The Perils of Responding to Nexus Questionnaires

A company should be very careful in determining whether to respond to the nexus questionnaire and how to respond to the questionnaire.   After all, any response is a statement to a government agency, which must be truthful and will be an admission on the part of the company.  A response that is inaccurate or a response that is not well thought out is worse than not responding at all.  In general, there is no obligation to respond to a nexus questionnaire, so the benefit of responding to a questionnaire may not be significant, yet the potential adverse consequences may be significant.

The problem in responding to a nexus questionnaire is highlighted by a recent case involving Barr Laboratories, in which the Michigan Court of Appeals held that the answers on a nexus questionnaire that indicated that the taxpayer’s employees visited Michigan between two and nine times during the year created a factual issue as to whether or not the company had nexus.   See Barr Laboratories, Inc. v. Department of Treasury (Mich. App. 2010).  The questionnaire indicated that the employees visited Michigan to solicit sales, but all sales were approved in New York.  Apparently that response overstated and mischaracterized Barr Laboratories’ connection to the state.  After an assessment by the Michigan Department of the Treasury of about $500,000, Barr Laboratories commenced a suit to abate the assessment.   In a summary judgment motion, Barr Laboratories submitted an affidavit of its Vice President of Taxation, which contradicted the responses in the questionnaire.  The affidavit stated that the visits to Michigan were only to gather information, and not to solicit sales, and were less frequent than stated in the questionnaire.   But the response to the questionnaire precluded Barr Laboratories from prevailing in the summary judgment motion, and the response was probably the basis for the assessment in the first place.

The taxpayer in that case made several mistakes.  First, it apparently assumed that the standard under Public Law 86-272 applies in the sales tax context, and therefore that the kind of activity that would otherwise be shielded by this federal statute from income tax liability would also be excluded from sales tax collection obligations.  Second, if it had understood the true state of the law and facts, it might have considered not completing the questionnaire in the first place.  Third, even if it decided to submit the questionnaire, it should have provided more precise answers without characterization of the activities as solicitation.  Stating that the employees solicited sales in Michigan is a difficult admission to overcome, even though the activity that had been undertaken may well not have been solicitation.   Thus, the old saw that “no good deed goes unpunished” certainly holds true in this case.

The lesson to be learned is to treat a response to a questionnaire as if it were court testimony.  In a court case, lawyers prepare, advise and counsel the company.  Responding to inquiries from state tax agencies should not be treated differently.  Advice of counsel regarding whether to respond to the questionnaire and how to respond to the questionnaire should be sought.

I hope all have a good Thanksgiving holiday.

Thanks from Warren Buffet!

Warren Buffet wrote a "thank you" letter to the U.S. Government which appeared in the New York Times (see Pretty Good for Government Work). It it, he reminds us that about two years ago our economy was on the brink of disaster. We looked to the government to remedy the situation and it responded with action. I agree with Buffet in this case. While the economy is not where we would like it, where business-oriented regulations are not what we might imagine, and many still lack jobs, the situation is not what it was two years back.

- JSM

Sarah Palin Criticizes Federal Reserve?

Exit elections, but the politics continue. While we ordinarily see the Federal Reserve as supposedly independent in terms of determining monetary policy, Sarah Palin did not pause to take a swipe at the announcement that the Federal Reserve will buy back government bonds (see Sarah Palin Takes Aim At Fed). In fact, she called on the Federal Reserve to "cease and desist." The rationale is that it will cause an unacceptable level of inflation that will erode our jobs and savings. The monetary policy pursued by the Fed raises more issues to me about simply whether it will work. With interest rates historically low, the Federal Reserve has few tools at its disposal to spark the economy. Let Bernanke do his job and let's hope that the Fed can impact the economy positively.

Palin's claim that prices are already rising simply doesn't bear out reality (see Palin Brawls with WSJ Over Inflated Inflation) in an economy where prices are increasing at notably slow rates. Inflation is not particularly high on the list of concerns that the Federal Reserve has currently, but jobs and the health of the economy generally is (See Dallas' Fed's Fisher: Inflation Low on List of worries).

For a discussion of the mixture of politics and the Federal Reserve, see

- JSM

So, What's in Your Wallet?

Katie Porter over at Creditslips did a piece on the cards that those who teach payment law might carry! It is an interesting read. See What's in Our Wallets?

As for me? As those who follow this blog know, I am not a fan of any cards. And, I mean that pretty much universally. From high interest rates to deceptive practices, I just don't like them. My recent dispute over an instance of credit card skimming has only increased my suspicions about card practices, even though the issuer finally capitulated and reversed the fraudulent
charge. Despite my widespread condemnation of cards, I find them necessary. Like others, I am not a fan of debt and prefer paying off balances whenever possible. Yet, having bought a home this summer, I've found a Lowe's card particularly useful! This card issued by GE Money Bank comes with many of the aspects like high interest rates that I dislike about cards. But, having a home that needs appliances and quite a bit of do-it-yourself initiative, Lowe's offers of no interest financing on many 6 and 12 month purchases is a plus. The risk is that if you don't pay off the amount in the time frame the interest is high, but for card users with discipline, the no interest deals are a nice way to spread out large home improvements over several months.

- JSM