tax management weekly state tax report · wolski; washington, d.c., jeff day index editors,...

H I G H L I G H T S

Texas Margin Tax Not ‘Income Tax,’ Appeals Court SaysMultistate businesses can’t choose whether to use the income apportionment formula under the Multistate Tax Com-pact or the Texas margin tax, because the margin tax isn’t an income tax in the first place, a Texas appellate courtruled in a win for the state. The Texas Court of Appeals for the Third Judicial District rejected arguments fromGraphic Packaging Corp., a Georgia-based packaging company, that because the margin tax isn’t a gross receipts taxit must be an income tax.

Multistate Tax Commission Group OKs Nexus Model StatuteA committee of the Multistate Tax Commission (MTC) has approved a model statute attempting to define when out-of-state sellers have an obligation to pay or collect sales and use taxes. The MTC Uniformity Committee voted 12-0to forward the Model Sales and Use Tax Statute to the commission’s Executive Committee, which will convene dur-ing the MTC’s 48th annual meeting in Spokane, Wash.

New Texas Enterprise Zone Rules Include Smaller BusinessesEffective Sept. 1, changes to the Texas Enterprise Zone Program will ultimately result in greater credit availability tonew and smaller companies looking to participate in the state’s tax incentives program designed to induce privateinvestment in severely distressed areas of the state, a Dallas tax attorney told Bloomberg BNA. Mike Goral, partner-in-charge of state and local tax (SALT) services at Weaver’s Dallas office, said the ‘‘benefits’’ of the new amendmentswould include ‘‘allowing new and smaller companies that begin business in Texas to participate in the Program, sincethe focus now is on new permanent jobs as opposed to job retention which tended to benefit larger companies thatgrabbed most of the available credit in the previous enterprise zone Program.’’

Illinois Towns Seek Class Certification in Hotel Tax DisputeIllinois municipalities are taking another swipe at online travel companies, filing an amended motion for class certi-fication in litigation that seeks unpaid hotel occupancy taxes and penalties from e-commerce defendants ExpediaInc., Orbitz LLC, Priceline.com Inc. and Travelocity.com LP. The Village of Bedford Park, Ill., recently filed a secondmotion for class certification in U.S. District Court for the Northern District of Illinois on behalf of 154 municipalities.

Perspective: Bloomberg BNA Q&A With Executive Director Of the Multistate Tax Commission, Joe HuddlestonJoe Huddleston has served as the executive director of the Multistate Tax Commission for the past decade. In this in-depth interview with Bloomberg BNA, Huddleston discusses the biggest challenges facing the state and local taxworld today, new frontiers for the MTC and his decision to return to the private sector.

Perspective: Does N.Y. Overreach in Its Tax Enforcement? An In-Depth Look at the State’s Policies and PracticesNew York is a leader in its tax enforcement and compliance efforts; however, many tax attorneys and certified pub-lic accountants interviewed by Bloomberg BNA expressed concerns that the state may be overreaching in a numberof key areas. This article examines the states policies and practices in key areas such as sales tax audits, residencyand domicile issues and criminal enforcement in order to determine whether the state sometimes goes too far.

Copyright � 2015 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. ISSN 1534-1550

NUMBER 31 JULY 31, 2015

Tax Management

Weekly State Tax Report™

2 (Vol. 2015, No. 31)

7-31-15 Copyright � 2015 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. TM-WSTR ISSN 1534-1550

TM Weekly State Tax Report

CEO and PRESIDENT:GREGORY C. MCCAFFERY

PRESIDENT, TAX & SPECIALTYDARREN MCKEWEN

VICE PRESIDENT and GENERAL MANAGER,TAX AND ACCOUNTING:LISA FITZPATRICK

BUREAU CHIEF:PAUL ALBERGO

NEWS DIRECTOR, TAX AND ACCOUNTING:CHERYL SAENZ

EDITORIAL DIRECTOR:GEORGE R. FARRAH

DEPUTY NEWS DIRECTORS,TAX AND ACCOUNTING:BRETT FERGUSON, RITA MCWILLIAMS

Contributing Editors, Molly Moses, S. AliSartipzadeh, Derek TongCopy Editors, Jane Bowling, MeganFinnerty, Dave Harrison, Kathy CarolinLarsen, Steven Marcy, Vandana Mathur,Ellen E. McCleskey, Gretchen Obert,Isabella Perelman, Laura Tieger Salisbury,Karen Saunders

Reporters/Legal Editors, MatthewBeddingfield, Kevin A. Bell, AlisonBennett, Laura Davidson, Diane Freda,Dolores Gregory, Marc Heller, Aaron E.Lorenzo, Erin McManus, Radha Mohan,Priya Nair, Tiwa Nwogu, Alex M. Parker,Anjana Solanki, Casey Wooten

Manager, Correspondents, Terence Hyland

Staff Correspondents: Albany, N.Y., JerrySilverman; Atlanta, Chris Marr; Austin,Tex., Paul Stinson; Boston, AdrianneAppel, Martha Kessler; Chicago, MichaelBologna; Cincinnati, Bebe Raupe; Denver,Tripp Baltz; Houston, Nushin Huq;Lansing, Mich., Nora Macaluso; LosAngeles, David McAfee, Carolyn Whetzel;New York, John Herzfeld, Stephen Joyce;Norwalk, Conn., Steve Burkholder, DeniseLugo; Philadelphia, Leslie Pappas;Phoenix, William H. Carlile; Raleigh, N.C.,Andrew Ballard; Sacramento, Calif., LauraMahoney; San Francisco, Joyce E. Cutler;Seattle, Paul Shukovsky; St. Louis,Christopher Brown; St. Paul, Minn., MarkWolski; Washington, D.C., Jeff Day

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T O P I C A L I N D E X

ALLOCATION/APPORTIONMENTIllinois issues proposed regulations for hedging

transactions ........................................................

Texas margin tax not ‘income tax,’ appeals courtsays ..................................................................

ASSESSMENT/COLLECTIONKansas, Indiana, Missouri to start amnesty

periods in fall .....................................................

CONSTITUTIONAL LIMITATIONSMultistate Tax Commission group OKs nexus

model statute ......................................................

ENTERPRISE ZONE CREDITSNew Texas enterprise zone rules include smaller

businesses ..........................................................

EXCISE TAXOregon to tax recreational marijuana sales..................

EXEMPTIONSDTE partly exempt from tax, Mich. high court

says ..................................................................

Untethered hot-air balloons exempt from Missourisales tax ............................................................

HOTEL TAXIllinois towns seek class certification in hotel tax

dispute ..............................................................

PROCEDUREAlabama requires security code for tax website............

Assessment blocked, appeal filed in Alabamatribal tax case .....................................................

Connecticut tax gap effort garners $85 million .............

Hotel buyer ruled liable for prior owner’s Georgiatax debt .............................................................

Oregon expands tax haven list, with notableomissions ...........................................................

Staff possibly blocking inquiry of N.M. Tax andRev. secretary .....................................................

SPECIFIC INDUSTRY CREDITSOregon governor signs bill extending tax credits ..........

TAX BASELegislators, governor butt heads over New

Hampshire budget ...............................................

Online travel companies owe District of Columbiasales tax ............................................................

TAX POLICYBloomberg BNA Q&A with executive director

of the Multistate Tax Commission, JoeHuddleston .........................................................

Does New York state overreach in its taxenforcement? A comprehensive look at thestate’s policies and practices .................................

TAX RATESNorth Carolina lowers corporate income tax rate

for 2016 .............................................................

UNCLAIMED PROPERTYDelaware overhauls unclaimed property program.........

I N D E X O F D E V E L O P M E N T S B Y S TAT E

ALABAMACarcieri v. Salazar ..................................................

Poarch Band of Creek Indians v. Hildreth ...................

DELAWARES.B. 141 .................................................................

DISTRICT OF COLUMBIAExpedia, Inc. v. D.C. ................................................

GEORGIADouglasville Hospitality Inc. v. Riley ..........................

ILLINOISVill. of Bedford Park, et al. v. Expedia, Inc. .................

MICHIGANDetroit Edison Co. v. Michigan Dep’t. of Treasury ........

MISSOURILetter LR 7067 ........................................................

NEW HAMPSHIREH.B. 1....................................................................

H.B. 2....................................................................

OREGONH.B. 2041 ...............................................................

(Vol. 2015, No. 31) 3

InThis Issue

TAX MANAGEMENT WEEKLY STATE TAX REPORT ISSN 1534-1550 BNA TAX 7-31-15

I N D E X O F D E V E L O P M E N T S B Y S TAT E

Continued from previous page

H.B. 2171 ...............................................................

S.B. 61 ..................................................................

TEXASGraphic Packaging Corp. v. Hegar .............................

I N D E X B Y P O R T F O L I O / N A V I G AT O R A F F E C T E D

1150-2nd T.M., Income Taxes: Principles of FormularyApportionment

Graphic Packaging Corp. v. Hegar .............................

1480-2nd T.M., Credits and Incentives: OR Through WYH.B. 2171 ...............................................................

Corporate Income Tax Navigator, at Delaware 14S.B. 141 .................................................................

Corporate Income Tax Navigator, at New Hampshire 5.1H.B. 1....................................................................

H.B. 2....................................................................

Corporate Income Tax Navigator, at Texas 6.3Graphic Packaging Corp. v. Hegar .............................

Excise Taxes Navigator, at Illinois 10.1Vill. of Bedford Park, et al. v. Expedia, Inc. .................

Excise Taxes Navigator, at Oregon 2.4H.B. 2041 ...............................................................

Sales and Use Tax Navigator, at D.C. 6.7Expedia, Inc. v. D.C. ................................................

Sales and Use Tax Navigator, at Georgia 10.5Douglasville Hospitality Inc. v. Riley ..........................

Sales and Use Tax Navigator, at Michigan 8.3Detroit Edison Co. v. Michigan Dep’t. of Treasury ........

Sales and Use Tax Navigator, at Missouri 9.11Letter LR 7067 ........................................................

TA B L E O F C A S E S

Detroit Edison Co. v. Michigan Dep’t. of Treasury ..........

Douglasville Hospitality Inc. v. Riley ............................

Expedia, Inc. v. D.C. ..................................................

Graphic Packaging Corp. v. Hegar ...............................

Poarch Band of Creek Indians v. Hildreth .....................

Vill. of Bedford Park, et al. v. Expedia, Inc. ...................

4 (Vol. 2015, No. 31)


PerspectiveTa x P o l i c y

Joe Huddleston has served as the executive director of the Multistate Tax Commission for

the past decade. In this in-depth interview with Bloomberg BNA, Huddleston discusses the

biggest challenges facing the state and local tax world today, new frontiers for the MTC and

his decision to return to the private sector.

Bloomberg BNA Q&A With Executive DirectorOf the Multistate Tax Commission, Joe Huddleston

BY RADHA MOHAN

BLOOMBERG BNA: How did you start your career andwind up in state taxation specifically?

HUDDLESTON: It is a somewhat convoluted history. Iwas practicing law in Tennessee and I had gotten in-volved in a political campaign. After my guy won, thedeputy to the governor asked if I might be interested ina position in their administration. Looking at my back-ground, he saw that I had spent some time working forthe Internal Revenue Service before going back to lawschool, and asked if I would be interested in a positionwith the department of revenue. At the time, I knewnext to nothing about state tax, but was very interestedin the position. So, I ended up in the commissioner’s of-fice in the Tennessee Department of Revenue.

BLOOMBERG BNA: You were working for the InternalRevenue Service?

HUDDLESTON: Yes, I was a revenue officer. A field col-lection officer, actually. So, you can see I knew next tonothing about tax!

Working as a field collection officer involved the veryend of a process that the revenue service goes througheither to secure delinquent returns or delinquent taxes.The revenue department has a lengthy process beforethe assignment gets made to the field. So, by the time

Joe Huddleston received the 11th annualaward for Outstanding Achievement in Stateand Local Taxation from New York Universityin 2012. Prior to joining the MTC, he was vicepresident of tax solutions for Liquid EnginesInc., a tax software firm focused on advancedstate income tax planning models and meth-odologies for multi-state and multi-nationalcompanies. Mr. Huddleston joined LiquidEngines from Grant Thornton LLP, then thenation’s sixth largest accounting and manage-ment consulting firm, where he was a part-ner and national director for state and localtax. Mr. Huddleston serves on numerous statetax related boards, including BloombergBNA’s State Tax Advisory Board..

(Vol. 2015, No. 31) 3


an assignment gets to the field, it is usually the most dif-ficult situation left to deal with.

BLOOMBERG BNA: Did any interesting experiencescome out of that?

HUDDLESTON: Almost a life history. Every strangesituation you can imagine, and many I hope you can’t,are confronted by revenue officers every day. Of all thethings I have done in my life, it was possibly the mostdifficult and certainly the most unpleasant.

BLOOMBERG BNA: How did you start working for theMultistate Tax Commission (MTC) and what have theMTC’s biggest accomplishments been during your ten-ure?

HUDDLESTON: I came to the MTC ten years ago. Theexecutive committee that hired me was very concernedthat the MTC over the past decade had been building areputation that was not very positive in the businesscommunity. This is certainly understandable when youhave an agency that audits people. It can be very con-tentious. Plus, the MTC was and still is on the forefrontof state tax policy issues and sometimes that can createproblems in the private sector as well.

I would point to a number of things during my ten-ure that I am very proud of. On the top of that list is myoriginal mandate to try to improve the view of the MTC.We have worked very hard with the private sector interms of transparency and our willingness to sit downand explain what we are doing and why. We have alsocontinually invited the private sector to participate inany and all of our discussions.

I don’t think that the tension that is inevitable in anaudit situation has gone away. I think that will alwaysbe there. But, I think our willingness to talk about theissues has developed some level of respect in the pri-vate sector community.

Another area where I am particularly proud of ouraccomplishments is a number of model statutes that wehave been able to develop over the past ten years. I amparticularly proud of our work on model financial insti-tutions. I also think our work with other areas, such asdigital goods and mobile workforce, has been verystrong.

I would be really remiss if I didn’t point to our re-write of UDITPA (Uniform Division for Income TaxPurposes Act), particularly sections 17 and 18, whichwere long overdue. While they were very contentious atthe time, I don’t think that there are any items that haveended up being very contentious. I think we have donean outstanding job dealing with tax structures that existtoday, versus tax structures that existed ten years ago.

BLOOMBERG BNA: You mentioned that the UDITPAre-write was somewhat contentious at the time. Howdid you get the wheels set in motion for this project?

HUDDLESTON: When we first started doing this, wewent to the Uniform Law Commission (ULC), whichwas the father of UDITPA to begin with. We gave theULC the opportunity to take the lead on this project.The result was a very contentious period where the pri-vate sector pushed back a lot.

The ULC commissioners ultimately decided that theywould not go forward with this. Part of this was basedon the concept that the ULC wants to convince them-selves upfront that any provision that they go forwardwith has a really strong chance of becoming law inmany states. There was a sense that these issues were

so contentious and problematic that the chance of get-ting it enacted into law was small. That is not the basison which the MTC has ever looked at its model statutes.

The MTC does not have the same constraints as theULC. We understand that many states look at these pro-visions as being important to them at different times.While one state may want to enact a provision this year,another state may not. It is our sense that providingthese re-writes dealing with the world as we see it todayis important. It is important to have these models avail-able to the states so that each individual state can refer-ence it when they see fit.

So, we proceeded along the lines of rewriting theUDITPA provisions. While we met with some pushbackand some criticism on it, it was not so great that we feltlike we would be unable to fulfill our mission and writeupdated provisions.

BLOOMBERG BNA: You mentioned that the UDITPAproject was in part spurred by a need to update provi-sions to reflect the current economic and technologicalmodel. What are some other ways in which state taxcodes need to change to be more closely aligned withthe current economy?

HUDDLESTON: I think the biggest issue we have seenover the past few years is the continuing move towardsa market-based economy. As we see that, a number ofstates have moved in the direction of single-sales factorand if not single-sales factor, multiple weighting of thesales factor.

Now, if you look at the history of the MTC, this iscertainly not the direction we envisioned moving in.Early in our history, we were big believers in an equallyweighted three-factor apportionment program. In theearly 70’s we were even adamantly against movingaway from anything other than an equally weightedthree-factor apportionment formula.

At the heart of the MTC’s mission is uniformity. Iwould suggest that where we would see the states mov-ing is towards this goal of uniformity. Unfortunately forour founders, it is moving away from the vision that weoriginally had. Nonetheless, it moves in the direction ofmuch greater uniformity as states begin to change theirstatutes to adapt to a market-based economy. The MTChas recognized that and has moved to build models anduniform rules and regulations that relate to theeconomy that we have in the 21st century.

BLOOMBERG BNA: Do you think that the movementaway from cost of performance-based sourcing and to-wards market-based sourcing will continue?

HUDDLESTON: Yes, I absolutely do think that morestates will adopt market-based sourcing. I also think wewill not only continue to see these same kinds of discus-sions at the state level, but also at the multinationallevel as well. I think what you find in government is thatvery often there is a substantial lag behind the way gov-ernments, whether it is national, state, or local govern-ments, tax and regulate relative to the way actual busi-ness activity is carried on. Businesses tend to move rela-tively quickly to adjust to changes in technology or intheir market. Governments, on the other hand, tend tobe really slow in making those adjustments.

So, I think that how businesses carry on business haschanged really dramatically in the past twenty years,but the way states tax and regulate has not changedthat much. But, it is changing all the time to try andcatch up with industry. Unfortunately, for all of us in

4 (Vol. 2015, No. 31) PERSPECTIVE


business and government, the two are never quite onthe same page.

