The Virginia General Assembly has enacted legislation requiring the Department of Taxation to adopt regulations consistent with recently issued guidance pertaining to the Local Business License Tax (BPOL) deduction for receipts attributable to other states. This development does not change the state of the applicable law, as the Virginia Supreme Court addressed the particular issue in 2015. However, having a regulation will hopefully give taxpayers clear guidance in a single source instead of having the rules spread out over a lengthy court decision, and multiple Department letter rulings. Additional background on the out-of-state deduction can be found here.
The legislation itself (HB 1961) is brief and to the point. It simply states that the Department must adopt regulations regarding the methodology for determining deductible gross receipts attributable to business conducted in another state consistent with the holding in The Nielsen Company v. County Board of Arlington County and rulings issued by the Department. Assuming the regulation will merely address the particular application of the out-of-state deduction at issue in Nielsen, taxpayers can expect the regulation to provide guidance on how to determine the allowable deduction when the BPOL tax base is computed using the payroll apportionment method.
Essentially, a taxpayer that uses payroll apportionment in initially computing its gross receipts attributable to the locality must be able to provide evidence that employees in the locality earn, or participate in earning, receipts attributable to customers in other states where the taxpayer filed an income tax return. If the taxpayer can provide such evidence, the taxpayer can claim a deduction from the tax base that is determined by multiplying the payroll factor percentage for the locality by the amount of gross receipts assigned to the states where the taxpayer filed an income tax return. Initially, this methodology was proposed and applied by the Department in a handful of rulings, and was affirmed as a reasonable approach by the court in the Nielsen ruling.
The more telling aspect of the developments on this issue is that they further support that the out-of-state deduction is not based on income tax apportionment rules. This is a common position taken by Virginia localities on audit or when deciding if a taxpayer is due a refund. Granted, the ability to claim the deduction is contingent upon a taxpayer filing an income tax return in the jurisdiction for which the deduction of the receipts is based. However, multiple Virginia rulings as well as the Nielsen decision make it clear that the amount of the deduction is not somehow tied to the amount of a taxpayer’s sales sourced to that state on its income tax returns. Indeed, such a requirement could result in similarly situated taxpayers ending up with different deduction amounts merely because the deduction is claimed with respect to states that have different sales factor sourcing rules for income tax purposes.
Whether a particular taxpayer has the ability to reduce their BPOL tax liability using the out-of-state deduction depends on how a taxpayer provides its services to its customers. Thus, the facts in each case become very important in assessing whether a taxpayer has been over reporting its BPOL tax. The best approach for any Virginia service provider is to seek out an experienced tax practitioner before filing that first BPOL tax return so the reporting is correct from the start. While refund claims can be great, the localities typically put up a fight even in the clearest cases. Taxpayers are typically required to provide extensive substantiation to support the claim. Still, many taxpayers overstate their BPOL tax base by such a large amount that the refund is substantial enough to endure dealing with a locality that is understandably reluctant to accept such a drastic change in the tax base without sufficient substantiation.
If you have concerns about whether your business is overpaying its BPOL tax, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
Massachusetts has joined the growing number of states that have implemented a sales tax collection obligation for out-of-state retailers. On April 3, 2017, the Massachusetts Department of Revenue issued a directive announcing that the Department is adopting an “administrative bright-line rule” for sales tax collection requirements for Internet vendors (Directive 17-1). Effective July 1, 2017, an Internet vendor with a principal place of business located outside of Massachusetts is required to collect the state’s sales tax if it had in excess of $500,000 in Massachusetts sales or 100 or more transactions with Massachusetts customers in the preceding 12 months.
On its face, the Directive appears to continue the trend of requiring remote sellers to collect sales tax merely due to a certain threshold of in-state sales being met. Besides Massachusetts, the most recent state to adopt a bright-line “economic nexus” standard for sales tax collection is Wyoming, where Gov. Matt Mead signed a bill establishing a sales tax collection threshold of $100,000 of annual sales or more than 200 sales to Wyoming customers. Similar rules have been passed in Alabama, South Dakota, and Tennessee, with the South Dakota rule likely headed to the state’s highest court.
