Multi-State Tax Law Blog

It is hard to believe we are more than halfway through 2014. What is not surprising is that states continue to battle with online companies, such as Amazon, as to whether it should be required to collect and remit sales tax. States continue with aggressive tactics and continue to look to distribution centers, affiliates, or even hard drives as a hook to establish nexus, which would require the company to collect and remit tax in that state.

In 1992, the Supreme Court of the United States heard a case called Quill v. North Dakota. In announcing the supreme law of the land, the Supreme Court ruled that a company has to have some physical presence in a state to have sales tax nexus. In other words, in order for a state to force a company to charge, collect, and remit its tax then the company has to have a warm body (an employee or independent contractor), or property (inventory) or something physical within the state’s borders. With no change in the law states slowly but surely have widdled away at this case.

Recently, at the end of 2013, the Supreme Court of the United States declined to hear New York’s Overstock.com and Amazon.com case. In essence, the New York “Amazon law” changed the definition of a vendor in New York and forced many out-of-state online retailers to charge, collect, and remit New York Tax. With the New York case off the map, a recent Colorado case has dominated the State and Local Tax (“SALT”) community.

Museums are often able to keep their collections diverse because of the wealthy art collectors that are willing to loan their pieces to them. On the surface, this seems like a very honorable act, but what many don’t know is there is a hefty tax incentive for these collectors. There is an increasing amount of art collectors that are employing this sales and use tax savings tactic when purchasing expensive art. As brought to the forefront in a recent NY Times article, they are using clever legal planning to get around paying a substantial sales (or use) tax bill on a multi-million dollar piece of art.

In the state and local tax (“SALT”) community, many art collectors are taking advantage of the so-called “Norton Simon rule” to avoid sales and use tax on art purchases. From a historical perspective, Norton Simon was a wealthy industrialist and art connoisseur whom used this tax break system and had lent his art to several museums. Typically, the way the scenario works is the art connoisseur offers their artwork to be displayed in a museum in one of the states that do not have a sales or use tax (New Hampshire, Oregon, Alaska, Montana, or Delaware). Most states with a sales and use tax regime also have a presumption that if art is first shipped to another state and remains there for a period of time (usually greater than 6 months) then its first use is in that state and no tax is due when they bring it back to their home state. Therefore, if the art is displayed in a tax-free state and then brought into a taxable state after the applicable period, then no sales or use tax is due.
Continue reading

Each year, the IRS and states alike, estimate the difference between taxes owed and taxes collected. This difference, known as the “tax gap,” has been steadily growing at both the federal and state level over the past several years. For example, the IRS estimates that the federal “tax gap” is about $385 billion. While it sounds like a large number, the IRS is able to boast about an 86% compliance rate. On the state side, similar problems exists. For instance, large states, such as California have a “tax gap” of about $10 billion. In response, the states are launching large and expensive “campaigns” in order to attempt to narrow the tax gap and generate revenue. Small businesses will undoubtedly feel the crack-down of the compliance efforts across the country.

Many states have leveraged technology to begin new automated collection systems. In order to reduce its $10 billion tax gap, California invested about $670 million over 5 years to improve its collection systems. This new technology is expected to raise about $1 billion a year in state tax revenue. Florida implemented a system that systematically sends out tax warrants (tax liens) on delinquent payers. Using this automated system, Florida sent out some 93,000 warrants in 2013, 8,000 of which were in error. The Florida Department of Revenue “proudly” sent an erroneous tax warrant to its Governor in February, 2013. BNA estimates that at least 30 states are following suit and implementing their own technology that will deter many, namely small businesses, from underreporting and not paying past due taxes.

The theme across the country over the past few years is to leverage third party reporting to reduce the state tax gap. For example, states like Florida, Tennessee, and Texas have received sales reports from beer and cigarette wholesalers as a check on retailers selling the same items. Florida recently announced it was turning to the Department of Highway safety as a cross-check on auto dealers and repair shops. Legal research companies have even been brought into the madness as it was reported that personal information from LexisNexis would be used to catch tax evaders in Georgia, Indiana, Louisiana and Massachusetts.

