Oklahoma has been in the news recently because of its enactment of a controversial sales tax statute, similar to the Colorado statute, that requires companies which do not collect and remit the Oklahoma sales and use tax because of their lack of physical presence to provide notification to Oklahoma purchasers of the purchasers’ obligation to remit sales and use tax. (See our related blog posts of June 24, July 1, and July 9.) In addition, Oklahoma has recently adopted a Business Activity Tax, which is in lieu of the franchise tax, and which requires any company with sales greater than $500,000 to Oklahoma destinations, regardless of the company’s physical presence in Oklahoma, to pay a tax of 1% of its gross sales revenue to Oklahoma residents. The Business Activity Tax legislation, like the sales tax legislation, ignores the Quill physical presence test, and bases nexus on the “economic presence” of an out-of-state company; i.e., greater than $500,000 of gross receipts from an Oklahoma source. The Business Activity Tax, insofar as the tax on gross receipts, does not go into effect until calendar year 2013.
As we wrote in our prior blog posts with regard to other state statutes based on an economic presence, the Oklahoma statute raises significant constitutional concerns. There is good U.S. Supreme Court precedent that stands for the proposition that the Quill/Bellas Hess physical presence standard of nexus applies to gross receipts taxes. See Tyler Pipe Industries, Inc. v. Washington Department of Revenue, 483 U.S. 232, 107 S.Ct. 2810 (1987); Commonwealth Edison Company v. State of Montana, 453 U.S. 609, 101 S.Ct. 2946 (1981).
Showing posts with label Gross Receipts Tax. Show all posts
Showing posts with label Gross Receipts Tax. Show all posts
Monday, September 13, 2010
Monday, August 30, 2010
Magazine Publishers Beware of the New Washington B&O Tax Law
As previously discussed in our blog post dated May 24, 2010, several states have taken the position that the Quill nexus standard applies only to sales and use tax. State courts in New Jersey (Lanco, Inc. v. Director, Division of Taxation, 188 N.J. 380, 908 A.2d 176 (2006)), West Virginia (Tax Commissioner v. MBNA America Bank, 220 W.Va. 163, 640 S.E.2d 226 (2006)), and South Carolina (Geoffrey, Inc. v. South Carolina Tax Commission, 313 S.C. 15, 437 S.E.2d 13 (1993) (cert denied, 114 S.Ct. 550 (1993)) have held that economic presence (i.e., sales to the state without a physical presence in the state) is sufficient to establish nexus for state income tax. As written in the May 24 blog post, there are other decisions (e.g. Commonwealth Edison v. Montana, 453 U.S. 609, 101 S.Ct. 2946 (1981)) that apply the Quill/Bellas Hess physical presence test to taxes other than sales tax.
By legislation, other states have adopted a gross receipts tax based on economic presence. The Ohio Commercial Activity Tax, the Michigan Business Tax and the Texas Margin Tax are examples. Recently, the State of Washington amended its B&O Tax, which is a gross receipts tax, with regard to the “service classification,” to require an economic nexus standard, based upon the level of service revenues to Washington. Washington has taken an expansive view of businesses subject to the service revenue classification, which now includes businesses that publish periodicals or magazines with respect to the advertising income that such publications derive. Since the nexus standard is quite low, this is likely to be a “sleeping dog” for most publishers.
Perhaps the limiting feature for national publications is the fact that the sourcing provisions of the new law would source advertising revenues to Washington for B&O purposes only on the basis of where the purchase orders for such advertisements were issued. Sourcing is not based on traditional apportionment factors such as payroll and property costs.
Publishers who do not have a physical presence in Washington would have a potential constitutional challenge to the new statute. In particular, as discussed in the prior blog post, Quill/Bellas Hess should be read to apply to gross receipts taxes, so (we would argue) that the physical presence test of Quill/Bellas Hess should apply. Indeed, in Tyler Pipe Industries, Inc. v. Washington State Department of Revenue, 483 U.S. 232, 107 S.Ct. 2810 (1987), the U.S. Supreme Court found that the B&O Tax could be imposed on an out-of-state company because it had sales representatives operating in Washington and therefore was making a market in Washington. While the Court did not cite to Quill or its predecessor Bellas Hess, it did cite as support for its holding National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977), which in turn relied on Bellas Hess. Sales representatives under Quill and Bellas Hess create a physical presence. Thus, if a publisher does not have sales representatives who operate in Washington, it should consider a potential constitutional challenge to any imposition of B&O tax on its advertising revenues.