BLOOMBERG BNA: You mentioned that discussions onformulary apportionment will continue on the multina-tional level. Do you see the international communityadopting formulary apportionment in the next fewyears?

HUDDLESTON: No, I don’t see the international com-munity doing this in the near future. But, I think this isa discussion they will have to come to grips with. As Isaid, regulatory bodies are about a decade behind time;it will probably be about close to that period of time be-fore most of the international community is able tocome to grips with the fact that the taxation methods ofthe 1950s don’t work very well in the 21st century.

A lot of that will be driven by the fact that the thirdworld is becoming a much greater influence in the areaof market for multinational businesses. These develop-ing countries will be looking more at a tax base that isdriven by the market they provide. So, a lot of the issuesthat have come up in the state arena as it has moved to-wards market-based sourcing will come up on the inter-national side in the next decade.

BLOOMBERG BNA: I imagine as companies like Netflixcontinue their expansion into highly populated Asianmarkets, their governments will want to derive a benefitfrom the market they provide.

HUDDLESTON: I think that is clearly true. I think yousee from the reaction of China and India and thosetypes of countries where there is a huge market, thattheir reaction to the OECD (Organization for EconomicCo-operation and Development) proposals has not beenvery positive.

BLOOMBERG BNA: The gap between current law andthe changing economic and technological model is oneof the biggest challenges in the state and local taxworld. What are some other major challenges that thestate and local tax world will face in the next five or tenyears?

HUDDLESTON: I certainly think that one is at the topof the list! But, I also think you are going to see a muchmore mundane challenge. That is, state tax agencies arefacing ever-increasing problems in terms of being ableto staff their programs. Some of it comes out of the factthat a number of years ago, in 2008, we had a substan-tial economic downturn. We had a lot of people at thattime that were looking at moving towards retirement.Many state agencies were very worried that they weregoing to lose a substantial amount of their institutionalknowledge because of people retiring.

That didn’t happen because the economic downturnwas so dramatic that a lot of people postponed their re-tirements. Now, I think you are seeing that curve comeback the other way.

I think in the next couple of years, you are going tosee some pretty dramatic losses in terms of institutionalknowledge at the state level as people begin to recoverfrom the economic downturn and start to retire.

BLOOMBERG BNA: What steps can states take to pre-serve that institutional knowledge?

HUDDLESTON: It is extremely difficult. The states havebeen able to achieve that through some programs thatallow employees to retire and then come back to work

without benefits, but still receive their retirement pay.This has been very attractive in some states.

This program has met with some success in the edu-cational area, where a lot of states implemented a pro-gram that allowed teachers to retire and start receivingretirement benefits, but come back to work. This isknown as a DROP (Deferred Retirement Option Plan)program in many states.

You may continue to see some of that as states try toprotect themselves from a loss of institutional knowl-edge. But, I will tell you it is a very difficult problem todeal with because from a budget cycle perspective, it isvery difficult to hire new employees while retaining oldemployees at the same time.

BLOOMBERG BNA: You just talked to me about thebiggest obstacles for state agencies. What about theMTC? Do the same problems apply to the MTC? Whatare the MTC’s biggest challenges going forward?

HUDDLESTON: Well, the MTC has been very fortunatein that over the last few years we have been able to addstates to our audit program, which is a very beneficialprogram for most states. At the same time, we are veryconscious of the fact that individual issues in individualstates often have an overriding effect on whether statesjoin or continue to participate in third-party audit pro-grams like the MTC’s.

So, these issues are largely out of our control, reallyalmost without consideration to what the return to thestates might be from these programs. We are alwaysconscious of our relationship with our program states.It is a never-ending problem to monitor that and pro-vide an adequate budget to staff our programs.

BLOOMBERG BNA: Another major initiative started bythe MTC is the ALAS (Arm’s-Length Adjustment Ser-vice) program. What is the future of this program? Willthe program generate enough interest to continue in itsfull form, or will the MTC have to scale back the pro-gram?

HUDDLESTON: It is conceivable that they will have toscale back, but I think it is important to remember thatwhen you begin an ambitious program like the Arm’s-Length Adjustment Service, it certainly takes a lot oftime to build the basis of it.

We have had a number of states respond verystrongly to the program and we have many more statesthat have responded in a very positive fashion, but havenot yet committed to financially support the program.But we are close.

I believe that within the next several months and cer-tainly in the next year, we will have more than an ad-equate number of states to get the program off theground in its current form.

If that doesn’t happen, I suspect that the MTC willwant to look at whether or not there is some structurethat can demonstrate its value at less than the full pro-gram parameters. But, at this point, I am very optimis-tic that there will ultimately be more than enough statesthat sign on to the program to get it up and running inthe next year. I think the potential there is just tremen-dous for the states.

BLOOMBERG BNA: Of course, it would provide stateswith additional resources to address income shiftingfrom the use of transfer pricing on corporate incometax returns. Some states already use third-party con-tractors to help with these cases. Can you tell me a bit

PERSPECTIVE (Vol. 2015, No. 31) 5


more about the role of third-party auditors in the MTC’sALAS program?

HUDDLESTON: Sure. We would not be involved indealing with their third-party auditors. We would hireauditors in-house. But where we would look to thirdparties initially is in the econometrics area with econo-mists who deal in transfer pricing-type activities.

Economists with this type of expertise can be veryexpensive and it is hard for the states to hire them onany basis. We will be trying to build that capability overtime. Initially, we would have to hire third-party econo-mists to be able to help us with that program, but theauditing process would be MTC auditors exclusively.

BLOOMBERG BNA: The Graphic Packaging case justcame out in Texas. Will this case have an impact on Gil-lette in California? What are your thoughts on the hold-ing?

HUDDLESTON: I doubt it will have much impact on theCalifornia case. Certainly not as much impact as Kim-berly Clark in Minnesota or IBM in Michigan. But, itwill be helpful because the Graphic Packaging court fo-cused primarily on the income tax issue and found thatfact to be largely dispositive of the case.

BLOOMBERG BNA: What is the next frontier for theMTC to address?

HUDDLESTON: I think there are two big areas that theMTC has increasing opportunities in. First, is unifor-mity.

In the uniformity area, the MTC has tremendous op-portunities to look more closely at rules and regula-tions, as opposed to broader-based model statutes. Iwould hope that they will continue along the lines thatthey have started to go down to look more closely atrules and regulations that address the impact of the newUDITPA models.

I think there are a lot of other areas, such as unifor-mity for Federal RARs (Revenue Agent Reports), thatthe MTC should continue to pursue.

The other area where I think there are a lot of oppor-tunities for the MTC is the area of legal support.

One thing that we have seen over the years is thatmost states are very narrowly focused on their own le-gal issues. Sometimes, they will miss broader issuesthat ultimately impact them, but immediately impact alot of other states.

Being able to utilize the legal resources of the MTCcan be a tremendous asset to states as they deal withboth legislation and litigation. I would like to see a con-tinued expansion of the MTC’s legal support capabili-ties.

BLOOMBERG BNA: What role do you see the interna-tional community playing in resolving some of the statetax controversies that have been brewing over the pastfew decades (remote vendor sales tax collection, mobileworkforce, etc.) Also, do you think there is a chancethat any of the state tax bills (Marketplace Fairness Act,Remote Transactions Parity Act, etc.) currently beforeCongress will be enacted?

HUDDLESTON: No, I think it is unlikely that we are go-ing to see legislation on most of these issues enacted inthe near term or in the near future. I think there are somany issues that Congress is focused on. So, I person-

ally think it is unlikely that many of these big issues willmove forward, certainly not in the next year or two.

Now, I think this is very unfortunate. I think thatmany of the issues that have faced state tax administra-tions have been around for a long time. It is well pastthe time for Congress to act, especially in the area of In-ternet retailers. I would hope that Congress will act insuch a fashion as to open the door for states to maketheir own laws and rules.

In the other areas, the more restricted areas thatCongress continues to consider, I am not sure that I seeCongress acting on those either.

BLOOMBERG BNA: So, essentially they will continue tomaintain the status quo?

HUDDLESTON: Yes, I think that’s the shortest way tosay it.

BLOOMBERG BNA: In the absence of congressional ac-tion on some of these issues, going back to Justice Ken-nedy’s concurrence in Direct Marketing Associationearlier this year, do you think that there is a chance ofa Quill II going before the U.S. Supreme Court any timesoon?

HUDDLESTON: I certainly think that there is a chanceand there is certainly a lot of discussion about this. Ifstates can find a vehicle that would allow them to dothis, I think they would move forward.

I think it is important to keep in mind that thesethings don’t just spring up—they tend to develop overtime. They also tend to develop in many states at once.When the Quill case came out a number of years ago,there were several states that were pursuing similartypes of activities and Quill just happened to be the casethat made it to the U.S. Supreme Court. I suspect thatthis is the sort of thing we will see this time around too.

BLOOMBERG BNA: What advice do you have for statetax practitioners who are just starting out?

HUDDLESTON: I would say the most significant thingyou can do is to find a face. That is what I like to tellpeople who say ‘‘what is the most important thing youcan do?’’ By that I mean, in every revenue departmentacross the country, taxpayers should find somebodywho they actually know. The ability to facilitate discus-sion is very important. Problems are just routine com-pliance issues, but your ability to find a solution is en-hanced when you can find someone in the departmentto call.

Even if they can’t solve your problem for you, gener-ally they will be happy to find the right person for youto talk to. Those types of contacts are just invaluable.

Also, not just on the level of someone you can corre-spond with or call on the telephone, but someone if youpass them on the street you would know who they are,and they would know who you are.

BLOOMBERG BNA: What is the next step for you inyour career?

HUDDLESTON: Well, I will be joining Ernst andYoung’s indirect tax practice in the Washington, D.C.national tax office as of August 3.

BLOOMBERG BNA: So, you will be moving back to theprivate sector?

HUDDLESTON: Yes, one more time.



Ta x P o l i c y

New York is a leader in its tax enforcement and compliance efforts; however, many tax

attorneys and certified public accountants interviewed by Bloomberg BNA expressed con-

cerns that the state may be overreaching in a number of key areas. This article examines

the states policies and practices in key areas such as sales tax audits, residency and domi-

cile issues and criminal enforcement in order to determine whether the state sometimes

goes too far.

Does New York State Overreach in Its Tax Enforcement?A Comprehensive Look at the State’s Policies and Practices

BY GERALD B. SILVERMAN

Introduction

N ew York, considered by some to be a leader in itstax enforcement and compliance efforts, may beoverreaching in a number of key areas, according

to tax attorneys and certified public accountants inter-viewed by Bloomberg BNA.

The tax practitioners acknowledged the importanceof compliance and the need for enforcement, but saidstate policies and practices in areas such as sales taxaudits, residency and domicile issues and criminal en-forcement go too far.

Practitioners are divided on the question of whetherNew York is more aggressive than other states and theInternal Revenue Service, but many said New York andCalifornia are the most aggressive states. They alsocited the vast resources available to the state, includingdata analytics.

State tax officials said the Department of Taxationand Finance (DTF) has a compliance continuum that

emphasizes voluntary compliance over audits, collec-tions, litigation and criminal enforcement.

An estimated 96 percent of the tax revenue collectedby the department—$96 billion—is reported and sub-mitted voluntarily by taxpayers, according to NonieManion, executive deputy commissioner of the depart-ment.

‘‘We want to leave the compliant taxpayers alone,’’Manion said. ‘‘We assign our resources based on wherewe think there are compliance issues.’’

Residency, Domicile IssuesThe area that seems to cause the most concern

among practitioners is the nonresident income tax andthe state’s interpretation of what constitutes residencyand domicile.

Under state tax law, a resident is generally defined asone domiciled in the state or one who isn’t domiciled inthe state but who maintains a permanent place of abodein the state and spends more than 183 days of the yearin New York.

The state devotes a large amount of its audit re-sources to this area and collects about $200 million ayear from residency audits, according to Manion. Shesaid the state receives 800,000 nonresident personal in-

Gerald B. Silverman is a correspondent forBloomberg BNA.



come tax returns per year and audits 2,800 of those. Ofthe 2,800, 49 percent result in change to the taxes due.

‘‘We do these residency audits because there are alot of people that do have homes in New York,’’ Manionsaid. ‘‘The nature of New York lends itself there.’’

Manion said many of the taxpayers who are auditedhave multiple homes, and the challenge for the state isto determine where they are ‘‘landing’’ and if that istheir domicile. Manion said the issue becomes some-what contentious with taxpayers because the state isasking for personal information such as travel andcredit card records.

She implored taxpayers to keep good records, aswell as a diary of receipts.

Examination AreasThree areas are examined during a residency audit,

according to June 2014 nonresident audit guidelinesfrom the DTF: domicile, statutory residency and incomeallocation. The state tax law doesn’t define ‘‘domicile,’’according to the guidelines. Instead, the definition is setin regulation and has been the subject of numerouscourt cases and decisions by the state Tax Appeals Tri-bunal.

The tax guidelines cite 62 cases before state courts orthe tribunal that have addressed the issues of domicileand residency.

‘‘The nonresident audit could place a heavy burdenon the taxpayer due to the subjective nature of the ar-eas reviewed,’’ according to the guidelines, which are128 pages long. ‘‘Throughout these guidelines, the De-partment recognizes and has attempted to reduce thisburden.’’

‘‘The auditor, team leader and section head shouldattempt to streamline the audit where possible, identi-fying the scope of the audit in the early stages and pin-pointing the specific records needed to accomplish thetask,’’ it said.

Unique SituationVerenda Smith, deputy director at the Federation of

Tax Administrators, said New York is unique becauseof its size, tax base, geographic location and the inclu-sion of New York City.

‘‘Other large states do not have to deal with sixborder-state neighbors that contain disparate culturesand tax types, with many of them clustered just outsideNew York City,’’ Smith said in an e-mail. ‘‘These lead toconstant fussing over sales and income taxation thatcrosses the New York border. Connecticut-New Jerseycommuters who work in New York City are an obviousexample.’’

‘‘You constantly read about New York’s challengingresidents who take large capital gains just after sayingthey have become domiciliaries of Florida,’’ she said.‘‘But do you know which state actually has the most ag-gressive program, and has the biggest problem? It’sIowa.’’

‘‘You just never hear about the flood of wealthyfarmers cashing in on their lifetime’s accumulation offarmland and moving to Florida,’’ she said.

Practitioners’ ViewTax practitioners have a different view of the resi-

dency and domicile issues.David S. Untracht, senior principal at the accounting

firm Untracht Early LLC, said his general experiencehas been that auditors take ‘‘seemingly extreme posi-tions’’ like refusing to recognize the change in domicileof a former New York resident who moved to a foreigncountry and remained there for several years with nointention to return to New York.

‘‘It’s an area the state devotes a lot of audit resourcesto because there is a lot of abuse,’’ Untracht toldBloomberg BNA.

Barry H. Horowitz, a partner in the accounting firmWithumSmith & Brown PC, said the area is particularlychallenging because ‘‘you have to prove a negative.’’ Hecited an example of overreach in a residency audit inwhich the state asked one of his clients for ‘‘millions ofdollars,’’ but eventually settled for only 25 percent ofthe original amount because it knew it was incorrect.

John R. Lieberman, managing director at the ac-counting firm Perelson Weiner LLP, cited a residencycase in which his client’s position was backed up bycourt precedent and a statute clarifying the issue. Theclient, a company executive, ended up with almost$100,000 in legal and accounting fees and decided tosettle instead of pressing on.

‘‘You’re either pregnant or you’re not pregnant,’’Lieberman said. ‘‘A clear cut case.’’

Most AuditsNew York conducts more residency audits and non-

resident income allocation audits than any other state,according to the law firm Hodgson Russ LLP, which hasrepresented clients in many of these cases, includingone of the first to reach the state’s highest court.

The New York Court of Appeals in 2014 ruled inMatter of John Gaied v. N.Y., State Tax Appeals Tribu-nal that individuals can’t be taxed as statutory residentsof the state for personal income tax purposes withoutevidence that their dwellings were actually utilized asresidences

The court said a New Jersey resident who owned abusiness and a multifamily apartment building inStaten Island, N.Y., wasn’t a statutory resident withinthe meaning of the tax law because there was no basisto conclude that he used the apartment as his residence.

‘‘New York auditors are notorious for taking the po-sition that ‘once a resident of the Big Apple, always aresident,’ ’’ Richard D. Pomp, a law professor at theUniversity of Connecticut School of Law and a leadingauthority on state and local taxation, said in an e-mail.

‘‘They see lots of folks who change their drivers li-censes, registration to vote, religious organizations andeven their run-of-the-mill doctors,’’ he said. ‘‘But theymay return to N.Y. for more sophisticated medical careand to see the kids and grandchildren.’’

‘‘They may have ambiguous living arrangementswhen they return,’’ Pomp said. ‘‘If things are gray, theauditors will not err on the side of the taxpayer. Theproblem is particularly acute in New York where youhave lots of high net-worth individuals, who are well ad-vised, and have the funds to spend time outside NewYork in a tax haven like Florida, and time inside thestate, thus complicating the issue of residency. Things



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can get very murky if the move to a tax haven takesplace shortly before the realization of a large gain.’’

Criminal EnforcementAnother area where practitioners said New York has

gone too far is in criminal enforcement.William J. Comiskey, a partner with Hodgson Russ

LLP who helped usher in that area when he was theDTF’s deputy commissioner for enforcement, says thestate has sometimes gone too far.

