Multi-State Tax Law Blog

Published on: November 4, 2014

Portable Toilets – What’s the True Object of the Transaction?

It never ceases to amaze me, the wide variety of companies that state agencies attempt to extort money from. Most states impose a sales tax on the sale or rental of tangible personal property. But what happens when the sale is part tangible personal property, part service (“known to the sales and use tax attorney as a “mixed transaction”)? Is the entire transaction subject to tax? Many states take the incredibly helpful, “it depends” approach and look to an even more helpful “object of the transaction” test. In reality, it truly seems like state agencies and courts reach a conclusion and fill in the reasons later.

By way of brief background, since the mid-1900’s, when states enacted their first versions of a sales tax, many courts created this “object of the transaction” test. The test attempted to formulate what the customer was really buying, product vs service. If it was a service then it is generally not taxable, but if it is a product then it typically is subject to sales tax. For example, if you went to a lawyer for advice and left with a tangible document, like a will, then you were obviously buying a service and the will was incidental. Conversely, if one goes to a restaurant, they are clearly buying the food, not the service involved in a chef using his or her expertise to put a well tasting meal together. Viewing everything in this light, one can make an argument in virtually any item it buys. If you buy a photo are you buying the tangible photo or the artistic service involved in taking or creating the picture? At the dentist’s office are you buying a professional service or the tangible cavity filling when you get your tooth fixed? The list can go on and on.
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Published on: October 23, 2014

Amazon Fulfillment – Customer Convenience or Sales Tax Disaster

By Jerry Donnini, Esq.

Now more than ever Amazon has been a one stop shop for many consumers. Not only can you buy just about anything you can think of on the Amazon website, but you can also receive lightning fast delivery of whatever you buy. Over the past few years, Amazon has taken their company to the next level. Now, in addition to selling items, Amazon provides a fulfillment service to online retailers.

As Amazon puts it, their fulfillment business “helps you grow your online business by giving you access to Amazon’s world-class fulfillment resources and expertise.” Simply put, the online retailer sends their products to Amazon. Amazon stores the item at one of its distribution centers. Once the item is purchased, Amazon packs and ships your product to the customer. In addition, Amazon provides customer support. While it certainly charges a fee for its services, Amazon boasts that retailers’ sales significantly increase. However, from a state and local tax perspective, this can create a ticking time bomb for the online retailer.
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Published on: October 9, 2014

Florida Motor Fuel Tax Audits on the Rise

By Jerry Donnini, Esq.

Over the past few years the Florida Department of Revenue (“FDOR”) has launched several new campaigns. About 2 years ago, the DOR gained the ability to access the data tracking all tobacco and alcohol items sold to retailers. Armed with third party data, the FDOR did several thousands of audits on those that sold tobacco or alcohol items. With the downturn in the economy, times are tough for the State of Florida and they are launching a similar campaign against auto dealers using DMV records. It was also brought to our attention that the DOR is launching a new campaign by training its auditors for motor fuel tax audits as well.

Has the FDOR reached out to your company or your client’s company about a pending Florida Motor Audit? If you or your client already received the Florida Form DR-840 – Notice of Intent to Audit Books and Records, then that means you have the joy of experiencing an audit. Under Florida law, you have 60 days in which the FDOR cannot bother you unless you waive it. We usually recommend that the Taxpayer use this 60 day period to organize their documents and get prepared for the audit. Around the 120 day mark, a Florida DOR auditor will push to start the audit and they are trained to come into your business with a smile and pretend that they are just there to help.
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Published on: October 1, 2014

KENTUCKY DOR’S SECRETS REVEALED

By Jerry Donnini, Esq.

Many states, like my home state of Florida, have broad freedom of information laws. Known in Florida as the Sunshine Laws, the state’s citizens can request a wide range of information from the government. Under the laws, so long as the information is not made confidential by a specific statute/law, then the government has an obligation to provide the citizen with whatever is requested. As a state and local tax (“SALT”) practitioner, I often use this knowledge to my advantage. I often request documents and statistics from the state that I find beneficial to myself, my client, or my practice.