By legislation, other states have adopted a gross receipts tax based on economic presence. The Ohio Commercial Activity Tax, the Michigan Business Tax and the Texas Margin Tax are examples. Recently, the State of Washington amended its B&O Tax, which is a gross receipts tax, with regard to the “service classification,” to require an economic nexus standard, based upon the level of service revenues to Washington. Washington has taken an expansive view of businesses subject to the service revenue classification, which now includes businesses that publish periodicals or magazines with respect to the advertising income that such publications derive. Since the nexus standard is quite low, this is likely to be a “sleeping dog” for most publishers.
Perhaps the limiting feature for national publications is the fact that the sourcing provisions of the new law would source advertising revenues to Washington for B&O purposes only on the basis of where the purchase orders for such advertisements were issued. Sourcing is not based on traditional apportionment factors such as payroll and property costs.
Publishers who do not have a physical presence in Washington would have a potential constitutional challenge to the new statute. In particular, as discussed in the prior blog post, Quill/Bellas Hess should be read to apply to gross receipts taxes, so (we would argue) that the physical presence test of Quill/Bellas Hess should apply. Indeed, in Tyler Pipe Industries, Inc. v. Washington State Department of Revenue, 483 U.S. 232, 107 S.Ct. 2810 (1987), the U.S. Supreme Court found that the B&O Tax could be imposed on an out-of-state company because it had sales representatives operating in Washington and therefore was making a market in Washington. While the Court did not cite to Quill or its predecessor Bellas Hess, it did cite as support for its holding National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977), which in turn relied on Bellas Hess. Sales representatives under Quill and Bellas Hess create a physical presence. Thus, if a publisher does not have sales representatives who operate in Washington, it should consider a potential constitutional challenge to any imposition of B&O tax on its advertising revenues.
Thursday, May 27, 2010
Supreme Court Declines To Review Retroactive Ban On Refund Claims
So you think a state cannot change its tax laws after the fact to validate an erroneous legal interpretation by its revenue department that caused massive over-reporting of tax? Think again. Indeed, we were reminded earlier this week that, at least in some circumstances, states can retroactively adjust the rules to foreclose even pending claims for tax relief.
The United States Supreme Court on May 24 declined to review a decision by the Kentucky Supreme Court in Miller v. Johnson Controls, Inc., 296 S.W.3d 392 (Ky. 2009). In Miller, the Kentucky Court upheld a state statute enacted in 2000 that retroactively barred refund claims by a group of corporate taxpayers who complied with a policy adopted by the Kentucky Revenue Cabinet, challenged the policy as unlawful, and got it invalidated back in 1994 (by the Kentucky Supreme Court, no less).
Here’s the background: In 1988, the Revenue Cabinet interpreted Kentucky law as prohibiting the filing of unitary income tax returns by corporate taxpayers, and instead required each corporation to file a separate return. The inability to file unitary returns resulted in substantially higher Kentucky taxes for a number of corporations. After the Kentucky Supreme Court ruled in 1994 that unitary returns were allowed under Kentucky law, the taxpayers amended their earlier returns, and sought refunds for the excess tax paid during the earlier years.
In 1996, the Kentucky legislature formally abolished the filing of unitary returns for tax years after 1994. Then, in 2000, with the pending refund claims for earlier years creating the prospect of a massive drain on the state treasury, the legislature passed a law prohibiting the filing of refund claims for any tax year before 1995, based on the submission of an amended, unitary return filed after December 22, 1994. As a result, even those taxpayers who had successfully challenged the 1988 policy in court and had pending refund claims were retroactively precluded from obtaining refunds of excess tax paid.
In response to a challenge to the retroactive effect of the 2000 statute, the Kentucky Supreme Court, citing United States v. Carlton, 512 U.S. 26 (1994), held last year that the law satisfied the requirements of due process because it was rationally related to the legitimate governmental purpose of raising and controlling revenue. The Court found that the taxpayers could have no settled expectation of obtaining the refunds, given the legislature’s action in 1996 to reverse the effect of the Court’s 1994 decision for subsequent years. The Court further held that the new, retroactive tax statute infringed no fundamental constitutional right of the taxpayers and thus resulted in no violation of equal protection.
The taxpayers asked the United States Supreme Court to review the decision, but the Court on Monday turned down the request. Johnson Controls v. Miller, U.S. Supreme Court, Dkt 09-981, petition for cert. denied (May 24, 2010). In light of the existing jurisprudence on taxpayer due process embodied by Carlton, the Kentucky case perhaps breaks no new constitutional ground, but it may expand the limits (not yet fully defined) on how far a state may go to foreclose tax relief in order to protect state coffers.
