Tuesday, January 31, 2012

SALT To Taste: Don't Put the Cart Before the Horse

Jimmy Helms; Geoff Christian

Oral arguments before the South Carolina Court of Appeals were heard in the CarMax case on January 26, 2012.  While there are many issues intertwined in this case, the judges focused primarily on the burden of proof issue. 


Exactly what had the judges so concerned? 

Read the full newsletter here.

Thursday, January 26, 2012

Tax First and Ask Questions Later

Rusty Little

In a previous article (Opening Up a Can of Worms), we discussed the trend of states beginning to address the sales taxation of the popular “Deal of the Day” or Groupon” online coupon business model. This is a brief update of a few more states that have issued guidance in this area since the time of the previous article.

Iowa has recently issued guidance on its website regarding its treatment of Groupons (see details HERE). Similar to the treatment of New York and Massachusetts that we previously discussed, Iowa has indicated that the sales tax base for a Groupon is the gross value stated on the voucher. For instance, if the customer paid $50 for a $100 voucher, the sales tax base is $100. In an interesting twist, Iowa does state that if the discounted price is printed on the voucher (something that Groupon does not normally do), then the discounted price is the sales tax base.

Our opinion is that the amount subject to sales tax should be the $50 since that is the amount that the retailer is choosing to discount its price to, and the amount actually paid by the customer (i.e. in this example, the $50 discount is a “phantom” amount since $50 in cash actually never changed hands).

Iowa (along with New York and Massachusetts) is continuing the recent trend of states “taxing first and asking questions later.” The facts of the transaction and the terms of the Groupon Agreement are being completely ignored.

Fortunately, two other states (Kentucky and Maine) have recently addressed the Groupon sales tax issue, and those states seem to have come to the appropriate conclusion (albeit in a round about way). In the December, 2011 issue of Kentucky Sales Tax Facts, Kentucky addressed the sales taxation of Groupons and concluded that the discounted price (the price paid by the customer) is the sales tax base if one of two conditions are met: (1) The discounted price must be indicated on the voucher (similar to Iowa), or (2) the local retailer must know and retain documentation of the discounted price. Presumably, retaining documentation of the discounted price will not be a problem for the retailer since the retailer’s account will be thoroughly documented in the dashboard on Groupon’s website, so we’ll give Kentucky the benefit of the doubt that they got this issue correct.

In Maine Revenue Service Sales, Fuel & Special Tax Division Instructional Bulletin No. 39, page 4, Maine indicates that the discounted value of the Groupon would be the sales tax base as long as the retailer can “reliably establish the value paid for the certificate and is treating the difference as a retailer discount.” As indicated above, this documentation should be more or less “automatic,” so we’ll put Maine in the “got it right” category.

Since informal guidance such as referenced above does not necessarily have statutory weight, retailers should carefully evaluate their particular facts in determining whether or not to counter a state’s position. Just because a state “taxes first” does not mean they have a basis to do so.

Wednesday, January 25, 2012

If at First You Don’t Succeed . . .

Rusty Little

The battle between online travel companies (“OTCs”) such as Expedia, Inc. and state taxing jurisdictions over the taxability of their “facilitation fees” has been raging for quite some time now. At issue is whether the service or facilitation fee that the OTC charges hotels for finding a customer and booking a room is subject to any applicable hotel occupancy tax. When this issue has been litigated, the OTCs have had mixed results in various jurisdictions all over the country but in most cases, the courts have ruled that the facilitation fees are subject to tax based on interpretations of individual state or local statutes.

On November 29, 2011, the Appellate Division of the Supreme Court of New York reversed a lower court’s order which had allowed New York City to change its hotel occupancy tax rules to tax the entire amount paid by a customer for a hotel room (including the portion attributable to the OTC’s facilitation fee). (See Expedia, Inc., et al. v. City of New York Dep’t of Finance, 2011 NY Slip Op 08648 (App. Div. 1st Dep’t, Nov. 29, 2011)).

The Appellate Division unanimously ruled that the statute (Local Law 43 enacted in 2009) violated the New York Constitution. The Appellate Division noted that “the plain language of the enabling legislation did not clearly and unambiguously provide the City with broad taxation powers with respect to imposing a hotel occupancy tax. Rather, it permitted the City to impose the tax on ‘hotel occupants.’” In other words, the statute permitted tax to be assessed on the charges for the room but not on the facilitation fees, and the City should not be allowed to arbitrarily expand the definition of the tax base.