Comiskey represented a Glens Falls, N.Y., business-man who was indicted in 2011 on tax fraud and false fil-ing charges. But in 2012, a Warren County court dis-missed the case after the district attorney’s office con-cluded that the DTF’s position was incorrect, Comiskeysaid.

The evidence showed that the alleged unreported in-come cited by the state was proceeds from the sale of apersonal residence, transfers from one bank account toanother and other nontaxable sources of income.

‘‘The department jumped the gun without conduct-ing any sort of real investigation,’’ Comiskey said. Itturned into ‘‘a nightmare’’ for the defendant and hisbusiness.

Alan J. Straus, a former chairman of the New YorkState Society of Certified Public Accountants, said thereis ‘‘a scary difference’’ between civil and criminal en-forcement.

‘‘They’re taking the approach that instead of civillymisstating your liability, you’ve criminally stolen ourmoney,’’ said Straus, an attorney and CPA. ‘‘That’s ascary difference.’’

GuidelinesThe DTF’s Criminal Investigations Division guide-

lines, which were issued in 2013, set forth the factorsthat must be considered before the state pursues crimi-nal sanctions. The state should consider the nature andseriousness of the misconduct, the putative defendant’shistory and whether other noncriminal sanctions wouldbe sufficient, according to the guidelines.

In addition, CID staff are supposed to consider thedeterrent impact of a criminal case, ‘‘building respectfor the law and creating a fair and equitable tax sys-tem.’’

‘‘While ultimate authority for pursuing prosecutionsrests with prosecutors—itself an important safeguardagainst improvident use of the criminal law—the refer-ral of a case for prosecutorial consideration or, evenmore clearly, pursuit by the Department on its own ini-tiative of an arrest or search warrant, is itself a signifi-cant step with likely adverse consequences to the sub-ject of the action,’’ according to the guidelines.

‘‘Given the gravity of the decision to pursue criminalsanctions, this memorandum sets out the factors thatCID personnel must consider when opening a CID mat-ter and, even more importantly, when determining toseek criminal sanctions.’’

Sales Tax AuditsSales tax audits are also a concern for many practi-

tioners.

Manion said sales tax audits are particularly chal-lenging in cases where a vendor doesn’t keep good re-cords or books and the state is forced to use indirectmethods of estimating taxes due.

‘‘It’s never clean,’’ she said. ‘‘It does come down to:This is our best estimate.’’

The state uses data analytics to target its audits to‘‘outliers’’ whose sales aren’t consistent with similarlysituated industries. In addition, it gets third-party infor-mation from beer, wine and liquor distributors, creditcards and franchisors to cross-check sales by bars, res-taurants and others, she said.

The use of third-party information has been success-ful in increasing voluntary sales tax compliance be-cause taxpayers know that the DTF has the informa-tion, Manion said.

Comiskey, who created the third-party programwhile at the department, said ‘‘some tools are designedto just be out there to create the impetus to have morecompliance.’’

The department, in another effort to increase volun-tary compliance, began a pilot program in 2014 calledthe ‘‘sales tax vendor relationship model,’’ Manion said.Under the program, the DTF sends collection staff tocertain new vendors to prospectively inform them abouttheir tax filing requirements or it sends the informationin the mail.

The department has found improved compliancewhen an agent visits and meets with a new vendor, butless success when information is simply left with thevendor without a personal visit, according to Manion.She said the department is getting into ‘‘behavioral sci-ence’’ to find the best method to communicate with andeducate taxpayers.

Manion said the state’s electronic filing of sales taxreturns has been a success by making filing mucheasier. About 90 percent of sales tax vendors aree-filing, she said.

Sales Tax ConcernsLeah Robinson, a partner at Sutherland, Asbill &

Brennan LLP, cited examples of her concerns about theDTF’s sales tax enforcement. In one case involving aFortune 500 company, the auditors asked for a ‘‘respon-sible person assessment’’ from high-level managementthat would have made senior management personally li-able.

‘‘It makes sense when you are worried about theability of a company to pay,’’ Robinson said, pointingout that this particular company was financially solid.‘‘It seemed to us to be a strategic way to force the com-pany to start talking settlement.’’

Another example was a case before an administra-tive law judge involving whether or not charges for filmrent was subject to sales tax if it was delivered on a tan-gible media. In the middle of the case, the DTF issuedan advisory opinion to another taxpayer that said thecharges were taxable. Although Robinson won the case,the department kept the guidance up on its website.

‘‘That was a questionable move in the middle of liti-gation,’’ she said, and ‘‘an example of less-than-forthcoming guidance.’’

Robinson said the imposition of sales tax on remotesoftware or online services is ‘‘a constant audit issue,’’with the state taking ‘‘a very aggressive reading of thestatute.’’



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AuditorsMany of the issues cited by tax practitioners involve

the practices of state auditors, who they said can putundue pressure on taxpayers to obtain payments. Prac-titioners who asked to remain anonymous used thewords ‘‘shake-down’’ and ‘‘extortion’’ to describe themost extreme cases. On the other hand, most practitio-ners acknowledged that auditors have a tough job andmany qualified their criticism by saying that there aregood auditors and bad auditors.

Untracht, whose practice is largely focused on NewYork, New Jersey and Connecticut, said that ‘‘NewYork is much more active.’’

‘‘They’re certainly the most active in auditactivity—by a lot,’’ said Untracht, a member of theNYSSCPA Financial Instruments and TransactionsCommittee.

Pomp said there are ‘‘conflicting expectations’’ fortax auditors. ‘‘They are the guardians of the fisc. In thatposition, they should be cautious, skeptical, cynical,and suspicious. Any auditor who has been around theblock has been lied to, deceived, and snookered.’’

‘‘On the other hand,’’ he said, ‘‘we want the auditorsto be flexible, reasonable, exercise good judgment, andview our clients as legitimate taxpayers, not tax dodg-ers.’’

Pomp said auditors ‘‘can be excused for being con-servative and ruling for the government’’ in cases thataren’t black and white, but supervisors need to play adifferent role.

‘‘They should not automatically circle the wagonsand support the auditors no matter what,’’ Pomp said.‘‘They should have the backbone to intervene and seethe issues more dispassionately and unbiased. Thereshould not be a disconnect between these higher levelofficials and the auditors.’’

DisconnectIt is exactly that disconnect that is frequently cited by

practitioners as a concern.‘‘I don’t think the audit staff are bad people,’’ said Ar-

thur R. Rosen, a partner at McDermott Will & EmeryLLP. ‘‘They just don’t have the same approach to theimportance of the law.’’

‘‘Audit staff looks to get something out of every cor-poration,’’ said Rosen, former deputy counsel at theDTF and former chairman of the American Bar Associa-tion Section of Taxation’s State and Local Tax Commit-tee. ‘‘The higher-level people understand that the law issupposed to control.’’

Rosen cited a case in which his client’s position wascorrect but he didn’t have 100 percent proof. The audi-tor threatened to request scads of documents and theclient ‘‘called the bluff’’ and agreed to the request. Thestate then asked for more documentation and asked fora certain amount of money. The client ultimately paid,realizing that the legal fees would have exceeded theamount requested by the state.

Rosen also cited a combined reporting case in whicha client provided extensive proof of instant unity, butthe state disagreed. The client settled because it wouldhave cost more to litigate, but ‘‘there was absolutely nobasis in law or facts,’’ he said.

‘‘That happens on a regular basis,’’ Rosen said.‘‘They’re coercing taxpayers into paying something.’’

‘Arbitrary and Capricious’Horowitz said auditors sometimes take ‘‘arbitrary

and capricious’’ positions that can then end up beingsettled at higher levels of the department.

‘‘There are some really good agents out there,’’ butsome think ‘‘every taxpayer’s a crook,’’ said Horowitz,a member of the NYSSCPA’s New York, Multistate &Local Taxation Committee.

Karen J. Tenenbaum of Tenenbaum Law P.C. saidshe had a case of a New York City restaurant that waspadlocked by the department, which had asked for alarge amount of money to settle the case. She broughtthe case to the tax commissioner at a ‘‘resolution room’’at a tax conference and it was subsequently settled fora much lower amount.

The restaurant is open and making its payments, ac-cording to Tenenbaum. ‘‘If you’re balanced, everyonewins,’’ she said.

Robinson said that in her experience representinglarge companies, she doesn’t frequently run into audi-tors going too far—perhaps because higher-level staff inAlbany are paying closer attention. ‘‘The audit supervi-sor seems to be checking with the technical division,’’she said.

Manion said ‘‘we work with our auditors to makesure they are not overly aggressive’’ through trainingand supervisory oversight. She said the department hasa three-to-one auditor-to-supervisor ratio.

The department also issues ‘‘an escalation letter’’ atthe start of every audit, informing taxpayers of the au-ditor, the supervisor, the section head and the programmanager. Manion said the DTF will sometimes rear-range the audit teams.

‘‘The tenor of the audit can be set by the practitioneror the taxpayer themselves,’’ she said. ‘‘We have a largeaudit workforce. We spend a lot of time on trainingthem.’’

In a recent interview with Bloomberg BNA, thestate’s new tax commissioner, Jerry Boone, said the‘‘use of advanced business analytics and predictivemodeling techniques enables us to target our audits sothat we’re not bothering the taxpayers that are comply-ing, but we’re significantly more likely to find non-compliance and focus our efforts on those non-compliers.’’

Suggested ImprovementsTax practitioners have a number of suggestions for

making the state’s tax enforcement fairer and more bal-anced for taxpayers, including the creation of an inde-pendent Office of Taxpayer Advocate.

While the state created the Office of the New YorkState Taxpayer Rights Advocate in 2009, the office ishoused within the Department of Taxation and Finance.Legislation to make the office completely independenthas been introduced for some 15 years, but the billshave either been vetoed or failed to pass both houses.

‘‘That would be one way to provide a mechanism totemper some of the enthusiastic enforcement thatpeople encounter,’’ Comiskey said.

Another suggestion is for the state to establish betterstandards for offers in compromise, much like thoseused by the IRS.

Straus said that until one recent case, New York hadnever accepted an offer in compromise from one of his



clients in 38 years of practice. ‘‘The standards are so ri-diculously high that you can’t meet them,’’ he said.

Similarly, the state could ease up on some of itsharsh collection terms, practitioners said.

Comiskey said collections ‘‘are really very aggres-sive’’ in some cases, with some taxpayers unable to af-ford the onerous terms for repayment. He said he has abetter appreciation since leaving the department of thepressure some businesses experience just to keep theirbusinesses afloat.

‘‘There’s a humanity to it that sometimes I thinkfolks on the enforcement side lose perspective of,’’Comiskey said.

Payment PlansFred Slater, a partner in the accounting firm MS

1040 LLC, said New York is frequently unwilling to ne-gotiate reasonable payment plans. The state could getmore people into the system with reasonable plans, butis instead pushing people ‘‘underground,’’ he said.

‘‘If you ask any accountant, do you pay the IRS firstor pay New York state, they’ll all tell you to pay NewYork state,’’ said Slater, a former chairman of theNYSSCPA’s Relations with the Internal Revenue Ser-vice Committee. ‘‘They don’t care if you don’t eat.’’

Slater, an outspoken critic of the department, offeredan example of overreach and delays in collections. Aclient who omitted some Forms 1099 filed an amendedreturn with the IRS and the state for his 2011 personalincome tax returns. The IRS case was resolved quickly,but the state case was only resolved in July 2015.

The state sent the client a notice and amended the re-turn by deleting the credit for long-term care insurance,saying the amendment was ‘‘based on information re-ceived,’’ Slater said. ‘‘In all senses, this is an auditchange and the taxpayer should be given a right to re-spond with New York state stating exactly why they arechanging the return,’’ Slater said in an e-mail.

The taxpayer sent two responses with proof of thelong-term care and asked for an explanation, but neverreceived one. Instead, the state sent a notice of demandfor payment and, six months after it amended the re-turn, filed a lien against the taxpayer, according toSlater.

‘‘So essentially letters written to New York state arenot assigned for months and the law that requires NewYork state to stop collection pending a resolution wastotally ignored,’’ Slater said. ‘‘No one was following therules about logging in a letter and stopping the collec-tion in a timely manner.’’

Performance MetricsThe DTF, in an effort to improve accountability,

posts its performance against four metrics on a quar-terly basis: response to telephone inquiries, issuing taxforms on time, resolving personal income tax (PIT)written inquiries and resolving business written inqui-ries.

For the quarter ending June 30:s 61.8 percent of telephone inquiries were answered

within five minutes, a decline from 74.7 percent in thesecond quarter of 2014;

s 100 percent of 107 tax forms and instructionswere issued timely and accurately, as in the secondquarter of 2014;

s an average of 88 percent of written inquiries re-garding PIT returns were resolved within 90 days, downfrom 92.7 percent in the second quarter of 2014; and

s 87.6 percent of written inquiries regarding busi-ness taxes were resolved within 90 days, down from92.7 percent in the second quarter of 2014.

Accessibility IssuesSome practitioners who represent individual taxpay-

ers and small businesses suggested that the departmentimprove its communications with taxpayers, whilepractitioners who represent large companies said theyusually have access to supervisory staff when needed.

Lieberman said he can usually get through to a man-ager at the IRS, if necessary, but ‘‘it’s very difficult toget through’’ in New York.

Slater said that ‘‘there’s nowhere to call, everythingis automated. Try and get a person, it’s almost impos-sible.’’

On the other hand, Robinson, who represents largecompanies, said mid-level and senior audit staff are ‘‘in-credibly accessible.’’ In some states, Robinson said shehas had to file a formal protest to get access to senioraudit management.

‘‘I’ve never had senior audit management decline ameeting,’’ she said. ‘‘To a large extent, that balancessome of the aggressiveness.’’

Tax GuidanceRobinson also had high praise for the amount of

guidance offered by the DTF. She said the state is some-times seen as aggressive because it is so forthcoming inguidance, whereas other states may be just as aggres-sive, but cases don’t become public until they are liti-gated.

‘‘New York, more than any other state I work inregularly, constantly issues guidance,’’ she said. ‘‘It’ssuch a huge benefit for taxpayers.’’

Improving communications is a priority of the state’snew tax commissioner. ‘‘We are targeting our commu-nications to the specific needs and characteristics of thetaxpayer so we can contact taxpayers directly, beforethere’s an issue, to remind them to file by a particulardate or to confirm for the taxpayer that we received theright documents on time,’’ Boone said. ‘‘This proactivecommunication fosters the relationship and continuesto build voluntary compliance.’’

Boone said the department is also getting ‘‘in front ofbusinesses early’’ to help them understand the tax laws.‘‘It’s an opportunity for us to receive feedback on whatis needed, or clarification, or respond to questions andjust make sure we are all on the right path to success,’’he said.

AwardsOne of the department’s greatest successes is its

e-file education program, which won the Federation ofTax Administrator’s 2015 Taxpayer Service and Educa-tion Award. The program included targeted mailings totaxpayers and tax preparers who had previously filedpaper returns, video and radio public service announce-ments, Web promotion and community outreach.



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In addition, the state created a network of free taxpreparation sites at 80 locations throughout the state.Ninety-two percent of taxpayers filed their personal in-come tax returns electronically in 2015.

The award was one of 19 received by the departmentduring the past four years, according to the DTF web-site. Others include awards for the use of technologyfrom the Center for Digital Government and an awardfor public service by the New York State Bar Associa-tion.

Compliance ContinuumNew York’s enforcement approach, which it calls a

compliance continuum, is viewed as a model by theFederation of Tax Administrators, according to Smith.The continuum moves from voluntary compliance ef-forts such as guidance and education to involuntary ef-forts like audit and criminal enforcement.

‘‘New York has a well-thought-out, data-driven strat-egy for enforced compliance,’’ Smith said in an e-mail.‘‘It is a strategy that maximizes voluntary complianceand minimizes the need for enforced compliance, or thedegree of enforcement that is necessary.’’

‘‘Other states do tend to think along these lines, butI don’t know of any that have as carefully and thor-oughly adapted all aspects of tax compliance to thestrategy as thoroughly as New York,’’ she said. ‘‘NewYork is in the very highest tier of states that knows howto use its resources efficiently.’’

Smith said New York has ‘‘a minimum of wasted en-forced compliance resources.’’

‘‘They aren’t wasting much time on the smaller oreasier stuff—they’re dealing with it through automatedmatching programs, well-placed communications andso forth,’’ she said. ‘‘So they actually have the resourcesto apply to the tougher cases that require enforced com-pliance, which, from a tax administrator’s viewpoint, isexactly the right outcome.’’



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IncomeTaxesDelawareUnclaimed Property

Delaware OverhaulsUnclaimed Property Program

D elaware has scaled back its aggressive collectionof unclaimed property with a system revamp thatshortens audit review periods, eliminates surprise

audits and could potentially reduce collections by tensof millions each year. [S.B. 141, enacted 7/22/15]

Delaware Gov. Jack Markell (D) signed S.B. 141 intolaw, enacting what practitioners have called a ‘‘dra-matic’’ and ‘‘fundamental’’ overhaul to the way Dela-ware administers its Abandoned Property Law.

The new law is the second this year to enact recom-mendations from a task force the state established in2014 to review and improve Delaware’s unclaimedproperty program.

S.B. 11 amended Delaware’s unclaimed property lawearlier this year by placing several limitations on un-claimed property audits performed by outside contrac-tors.