In 2012, an important case in favor of tobacco distributors was decided by a Florida appellate court. Technical tax issues aside, Micjo taught us that if a taxpayer does not agree with a department’s tax decision, then it should fight for its money that is not due. Since the Micjo ruling, many other tobacco distributors have been filing refunds and fighting tax assessments based on the appellate case. After filing several Micjo refund cases, we discovered another pro-tobacco distributor case was decided in Oregon that could take Micjo a step further. Logically, the case should apply to Florida and other states’ tobacco taxing laws. If correct, then tobacco distributors may be entitled to large refund claims.

Taking a step back, Micjo was decided in 2012 and it discussed the correct taxable base for other tobacco products (“OTP”) tax in Florida. The case ruled that the OTP tax should only apply to the charges for the tobacco itself and does not apply to federal excise tax charges or shipping for a distributor to obtain the tobacco. Put another way if an invoice has charges for $100 for tobacco, $50 for federal excise tax, and $25 for shipping, then the tax should only apply to the $100, rather than the $150, or $175. Being that the tax rate is 85%, this distinction resulted in large tax refunds if the distributor was paying tax on the full invoice amount.

In Oregon, Global Distributor & Wholesales, Inc. v. Oregon Dep’t of Revenue was brought to my attention. In this case, Global, a distributor, purchased hookah tobacco to which Oregon tobacco tax applied. Global received the tobacco in foil bags and then inserted it into tin canisters, applied a label to it, and sold the product to smoke shops and hookah lounges throughout Oregon. Apparently Global claimed that it bought the tobacco itself for about $3.00 and the packaging and labeling supplies ran the taxpayer about $5.50 in cost. It would then sell the final product to customers for $14-$15, who would then sell it to customers for about $20.

In addition, Global also entered into an exclusivity agreement with its suppliers. Under the exclusivity agreement, in exchange for a fee, Global was the only distributor that sold a particular product in Oregon. Although the agreement was oral, Global testified that it purchased the exclusivity agreement for a flat fee of $3,000. In addition, it was also charged a fee based on the number of units that totaled about $3,800 for the period at issue.

With those facts in mind, Global took the position that Oregon’s tobacco tax applied only to the cost of the tobacco itself and not to the exclusivity or packaging charges. Of course, as state agencies tend to do, Oregon’s taxing agency believed that its tax applied to the total invoice which included the charges for packaging as well as the exclusivity fees.
Continue reading

For the last three years, our firm has been relentless writing and warning any business that sells beer, liquor, and/or cigarettes, that the Florida Department of Revenue was coming. The onslaught of the industry all stemmed from a law change in 2011. With little support, a new law went into effect in Florida that required all wholesalers, manufacturers, and distributors of alcohol and tobacco to provide annual sales information the Florida DOR. Shockingly, some ABT retailers were purchasing multiples of gross sales of alcohol and tobacco alone. For example, the average Florida C-store purchased about $50,000 a month in ABT items alone but only reported gross sales of $20,000 for sales tax purposes. As predicted, we were told that approximately 200 audit notices were going out every three months (DR-846 – “desk audits” & DR-840 – “full audit notices”) and each of the state’s some 500 auditors was assigned at least 1 ABT case. That was exactly what happened.

Starting in 2012, our law firm has been inundated with calls from the alcohol and tobacco retail industries. The Florida DOR relied on a flawed formula to complete hundreds of sales and use tax audits assessing sales tax, penalties and interest greatly in excess of what the businesses owed. Since 2012, our firm has been defending these alcohol and tobacco retailers. Contrary to guidance from our friends in Tallahassee, the audits are often defendable to a degree. Specifically, the Florida DOR relies on industry averages and the reality is that each store has its unique story. In addition, the purchase information relied upon by the Department is often times inaccurate or incomplete.

It would be a severe understatement to say this ABT audit program has been profitable to the state. According to the program’s statistics the Florida DOR has assessed tax penalty and interest about $102,124,022 (about $74,000,000 in tax) as of March 2014. Assuming a 6% tax rate, this equates to $1.1 billion, with a “b,” of alleged unreported sales.