Not surprisingly, the City has filed a motion to re-argue and/or appeal the case and “try again.” Among the City’s arguments is one that the Appellate Division “overlooked or misapprehended the facts or law” in its reversing decision. The City also argues that the statute changed the method of calculating the occupancy tax and that the tax is based on the full price of the room “regardless of whether such an amount is received from a hotel occupant by a hotel operator, or a room marketer.”

With regard to post-2010 facilitation fees, the motion filed by the City is somewhat of a moot point anyway because legislation was passed in 2010 that does in fact give the City the right to subject the facilitation fees to tax. Regardless of the outcome of this case, this is another example of a taxing jurisdiction pushing their existing tax statutes to the limit and/or enacting new tax statutes, to target business models which would otherwise legitimately avoid tax.

Tuesday, January 24, 2012

SALT To Taste:
Unclaimed Property: Getting Your Priorities Straight

Kellie Lanford; Marshal Kline

All fifty states in addition to the District of Columbia, Puerto Rico, and the U.S. Virgin Islands have unclaimed property laws. These laws require holders of unclaimed property to report and remit such property to the state (after a prescribed period of time has elapsed) until the owner of such property can be located. Unclaimed property is generally remitted to a state based upon the “first” and “second” priority rules that were established under Texas v. New Jersey. Pursuant to these rules, the state of the last known address of the owner, as shown by the holder’s books and records, has a first priority right to the unclaimed property. If the holder has no record of the owner’s last known address, or if the last known address is in a state that does not provide for the escheatment of the abandoned property, then the holder’s state of incorporation has a second priority right to that unclaimed property.

If these rules are as simple and straightforward as they seem, why is there always controversy in this area? Do states have the authority to escheat unclaimed property under other priority schemes? If so, should holders be concerned?

Find out these answers and more by reading the full newsletter here.

Friday, January 20, 2012

State Tax Alerts - This Week's Stories Worth a Second Look

Rusty Little

In case you missed them, the following is a summary of a few key state tax developments, news articles, and observations during the past week:

U.S. Court of Appeals for the Third Circuit Affirms District Court of New Jersey's Orders - On January 5, 2012, the U.S. Court of Appeals for the Third Circuit (“Third Circuit”) affirmed the District Court of New Jersey’s (“District Court”) grant of preliminary injunction with respect to the retroactive enforcement of Chapter 25 (as it relates to stored value cards) and the prospective enforcement of the place-of-purchase presumption and the accompanying Treasury Guidance. Read more HERE


A few more states have introduced online sales tax/click-through nexus legislation:
  • Georgia – click HERE
  • Hawaii – click HERE
  • Minnesota – click HERE

Two more states have recently addressed the sales tax ramifications of Groupon-type deals:
  • Kentucky – click HERE
  • Maine (see bottom of page 4) – click HERE
(Note - both Kentucky and Maine treat these deals correctly, unlike the other states discussed HERE)

It has been relatively quiet in the area federal online sales tax legislation, but here is the text of each piece of the currently proposed online sales tax legislation for your reference in the meantime.

Many states have various tax proposals in front of their Legislatures right now, so stay tuned . . .

Wednesday, January 18, 2012

U.S. Court of Appeals for the Third Circuit Affirms District Court of New Jersey's Orders

Regarding 2010 N.J. Amendments to its Unclaimed Property Law

by Kellie Lanford

On January 5, 2012, the U.S. Court of Appeals for the Third Circuit (“Third Circuit”) affirmed the District Court of New Jersey’s (“District Court”) grant of preliminary injunction with respect to the retroactive enforcement of Chapter 25 1 (as it relates to stored value cards) and the prospective enforcement of the place-of-purchase presumption and the accompanying Treasury Guidance. The Third Circuit also affirmed the District Court’s denial of preliminary injunction as to the data collection provision and the two-year abandonment period.

Keep in mind that this decision was issued in response to a preliminary injunction motion and that further litigation is likely.