Two ‘Earth-Moving’ Changes. S.B. 141 makes two more‘‘earth-moving’’ changes, according to MichaelHoughton, a partner at Morris Nichols Arsht & Tunnellin Wilmington, Del., and a task force member repre-senting the Uniform Law Commission.

First, it shortens the review period of a company un-der audit from 34 years to 22 years. The previous lawallowed state auditors to look back to 1981, whereas thenew law stops at 1996. The 22-year look back is still lon-ger than most states, which generally review a period of10 to 15 years, Houghton said.

Second, the new legislation eliminates surprise au-dits by the Delaware Division of Revenue. Instead, com-panies will be notified in writing by the Secretary ofState that they may enter a voluntary disclosure agree-ment (VDA) program, giving the companies a chance toself-report unclaimed property on their books.

Companies newly enrolled in the VDA program willbe given an even shorter look back period of 19 yearsunder the new law. Only companies that decide not toenter the program within 60 days of being notified willbecome candidates for audit by the State Escheator.

Rather than ‘‘a bolt out of the blue,’’ companies willbe given ‘‘an invitation to get their house in order anddo it themselves,’’ Houghton told Bloomberg BNA in aphone call July 27.

Estimating and Extrapolating. The revised look backperiod is important because most companies don’t keeprecords beyond 10 years, meaning that older liabilitiesare usually estimated and extrapolated by contract au-ditors hired by the state.

In its final report, the task force found that estimatesof company liability for unclaimed property constituted15 to 20 percent of Delaware’s total annual unclaimedproperty revenues from 2008 to 2013.

Auditors may get paid as much as 12 percent of thetotal obligation they find, an arrangement that ‘‘raisesquestions,’’ Houghton said. ‘‘So here you have an audi-tor who is incentivized to inflate the finding, particu-larly when the finding is based on an estimated liabil-ity,’’ said Houghton.

Delaware’s methods of estimating and extrapolatingunclaimed property liabilities has come under increas-ing attack, Houghton said.

In one case, Temple-Inland Inc., a corrugated pack-aging manufacturer incorporated in Delaware andheadquartered in Memphis, Tenn., sued Delaware infederal court to prevent the state from collecting an es-timated $1.3 million obligation. Temple-Inland has chal-lenged Delaware’s estimation method as unconstitu-tional (Temple-Inland Inc. v. Cook, No.1:14-CV-00654-SLR, (D. Del. filed May 21, 2014)).

Revenue Loss. The overhaul made by S.B. 141 couldcost Delaware millions, according to the state’s own es-timates.

‘‘Delaware derives a significant portion of its rev-enues from unclaimed property, which is Delaware’sthird-largest revenue source,’’ the task force’s final re-port says.

According to the Delaware Economic and FinancialAdvisory Council’s June 2015 revenue forecast, thestate collected $474.9 million in abandoned property infiscal year 2014 and expects to collect $515 million infiscal year 2015.

The Delaware Department of Finance estimates thatthe shortened look back period under the new lawcould decrease state revenues by $1 million to $3 mil-lion in fiscal year 2018 and by $5 million to $10 millionin fiscal 2019, according to a fiscal note accompanyingthe legislation.

The state has had ‘‘a vested financial interest in hav-ing what many people characterize as an ‘aggressive’ ’’unclaimed property program, Houghton toldBloomberg BNA. The Delaware budget ‘‘has essentiallybeen propped up by hundreds and hundreds and hun-dreds of millions of dollars in unclaimed property.’’

Interest Assessment. The new legislation will have ‘‘avery significant impact on Delaware’s unclaimed prop-erty revenues’’ because of the shorter look-back period,according to Kendall Houghton (no relation), a partnerat Alston & Bird LLP in Washington, D.C.

Yet in an offset to the shorter audit period, the newlegislation also reinstates the state’s interest provision,which had been repealed in 2014, she told BloombergBNA in a phone call July 27. The interest provision willallow Delaware to impose interest of 0.5% per month on

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outstanding unpaid amounts of unclaimed property, upto a cap of 25 percent of the total amount to be paid.

‘‘This is sort of give with one hand, take back withthe other,’’ she said. ‘‘It’s a balancing act from a fiscalstandpoint.’’

Companies incorporated in Delaware that have beeninvited into the VDA program should start talking totheir advisors about how to proceed, she said. Since2012, Delaware has reached out to roughly 5,000 com-panies about the VDA program, she said.

According to the task force’s final report, more than700 entities are enrolled in the VDA program.

‘‘There’s a pretty significant gap between companiesthat were notified of the VDA program and companiesthat participated,’’ Alston & Bird’s Houghton toldBloomberg BNA.

It is unclear whether companies that received out-reach in the past but did not join the program would beconsidered a high-risk target, she said. ‘‘We would ad-vise that if you received any communication from theSecretary of State that you review this law carefully andtalk to your advisors’’ about the potential risks, shesaid.

S.B. 141 is available at http://legis.delaware.gov.The final report from the Delaware Task Force is

available at http://legis.delaware.gov.

BY LESLIE A. PAPPAS

To contact the reporter on this story: Leslie A. Pap-pas in Philadelphia at [email protected]

To contact the editor responsible for this story:Cheryl Saenz at [email protected]

� For additional discussion of unclaimed propertyin Delaware, see Corporate Income Tax Navigator,at Delaware 14.

IllinoisAllocation/Apportionment

Illinois Issues Proposed Regulations to TreatGains, Losses From Hedging Transactions

T he Illinois Department of Revenue has issued pro-posed regulations directing taxpayers toward theproper sales factor treatment of gains and losses

from certain hedging transactions.The proposed rules, released July 17, generally apply

to transactions in which a taxpayer is hedging againstthe effect on profits or costs resulting from fluctuationsin interest rates and currency exchange rates.

According to a summary published in the IllinoisRegister, the rulemaking generally ‘‘requires taxpayersto treat these gains and losses as adjustments to the dol-lar amounts of the hedged transactions, rather than asseparate transactions, in computing the sales factor.’’

‘Narrow’ Set of Transactions. Fred M. Ackerson, a taxattorney in the Chicago office of McDermott Will & Em-ery LLP, said the regulations would capture a fairlysmall group of transactions by corporate taxpayers. Henoted that the regulations don’t appear to apply to any

hedging activities involving agricultural products, food,raw material or fuel.

‘‘They have a very narrow set of hedging transac-tions that are included in the factor,’’ Ackerson toldBloomberg BNA in an interview July 28.

The regulations create a general rule stating any in-come, gain or loss from a transaction defined as a hedgeis ‘‘excluded from the numerator and denominator ofthe sales factor.’’

Special Rule. But the regulations also establish a‘‘special rule’’ in which any income, gain or loss fromthe hedging transaction ‘‘shall be included in the de-nominator of the sales factor if the gross receipts fromthe hedged item are included in the denominator. Thatincome, gain or loss shall be included in the numeratorof the sales factor if the gross receipts from the hedgeditem are included in the numerator of the sales factor,and shall be excluded from the numerator of the salesfactor if the gross receipts from the hedged item are ex-cluded from the numerator of the sales factor.’’

The special rules further specify that ‘‘if the hedgingtransaction relates to an identified group of hedgeditems, the income, gain or loss from the hedging trans-action is included in the numerator of the sales factor inthe same proportion that the gross receipts from thegroup of hedged items are included in the numerator ofthe sales factor.’’

Ackerson said the proposed regulations appear tobenefit local taxpayers.

‘‘In general, this helps companies headquartered inIllinois that would ordinarily engage in their hedgingtransactions in Illinois,’’ Ackerson said. ‘‘In general ithurts companies that are headquartered outside of Illi-nois. I’m not sure it is a huge item for anybody, but it’sa real issue.’’

The new hedging rules are available at http://www.revenue.state.il.us/LegalInformation/Prules/86_IAC_100.3380_Proposed_Amendment.pdf.

BY MICHAEL BOLOGNA

To contact the reporter on this story: Michael Bolo-gna in Chicago at [email protected]


� For additional discussion of the sales factor in Il-linois, see Corporate Income Tax Navigator, at Illi-nois 6.6.

North CarolinaTax Rates

North Carolina Corporate IncomeTax Rate Will Fall to 4 Percent in 2016

N orth Carolina’s corporate income tax rate willdrop to 4 percent in 2016.

According to Gov. Pat McCrory (R), a state revenuetarget set by a 2013 law has been met and the tax ratewill decrease as a result on Jan. 1, 2016.

14 (Vol. 2015, No. 31) INCOME TAXES


http://legis.delaware.gov/

http://legis.delaware.gov/

mailto:[email protected]

print

http://www.revenue.state.il.us/LegalInformation/Prules/86_IAC_100.3380_Proposed_Amendment.pdf






The governor said in a July 28 statement that follow-ing the reduction, North Carolina will have ‘‘the lowesttop rate in the country.’’

According to state corporate tax information for2015 compiled by the Federation of Tax Administrators,some states have a flat tax rate while others impose dif-ferent rates based on income brackets. The FTA saidthat as of Jan. 1, Kansas had the lowest top corporateincome tax rate at 4 percent, but also levied a 3 percentsurtax on taxable income above $50,000.

North Carolina’s corporate income tax rate is flatand has been gradually lowered over the past few years;it currently is 5 percent.

2013 Law Set Revenue Triggers. In July 2013, McCrorysigned legislation (Session Law No. 2013-316) that re-duced North Carolina’s personal and corporate incometax rates. The measure was a compromise between thegovernor and lawmakers on different tax overhaul pro-posals.

S.L. 2013-316 lowered the corporate income tax ratefrom 6.9 percent to 6 percent in 2014, and further re-duced it to 5 percent in 2015. The law also provided foradditional reductions in the corporate tax rate for 2016and 2017 if certain revenue targets were met.

To trigger the drop to 4 percent in 2016, state generalfund tax collections had to exceed $20.2 billion. Mc-Crory said July 28 that final budget figures indicatedthat the target was met.

According to the governor, tax payments in Aprilwere up between 15 percent and 20 percent comparedwith 2014, a boost ‘‘largely driven by increased businessincome and capital gains.’’

North Carolina has a $445 million revenue surplusfor the 2014-15 fiscal year that ended June 30, McCrorysaid. ‘‘The surplus is evidence that reforming the taxcode and increasing competitiveness are strengtheningNorth Carolina’s economy and putting more money intothe budget of working families,’’ he said.

A further drop in the corporate income rate to 3 per-cent is possible if net general tax fund collections forthe current fiscal year exceed $20.975 billion.

Text of Session Law No. 2013-316 is available athttp://www.ncga.state.nc.us/Sessions/2013/Bills/House/PDF/H998v8.pdf.

The FTA chart of state corporate tax rates is avail-able at http://www.taxadmin.org/fta/rate/corp_inc.pdf.

BY ANDREW M. BALLARD

To contact the reporter on this story: Andrew M. Bal-lard in Raleigh, N.C., at [email protected]


� For additional discussion of corporate income taxrates in North Carolina, see Corporate Income TaxNavigator, at North Carolina 4.

OregonProcedure

Oregon Expands Tax HavenList, With Notable Omissions

G ov. Kate Brown (D) signed a bill July 21 expand-ing Oregon’s list of tax havens to include severalsmaller island nations.[S.B. 61, enacted 7/21/15]

Assiduous resistance to S.B. 61’s original versionfrom Dutch diplomats circumvented attempts to add theNetherlands to Oregon’s list of tax havens. Switzerlandand Hong Kong were also initially considered for inclu-sion to the list, but ultimately not added.

Only Guatemala, Trinidad and Tobago, and five tinyCaribbean island jurisdictions that evolved from the dis-solution in 2010 of the Netherlands Antilles were addedto the list already heavy with islands states. The list alsoincludes countries such as Bahrain, Cyprus, Liberia,Liechtenstein, Luxembourg and Malta.

The tax-haven list was originally created in 2013with the passage of H.B. 2460, which requires corpora-tions filing consolidated returns in Oregon to include in-come from affiliated entities incorporated in one of thecountries on the list. Montana is the only other state tomaintain such a list. Several other states capture in-come tax from corporate tax havens by applying crite-ria like those developed in 2011 by the Multistate TaxCommission to identify such havens on a case-by-casebasis.

New Language. The bill also contains new policy lan-guage making clear that corporations are not precludedfrom providing information to the state Department ofRevenue showing that the mere presence of an affiliatedentity in a listed country does not mean that incomefrom that country reflects earnings stripped from U.S.activities.

That language was added as an amendment July 1 inthe House Revenue Committee the day before the billpassed the full House by a vote of 58 to 1. The Senateconcurred in the amendment and repassed the billunanimously July 3.

House Revenue Committee Chairman Phil Barnhart(D) told Bloomberg BNA July 27 in a telephone inter-view that the amendment was added after ‘‘one very-large, international business came to us and said thatthey are set up in one of the listed countries, but that theincome was not earned in the United States. We toldthem to go explain that to the Department of Revenueand if they agree with you, you won’t be taxed on it.’’

‘‘This amendment was our way of signaling to bothto the department and the company that we wanted thedepartment to listen to the arguments and accept themif they are real; if that income was actually not from theUnited States.’’

Dutch Resistance. Barnhart blamed inaction by Con-gress as the reason behind the creation of the list. ‘‘Thistax-haven legislation is a way to deal with the distortionin incomes that some very large corporations report inthe United States. Congress hasn’t kept up and enactedrules that prevent corporations from distorting their in-

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come in the United States. If Congress had taken it upand fixed it, we wouldn’t have to do it.’’

A contingent of Dutch diplomats and Finance Minis-try officials traveled to Oregon in April and met withlegislative leaders, the governor’s office and the Depart-ment of Revenue to contest the inclusion of the Nether-lands on the list in the original bill.

In a June 15 letter to the Senate Finance CommitteeChairman Mark Hass (D), the Netherlands Ambassa-dor, Rudolf Bekink, makes an extensive case its corpo-rate income tax system complies with internationalstandards. It notes that the Netherlands—which had$275 billion in direct investment in U.S. companies in2012—acknowledges ‘‘Oregon’s desire to ensure that itscitizens and businesses pay their fair share of tax to thestate, as well as Oregon’s frustrations with the pace ofchange in federal law and the inherent potential foravoidance caused by disparate systems of taxationamong nations.’’

‘‘A solution to international tax evasion can only befound through international coordination and interna-tional enforcement,’’ the ambassador wrote. Sen. Hassdid not respond to Bloomberg BNA voicemail ande-mail messages July 27 seeking comment.

‘Not the Classic Tax Havens.’ ‘‘Ultimately, when youlook at the countries that were chosen not to be on thelist, they were all countries that have substantial econo-mies. They were not the classic tax havens with a postoffice box only,’’ Oregon Legislative Revenue OfficerPaul D. Warner—who provides staff support to both theHouse Revenue and Senate Finance Committees—toldBloomberg BNA in a July 27 telephone interview.

Barnhart said that despite the visit by Dutch officials,‘‘I don’t believe we got a clear understanding of what itstax code does’’ to prevent tax avoidance. ‘‘But the legis-lature simply wasn’t ready to include large countrieswith large economies in this legislation. That doesn’tmean we won’t. But we weren’t ready to do it this year.We are still analyzing how to go about addressing that.’’

Department of Revenue Policy Analyst Jason Lar-imer told Bloomberg BNA in a July 27 telephone inter-view that its initial recommendations to the legislatureto include countries such as the Netherlands, Switzer-land and Hong Kong on the list were based on ‘‘objec-tive information. We evaluated these different jurisdic-tions against the 2011 Multistate Tax Commission crite-ria for the identification of tax havens. That was ourstandard.’’

‘‘One thing we found often is that different jurisdic-tions would be identified by public accounting firms ashaving advantageous tax regimes for corporations,’’ La-rimer said. ‘‘That is how we went about identifyingthese jurisdictions. Then we went about gathering ob-jective information against that standard and made ourrecommendations to the legislature accordingly.’’

S.B. 61 is available at https://olis.leg.state.or.us/liz/2015R1/Downloads/MeasureDocument/SB61/Enrolled.

The Department of Revenue’s recommendations oncountries to be added to the tax-haven list is availableat http://www.oregon.gov/dor/docs/HB2460_01-01-15.pdf.

The letter from the Dutch ambassador is available athttps://olis.leg.state.or.us/liz/2015R1/Downloads/CommitteeMeetingDocument/78371.

BY PAUL SHUKOVSKY

To contact the reporter on this story: Paul Shukov-sky in Seattle at [email protected]


TexasAllocation/Apportionment

Court: Tax Compact Formula Doesn’t ApplyBecause Texas Margin Tax Not Income Levy

M ultistate businesses can’t choose whether to usethe income apportionment formula under theMultistate Tax Compact or the Texas margin

tax, because the margin tax isn’t an income tax in thefirst place, a Texas appellate court ruled in a win for thestate. [Graphic Packaging Corp. v. Hegar, Tex. App., No. 03-14-00197-cv, 7/28/15]

The Texas Court of Appeals for the Third JudicialDistrict rejected arguments from Graphic PackagingCorp., a Georgia-based packaging company, that be-cause the margin tax isn’t a gross receipts tax it mustbe an income tax. The margin tax is ‘‘determined in sev-eral ways, none of which results in taxing net income,’’the court said.

The comptroller of public accounts was correct in re-quiring the company to use a single-factor apportion-ment formula based on gross receipts that was includedin the margin tax scheme that took effect Jan. 1, 2008,the appellate court said in affirming a state trial courtruling.