The United States Supreme Court on May 24 declined to review a decision by the Kentucky Supreme Court in Miller v. Johnson Controls, Inc., 296 S.W.3d 392 (Ky. 2009). In Miller, the Kentucky Court upheld a state statute enacted in 2000 that retroactively barred refund claims by a group of corporate taxpayers who complied with a policy adopted by the Kentucky Revenue Cabinet, challenged the policy as unlawful, and got it invalidated back in 1994 (by the Kentucky Supreme Court, no less).
Here’s the background: In 1988, the Revenue Cabinet interpreted Kentucky law as prohibiting the filing of unitary income tax returns by corporate taxpayers, and instead required each corporation to file a separate return. The inability to file unitary returns resulted in substantially higher Kentucky taxes for a number of corporations. After the Kentucky Supreme Court ruled in 1994 that unitary returns were allowed under Kentucky law, the taxpayers amended their earlier returns, and sought refunds for the excess tax paid during the earlier years.
In 1996, the Kentucky legislature formally abolished the filing of unitary returns for tax years after 1994. Then, in 2000, with the pending refund claims for earlier years creating the prospect of a massive drain on the state treasury, the legislature passed a law prohibiting the filing of refund claims for any tax year before 1995, based on the submission of an amended, unitary return filed after December 22, 1994. As a result, even those taxpayers who had successfully challenged the 1988 policy in court and had pending refund claims were retroactively precluded from obtaining refunds of excess tax paid.
In response to a challenge to the retroactive effect of the 2000 statute, the Kentucky Supreme Court, citing United States v. Carlton, 512 U.S. 26 (1994), held last year that the law satisfied the requirements of due process because it was rationally related to the legitimate governmental purpose of raising and controlling revenue. The Court found that the taxpayers could have no settled expectation of obtaining the refunds, given the legislature’s action in 1996 to reverse the effect of the Court’s 1994 decision for subsequent years. The Court further held that the new, retroactive tax statute infringed no fundamental constitutional right of the taxpayers and thus resulted in no violation of equal protection.
The taxpayers asked the United States Supreme Court to review the decision, but the Court on Monday turned down the request. Johnson Controls v. Miller, U.S. Supreme Court, Dkt 09-981, petition for cert. denied (May 24, 2010). In light of the existing jurisprudence on taxpayer due process embodied by Carlton, the Kentucky case perhaps breaks no new constitutional ground, but it may expand the limits (not yet fully defined) on how far a state may go to foreclose tax relief in order to protect state coffers.
Monday, May 24, 2010
NEXUS: Quill Physical Presence Test Should Apply to Gross Receipts Taxes
Since National Bellas Hess, Inc. v. Illinois Department of Revenue, 386 U.S. 753 (1967), was decided in 1967, states have attempted to avoid the physical presence test of nexus that the National Bellas Hess case established. Thus, in the 1980’s, the Pennsylvania Department of Revenue argued that that our client, L. L. Bean, Inc., was required to collect Pennsylvania sales and use tax on all of its sales into the state because the mail order industry had changed since National Bellas Hess was decided. The Pennsylvania Commonwealth Court squarely rejected this challenge to National Bellas Hess. L. L. Bean, Inc. v. Department of Revenue, 516 A.2d 820 (Pa. Cmwlth. 1986).
Similarly, the State of California threatened assessment of 300 direct marketers on the ground that they had nexus with California because of their use of 1-800 numbers and acceptance of credit cards. On behalf of the Direct Marketing Association, Brann & Isaacson sued in federal court, and the Ninth Circuit issued a judgment in favor of the DMA, on behalf of its members, declaring that in the absence of a physical presence in a state, a company is not liable for sales and use tax in that state. DMA v. Bennett, 916 F.2d 1451 (9th Cir. 1990), cert. denied, 500 U.S. 905 (1991).
The states’ next test case, Quill v. North Dakota, 504 U.S. 298 (1992) (Brann & Isaacson filed an amicus curiae brief on behalf of the DMA in Quill), was yet another unsuccessful effort by the states to overrule and/or limit the physical presence test.
The states’ latest efforts to limit the nexus test under the Commerce Clause by adoption of an economic presence test to measure nexus for gross receipts tax should also be rejected.
Michigan (in the Michigan Business Tax (“MBT”)), Ohio (in the Ohio Commercial Activity Tax (“CAT”), Texas (in the Texas Margin Tax), and Washington (most recently in the May 2010 amendments to its Business and Occupation Tax), however, have asserted that the Quill physical presence test does not apply to gross receipts taxes, but is limited to sales tax. Citing a footnote in the Quill decision, these states argue for a different standard; namely that the mere economic presence of a taxpayer by sales into the state should create nexus.