Retroactive Enforcement of Chapter 25

Prior to the enactment of Chapter 25, New Jersey unclaimed property law did not provide for the escheatment of gift certificates. Chapter 25 now provides for the escheatment of stored value cards (“SVCs”) which include gift certificates, gift cards, rebate cards, and other similar instruments.

The Third Circuit held that SVC issuers “showed a reasonable likelihood of success on the merits of their Contract Clause claim with respect to SVCs that are redeemable for merchandise and services” for the following reasons:

(1) The change in New Jersey law substantially impaired the contractual relationship by requiring SVC issuers to submit the value of the SVC in cash at the end of the dormancy period (even though the SVCs are not redeemable for cash) as this expected profit was vital to the issuer’s contractual relationship. The retroactive obligations imposed by Chapter 25 also impaired the contractual relationship as this was an unexpected obligation since New Jersey had never before provided for the escheatment of SVCs.
(2) Although it was determined that the law change had a “legitimate and important public purpose” because its goal was to reunite abandoned property with its owners, the “adjustment of the rights of the parties to the contractual relationship was [not] reasonable and appropriate in light of that purpose,” given that it failed to allow SVC issuers to collect their expected profits.
Place-of-Purchase Presumption

Chapter 25 §5(c) provides that “[i]f the issuer of a stored value card does not have the name and address of the purchaser or owner of the stored value card, the address of the owner or purchaser of the stored value card shall assume the address of the place where the stored value card was purchased or issued and shall be reported to New Jersey if the place of business where the stored value card was sold or issued is located in New Jersey.”

The Third Circuit held that “SVC Issuers demonstrated a reasonable likelihood of success on their claim that Chapter 25’s place-of-purchase presumption as well as the Treasury Guidance are preempted under federal common law.” The Court stated that the place-of-purchase presumption language directly contradicts the second priority rule as provided in Texas v. New Jersey,2 and the presumption, if executed in accordance with the Treasury Guidance, allows New Jersey to infringe on the sovereign authority of other states.

Watch for our upcoming SALT To Taste for further information about this New Jersey development and discussion of “third” priority rules.

Data Collection Provision

Chapter 25 §5(c) further provides that SVC issuers “shall obtain the name and address of the purchaser or owner of each stored value card issued or sold and shall, at a minimum, maintain a record of the zip code of the owner or purchaser.”

The Third Circuit held that “the District Court did not abuse its discretion in denying a preliminary injunction of the data collection provision.” The Court stated that the data collection provision furthers the purpose of reuniting customers with their property by making it more likely that the State will be able to reunite the owner with the abandoned SVC funds. Additionally, the Court stated that the “State Legislature’s intent suggests that Chapter 25’s data collection provision is severable from the place-of-purchase presumption.”

Two-Year Abandonment Period

Chapter 25 presumes SVCs to be abandoned after two years of inactivity and requires issuer to transfer to the State the remaining value of the SVCs at the end of the two-year abandonment period.

The Third Circuit held that “SVC Issuers failed to show a reasonable likelihood of success on the merits of their claim that Chapter 25’s two-year abandonment period is expressly preempted by the federal Credit CARD Act of 2009.” In reaching this conclusion, the Court stated that “the CARD Act only requires the funds to be available for five years whereas Chapter 25 protects the funds in perpetuity. Second, even with respect to non-expiring gift cards, Chapter 25 still provides greater protection because the consumer is able to reclaim the full cash value of the SVC under Chapter 25 after two years, whereas he would have been able to redeem only merchandise or services using the SVC.”

1. 2010 N.J. Laws Chapter 25 which amended New Jersey's unclaimed property statute.
2.Texas v. New Jersey, 379 U.S. 674 (1965).

Monday, December 5, 2011

Tennessee Settlement Opportunity for Intangible Expense Deductions


The Tennessee Department of Revenue has recently issued Tennessee Important Notice 11-17 which discusses a potential settlement opportunity for taxpayers who have had intangible expense deductions disallowed or who may be concerned about future disallowances on returns not yet reviewed.  A compromise allowing seventy-five percent of the intangible expense deduction is currently being considered for all taxpayers promptly contacting the Department and will be considered for open tax years ending on or before June 30, 2012.

Read the full Dow Lohnes Price alert here.