However, Massachusetts’ strategy appears to be slightly different from the others states. Legislation passed in the other states require sales tax collection by retailers with no in-state physical presence, which is clearly at odds with the nexus standard established by the U.S. Supreme Court in the 1992 case of Quill Corporation v. North Dakota. The presumed strategy of the states enacting such provisions is to have the issue taken up by the courts in light of the failed attempts by Congress to address the issue through federal legislation.
Rather than attacking Quill head on, Massachusetts is attempting to distinguish what constitutes a physical presence for a mail order retailer as opposed to an Internet retailer. The ruling in Quill addressed the sales tax collection obligation of a mail order retailer, and concluded that the court’s bright-line “physical presence” standard was not met by a retailer whose only connection with customers in a taxing state is by common carrier or the United States mail. The Massachusetts Directive reasons that the business activities of Internet retailers are factually distinguishable from the business of mail order retailers because Internet retailers do not limit their contacts with the state to mail and common carriers. The directive concludes that Internet retailers have a physical presence in Massachusetts because (1) retailer-owned software is affirmatively downloaded through the use of “native” or “mobile” apps or downloaded by a customer’s general use of the retailer’s website; and (2) retailer-owner proprietary cookies are placed on their customers’ computers and devices.
The troubling nature of the Directive is it seems to ignore that the Quill decision concluded that a sufficient physical presence was not established through mailings made into the state that were owned by the retailers. The in-state mailings did establish some existence of a physical presence for the mail order retailer, but it was not sufficient in the eyes of the Court. Any software and cookies that are downloaded by an in-state customer seemingly serve the same purpose as a mailed catalog. The analogous nature of mailed catalogs and downloaded software arguably should result in the same non-sufficient physical presence as concluded in Quill. Whether online retailers abide by this directive is yet to be seen. If the developments in other states are any indication, the issue of remote seller sales tax collection could very well be litigated in Massachusetts in the near future. It seems that it is only a matter of time before the U.S. Supreme Court will be forced to address the issue again.
If you have any questions regarding your sales tax collection obligations, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
On February 20, 2017, the Governor of Virginia signed legislation into law that will require the Virginia Department of Taxation to administer a tax amnesty program. The legislation, House Bill 2246, requires the program to take place sometime between July 1, 2017 and June 30, 2018, for a period of 60-75 days. This amnesty program is Virginia’s first since 2009.
Participating taxpayers with unpaid tax liabilities due to Virginia will receive a waiver of all civil or criminal penalties and one-half of the interest due in exchange for payment of the outstanding tax liability. The program is available to taxpayers with liabilities resulting from nonpayment, underpayment, non-reporting, or under-reporting of their tax liabilities. Any tax administered or collected by the Department is eligible for the program.
The amnesty program does have limitations related to tax periods and assessments that are eligible for amnesty. For income tax purposes, the program generally will not apply to any tax liability that is attributable to taxable years beginning on and after January 1, 2016. Further, a liability with respect to an outstanding assessment dated less than 90 days prior to the first day of the amnesty program is not eligible for the program. As with many state tax amnesty programs, a 20% post-amnesty penalty will be assessed against any taxpayer that does not participate in the program on any tax balance remaining after the amnesty program ends. The Department will issue additional details on the exact dates of the program and the participation procedures.
The amnesty program is separate from Virginia’s ongoing voluntary disclosure program, which is generally available to out-of-state non-registered business taxpayers with an outstanding Virginia tax liability. Any businesses considering coming forward to pay their Virginia tax liabilities should examine which program is more beneficial. One important distinction is that the voluntary disclosure program grants a waiver of all tax, penalties, and interest for periods older than a three-year look-back period. Thus, businesses with a tax exposure that is greater than three years may find the voluntary disclosure program more appealing despite it not offering the same level of penalty and interest waivers for the periods for which tax will be paid.
If you have any questions about Virginia’s amnesty program, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.