‘‘The agency is pleased with the ruling and the soundlegal reasoning in coming to its decision but declines tocomment further until all litigation is concluded,’’ ChrisBryan, spokesman for the Texas comptroller, toldBloomberg BNA July 28.

Different From ‘Gillette’, ‘IBM’. Amy Silverstein, an at-torney with Silverstein & Pomerantz LLP in San Fran-cisco representing Graphic Packaging, declined to com-ment to Bloomberg BNA July 28.

Graphic Packaging can ask the appellate court for arehearing, or can appeal to the Texas Supreme Court.

The ruling differs from similar cases in Californiaand Michigan that found corporations could use thethree-factor income apportionment formula in the com-pact, which equally weights in-state property, payrolland sales compared with those factors elsewhere, de-spite those states’ adoption of alternate formulas.

California and Michigan have since repealed theMultistate Tax Compact. In Michigan, Court of ClaimsJudge Michael J. Talbot ruled that IBM, which had pre-viously prevailed at the Michigan Supreme Court in itsargument that it was entitled to use the compact for-mula, couldn’t make that election because the state in2014 repealed the compact retroactively, effective Jan.1, 2008.

The Court of Claims found that the Michigan Su-preme Court’s decision was not controlling or appli-cable because of the intervening law change by thestate legislature.

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https://olis.leg.state.or.us/liz/2015R1/Downloads/MeasureDocument/SB61/Enrolled

https://olis.leg.state.or.us/liz/2015R1/Downloads/MeasureDocument/SB61/Enrolled

http://www.oregon.gov/dor/docs/HB2460_01-01-15.pdf

http://www.oregon.gov/dor/docs/HB2460_01-01-15.pdf

https://olis.leg.state.or.us/liz/2015R1/Downloads/CommitteeMeetingDocument/78371

https://olis.leg.state.or.us/liz/2015R1/Downloads/CommitteeMeetingDocument/78371



Another difference between the Texas case and theGillette and IBM cases is that the taxes at issue in Cali-fornia and Michigan were income taxes.

By hanging its ruling on the finding that the margintax isn’t an income tax, the court said it wouldn’t ruleon two other questions raised by Graphic PackagingInc., as well as in the California and Michigan cases.The company asked the court to find that the TexasLegislature didn’t impliedly repeal the compact when itenacted the margin tax in 2008, but even if it did, thecompact is binding on states until they explicitly with-draw.

Not an Income Tax. Under the Texas rules, a compa-ny’s margin for Texas franchise tax purposes is calcu-lated using total revenue minus the greater of four de-ductions: $1 million, the cost of goods sold, compensa-tion, or 30 percent of total revenue. Alternatively, abusiness with less than $10 million in total revenue canuse its total revenue as its tax base.

Graphic Packaging argued the margin tax is an in-come tax based on the definition in the compact, whichis still part of Texas law. The compact states that a taxis an income tax if it is ‘‘imposed on or measured by anamount arrived at by deducting expenses from gross in-come, one or more forms of which expenses are notspecifically or directly related to particular transac-tions.’’

For the years at issue in the case, the company sub-tracted its costs of goods sold, which included indirectcosts, meeting the definition, Graphic Packaging ar-gued.

The court said the alternatives within the margin taxscheme clearly don’t fall under the definition of an in-come tax.

To support the company’s interpretation of the term‘‘net income,’’ the court said it would need to rewritethe Texas statute to say deduction of any expensewould be sufficient. The court is not free to rewrite thestatute, the opinion said.

‘IBM’ Doesn’t Apply. Graphic Packaging also improp-erly relied on the Michigan Supreme Court decision,Int’l Bus. Machs. Corp. v. Mich., Dep’t of Treasury, 2014BL 196103, 852 N.W.2d 865 (2014), which held thatMichigan’s modified gross receipts tax (MGRT) fitwithin the compact’s definition of income tax, the courtsaid.

‘‘In contrast, a taxpayer’s margin for Texas franchisetax purposes is not a ‘variation of net income’ as mar-gin is determined in several alternative ways, none ofwhich results in taxing net income,’’ the court said.‘‘Thus we do not find Michigan’s MGRT sufficientlysimilar to the Texas franchise tax to find that case help-ful to Graphic’s position.’’

Justice Melissa Goodwin wrote the 16-page opinion,issued two months after Goodwin, Chief Justice JeffRose and Justice Scott Field heard oral arguments.

Graphic Packaging is seeking more than $1 millionin tax, penalties, and interest, but cases filed in Texasby 24 other companies with similar claims hinge on theoutcome of the appeal. Claims from the other compa-nies, including Abercrombie & Fitch Co., ChevronU.S.A. Holdings Inc., Gillette Commercial OperationsNorth America Inc., H.J. Heinz Co., Hasbro Inc., HonIndustries Inc., Medtronic Inc., Michelin Corp. andNestle USA Inc. total more than $70 million.

Challenges to Compact. The Texas, California, andMichigan cases each challenge those states’ positionsthat alternative apportionment formulas they adoptedafter joining the Multistate Tax Compact and enactingthe compact’s formula in the 1960s and 1970s are theformulas taxpayers must use.

The California case, Gillette Co. v. Franchise TaxBd., was the first to raise the issue. It has so far gone inthe taxpayer’s favor and is awaiting oral arguments be-fore the California Supreme Court. In Michigan, thestate Supreme Court ruled in favor of the taxpayer, say-ing in 2014 that IBM was entitled to use the MTC’sthree-factor formula despite the state’s adoption of theMichigan Business Tax Act.

California and Michigan have since repealed theMultistate Tax Compact.

Graphic Packaging is represented by James F. Mar-tens, Lacy L. Leonard, and Danielle Ahlrich of Martens,Todd, Leonard, Taylor & Ahlrich in Austin and Amy Sil-verstein of Silverstein & Pomerantz LLP in San Fran-cisco. Silverstein also represents Gillette in the Califor-nia case.

Texas is represented by Attorney General Ken Pax-ton (R), First Assistant Attorney General Charles E.Roy, Deputy Attorney General James E. Davis, SolicitorGeneral Scott A. Keller, Assistant Solicitor GeneralRance Craft, and Assistant Attorney General Cynthia A.Morales.

Text of the decision is available at http://www.search.txcourts.gov/

BY LAURA MAHONEY

To contact the reporter on this story: Laura Mahoneyin Sacramento, Calif., at [email protected]

To contact the editor responsible for this story: BrettFerguson at [email protected]

� For a discussion of a discussion of the Gillettecase and the controversy surrounding the three-factor apportionment election under the MultistateTax Compact, see 1150-2nd T.M., Income Taxes:Principles of Formulary Apportionment, at 1150.02..For additional discussion of apportionment in Texas,see Corporate Income Tax Navigator, at Texas 6.3.

INCOME TAXES (Vol. 2015, No. 31) 17


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Sales&UseTaxesMultistate DevelopmentsConstitutional Limitations

Multistate Tax Committee Panel ApprovesNexus Model Statute for Out-of-State Sellers

A committee of the Multistate Tax Commission(MTC) has approved a model statute attempting todefine when out-of-state sellers have an obligation

to pay or collect sales and use taxes.The MTC Uniformity Committee July 28 voted 12-0

to forward the Model Sales and Use Tax Statute to thecommission’s Executive Committee, which will conveneJuly 30 during the MTC’s 48th annual meeting in Spo-kane, Wash.

The model statute defines a ‘‘retailer engaged inbusiness’’ in a state as being a person on whom a taxpayment or collection burden is imposed. It contains alist of activities that would bring a person within thedefinition.

Rebuttable Presumption. A separate section of thedraft is the ‘‘click-through’’ nexus provision modeled onwhat some 15 states have enacted—which takes theform of a rebuttable presumption and contains a mini-mum annual gross receipts threshold of $10,000.

The model statute project began in 2011 with an ini-tial goal of drafting a click-through nexus provision pat-terned after New York’s 2009 law. The project was ex-panded later to cover nexus generally.

The draft has gone through substantial changes inrecent years, with two versions previously presented tothe Uniformity Committee, said Richard Cram, directorof the Kansas Department of Revenue, who headed upa work group that hammered out the model.

Nexus Survey. Cram told the Uniformity CommitteeJuly 28 the most recent draft did not have substantialchanges but did include the results of a nexus survey ofthe states published by Bloomberg BNA in April 2015.

‘‘It defines retailer as a business engaged in the state,and assumes that a retailer is a seller,’’ he said. ‘‘Moststates extend their statutory use tax collection obliga-tions on sellers and business activities to the extent ofwhat the Constitution allows.’’

Helen Hecht, MTC general counsel, explained whatthe model does, noting that the drafting group felt thatthe model should adopt the common click-throughnexus provision. The model adopts the approach usedby virtually all states, which includes the rebuttable pre-sumption, she said.

Under click-through provisions, sellers have a usetax collection obligation if they meet the minimum salesthreshold resulting from retail activities of an in-statereferral agent or website.

Model as Standard. Hecht said it seems doubtfulstates with tax imposition statutes similar to the modelwill simply adopt the model, but rather will look to themodel as a standard in evaluating their own law anddefinition.

Since cases with nexus implications are by definitionfact-intensive, there is also some question as to whetherthe model will increase uniformity among the states,she said. ‘‘Adoption of the model or conforming of statelaw to the model’s general outlines would likely createconsistencies that would benefit taxpayers,’’ she said ina memo to the committee.

‘Market-Based’ Sourcing. The Uniformity Committeealso heard a presentation from a work group draftingmodel regulations for application of ‘‘market-based’’sourcing of receipts from the sale of services and theutilization of intangible property. The model regula-tions would amend Section 17 of the MTC’s Article IVof the Uniform Division of Income for Tax Purposes Act(UDITPA).

A growing number of states have recently shiftedfrom the cost of performance method to market-basedsourcing for sales of services and intangibles for in-come tax purposes.

The work group has been using Massachusetts regu-lations on market-based sourcing as a template for de-veloping a model. The group sought direction from theUniformity Committee on several questions, amongthem a query as to whether credit card processing ser-vices should be included in the definition of profes-sional services.

Credit Card Processing. The effect of doing so wouldbe to clarify that such receipts would be sourced to thecustomer’s commercial domicile as the place of deliv-ery, when those receipts might otherwise be sourced towhere those services are delivered as in-person ser-vices.

After a brief discussion, the committee advised thework group to consider credit card processing servicesin the definition of professional services.

The committee also directed the work group to in-clude examples in the draft regulations under relevantsection headings. Some state laws do not allow the in-clusion of examples in tax statutes.

The committee also received a summary of a sepa-rate drafting group’s work on Section 1 of Article IV ofUDITPA, which concerns definitions of apportionableand non-apportionable income.

The agenda for the MTC annual conference, whichincludes copies of MTC draft model statutes, is avail-able at http://www.mtc.gov/Events-Training/2015/48th-Annual-Conference-Committee-Meetings.

BY TRIPP BALTZ

To contact the reporter on this story: Tripp Baltz inDenver at [email protected]

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� For a discussion of measures aimed at permittingstates to tax remote vendors selling products on theInternet, see 1420-2nd T.M., Limitations on States’Jurisdiction to Impose Sales and Use Taxes, at 1420.

District of ColumbiaTax Base

Online Travel Companies Owe DistrictOf Columbia Sales Tax on Full Payments

T he District of Columbia achieved a major victory inits ongoing tax dispute with online travel compa-nies when an appeals court ruled the e-commerce

companies must remit sales tax to the District on thefull amount paid by consumers to secure hotel rooms.[Expedia, Inc. v. D.C., D.C., No. 14-cv-308, 7/23/15]

The appeals panel on July 23 upheld a previous su-perior court ruling, which granted summary judgmentto the District of Columbia in D.C. v. Expedia, Inc.

The panel also upheld the superior court’s findingthat the Online Travel Companies (OTCs) aren’t liablefor taxes on the ‘‘sales tax reimbursement’’ amountsthat are passed to the hotels and then remitted to theDistrict.

The ruling, rendered unanimously by a three-judgeappeals panel, advances the District’s chances for a$60.9 million payday under the terms of a ‘‘contingentsettlement’’ reached in February 2014. The settlementlargely reflects the companies’ liabilities for unpaidsales taxes dating back more than a decade. The agree-ment was struck with Expedia Inc. and its Hotels.comand Hotwire subsidiaries, Orbitz LLC, Travelocity.comInc., and Priceline.com Inc.

The settlement, however, is only payable after theparties have exhausted their appeal options.

Attorney General Karl A. Racine called the ruling awin for the taxpayers of the District of Columbia.

‘‘This is a huge victory for the District’s taxpayers,and it ensures that online travel companies have to fol-low the same rules as everyone else,’’ Racine said in astatement. ‘‘The Office of the Attorney General willzealously pursue claims in the interests of the District’staxpayers, and continue to initiate actions against thosewho harm District consumers.’’

A spokesman for the Travel Technology Association,the OTCs’ trade organization, acknowledged the ruling,but declined to comment. The online travel companiescould seek en banc review of the ruling or an appeal tothe U.S. Supreme Court.

Merchant Model. The dispute involves whether thesales tax, governed under D.C. Code Ann. §§47-2001 to47-2027, must be paid on the discounted wholesale ratenegotiated between OTCs and hotels, or the higher re-tail rate paid by consumers.

The online travel companies cling to the wholesalerate analysis, which they often refer to as the ‘‘mer-chant model.’’ Under this model, the OTCs view the in-

crement between the wholesale rate and the retail ratepaid by consumers as a markup for facilitating thetransaction. In dozens of suits affecting municipal salesand hotel occupancy taxes across the country, the travelcompanies have argued they have no duty to remittaxes on the markup.

The appeals court acknowledged ambiguity in theDistrict’s sales tax statute and commented that bothparties had provided ‘‘reasonable’’ rationales for theirviews. At the same time, the court found the District op-erates a sales tax rather than an operator’s tax, and thetax should be applied on all charges paid by consumers,including any retail margins.

‘‘Like the trial court, we conclude that an analysis ofthe sales tax law’s structure, purpose, and legislativehistory is sufficient to resolve the ambiguity that existedon the face of the law,’’ Judge Corinne Beckwith wroteon behalf of the panel.

She added, ‘‘we hold that the OTCs, in their mer-chant model transactions, were engaging in ‘the sale orcharge for any room . . . furnished to transients by anyhotel’ within the meaning of D.C. Code §47-2001(n)(1)(C), and are therefore vendors liable for the Dis-trict sales tax.’’

Imposed on Full Sales Price. Diving into the tax ques-tion deeper, Beckwith said the District’s sales tax is im-posed on the gross receipts of a retail sale. She said thestatute specifies that gross receipts must include the en-tirety of the ‘‘sales price,’’ including any ‘‘ancillary ser-vices’’ that are part of the taxable transaction.

Under these definitions, Beckwith wrote, ‘‘the OTCs’retail margins are part of that sale.’’

In addition, Beckwith said, a review of the legislativehistory confirms congressional intent to tax the fullamount paid by consumers for hotel room rentals in theDistrict.

‘‘Congress aimed to tax the amount that the pur-chaser pays for the enumerated service, and—in target-ing the sale—sought to include ancillary or intermedi-ary transactions,’’ Beckwith wrote. ‘‘While Congress inthe year 1949 did not contemplate online travel compa-nies matching customers with hotels using sophisti-cated information technology, it did know what amiddleman was and did address the issue.’’

Text of the ruling is available at http://www./uploadedFiles/BNA_V2/PDF/2015/OTC-DC.pdf.

BY MICHAEL BOLOGNA



� For additional discussion of the sales tax on hotelrooms provided by OTCs in the District of Columbia,see Sales and Use Tax Navigator, at D.C. 6.7.

SALES & USE TAXES (Vol. 2015, No. 31) 19



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GeorgiaProcedure

Hotel Buyer Ruled Liable ForPrior Owner’s Georgia Sales Tax Debt

T he purchaser of a Georgia business isn’t shieldedfrom its prior tax liabilities by a statute of limita-tions, a Georgia Tax Tribunal judge ruled in the

case of a hotel whose previous owner fell behind onsales tax payments. [Douglasville Hospitality Inc. v. Riley,Ga. Tax. Trib., No. TAX-S&UT-1526300, decision, 7/23/15]

The tribunal’s chief judge, Lawrence O’Neal Jr., up-held the Georgia Department of Revenue’s impositionof $88,223.83 in sales taxes, interest and penalties owedby Douglasville Hospitality Inc. in a July 23 opinion. Indoing so, he wrote that Georgia’s statute related to thetax liability of a corporate successor contains no statuteof limitations, despite the three-year statute of limita-tions for tax assessments that Georgia law provides incertain other circumstances.

The attorney representing Douglasville Hospitalitysaid he was disappointed with the ruling and said hisclient is considering whether to ask for a reconsidera-tion or appeal to the Fulton County Superior Court inAtlanta.

‘‘We’ve never seen any kind of court upholding anassessment that was made outside of three years,’’Samuel H. Grier of Bomar Law Firm in Atlanta toldBloomberg BNA July 28.

Hotel Acquired in 2011. Douglasville Hospitalitybought a hotel in Douglasville, Ga., on April 1, 2011, for$2.3 million from Vanmali Investments Inc. On June 16,2014, the Department of Revenue issued a letter of as-sessment and demand for payment to Douglasville Hos-pitality for the taxes, interest and penalties previouslyowed by Vanmali, according to the summary of facts inthe tribunal’s opinion.