Other states have similar laws. In Kentucky, the Open Records Act gives its citizens a mechanism to request a broad spectrum of information from its government. Like many state agencies believe, the Kentucky Department of Revenue thought it was above the law. In a decision sounded on no legal basis, the DOR in Kentucky did not make available to its citizens some 700 administrative court decisions because it feared it would disclose confidential taxpayer information. Further, the DOR argued that producing some 700 opinions was overly burdensome and would not be helpful to its citizens. Mark Sommer, an attorney in Louisville, had a fundamental problem with the secrecy of the government and challenged the DOR’s interpretation of the law by filing suit.
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Published on: September 24, 2014

DON’T MESS WITH THE SEMINOLES – INDIANS WIN SALES TAX CASE IN FLORIDA

By Jerry Donnini, Esq.

As a Florida state and local tax attorney I live in the world of strange. Few attorneys or tax professionals are even aware of our peculiar area of the law. Even fewer attorneys or tax professionals have heard of, let alone practiced in the even stranger area of Native American Taxation. During my travels and while earning my LL.M. at NYU, I was one of the few fortunate souls to be exposed to this spin off of state and local tax. In fact, there are only two courses offered in the United States at the LL.M. level on this subject. Native American Taxation is poorly developed, the rules are unclear, and the cases make no sense whatsoever. While this is common for Florida attorneys like me who live in a world with no clear answers, living in this gray area of the law is uncomfortable for most lawyers and professionals.

From a legal perspective, a state’s ability to tax tribal activities turns on 1) whom is being taxed, Indian vs. Non-Indian and 2) where the transaction is taking place, on vs. off the reservation. One of the primitive cases, Utah Railroad, from 1885, stands for the idea that a state’s power to tax is at its weakest if the tax is imposed on a reservation and the burden falls on a member of a tribe. For example, Mescalero says that ad-valorem tax (property tax) cannot be imposed by a state for real estate located on a reservation. Similarly, a case called McClanahan holds that a state cannot tax a Native American’s income if it is derived from within the reservation’s borders. If sales are wholly made to Indians on the reservation then a state cannot impose its sales tax on those transactions. Warren trading.
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Published on: September 16, 2014

Illinois Tries Again with Nexus Law

By Jerry Donnini, Esq.

On March 28, 2013, Overstock and Amazon lost their challenge of a state tax on online sales in New York’s highest court. Further, the the Supreme Court of United States declined hearing the case, because the court determined that such a law did not violate the federal Commerce Clause. Following the Amazon decision, we expected the states to follow New York’s lead and enact its own click-through-nexus laws.

In 2011, Illinois did just that. Specifically, Illinois has a nexus law that required any company with a place of business in Illinois to collect and remit tax to Illinois. In 2011, Illinois enacted its so-called “Click Through” nexus law, which required a business to collect and remit tax if it has contact with a person or business in Illinois who referred customers to the business’s website for a commission. In this case, the trade group believed the law to be unfair, so it challenged it in court. After enacting its version of the “Click Through” Nexus law in Illinois, the Illinois courts struck it down.

With the “Click Through” Nexus debate rounding third, Illinois threw the state and local tax (“SALT”) community a curve ball with its ruling in Performance Marketing Association v. Hamer. Specifically, the court determined that such a law did violate the federal Commerce Clause and the Internet Tax Freedom Act. Many wondered if Illinois would just draft a new law to attempt to capture online-retailers, similar to the way New York did.

Published on: September 3, 2014

Caterpillar Loses Foreign Dividends Discrimination

By Jerry Donnini, Esq.

The Constitution gives the power to Congress, and Congress alone, to regulate commerce with foreign nations. This means the individual states cannot regulate commerce with foreign nations. This concept is known as the Foreign Commerce Clause. While it seldom comes up in the area of state taxation, the Foreign Commerce Clause states, “Congress shall have Power . . . To regulate Commerce with foreign Nations, and among the several States . . .” This idea seems fairly simple conceptually, however, it can be difficult in practice to determine whether a state tax impedes on Foreign Commerce.

