draft sales and use tax nexus model act open for public comment

The hearing is to be held on September 15, 2015. Written comments are due no later than September 11, 2015. Persons making oral presentations are requested to file written comments as well. 

The following is an excerpt of the Summary of the Important Provisions of the Model as published by the Multistate Tax Commission (MTC) Uniformity Committee:

While the model is called the “nexus” model, states generally do not define nexus as part of their sales and use tax statutes. Rather, almost all states impose tax payment or collection obligations on defined persons who engage in defined activities in the state (e.g., “retailers” or “vendors”, and “doing business” or “engaging in business”). Many statutes do this within a “general definitions” section for the particular act or article, while others do so in the imposition statute itself.

Most states explicitly or implicitly extend their statutory use tax collection obligations to the limits of what the Constitution allows. The draft model follows this general approach of defining the operative terms for imposing a collection duty. The draft consists of two main provisions – a definition and a presumption – in Sections (a) and (b) respectively.

Section (a) defines the person on whom a tax payment or collection burden is imposed (here, “retailer engaged in business”) as a retailer, whether or not authorized to do business in this state, that has a sufficient connection with this state under the United States Constitution to be subject to sales and use tax collection duties . . . .

Section (a) also contains a list of activities that would bring a person within the definition of “retailer engaged in business.”

Section (b) is the “click-through” nexus provision modeled on what other states have enacted, generally—which takes the form of a rebuttable presumption. This provision also contains a minimum threshold.

Other provisions of the bill define certain terms and also provide for the possibility that federal legislation might someday grant states authority over other out-of-state persons (i.e. remote sellers).

The workgroup discussed but decided not to include any explicit de minimis rule for the activities listed in Section (a) or any “trailing” nexus provision.

For more info, please see the MTC's Notice of Public Hearing and site.

retroactively changing state tax legislation creates uncertainty

COST or (Council on State Taxation) recently urged the U.S. Supreme Court to hear a court case involving the state's ability to retroactively change legislation enacted eight years earlier (Hambleton v. State of Washington). The case involves Washington's estate tax, but has implications for other tax types (income tax and sales tax).

what are the limits?

COST's amicus brief discusses the history of the courts allowing retroactive changes to legislation and the limits imposed. According to COST, some courts have found as little as 16 months excessive and other courts have found more than ten years permissible. COST mentions that the Court has held that retroactive changes are allowed to carry out the intent of legislation enacted slightly more than one year before. The broad range and lack of uniformity among the states not only creates compliance concerns for taxpayers, but also carries the potential for violating the Due Process Clause of the U.S. Constitution.

uncertainty creates burden

Taxpayers generally take positions based on their own risk tolerance. Taxpayers who have a high risk tolerance may be willing to take positions based on their interpretation that a grey area of tax law is not constitutional or vague. These types of taxpayers run the risk of a state not only assessing additional tax, interest and penalties, but also are exposed to a state's ability to retroactively change its law in its favor.

Taxpayers with a lower risk tolerance may choose to take a conservative position and follow the grey are of tax law despite how obvious it may be that the law is unconstitutional or vague. These types of taxpayers may choose to file amended returns claiming a refund of the tax paid. In this case, the taxpayer is protected from being assessed additional taxes, interest and penalties. However, the taxpayer is still exposed to a state's ability to retroactively change its law in its favor resulting in the disallowance of the taxpayer's refund claim. 

In both situations, taxpayers may incur compliance costs, consulting fees, attorney fees, court costs, etc. before the issue is resolved. Additionally, while the issue is being litigated or considered, the uncertainty creates additional exposure for current tax years. 

I agree with COST, and urge the U.S. Supreme Court to consider this case not only for the reasons asserted by COST in their amicus brief, but also because states have an obligation to create a stable and reasonable compliance environment that doesn't keep taxpayers guessing.

2015 state tax amnesty programs - should your company apply?

Is amnesty the way forward? Does your company have past liabilities that need paid without paying penalties or interest? Should your company participate in a state's amnesty program or utilize the state's Voluntary Disclosure Program?

These questions plague companies when faced with identified compliance exposure and failures for multiple tax years. Some states offer one-time, short time-frame amnesty periods allowing companies to come forward, file prior year tax returns, and pay tax with the promise of future compliance. Depending on the specifics of the state's amnesty program, penalties and/or interest may be abated.

Key to remember: if your company has exposure and does not come forward, then the state may assess more significant penalties and interest when it finds your company later.

The Council on State Taxation (COST) has put together a great matrix of 2015 state tax amnesty programs. Check it out here.

Also, if you would like to read more about amnesty, check out my previous posts here.

Specifically, you may like: Amnesty and Voluntary Disclosure Agreements: What, When, Why?

are sales tax auditors being 'unreasonable'?

Did your sales tax auditor ask to see 'all' of your accounts and records? 

If you answered 'yes,' you are not alone. If put in this position, what do you do? Well, ask yourself the following questions:

1. Are your records so detailed, complex or voluminous that an audit of all detailed records would be unreasonable or impractical?
2. Would the cost of an audit of all detailed records to the taxpayer or to the state be unreasonable in relation to the benefits derived and sampling procedures would produce a reasonable result?

If you answered 'yes' to any of these questions, the state should work with you to determine a reasonable method of performing the audit. Unfortunately, this is not always the case. Sometimes auditors dig their heels in, and you have to ask to speak with their manager, and then the manager's manager. It can be very frustrating. Especially if the taxpayer has been audited by the state in the past using 'reasonable' methods.