Douglasville Hospitality contested this tax liability,citing a Georgia statute that sets a three-year limit forassessment of taxes owed in a case where a taxpayerfiles a report or return to the department, as Vanmalidid during its ownership of the hotel (Ga. Code Ann.§48-2-49(b)). The Department of Revenue, however, ar-gued that it had previously assessed the taxes, interestand penalties against Vanmali and was merely assert-ing Douglasville Hospitality’s liability as successor, ac-cording to the tribunal opinion.

In his opinion, the judge wrote that Georgia law in-structs the purchaser of a business to obtain a certifi-cate from the seller indicating all taxes have been paidor else to withhold from the purchase price the amountof any taxes due until the seller has paid them (Ga.Code Ann. §48-8-46). If a purchaser fails to do this, thenhe or she is responsible for paying the taxes, the judgewrote.

In this case, the buyer ‘‘did not take advantage of thestatutory safe harbor, and is personally liable as succes-sor,’’ the judge wrote.

O’Neal recently stepped into the position of chiefjudge for the Georgia Tax Tribunal after he resigned hisseat in the state House of Representatives and Gov. Na-than Deal (R) appointed him to the tribunal in April.

The decision is available at http://gataxtribunal.georgia.gov/sites/gataxtribunal.georgia.gov/files/related_files/document/Douglasville%20Hospitality%2C%20Inc.%20-%20Decision%2C%202015-5%2C%20Ga.%20Tax%20Tribunal%2C%20July%2023%2C%202015.PDF.

BY CHRIS MARR

To contact the reporter on this story: Chris Marr inAtlanta at [email protected]


� For additional discussion of successor liability,see Sales and Use Tax Navigator, at Georgia 10.5.

MichiganExemptions

DTE Only Partly Exempt FromTax, Michigan High Court Says

D TE Energy Co. is only partly exempt from Michi-gan’s use tax on machinery and equipment, theMichigan Supreme Court said, sending the case

back to the Court of Claims to determine a formula forcalculating the portion of the utility’s property eligiblefor the industrial processing exemption. [Detroit EdisonCo. v. Michigan Dep’t. of Treasury, Mich., No. 148753, opin-ion, 7/22/15]

The Michigan Court of Appeals erred when it foundthe company was entitled to the exemption for its entireelectric system, as certain activities—notably, distribu-tion, warehousing, shipping and advertising—are ex-cluded from exemption, the Supreme Court said. How-ever, the court in a July 22 opinion agreed with the ap-peals court that DTE does engage in industrialprocessing when it alters the voltage of electricity fordistribution to consumers, so the company is entitled tothe exemption for that portion of its business.

Industrial Processing. The appeals court held that thecompany was entitled to the exemption for electrictransmission and distribution equipment located out-side its generation plants, because the equipment isused in the activity of converting and conditioning elec-tricity. The treasury appealed, arguing that electricitytransmission doesn’t meet the definition of industrialprocessing—a change in ‘‘form, composition, quality,combination or character’’ of a material—under the UseTax Act.

‘‘Under the industrial-processing exemption, whenproperty is simultaneously used for exempt industrial-processing activity and non-exempt shipping and distri-bution activities, the taxpayer is entitled to anindustrial-processing exemption based on the percent-age of exempt use to total use as determined by a rea-sonable formula or method approved by the Depart-ment of Treasury,’’ the Supreme Court said in opinionauthored by Justice Stephen Markman.

‘‘Electricity is not usable at the high voltage levels atwhich it exists when it is initially generated and as it

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moves throughout the entire electric system,’’ Mark-man wrote. That means the process of converting theelectricity to a usable form is ‘‘industrial processing,’’and the company is entitled to an exemption for thatpart of its business. However, parts of DTE’s transmis-sion system are used for other purposes, such as distri-bution and shipping, and the exemption doesn’t applyto those, he wrote.

Three justices—Mary Beth Kelly, Brian Zahra andBridget McCormack—dissented, saying they wouldhave reversed the entire appeals court judgment. Elec-tricity doesn’t change ‘‘form, composition, quality, com-bination or character’’ during the process of reducingvoltage, they argued.

John Pirich, attorney for DTE, declined to commenton the decision. The treasury is reviewing it pending theremand, a spokesman for the department said in a July23 e-mail to Bloomberg BNA.

The opinion is available at http://cdn2.hubspot.net/hubfs/434504/Detroit_Edison-OP.pdf?t=1437584688471&t=1437584688471&utm_source=hs_email&utm_medium=email&utm_content=20766413.

BY NORA MACALUSO

To contact the reporter on this story: Nora Macalusoin Lansing, Mich., at [email protected]


� For additional discussion of exempt intended usesin Michigan, see Sales and Use Tax Navigator, atMichigan 8.3.

MissouriExemptions

Fees for Untethered Hot-Air BalloonRides Not Subject to Missouri Sales Tax

A fee charged for a hot-air balloon ride during whichthe balloon is untethered and floats free of theground is not subject to the state sales tax, the

Missouri Department of Revenue said. [Mo. Dept. of Rev.,Letter LR 7067, issued 7/10/15]

This is because untethered hot-air balloon rides fallwithin the definition of ‘‘air commerce’’ in federal lawand are exempt from state taxation, the ruling said.

By contrast, a fee charged for riding in a hot-air bal-loon that floats aloft but is tethered to the ground doesnot fall within the definition of air commerce and is sub-ject to the sales tax, the ruling said.

Missouri Supreme Court Ruling. The applicant com-pany was a Missouri corporation that offers hot-air bal-loon rides, both tethered and untethered, from a fair-ground location in central Missouri and from other lo-cations in the state.

In the untethered rides, the passenger is carried aloftfor a ride of between 45 minutes and an hour, the appli-cant said. In the tethered rides, the balloon remains tiedto the ground by three ropes attached to posts, trees orvehicles, with the ropes being long enough to allow theballoon to ascend to a height of between 50 and 80 feet.Participants enter the gondola, the balloon rises, hoversfor a short period of time, and then descends back tothe ground, it said.

At issue in the letter ruling was the sales tax treat-ment of fees charged for the two ways of going up inhot-air balloons.

Untethered Rides. According to the ruling, Missouristatute provides that fees paid for entrance to amuse-ment parks and for rides are normally subject to a4-percent sales tax.

But under a 2014 Missouri Supreme Court ruling inBalloons Over the Rainbow Inc. v. Director of Revenue,427 S.W.3d 815, 824 (Mo. Banc 2014), untethered hot-air balloon rides are not subject to the sales tax becausethey fall within the definition of ‘‘air commerce’’ in thefederal Anti-Head Tax Act, which prohibits state taxa-tion of activities that occur in air commerce, the rulingsaid.

Air commerce is defined in the AHTA as the opera-tion of aircraft within the limits of a federal airway, orthe operation of aircraft that may endanger safety in in-terstate commerce, the ruling said. Because an unteth-ered hot-air balloon could endanger safety in interstatecommerce, untethered rides were covered by AHTAand therefore exempt from taxation, it said.

Untethered rides, on the other hand, rise just 50 to 80feet in the air and do not enter a federal airway as de-fined in AHTA, the ruling said. As a result, such ridesare not considered air commerce.

And because the tethered hot-air balloon does notleave the fairground and remains in the applicant com-pany’s control, the fee paid for the ride is a fee paid toa place of amusement, and therefore subject to the salestax, it said.

Letter LR 7607 can be found at http://dor.mo.gov/rulings/show.php?num=7607.

BY CHRISTOPHER BROWN

To contact the reporter on this story: ChristopherBrown in St. Louis at [email protected]


� For additional discussion of the taxation of hot-air balloon rides in Missouri, see Sales and Use TaxNavigator, at Missouri 9.11.

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PropertyTaxesAlabamaProcedure

Assessment Blocked, AppealFiled In Alabama Tribal Tax Case

A dispute over the taxability of an Indian tribe’s landin Alabama hinges largely on a statute of limita-tions, as the case moves to a federal appeals court.

[Poarch Band of Creek Indians v. Hildreth, S.D. Ala., No.1:15-cv-00277, notice of appeal, 7/28/15]

James H. Hildreth Jr., the tax assessor for EscambiaCounty, Ala., filed notice July 28 that he is appealing apreliminary injunction order to the U.S. Court of Ap-peals for the Eleventh Circuit. Judge Callie Granade is-sued the injunction on July 22 in the U.S. District Courtfor the Southern District of Alabama, prohibiting Hil-dreth from assessing any tax against the property heldin U.S. trust on behalf of the Poarch Band of Creek In-dians.

In her injunction order, Granade wrote that Hil-dreth’s attempt to tax the property amounts to a chal-lenge of the Poarch Band’s status as a federally recog-nized Indian tribe. This challenge falls outside the six-year statute of limitations set by the federalAdministrative Procedure Act because the Departmentof Interior recognized the Poarch Band in 1984 andthen took 229.5 acres of land into trust on the tribe’s be-half, she wrote.

Hildreth’s attorneys have argued the 2009 U.S. Su-preme Court ruling in Carcieri v. Salazar, 555 U.S. 379(2009) calls into question the Poarch Band’s right totax-exempt land because the court interpreted the In-dian Reorganization Act as defining Indians as peoplewho were members of an Indian tribe under federal ju-risdiction at the time of the act’s enactment in 1934.

But Granade wrote the Carcieri case differed be-cause it was a timely challenge of the U.S. taking landinto trust, having been brought within the six-year win-dow.

‘‘Since Carcieri, in cases analogous to this one,courts have found that challenges to the Trust land ac-quisitions are subject to APA procedures, including thesix-year statute of limitations for challenging agencydecisions,’’ Granade wrote.

Tribe Prevailed in Similar Case. An attorney for the Po-arch Band, Mark Reeves of Kilpatrick Townsend &Stockton, agreed the statute of limitations is a crucialfactor in the case and rightfully should block Hildreth’sattempt to tax the land.

Reeves also is one of the attorneys for the PoarchBand in a similar case pending before the Eleventh Cir-cuit, in which the State of Alabama is opposing thetribe’s right to legally operate casinos in the state (Stateof Alabama v. PCI Gaming Authority, 11th Cir., No. 14-

12004). The state appealed to the Eleventh Circuit aftera judge in the Middle District of Alabama dismissedAlabama’s complaint in April 2014.

‘‘We feel like they both got it right and hope we’ll getthe same from the Eleventh Circuit in both cases,’’Reeves told Bloomberg BNA on July 29. In both cases,the judges found that a challenge to the Poarch Band’sstatus and rights as a tribe would be subject to the six-year statute of limitations.

‘‘That’s a developing, consistent message from thefederal courts, and I think our case falls in line withthat,’’ Reeves said.

Richard Pomp, a University of Connecticut law pro-fessor who has written on taxation of Indian tribes, saidthe judge in the property tax case might have viewedHildreth as a local tax assessor looking for an opportu-nity to take advantage of the tribe’s casino profits.

‘‘This is another example of a State’s hostility to anIndian Tribe, especially one that is viewed as having apot of gold from gaming,’’ Pomp told Bloomberg BNAJuly 28. ‘‘The Tribe had strong federal law on its side,which is why an injunction was issued.’’

Assessor Disputes Time Limit. The application in thiscase of the APA’s statute of limitations conflicts withEleventh Circuit precedent, said Bryan M. Taylor fromBachus, Brom & Taylor, which is representing Hildreth.

Both the Eleventh Circuit and Federal Circuit havepreviously ruled that challenges to a federal agency’sdiscretionary decisions are time limited, but not chal-lenges to regulations that defy federal statute, Taylortold Bloomberg BNA July 29.

‘‘When the challenge involves an unauthorized exer-cise of power that is contrary to statute or constitutionalauthority, the statute of limitations doesn’t apply,’’ hesaid.

Hildreth views the land as taxable regardless of hisability to challenge the Poarch Band’s status or theoriginal placement of the land into trust, Taylor said,since trust land becomes taxable whenever it no longerserves its original purpose.

‘‘The only purpose for a trust is to provide land forIndian tribes that were federally recognized before the1934 act,’’ he said, citing the guidance of the SupremeCourt in Carcieri. The Poarch Band’s own representa-tives have testified to Congress that the Supreme Courtruling sets up two different classes of Indians, he added.

‘‘We have repeatedly stated that we acknowledge thetribe’s federal recognition, but under the guiding Su-preme Court ruling, that alone is not what establishes atribe’s right to a tax exemption under the Indian Reor-ganization Act,’’ Taylor said.

Time Limit Hard to Escape. Similar cases since theCarcieri ruling have seen states trying to assert theright to tax Indian lands, said Bruce Ely, an Alabamatax attorney at Bradley Arant Boult Cummings.

22 (Vol. 2015, No. 31)


‘‘They become statute of limitations cases,’’ Ely toldBloomberg BNA July 28.

‘‘I think the tax assessor has some viable claims, butthe statute of limitations may prevent the substantive is-sues from ever being heard,’’ he predicted.

In both of the cases involving the Poarch Band, thestate and local officials are partly motivated by the mil-lions of dollars that the tribe makes from gambling op-erations, while the state receives no tax revenue, Elysaid.

‘‘I expect there will be more litigation to come,’’ headded.

The preliminary injunction order is available athttp://www.bloomberglaw.com/public/document/Poarch_Band_of_Creek_Indians_v_Hildreth_Docket_No_115cv00277_SD_A.

The notice of appeal is at http://www.bloomberglaw.com/public/document/Poarch_Band_of_Creek_Indians_v_Hildreth_Docket_No_115cv00277_SD_A/1.

BY CHRIS MARR


To contact the editor responsible for this story:Cheryl Saenz at [email protected].

PROPERTY TAXES (Vol. 2015, No. 31) 23


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MiscellaneousTaxesIllinoisHotel Tax

Illinois Towns Seek Class CertificationIn Suit Against Online Travel Companies

I llinois municipalities are taking another swipe at on-line travel companies, filing an amended motion forclass certification in litigation that seeks unpaid ho-

tel occupancy taxes and penalties from e-commerce de-fendants Expedia Inc., Orbitz LLC, Priceline.com Inc.and Travelocity.com LP. [Vill. of Bedford Park, et al. v. Ex-pedia, Inc., N.D. Ill., No. 1:13-cv-05633, 7/17/15]

The Village of Bedford Park, Ill., filed a second mo-tion for class certification July 17 in U.S. District Courtfor the Northern District of Illinois on behalf of 154 mu-nicipalities.

The cities of Chicago, Fairview Heights and Rose-mont aren’t parties to the litigation due to previous suc-cessful claims against the OTCs.

The amended motion comes six months after DistrictCourt Judge Matthew F. Kennelly denied without preju-dice the plaintiffs’ original petition for class certifica-tion. Kennelly’s ruling, dated Jan. 6, faulted the plain-tiffs for failing to demonstrate that the ordinances ad-ministered by the municipalities could be arranged intoa ‘‘modest number of subclasses’’ with ‘‘materially iden-tical’’ legal standards. At the same time, Kennelly didn’tcompletely dismiss the possibility of a viable classstructure in the litigation.

The plaintiffs seek to remedy deficiencies in theiroriginal motion, creating a single overarching class andfive subclasses.

The overarching class is defined as all Illinois mu-nicipalities that have ‘‘enacted and collect a tax on thepercentage of the retail rate that each consumer occu-pant pays for lodging, including service costs, denomi-nated in any manner, including but not limited to, occu-pancy tax, a hotel or motel room tax, a use tax, a privi-lege tax, a hotel or motel tax, a licensing tax, anaccommodations tax, a rental receipts tax, a hotel op-erator’s tax, hotel operator’s occupation tax, or a roomrental, lease or letting tax.’’

Five Subclasses Proposed. The motion creates fivesubclasses reflecting the different ordinance features ofthe 154 plaintiffs, including:

s engaged in business/gross rental receipts subclass(50 municipalities);

s operator/gross rental or leasing charge subclass(26 municipalities);

s owner, operator or manager/gross rental or leas-ing charge subclass (26 municipalities); and

s owner, operator and licensed operator/grossrental receipts subclass (22 municipalities).

s owner/rent charged subclass (30 municipalities).

The central tax question in the proposed class actioninvolves whether hotel occupancy taxes should be paidto the municipalities on the discounted wholesale roomrental rate negotiated between online travel companiesand hotels, or the higher retail rate paid by consumers.

The companies cling to the wholesale rate analysis,which they often refer to as the ‘‘merchant model.’’ Un-der this model, the travel companies view the incrementbetween the wholesale rate and the retail rate paid byconsumers as a markup for facilitating the transaction.The companies have argued they have no duty to collectand remit taxes on the markup. The governmental unitscontend the travel companies are obligated to submittaxes on the full price paid by consumers for the privi-lege of occupying a hotel room.

Superiority Argument. The municipalities insist thenew class structure envisioned under the amended peti-tion satisfies all requirements of the Federal Rules ofCivil Procedure governing certification.

The plaintiffs assert the new structure is superior toany other available method for fairly and efficiently ad-judicating the tax dispute. The municipalities specifi-cally assert that:

s all claims could be dealt with at one time, preserv-ing judicial economy;

s lack of certification would prompt dozens of indi-vidual claims across Illinois and generate inconsistentlegal rulings; and

s some municipalities wouldn’t be able to afford orjustify the cost of litigation.

Finally, the plaintiffs contend their class model is thesuperior strategy for resolving the dispute because theonline travel companies’ (OTCs) merchant model oper-ates the same way throughout Illinois.

‘‘Although the OTCs uniformly collect accommoda-tion taxes from their customers based upon the retailrate of a hotel room sale, the OTCs—pursuant to corpo-rate policy—do not remit taxes to the municipalities onthe retail rate,’’ the plaintiffs wrote.