Since 2009, Indiana has been wrestling whether a provision of its state corporate income tax impermissibly burdens interstate commerce. Specifically, Caterpillar Inc., the world’s largest manufacturer of construction and mining equipment, took exception with a portion of Indiana’s corporate income tax law. As it turned out, Caterpillar incorporated in Delaware and had its headquarters in Peoria, Illinois and had one of its many plants in Lafayette Indiana. It also happened to own some 250 subsidiaries, most of which were foreign corporations.
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Published on: August 15, 2014

Colorado Shocked With Pot Tax Revenue

By Jerry Donnini, Esq.

One of the main goals accomplished by legalizing marijuana in Colorado was the perceived increased revenue stream from state tax. Lawmakers strongly believed Colorado would benefit financially from the legalization of marijuana in its state. To their shock and dismay, the legalization has not been as profitable as lawmakers had hoped.

By way of brief background, Colorado enacted a pot tax in 2013. Specifically, on November 5, 2013, Colorado voters passed the pot tax. The tax operated similar to other sin taxes in that it came at a hefty rate. Recreational marijuana sales were subjected to a 25% tax which went into effect on January 1, 2014. Of the 25%, 15% will be tagged for public school construction projects and 10% was earmarked to funding enforcement regulation on the retail pot sales. This excise tax, which is similar to tobacco and cigarette taxes, is in addition to 2.9% sales tax at the retail level. Colorado estimated that the recreational marijuana tax would generate about $100 million in revenue within the first two years. However, as Colorado’s Legislative Council economist Larson Silbaugh eloquently put it “I think our original assumption about cannibalization was wrong.”

In fact Colorado’s projection on its pot tax was off by about 60 percent. In its first fiscal year, the tax generated just over $12 million, which was down from its $33.5 million projection. This also scaled back its year 2 projections from the $100 million number to about $30 million.

Published on: July 29, 2014

Should Gas Stations Fight Two-Tiered Pricing?

By Jerry Donnini, Esq.

Have you ever wondered why gas stations often advertise two different prices on their sign? If you have not, then start looking and you will notice most stations advertise one price for cash (or company specific credit cards, such as Mobil, Shell, Chevron, etc.) and another for credit. The $0.10 difference, known as two-tiered pricing, is an attempt by station owners to recover steep credit card fees by incentivizing customers to use cash.

Over the past few years, many customers have expressed frustrations towards the station owners by being lured into a gas station for a lower price only to find a higher price at the pump when using their credit card. In response to public outcry, many counties enacted ordinances that require stations to list the highest price on their signs. For example, in Broward County, there is an ordinance on the books that requires gas stations to “disclose the highest price that the customer must pay for each grade of such gasoline or diesel fuel.” Recently, around mid-June 2014, Palm Beach County enacted a similar ordinance that required gas stations signs to clearly “indicate the maximum retail price per gallon.” As such, stations are not required to list the two prices. Rather as long as the highest price is listed then the gas station is in compliance.

It is commendable that the counties are attempting to keep the public informed as to the price of fuel. However, from the business owners’ perspective, the law change can result in signs that cost in the tens of thousands of dollars and/or citations from the cities and counties for failing to comply. Being that our firm represents businesses with tax and licensing issues against state and local governments and government agencies, I wondered whether the cities and counties had the authority to make such laws.

Published on: July 21, 2014

SCOTUS Decides to Hear CSX – But Why?

By Jerry Donnini, Esq.

Each year, the Supreme Court punts on dozens of cases. Included in the dozens of cases which the court elects not to hear each year are sales tax cases. They are uninteresting to the majority of the population and just not the type of cases the justices want to hear. In fact, despite having a significant affect in most multi-state businesses, the Supreme Court has not heard a sales tax nexus case since Quill in 1992.

If there was ever a case to hear, it was Amazon and Orbitz versus New York. At issue was the two large online retailers versus the mighty state of New York. To the dismay of many State and Local Tax (“SALT”) critics, the Supreme Court decided to punt on this case at the end of 2013. Perhaps, it thought Congress was going to shock the world and actually do something. Or, perhaps, it just really didn’t care about sales tax nexus.

Then along comes CSX Transportation v. Alabama DOR. At issue is whether a state can enact a tax that imposes a higher rate on one group opposed to another group. In other words, can a state charge one group a 2% sales tax and another group a 4% sales tax on the same item? Without a sufficient justification it generally cannot. But does anyone really care?