Let's face it, an auditor should not ask or reasonably believe it can review all of the records of a Fortune 500 company. Even with the best systems in place, it is a monumental task. Yet, some state auditors or states have adopted policies to push this requirement.

The ironic part of this request and requirement is that auditors don't really want all of these records because if they did, they would have to review them. Auditors don't have the time.

So why do states attempt to impose this burden?

If records are not provided, some states threaten to calculate an audit assessment using estimates (which are essentially based on bad numbers) or a 'jeopardy assessment.' 

It seems like states are simply using this strategy to be able to issue an assessment based on estimated numbers.

Why would the state do this?

Perhaps it is because they are understaffed. They don't have the resources to perform a reasonable audit. Thus, they impose an unreasonable requirement that can't be met so they can simply issue an estimated assessment and move on.

We Don't Live in a Perfect World

Common sense and reasonableness should apply on both sides of the table. In a perfect world, a taxpayer would be able to supply all records. State auditors would be able to review all records. Tax law would be simple, clear, without any room to argue or interpret. Simply push a button and 'boom,' you know what your tax is. No questions asked. No need for auditors. No need for large tax departments. No need for a tax profession. But wait, we don't live in a perfect world.

Action

The next time this happens to you, try to have a reasonable discussion with the auditor, the auditor's manager and the manager's manager (if necessary). If that doesn't work, be prepared to appeal an unreasonable audit assessment or supply all of your records. The good news is that a state's Appeals Division is usually a great place to receive a reasonable result after bad audit policies were followed. I have seen this firsthand.

Do you have any audit horror stories?

Do you have any audit strategies?

If so, feel free to share them here, or to remain confidential, contact me at strahle@leveragesalt.com.

Remote Transactions Parity Act (RTPA) of 2015 Provides No Exceptions

The RTPA of 2015 was introduced by Rep. Chaffetz this week in an attempt to provide an alternative to the Marketplace Fairness Act (MFA). If you have read the numerous articles circling in the media, there are groups that praise the RTPA and several that throw stones.

Without taking sides on the issue, the RTPA proposes to reach the same goal of the Marketplace Fairness Act and that is, 'level the playing field' between remote/online retailers and traditional brick and mortar retailers. The RTPA plans to achieve that level playing field the same way the MFA proposed - by ignoring legal precedent against imposing sales tax collection obligations on out-of-state taxpayers who lack a physical presence in a state.

The RTPA proposes to allow each member state under the Streamlined Sales and Use Tax Agreement to require remote sellers not qualifying for the small remote seller exception to collect and remit sales and use taxes on remote sales. States that are not members of the Streamlined Sales and Use Tax Agreement may require remote sellers to collect and remit sales and use taxes on remote sales as long as the state adopts and implements minimum simplification requirements. The act provides a listing of the 'simplification requirements.'

Perhaps the most significant concern with the RTPA (aside from the obvious) is the definition of 'small remote seller." Small remote sellers would be excluded from the collection requirements. The small remote seller exclusion is a phased-in approach and the definition doesn't include remote sellers that use an 'electronic marketplace' (like Etsy). Consequently, any small remote seller using Etsy would be subject to the collection requirements. That is crazy my friends. Most, if not all, remote sellers using Etsy are 'small remote sellers,' otherwise they wouldn't be using Etsy.

The RTPA defines an 'electronic marketplace' as a digital marketing platform where products or services are offered for sale by more than one remote seller, and buyers may purchase such products or services through a common system.

For the first year after enactment, small remote sellers are defined as having gross receipts less than $10 million. For the second year, small remote sellers are defined as having less than $5 million. For the third year, small remote sellers are defined as having less than $1 million in gross receipts.

Despite what side of the issue you are on, you have to ask the following questions: Why does the 'small remote sellers' exception phase-out? Why tax remote sellers using an electronic marketplace regardless of the amount of sales? 

The RTPA asserts that the Act does not create any nexus between a person and a state. This is a strange statement since the effect of the RTPA is creating a nexus relationship between the remote seller and customer causing the remote seller to collect and remit sales taxes. That's like the common analogy of 'putting lipstick on a pig.' Regardless of what you do or call it, it is still a pig.

The RTPA defines a 'remote sale' as a sale that originates in one State and is sourced to another State which the seller would not legally be required to pay, collect or remit state or local sales and use taxes without the authority provided by the RTPA. Consequently, the RTPA is giving states the right to do something that (without the RTPA) would be illegal.

Regardless of what you think about the RTPA, Congress is definitely looking for solutions to resolve this perceived loophole or problem of collecting sales tax on remote sales. My intuition tells me that a solution will be enacted; however, I'm not convinced that solution should be the RTPA.

the 'upfront' Minnesota capital equipment exemption

Companies that make capital equipment purchases in Minnesota will no longer have to go through the pain of paying sales tax, and then filing refund claims. Minnesota legislation (enacted in 2014) changing the capital equipment exemption to an 'upfront' exemption goes live July 1, 2015.

According to Minnesota Sales Tax Fact Sheet No. 103, taxpayers must give a supplier a completed Form ST3, Certificate of Exemption and use the code, "Capital Equipment" to claim the exemption.

This is welcome news for taxpayers in Minnesota. The process of filing refund claims was not only costly (causing taxpayers to pay the tax first), but created a burden on taxpayers to jump through 'hoops' to identify eligible purchases, gather the paperwork and file the claims.