‘‘Given the subject 154 municipalities’ commonclaims and issues regarding collection of local accom-modations taxes on the retail rate of sale, requiringthem to file a multitude of individual lawsuits againstthe OTCs in jurisdictions throughout Illinois does notserve the interests of Illinois’ municipalities, courts, ortaxpayers. For these reasons, and the other reasonsherein, this action is particularly well-suited for classcertification.’’

Text of the municipalities’ amended motion for classcertification is available at http://www.bloomberglaw.com/public/document/Village_of_Bedford_Park_et_al_v_Expedia_WA_et_al_Docket_No_113cv0/1.

BY MICHAEL BOLOGNA


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� For additional discussion of the hotel tax in Illi-nois, see Excise Taxes Navigator, at Illinois 10.1.

OregonExcise Tax

Oregon Governor Signs LegislationTaxing Recreational Marijuana Sales

O regon Gov. Kate Brown (D) July 20 signed legisla-tion that will place a 17 percent tax on recre-ational marijuana sales in the state. [H.B. 2041, en-

acted 7/20/15]The bill, sponsored by Reps. Greg Smith (R) and Ann

Lininger (D), is expected to generate nearly $29 millionin annual tax revenues by the time it is fully imple-mented in fiscal year 2018. It is expected to generatemore than $30 million the following fiscal year.

The bill will also allow local governments to levy asales tax of up to 3 percent on marijuana sales. Localgovernments will also have the ability to prohibit mari-juana sales within their jurisdictions.

Bob Estabrook, spokesman for the Oregon Depart-ment of Revenue, told Bloomberg BNA July 28 that H.B.2041 changes some of the provisions of Measure 91, thelaw passed by Oregon voters last year that legalizedrecreational marijuana sales. The measure called forproducers to pay a $35 per ounce tax on marijuanaflowers, he said. The new law will replace that tax witha sales tax on marijuana flowers, leaves, immatureplants, edible cannabis, concentrate and extract.

He said the tax will be collected by retailers and re-mitted to the state quarterly. Retailers will be allowed tokeep 2 percent of the taxes they collect, he said, to re-imburse them for their expenses.

Paul Warner, legislative revenue officer, said the 17percent tax rate was chosen because that rate is ex-

pected to generate the same amount of revenue as themeasure’s $35 per ounce tax rate on producers. He saidlegislators also took into account the prices beingcharged for marijuana in Colorado and Washington. Itwas imperative, he said, that the state be competitive.

According to the legislation, tax revenues from saleswill be used to pay for the administration and licensingof the marijuana sales program. Revenues beyond theprogram’s cost will be dedicated to schools, mentalhealth services, state police, cities, counties and thestate’s health authority. Cities and counties that do notallow marijuana sales will not be eligible for tax rev-enue dollars.

Early Sales. Estabrook said the tax will go into effectJan. 4, 2016. However, limited recreational marijuanasales will be allowed as of Oct. 1. Since no recreationalmarijuana dealers will be licensed by that date, recre-ational sales will be allowed at medical marijuana dis-pensaries in the state. Sales from the dispensaries willbe taxed at 25 percent, he said.

Geoff Sugerman, lobbyist for the Oregon CannabisPAC, said the medical dispensaries will likely be theonly places Oregonians can buy recreational marijuanauntil the fall of 2016. He said licensing of retailers willnot start until next year, and it is clear from both Colo-rado’s and Washington’s experiences that establishinga regulatory process for recreational marijuana salestakes time.

Retail sales will be delayed because the state must li-cense growers and processors. There must be a supply,he said, before retailers can be selling marijuana.

H.B. 2041 is available at http://olis.leg.state.or.us/liz/2015R1/Downloads/MeasureDocument/HB2041/Enrolled.

BY MARK WOLSKI

To contact the reporter on this story: Mark Wolski inSt. Paul, Minn., at [email protected]


� For additional discussion of the taxation of non-medical marijuana in Oregon, see Excise TaxesNavigator, at Oregon 2.4.

MISCELLANEOUS TAXES (Vol. 2015, No. 31) 25



http://olis.leg.state.or.us/liz/2015R1/Downloads/MeasureDocument/HB2041/Enrolled





Credits&IncentivesOregonSpecific Industry Credits

Oregon Governor SignsBill Extending Tax Credits

O regon Gov. Kate Brown (D) has signed an omni-bus bill extending several tax credits while prohib-iting credits from being used to offset the state’s

corporation minimum tax. [H.B. 2171, enacted 7/20/15]The bill also combines the state’s two child and de-

pendent care credits into one credit. It will reduce gen-eral fund revenues in the state by $20.9 million in the2015-2017 budget biennium, according to the OregonLegislative Revenue Office (LRO).

The largest revenue reduction, $31.4 million in the105-17 biennium, will be accomplished by the revisedWorking Family Child and Dependent Care Tax Credit,designed to offset costs for low-income working fami-lies who are paying for care for young children and de-pendents.

Taking Both Credits. The credit is a combination oftwo prior credits, the Working Family Child Care Creditand the Child & Dependent Care Tax Credit. Lawmak-ers considered evidence that some individuals in thestate were taking both credits, Chuck Sheketoff, execu-tive director of the Oregon Center for Public Policy(OCPP), a think tank based in Silverton, toldBloomberg BNA July 29.

The singular combined credit can be taken in taxyears 2016 through 2021, according to the bill.

The declaration that tax credits may not be used tooffset the Corporation Minimum Tax reverses a 2013Oregon Supreme Court ruling (Con-Way Inc. v. Dep’t ofRevenue, Or. Sup. Ct., No. SC S060141, 5/31/2013) andwill generate $19.2 million in revenues for the state inthe 2015-17 biennium, according to the Legislative Rev-enue Office.

Ruling ‘Broadly Applies.’ In its ruling, the court saidthe state’s Business Energy Tax Credit may be allowedagainst the corporation minimum tax, prompting theOregon Department of Revenue to say it interpreted theruling to ‘‘broadly apply to corporation tax credits al-lowed against taxes’’ imposed under the section of statelaw concerning the minimum tax.

Sheketoff said the OCPP was glad the omnibus taxcredit bill effectively reversed the ruling of the court,but he said the center was disappointed the legislatureplaced a sunset on the provision. The prohibition on us-ing tax credits to offset the Corporation Minimum Taxapplies to tax years 2015 to 2020, according to the LRO.

‘‘They did that for no good reason,’’ he said. ‘‘It madeno sense. They were closing a loophole—you put a sun-

set on something when you have questions aboutwhether it’s good policy or not and you want to forceyourself to come back to it. Not when you are fixing badtax policy.’’

‘‘When you take your cat to the veterinarian to be‘fixed,’ you expect it to be permanent,’’ he said. ‘‘You’dbe disappointed if the vet told you your cat could getpregnant again in six years.’’

Regular Policy Review. Sheketoff said the center sup-ported much of what was contained in the omnibus taxcredit bill. A 2009 bill (H.B. 2067) made all tax creditsin Oregon subject to a policy review that includes statu-tory sunset dates on a rolling six-year basis. Roughlyone-third of all tax credits are reviewed each legislativesession. The 2105 omnibus tax credit bill completes thefirst such review, the LRO said.

In addition to extending and modifying several taxcredits, the bill also declared certain military active ser-vice income earned in Oregon to be exempt from per-sonal income taxes. It also expands the existing chari-table property tax exemption to certain museums.

The bill made policy changes to several tax creditsand moved the sunset dates of most of them to 2022. Itmoved the sunset data for an existing film and video taxcredit—geared toward establishing a sustainable infra-structure for the industry in the state—to 2024.

One Credit Expires Early. It also moved up the sunsetdate for a long-term care insurance credit to 2015. Thecredit would have expired in 2016. That change will in-crease state revenues by $10.4 million in the 2015-17 bi-ennium.

The House approved the bill 45-13 July 2 and theSenate approved it 29-1 July 6, the LRO said.

Republicans issued a statement July 1 saying theysupported the reduction in taxes for active-duty militarymembers and expanded tax credits for working fami-lies, but said they believed ‘‘the middle class lost outwhen Senate Democrats increased the Hollywood taxcredit that benefits wealthy, out-of-state actors, produc-ers, and multinational film corporations.’’

More information about the bill is available at http://olis.leg.state.or.us/liz/2015R1/Measures/Overview/HB2171.

The Oregon Supreme Court ruling in Con-Way Inc.v. Dep’t of Revenue is available at http://www.publications.ojd.state.or.us/docs/S060141.pdf.

BY TRIPP BALTZ

To contact the reporter on this story: Tripp Baltz inDenver at [email protected]


� For a discussion of tax credits in Oregon, see1480-2nd T.M., Credits and Incentives: OR ThroughWY, at 1480.06.

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TexasEnterprise Zone Credits

New Texas Enterprise Zone Rules OpenLifeline to Smaller Prospective Businesses

E ffective Sept. 1, changes to the Texas EnterpriseZone Program will ultimately result in greatercredit availability to new and smaller companies

looking to participate in the state’s tax incentives pro-gram designed to induce private investment in severelydistressed areas of the state, a Dallas tax attorney toldBloomberg BNA.

Mike Goral, partner-in-charge of state and local tax(SALT) services at Weaver’s Dallas office, said the‘‘benefits’’ of the new amendments would include ‘‘al-lowing new and smaller companies that begin businessin Texas to participate in the Program, since the focusnow is on new permanent jobs as opposed to job reten-tion which tended to benefit larger companies thatgrabbed most of the available credit in the previous en-terprise zone Program.’’

‘‘The new enterprise zone credit has been signifi-cantly modified by the Texas legislature,’’ said Goral ina July 27 e-mail.

Tex. Gov. Greg Abbott (R) signed the bill—S.B. 100—into law June 16, following a 139-3 May 24 approval inthe House and unanimous Senate passage April 14.

Set to go into effect Sept. 1, the amendments to theprogram are an effort, the legislation’s author said, toimprove the mix of jobs created by the zone, which cur-rently tilts heavily toward job retention rather than cre-ation.

Authored by Vice-Chairman of the Senate Commit-tee on Finance, state Sen. Juan ‘‘Chuy’’ Hinojosa (D),S.B. 100 amounts to a restructuring of the Texas Enter-prise Zone program and would amend requirements re-lated to project eligibility for various designations andbenefits.

Stressing Job Creation Rather Than Retention. Adminis-tered by the Texas Economic Development Bank, ap-proved projects are eligible to apply for state sales anduse tax refunds on qualified expenditures, with thoseamounts tied to capital investment criteria and the num-ber of pledged jobs created at the qualified businesssite.

A major amendment to the enterprise zone ruleswould see maximum refund levels fall from $3.75 mil-lion to $1.25 million for projects designed to retain jobs,according to a bill analysis authored by the House Re-search Organization (HRO), a nonpartisan independentdepartment of the Texas House.

Under the new amendments, a $1.25 million refundwould be the ceiling for projects designed to retain jobs.

The current mix of program benefits under the pro-gram sees 86 percent of the program directed towardretained jobs, with the remaining 14 percent going to-ward new jobs, according to an excerpt from a June 26legislative report from Hinojosa’s office authored bylegislative director Josh Reyna.

Double, Triple Jumbo Designation Require New Perma-nent Jobs. Under the changes set to be enacted by theamendments beginning at the start of September, proj-ects could be designated as Double Jumbo and TripleJumbo only if they created new permanent jobs.

As designated by the state development bank, a proj-ect can be considered Triple Jumbo if the capital invest-ment is $250 million or greater and it creates more than500 new jobs.

While incentive levels will fall for those projects tar-geting job retention, Triple Jumbo projects creatingnew permanent jobs will be eligible for a refund of upto $7,500 per new permanent job, with a maximum re-fund of $3.75 million.

Under the new regulations, a project receiving the‘‘Double Jumbo’’ designation from the bank will be eli-gible for a refund of up to $5,000 per new permanentjob created, with a refund ceiling of $2.5 million for thecreation of 500 new permanent jobs and between $150million and $249 million in capital investment, accord-ing to the legislation.

Created in 1988 and modeled after President RonaldReagan’s federal enterprise zone initiative, the currentincarnation of the program ‘‘offers greater incentives tobigger projects [double-jumbo and triple-jumbo] basedon higher pledged jobs (created or retained) andgreater capital investment,’’ according to Hinojosa’s of-fice.

‘‘However, over the years the program moved awayfrom its mission of creating jobs and turned its focus onsubsidizing retained jobs,’’ according to Reyna.

The program has accounted for 897 projects with353,131 jobs (new and retained) and $59.5 billion incapital investment as of August 2013, according to a De-cember 2014 data sheet on the program authored by theTexas Economic Development Bank.

Loss of Franchise Tax in Enterprise Projects. Addition-ally, approved enterprise projects would no longer beeligible to receive a franchise tax credit, according tothe HRO bill analysis.

Weaver’s Goral said the loss of the franchise taxcredit amounted to a ‘‘disadvantage’’ in terms of assess-ing the new amendments, but downplayed that signifi-cance of that change.

‘‘Texas’ relatively low franchise tax rate and the factthat most companies remit significantly more sales taxthan franchise tax is really not in my view a significantloss of benefit for many companies,’’ said Goral.

‘‘In addition, the ability to use the credit for addi-tional sales tax items and expanding the number ofitems that can be offset by the sales tax makes the salestax credit even more appealing,’’ he said.

Pointing to another benefit, Goral said that even inthe event a company does not hire new employees fromthe enterprise zone where the company is physically lo-cated but hires at least 35 percentof new permanentjobs from residents of other enterprise zones, economi-cally disadvantaged individuals or veterans still qualifyfor the credit.

Assessing the broader ramifications of the amend-ments, Goral said local communities ‘‘will be impacted’’by the new regulatory landscape, noting that with theelimination of the franchise tax—paid from the state’scoffers—local governments may have to give up some

CREDITS & INCENTIVES (Vol. 2015, No. 31) 27


http://www.capitol.state.tx.us/tlodocs/84R/billtext/pdf/SB00100F.pdf#navpanes=0

http://www.hro.house.state.tx.us/pdf/ba84r/sb0100.pdf#navpanes=0

http://www.senate.state.tx.us/75r/senate/members/dist20/pr15/84R.Legislative.Report.FINAL.pdf

https://texaswideopenforbusiness.com/sites/default/files/12/03/14/enterprisezone.pdf

https://texaswideopenforbusiness.com/sites/default/files/12/03/14/enterprisezone.pdf

sales tax revenue to offset the credit offered to compa-nies.

‘‘However the benefit of having additional local citi-zens working is believed by the legislature to more thanmake up any losses from sales tax revenue,’’ he said.

Program Benefits Guidelines for the Texas Enter-prise Zone Program are available at http://comptroller.texas.gov/taxinfo/enterprise_zone/jc_guidelines.pdf.

BY PAUL STINSON

To contact the reporter on this story: Paul Stinson inAustin, Texas at [email protected]


� For a discussion of Enterprise Zone Credits inTexas, see 1480-2nd T.M., Credits and Incentives: ORThrough WY, at 1480.12.A.

28 (Vol. 2015, No. 31) CREDITS & INCENTIVES


http://comptroller.texas.gov/taxinfo/enterprise_zone/jc_guidelines.pdf





OtherDevelopmentsMultistate DevelopmentsAssessment/Collection

Kansas, Indiana, Missouri to LaunchTax Amnesty Periods in September

T axpayers in Kansas, Indiana and Missouri who oweback taxes from prior years will be able to take ad-vantage of tax-amnesty periods beginning in Sep-

tember, the Kansas Department of Revenue, the Indi-ana Department of Revenue and the Missouri Depart-ment of Revenue said.

In Kansas, taxpayers who owe business or personaltaxes accrued before Jan. 1, 2014 will be able to avoidpenalties and interest if they pay their taxes due be-tween Sept. 1 and Oct. 15, 2015.

The amnesty applies to income tax, privilege tax, es-tate tax, withholding and estimated tax, sales tax, com-pensating use tax, liquor enforcement tax, liquor drinktax, cigarette and tobacco products tax, and mineralseverance tax, according to a Kansas DOR statement.

The amnesty does not apply to matters that are in ap-peal, to matters under criminal investigation, or tothose at issue in any criminal or civil litigation relatedto taxes imposed by the state of Kansas, Kansas DORsaid.

Indiana. In Indiana, taxpayers owing personal orbusiness taxes accrued before Jan. 1, 2013, will be al-lowed to avoid penalties, interest and collection fees ifthey pay taxes due between Sept. 15 and Nov. 16, 2015.

The amnesty applies to 40 different tax types, includ-ing income tax, sales tax, withholding tax, inheritanceand estate tax, gambling-related taxes, utility tax, gaso-line tax and other fuel taxes, motor vehicle excise taxesand alcoholic beverage excise taxes, according to an In-diana DOR statement.

The amnesty also allows taxpayers who have failedto file or have underreported their tax liabilities to filethe appropriate tax returns and pay the base tax, Indi-ana DOR said. Those who take advantage of this pro-gram will lose the right to protest the assessment andwill not be not allowed to file a later claim for refund, itsaid.

Taxpayers who participated in a 2005 amnesty pro-gram will not be eligible to participate in 2015, andthose who participate in 2015 will be ineligible for fu-ture amnesty programs, it said.

Missouri. In Missouri, taxpayers owing personal orbusiness taxes accrued before Jan. 1, 2015, will be al-lowed to avoid penalties, additions to tax and interest ifthey pay taxes due between Sept. 1 and Nov. 30, 2015.

