sales tax on the purchase of a company's business assets?  Is there a bulk sale notification requirement?
17. If our company buys the assets of another company, are there any real estate transfer taxes due?
18. When can our company remove our FIN 48 reserve for uncertain state tax positions?
19. If our company owns an interest in a partnership, does that ownership interest give our company a taxable presence in the states in which the partnership operates?
20. If our company sells assets or liquidates a division of our company, is that treated as business or nonbusiness income?