Winning a contract in a new state can present many challenges, not least of which is ensuring that your company is compliant with the state’s tax code. The worst approach to state tax compliance is assuming that the taxes your company may be subject to and the tax treatment of your company’s activity will be the same as in other states. This is especially the case when it comes to Hawaii. It’s not surprising that many government contractors venturing into Hawaii overlook the General Excise Tax (GET), as it’s often assumed that the GET is essentially the same as most other states’ sales and use taxes. However, the unique nature of the GET can catch many businesses off guard, and the Department of Taxation’s penalties can be quite unforgiving.
The first thing every government contractor needs to know about the Hawaii GET is that it is NOT a sales tax. Certainly, the GET has some similarities to a typical sales and use tax. However, the GET has three critical distinctions from a typical sales tax, all of which affect government contractors. Those distinctions are:
Contractors hanging their hat on the “I am a government contractor, so I am exempt from tax” stance are in for a rude awakening when they receive a notice from Hawaii requesting GET returns for the past decade. Most government contractors providing services to the government are subject to the GET at a rate of either 4.0% or 4.5% of their gross receipts, so it does not take a particularly large contract to result in a material tax liability.
At its core, the GET is rather simple. The tax base for a service provider is generally gross revenue from services performed from within Hawaii. Given that the GET is a gross receipts tax, there are very few exemptions or deductions. However, the few that government contractors should be aware of are:
Government contractors need to be proactive in recognizing that their receipts will likely be subject to the GET, so the additional costs should be factored into their bids. Contractors that are assessed years after a contract has ended will likely be unable to recoup those liabilities from their customers. Finally, the penalties assessed by Hawaii can be up to 60% of the tax liability, but there is a fair chance of getting those penalties waived, especially if you come into compliance before Hawaii issues you a notice.
If you have concerns about your company’s compliance with the Hawaii GET, please contact Aronson or Michael L. Colavito, Jr. at 301.231.6200.
This article was co-authored by Paul A. Zee-Cheng.
On October 3, 2016, Tennessee issued a proposed rule making it the third state to impose a sales tax collection obligation on certain out-of-state sellers with no physical presence in a State (Rule 1320-05-01-.129). Under the new rules, out-of-state sellers who make over $500,000 in sales to consumers in Tennessee during the previous twelve-month period automatically have substantial nexus with the state, and are obligated to collect and remit Tennessee sales tax.
The new rule requires out-of-state sellers meeting the sales threshold to register with the state by March 1, 2017, and begin collecting sales tax on July 1, 2017. If a taxpayer meets the threshold after the March deadline, then they must register with the state and begin collecting sales tax on the first day of the third month after the month that they meet the threshold. Taxpayers that do not comply with the new rule will be subject to penalties.
Tennessee’s economic nexus provision for sales tax, which is similar to recently adopted rules in Alabama and South Dakota, is in direct contradiction to the nexus standard established by the U.S. Supreme Court in the 1992 case of Quill Corporation v. North Dakota. In Quill, the Court held that a retailer must have a physical presence within a state to be obligated to collect sales tax. The new economic nexus rules that states are adopting attempt to pave the way for Quill to be revisited by the Court, through a challenge to one of the new rules. Justice Kennedy recently invited such a challenge in his concurring opinion in Direct Marketing Association v. Brohl. With pending litigation in Alabama and South Dakota, the physical presence nexus standard could be revisited sooner rather than later.
The Tennessee Department of Revenue did acknowledge the conflict with Quill in its response to public comments regarding the new rules. Despite the conflict, the Department maintains that the rule does not restrict interstate commerce for three reasons. First, as the Court observed in Brohl, the economy has experienced significant structural changes in the past 24 years. The use of online shopping means that a business may now be present in a state without a traditional physical presence. Second, the burden of tax compliance on out-of-state sellers has decreased with sophisticated new tax software. Third, despite pressure from Tennessee and other states, so far Congress has come up short in creating an alternative legislative solution for sales tax collection by remote sellers.
Tennessee’s new rule is still subject to review under the state congress Government Operations Rule Review Committee. This committee could theoretically vote to request the agency repeal, amend, or withdraw the rule. Retailers potentially impacted by Tennessee’s new nexus provision should plan on registering by March of next year, as well as monitor whether any challenges to the provision result in delayed enforcement.
If you have questions about your company’s sales and use tax obligations, please contact Aronson or Michael L. Colavito, Jr. at 301.231.6200.