Eligible tax types include the use tax, corporate fran-chise tax, corporate income tax, employer withholding

tax, fiduciary tax, individual income tax, sales tax andvendor’s use tax, according to information on the Mis-souri DOR website.

The amnesty does not extend to taxpayers who aresubject to civil or criminal investigation regarding un-paid Missouri taxes, and taxpayers who participate willbecome ineligible for future amnesty periods for thesame type of tax, Missouri DOR said.

Participants also are required to comply with statetax laws for the next eight years after the amnesty, Mis-souri DOR said. Failure to comply will void the amnestyagreement, triggering an immediate requirement to payany penalties, additions to tax or interest that werewaived under the amnesty.

Information on the Indiana amnesty period is avail-able at http://www.in.gov/dor/amnesty/.

Information on the Kansas amnesty period is avail-able at http://www.ksrevenue.org/taxamnesty.html.

Information on the Missouri amnesty period is avail-able at http://dor.mo.gov/faq/amnesty.php.

BY CHRISTOPHER BROWN

To contact the reporter on this story: ChristopherBrown in St. Louis at [email protected]


AlabamaProcedure

Alabama RequiresSecurity Code For Tax Website

A labama added an authentication step to its onlinetax portal, as the state looks for ways to better pre-vent tax fraud, the state Department of Revenue

announced.Effective July 25, users of the state’s My Alabama

Taxes portal are required to enter an authenticationcode after entering their log-in name and password. Us-ers can opt to receive the code via text message ore-mail, according to the department’s announcement.

Users also can select the ‘‘trust this computer’’ op-tion, which will allow the portal to recognize the com-puter and Web browser at future log-ins.

Alabama Revenue Commissioner Julie Magee hasbeen active this year in collaborative efforts among thestates to improve security measures and preventfraudulent tax filing. Among those efforts, she has par-ticipated in a security summit organized by the InternalRevenue Service, through which state revenue agenciesplan to request specific data points from tax-filing soft-ware vendors that will aid in verifying a taxpayer’sidentity.

(Vol. 2015, No. 31) 29


http://www.in.gov/dor/amnesty/

http://www.ksrevenue.org/taxamnesty.html

http://dor.mo.gov/faq/amnesty.php



The announcement is available at http://revenue.alabama.gov/news/07242015.pdf.



ConnecticutProcedure

Tax Gap Program in Connecticut Generates$85 Million in Uncollected Revenues

A program implemented by Connecticut tax officialsto reduce the gap between taxes due and taxes col-lected generated at least $85.8 million during fis-

cal year 2015, a figure that could go even higher asnumbers for the fiscal year are finalized.

The tax gap program, which was called for by Gov.Dannel P. Malloy (D) in 2014, will also continue to gen-erate income going forward as some of those taxpayerswho had previously not been in the system continue topay their taxes in the future, Revenue CommissionerKevin B. Sullivan told Bloomberg BNA in an interviewJuly 8.

Sullivan explained that the program consisted of twophases—a corporate tax resolution initiative and an ac-counts receivable scoring effort.

Certainty for Payment. Under the corporate tax reso-lution initiative, the Department of Revenue Services(DRS) was able to resolve a number of larger tax dis-putes over issues he characterized as ‘‘transfer pay-ments’’ which had long been under audit. Essentially, itwas cases involving 20 to 30 companies for which theDRS was challenging apportionment and allocation is-sues, he said.

The agency did not prevail on every issue, but theones on which the DRS did prevail netted the state$31.6 million, he explained.

Sullivan said that under the program, large corporatetaxpayers were invited to voluntarily come in and re-solve these outstanding issues with DRS. ‘‘They maylose a little money in the short-term, but these issueswould then be resolved for the long-term.’’ And thoseentities now have three years during which those issueswill not be reviewed by the department, assuming theydon’t change their practices, Sullivan said.

He also noted that as a result of this program, theDRS will be more sophisticated in the way it is able tolook at the interstate and international allocation of cor-porate income. ‘‘Most tax jurisdictions are trying to[become more sophisticated] because generally speak-ing, we were at the children’s table when it comes to amajor entity coming in and saying this is how we wouldlike you to accept the analysis we have done to justifythe way in which we allocate and apportion to yourstate the income that we believe is derived from yourstate.’’

This effort has given audit personnel some trainingand tools that the department can now use that will

level that analytic playing field a little bit, he said. Andit gives the companies some certainty going forward.

Enforcement Effort. The second phase, which focusedon enforcement, consisted of three parts.

Sullivan said the agency ramped up an existing effortto be more diligent in denying the renewal of tax per-mits to those who owed taxes. ‘‘If you owe back taxes,you must enter into payment or a payment plan or wewill not renew your permit. If we do not renew your per-mit then you are operating illegally.’’

This generated about $6.2 million in taxes paid or taxpayment plans entered into, he said. And this will be inplace going forward, with a shortened renewal period,he noted.

A second part of the enforcement program was ad-vanced by the recent effort by the Internal Revenue Ser-vice to release 1099(k) files to the states so the state cando a comparison of state reported sales and federal re-ported credit card sales. By using that data and by con-tinuing to use enhanced collection scoring to identifythose cases that are most likely to be collected with thegreatest amount of collection, the DRS was able to gar-ner $34.3 million, Sullivan said.

The third part of the program looked at sales tax andwithholding tax non-payers. Sullivan said the DRSidentified where there was a backlog of ‘‘this is your lastnotice’’ situations and then deputized a series of em-ployees to go out into the field and knock on doors andvisit offices and let them know they could face closureor criminal action if they did not come into compliancewith the tax laws. Getting these parties into compliancegenerated $13.7 million and will become an annualcompliance event, he said.

BY MARTHA KESSLER

To contact the reporter on this story: Martha Kesslerin Boston at [email protected]


New HampshireTax Base

Legislative Leaders, GovernorsDiscuss Budget in Wake of Veto Action

N egotiations over a budget package and possibletax changes affecting businesses in New Hamp-shire are underway between Gov. Maggie Hassan

(D) and leaders and of the Republican controlled legis-lature.

The legislature passed and sent to the governor a FY2016 budget package in June that Hassan vetoed June25.

That package (H.B. 1 and H.B. 2) included a reduc-tion in the Business Profits Tax from 8.5 percent to 8.3percent, and the Business Enterprise Tax from 0.75 per-cent to 0.725 percent in 2017. Both taxes would droptwice over the next four years, with the BPT ending at7.9 percent and the BET at 0.675 percent by 2020.

30 (Vol. 2015, No. 31) OTHER DEVELOPMENTS


http://revenue.alabama.gov/news/07242015.pdf

http://revenue.alabama.gov/news/07242015.pdf





In her veto message on June 25, Hassan said sheaxed the budget because ‘‘it is unbalanced, makes falsepromises about what it funds and gives unpaid-for taxgiveways to big corporations, many based out-of-state,at the expense of critical economic priorities.’’

Senate President Chuck Morse (R) and HouseSpeaker Shawn Jasper (R) said in a statement June 24that they were proud of the balanced budget passed bythe legislature which they said ‘‘both increases fundingto vital social services while effectively reducing busi-ness taxes in support of increased job growth in thestate.’’

In anticipation of the governor’s plan to veto the bud-get bill, the legislature June 24 passed a continuingresolution that will keep the state’s operations fundedat FY 2015 levels while debate continues over a 2016budget.

‘Compromise Proposal.’ On July 23, Hassan offeredwhat she called a ‘‘compromise proposal’’ on the bud-get.

Hassan said her proposal lowers the BPT to 7.9 per-cent for the 2016 tax year, three years earlier than theCommittee of Conference budget which she vetoed,while increasing the threshold on who has to file andpay the BET, eliminating the tax completely for 5,500small businesses.

To offset the business tax cuts and a use of carryfor-ward funds, the governor’s proposal would increase thecigarette tax by 21 cents and include parity fore-cigarettes and other tobacco products. It would alsoincrease the state portion of the motor vehicle registra-tion fee by five dollars and close a tax loophole restor-ing the Taxpayer Protection and Fair Documentationrequirements to the state’s tax code.

‘‘Over the past several weeks, I have met with busi-ness leaders and citizens across New Hampshire, andwhile businesses would of course like to pay lowertaxes, they also recognize—as the bipartisan businesstax commission has said—that there are other criticalpriorities that we must support, including investing inhigher education, substance abuse prevention, healthcare and transportation infrastructure,’’ Governor Has-san said in a statement July 23. ‘‘This plan would allowus to do both: lower business taxes and ensure that inthe future we do not have to make significant cuts tothose critical priorities.’’

Hassan’s proposal has the backing of House Demo-cratic Leader Stephen Shurtleff (D).

Republican Opposition. However, GOP leaders of theRepublican-controlled legislature objected to Hassan’sdecision to release the proposal without first talkingwith them, and said they stand by the provisions con-tained in the original budget passed in June but vetoedby Hassan.

‘‘We only received a copy of the proposal after thegovernor’s press conference had started. At first glancethese seem to be nothing more than warmed over pro-posals that have already been floated and rejected. Per-haps the governor’s time would be more wisely spentdiscussing these matters with legislators in personrather than trying to negotiate these important issuesthrough a press conference,’’ House Majority WhipRichard Hinch (R) said in a statement July 23.

‘‘I am disappointed to learn of this compromisethrough a press conference, which strikes me as a po-litical stunt; regardless, I will continue to meet andwork towards a budget solution for the State of NewHampshire,’’ Senate President Morse said July 23.

‘‘I am encouraged that the governor agrees with usthat high business taxes are a problem and she’s readyto make New Hampshire better than 48th highest in thenation,’’ he said. ‘‘It is concerning, however, that herproposal also increases spending by about $100 millionand adds $100 million in new taxes and revenues.’’

Discussions over the budget are expected to continueinto August. However, Senate Finance Chair JeanieForrester (R) said in a statement July 23 that while theparties need to continue working towards a compro-mise, the option exists to override the governor’s vetoduring a legislative session in September.

The text of H.B. 1 as passed by both houses is avail-able at http://www.gencourt.state.nh.us/legislation/2015/HB0001.html.

The text of H.B. 2 as passed by both houses is avail-able at http://www.gencourt.state.nh.us/legislation/2015/HB0002.html.

Hassan’s compromise proposal is available at http://www.bna.com/uploadedFiles/BNA_V2/PDF/2015/Compromise Path Forward With Business Tax Cuts.pdf.

BY MARTHA KESSLER

To contact the reporter on this story: Martha Kesslerin Boston at [email protected]

To contact the editor on this story: Cheryl Saenz [email protected]

� For additional discussion of the Business ProfitsTax and the Business Enterprise Tax in New Hamp-shire, see Corporate Income Tax Navigator, at NewHampshire 5.1.

New MexicoProcedure

Staff Blocking Inquiry of New MexicoTax and Revenue Secretary, Auditor Says

N ew Mexico’s state auditor July 22 accused Taxa-tion and Revenue Department administrators ofattempting to obstruct his inquiry into allegations

that Secretary Demesia Padilla used her position to givepreferential treatment to a former client during a taxaudit.

Auditor Tim Keller, speaking at a media conference,distributed copies of correspondence between attorneysfor his office and the department that took place aboutone month before the inquiry into Padilla was publi-cized.

The impact that such a case might have upon the de-partment’s operations could not immediately be deter-mined. Calls and e-mails from Bloomberg BNA to thestate Accountancy Board seeking comment were not re-turned.

While Keller did not release all material gathered inthe investigation, citing privacy laws, the documentsthat were suggest that the Department of Taxation and

OTHER DEVELOPMENTS (Vol. 2015, No. 31) 31


http://www.gencourt.state.nh.us/legislation/2015/HB0001.html




http://www.bna.com/uploadedFiles/BNA_V2/PDF/2015/Compromise Path Forward With Business Tax Cuts.pdf




mailto: [email protected]

Revenue (T&R) questioned the auditor’s motives andwas reluctant to make available personnel for inter-views in the case.

Gov. Susana Martinez (R) has expressed confidencein her cabinet secretary, who was appointed when thegovernor took office in 2011.

A spokesman for the department, meanwhile, toldBloomberg BNA via e-mail that Keller’s action was ‘‘amedia stunt’’ with the sole purpose of advancing his po-litical career.

‘‘It is absolutely outrageous that the state auditorwould claim obstruction when he never even tried to in-terview Secretary Padilla or any high-ranking officialsin the department,’’ the statement read.

Case First Publicized in July. The case was first publi-cized on July 9 when Keller gave notice of an initial in-vestigation after receiving an anonymous complaint tothe auditor’s fraud hotline.

A preliminary investigation was completed by an in-dependent certified forensic and investigative account-ing firm, which determined that the case merited fur-ther investigation concerning potential criminal andethical violations, Keller said July 9 in a prepared state-ment.

The matter was then referred to the attorney general.Keller said that he was required by law to forward thefindings.

At the July 22 press conference, an example Kelleroffered of alleged obstruction by Padilla’s staff was aletter dated June 9 from Sarita Nair, auditor generalcounsel.

‘‘We understand that on June 5, 2015, the depart-ment informed the independent firm retained for thismatter that the [Tax and Revenue] department prohib-ited an employee from participating in a scheduled in-terview that afternoon,’’ Nair wrote.

‘‘To protect the persons against whom allegationshave been made until we had further information, we

had attempted to extend the initial fact-finding periodwhile the independent firm completed its work. Giventhe department’s refusal to cooperate, we cannot main-tain this course of action,’’ the letter continued.

Nair wrote that if the department failed to cooperate,the auditor’s office would instigate a forensic audit ofT&R.

Brad Odell, the department’s general counsel, wrotein a June 11 letter that T&R was reluctant to allow in-vestigators to talk to two employees. The names wereredacted from the copies distributed by Keller to report-ers.

‘‘Based on the employee the [auditor] seeks to inter-view, the department has grave concerns that this in-vestigation seeks to determine whether the departmentis properly enforcing the tax code and collecting taxes,penalties and interest.’’ That authority, according toOdell, is the responsibility of the department.

Odell also said the department was concerned theauditor would ‘‘seek disclosure of confidential taxpayerinformation.’’ But ‘‘in the spirit of cooperation,’’ Odellsaid, the department would make the employees avail-able.

Investigators eventually were able to talk to the two,Keller said, but he added that T&R could have compro-mised the inquiry by informing those employees thatthe department did not want them to be interviewed.

The correspondence is available at http://www.bna.com/uploadedFiles/BNA_V2/PDF/2015/General Correspondence TRD.pdf.

Additional information on the state auditor’s office isat http://www.saonm.org/.

BY WILLIAM H. CARLILE

To contact the reporter on this story: William H. Car-lile in Phoenix at [email protected]


32 (Vol. 2015, No. 31) OTHER DEVELOPMENTS


http://www.bna.com/uploadedFiles/BNA_V2/PDF/2015/General Correspondence TRD.pdf



http://www.saonm.org/



StateTaxCalendar2015

AugustAdvanced State and Local Tax Institute, Aug. 6 - Aug. 7;Washington, DC; Georgetown University Law Center;(202) 662-9890; https://www.law.georgetown.edu/continuing-legal-education/programs/cle/state-and-local-tax-institute/

OctoberTEI 70th Annual Conference, Oct. 18 - Oct. 21; Dallas,Texas; Tax Executives Institute, Inc.; (202) 638-5601;http://www.tei.org/

COST 46th Annual Meeting, Oct. 21 - Oct. 23; Chicago, IL;Council On State Taxation; (202) 484-5222; http://cost.org/

Paul J. Hartman State and Local Tax Forum, Oct. 27 - Oct.29; Nashville, TN; Vanderbilt University Law School;(615) 668-0222; http://www.hartmansaltforum.org/

November2015 California Tax Policy Conference, Nov. 4-6; La Jolla,CA; State Bar of California Taxation Section; 415-538-2000; http://taxation.calbar.ca.gov/Education/TaxAnnualMeetingandTaxPolicyConference.aspx.

DecemberInstitute on State and Local Taxation, Dec. 17 - Dec. 18;New York, NY; NYU School of Professional Studies;(212) 998 -7100; http://www.scps.nyu.edu/

2016

JanuaryCOST SALT Basics School, Jan. 24 - Jan. 29; Grapevine,Texas; Council On State Taxation; (202) 484-5222;http://cost.org/

MarchTEI 66th Midyear Conference, March 13- March 16;Washington, DC; Tax Executives Institute; (202) 638-5601; http://www.tei.org/

(Vol. 2015, No. 31) 33


https://www.law.georgetown.edu/continuing-legal-education/programs/cle/state-and-local-tax-institute/



http://www.tei.org/events/Pages/70th-Annual-Conference.aspx

http://cost.org/CalendarItem.aspx?EventName=46th Annual MeetingSchool

http://cost.org/CalendarItem.aspx?EventName=46th Annual MeetingSchool

http://www.hartmansaltforum.org/

http://taxation.calbar.ca.gov/Education/TaxAnnualMeetingandTaxPolicyConference.aspx

http://taxation.calbar.ca.gov/Education/TaxAnnualMeetingandTaxPolicyConference.aspx

http://www.scps.nyu.edu/academics/departments/finance-tax-and-law/conferences-events/institute-on-state-and-local-taxation.htmlEventName=46th Annual MeetingSchool

http://cost.org/CalendarItem.aspx?EventName=2016 COST SALT Basics School

http://www.tei.org/Documents/Continuing%20Education%20Calendar.pdf