The states fail to recognize, however, the U.S. Supreme Court’s decision in Commonwealth Edison Company, et al. v. State of Montana, 453 U.S. 609, 101 S.Ct. 2946 (1981), which applied a physical presence test to a gross receipts tax. In that case, the Court addressed the standard to apply to a Montana severance tax on coal extracted from Montana mines, which was a gross receipts tax. Although the Court upheld the constitutionality of the tax, the Court noted the physical presence standard for determining nexus. In particular, the Court cited National Bellas Hess as the standard for finding nexus. The physical presence test of National Bellas Hess doctrine was confirmed in the Quill case in 1992.
The states’ argument also ignores the fair relation prong of the Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977) test. The fair relation prong requires that there be a fair relation between a tax and the benefits conferred upon the taxpayer by the State. Although the Court has not required a detailed accounting of the services the states provide in order to be able to tax, the taxpayer must be engaged in some activity in the state in order to be subject to tax. Thus, in Oklahoma Tax Commission v. Jefferson Lines, Inc., 514 U.S. 175 (1995), the Court defined the fair relation prong as follows “Complete Auto’s fourth criterion asks only that the measure of the tax be reasonably related to the taxpayer’s presence or activities in the state.” (Id. at 200, citing Commonwealth Edison Company v. Montana as setting forth the applicable standard). Clearly, if the taxpayer lacks any physical presence in the state, the fair relation prong of Complete Auto cannot be satisfied.
In short, Complete Auto, Commonwealth Edison Company, and Oklahoma Tax Commission provide one basis to resist a state’s gross receipts tax enforcement efforts against online companies and direct marketers that lack a physical presence in the state.
Similarly, the State of California threatened assessment of 300 direct marketers on the ground that they had nexus with California because of their use of 1-800 numbers and acceptance of credit cards. On behalf of the Direct Marketing Association, Brann & Isaacson sued in federal court, and the Ninth Circuit issued a judgment in favor of the DMA, on behalf of its members, declaring that in the absence of a physical presence in a state, a company is not liable for sales and use tax in that state. DMA v. Bennett, 916 F.2d 1451 (9th Cir. 1990), cert. denied, 500 U.S. 905 (1991).
The states’ next test case, Quill v. North Dakota, 504 U.S. 298 (1992) (Brann & Isaacson filed an amicus curiae brief on behalf of the DMA in Quill), was yet another unsuccessful effort by the states to overrule and/or limit the physical presence test.
The states’ latest efforts to limit the nexus test under the Commerce Clause by adoption of an economic presence test to measure nexus for gross receipts tax should also be rejected.
Michigan (in the Michigan Business Tax (“MBT”)), Ohio (in the Ohio Commercial Activity Tax (“CAT”), Texas (in the Texas Margin Tax), and Washington (most recently in the May 2010 amendments to its Business and Occupation Tax), however, have asserted that the Quill physical presence test does not apply to gross receipts taxes, but is limited to sales tax. Citing a footnote in the Quill decision, these states argue for a different standard; namely that the mere economic presence of a taxpayer by sales into the state should create nexus.
The states fail to recognize, however, the U.S. Supreme Court’s decision in Commonwealth Edison Company, et al. v. State of Montana, 453 U.S. 609, 101 S.Ct. 2946 (1981), which applied a physical presence test to a gross receipts tax. In that case, the Court addressed the standard to apply to a Montana severance tax on coal extracted from Montana mines, which was a gross receipts tax. Although the Court upheld the constitutionality of the tax, the Court noted the physical presence standard for determining nexus. In particular, the Court cited National Bellas Hess as the standard for finding nexus. The physical presence test of National Bellas Hess doctrine was confirmed in the Quill case in 1992.
The states’ argument also ignores the fair relation prong of the Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977) test. The fair relation prong requires that there be a fair relation between a tax and the benefits conferred upon the taxpayer by the State. Although the Court has not required a detailed accounting of the services the states provide in order to be able to tax, the taxpayer must be engaged in some activity in the state in order to be subject to tax. Thus, in Oklahoma Tax Commission v. Jefferson Lines, Inc., 514 U.S. 175 (1995), the Court defined the fair relation prong as follows “Complete Auto’s fourth criterion asks only that the measure of the tax be reasonably related to the taxpayer’s presence or activities in the state.” (Id. at 200, citing Commonwealth Edison Company v. Montana as setting forth the applicable standard). Clearly, if the taxpayer lacks any physical presence in the state, the fair relation prong of Complete Auto cannot be satisfied.
In short, Complete Auto, Commonwealth Edison Company, and Oklahoma Tax Commission provide one basis to resist a state’s gross receipts tax enforcement efforts against online companies and direct marketers that lack a physical presence in the state.
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