It is difficult these days to read an article about sales tax without coming across issues with online companies such as Amazon. For those of you that do not spend most of your day hunting down interesting sales tax articles, please just take my word for it. In fact, before Congress right now is an attempt to nationalize sales tax collection by passing a law known as the Marketplace Fairness Act. This law would essentially cause most online retailers, like Amazon, to collect tax in every jurisdiction to which they sell. Not surprisingly, and despite the literally thousands of articles discussing the MFA and online sales tax collection, most consumers and many commentators still are not understanding how a sales tax works.

By way of background and for review for many of you, a sales and use tax work complimentary to each other. If a company has nexus, a connection, with a state, then it is supposed to charge, collect, and remit a sales tax on sales made into a particular jurisdiction. Conversely, if a consumer uses an item in which tax has not been paid, then the consumer owes a use tax to the state on that item. In the online marketplace, that means that if you buy an item online and the online seller does not charge tax, then it is your responsibility as the consumer to file a use tax return and pay the tax directly to the state. However, I regularly bring up this concept during my speaking engagements in Florida, and my audience just laughs when I ask them who has filed their use tax return (DR-15 MO) for the clothes and shoes they bought on Amazon over the last year.

In my recent readings, I came across a Forbes article entitled 3 Ways to Still Avoid Sales Tax Online by Robert Wood. In his article, Mr. Wood points out that aside from the states that do not have a sales tax (Alaska, Delaware, Montana, New Hampshire, and Oregon if you are interested), online shoppers have been charged sales tax in more and more states each year. Each year states try to enlarge their nexus statutes to require more online retailers to collect. In addition, Amazon is collecting in at least 20 states.

On a regular basis, our firm receives questions from taxpayers and their CPA’s alike regarding businesses that provide both services and tangible personal property. In most states, tangible personal property is subject to sales tax while the sales of services is not. Alternatively, a similar question comes in with real property improvement contractors that sell some tangible personal property, some installation, and some real property contracts with installation. The question is even more pressing in the case in which the taxpayer is a real property improvement company that has significant sales to tax-exempt or governmental entities. The issue remains the same, how does the taxpayer exempt the service or minimize the sales tax ramifications in their business?

In a simple example, consider an interior design company. In most states the sale of the interior design services are not taxable. Conversely, the sale of furniture (TPP), is subject to sales tax. What about the scenario in which both are sold? In most jurisdictions the answer turns on whether the purchase of TPP is optional. Other states look to what is the “true object of the transaction,” services or TPP. In either scenario taxpayers are often left with an uphill battle on audit. If the taxpayer takes the position that only the TPP is taxable, it risks having to come out of pocket and pay tax on professional service transactions it never charged tax on.

In the real property world, taxpayers face a similar conundrum. In most states real property improvement contractors are considered the end user of tangible personal property. Therefore, they are required to pay a use tax on their material costs. In turn, they do not charge customers tax on their sales. Consider, however, they are installing items of TPP. In that case, suddenly the sale of TPP plus any labor charges may become subject to sales tax in many states. More commonly, the real property contractor incorrectly does not pay tax on its materials and then attempts to exempt the sale by accepting an exemption certificate from its tax-exempt customer. Unfortunately, in most states, an exemption certificate only works to exempt the sale of tangible personal property, not real property. Therefore, if the real property improvement contractor did not pay tax on its materials and did not charge tax, it could get slammed with a hefty sales tax bill.

So what can be done?
Continue reading

In mid-January 2014, I stumbled across an article in the Wall Street Journal discussing shopping trends over the holiday season. According to the Journal’s article, As Shoppers Skip the Mall, Stores Search for Fresh Lures, the shift to online shopping and away from the traditional brick-and-mortar was heavily price driven. Of course, other factors contributed such as convenience of shopping online and having a more defined mission when going to the store due to online research. However, the article suggested a “permanent” shift away from store showrooms and more to that of an online marketplace. Is it possible that a perceived sales tax savings is also contributing?

Irrespective of the rationale, the results of this year’s shopping trends analysis was staggering. Courtesy of ShopperTrak, a data firm, stores can monitor foot traffic by the use of a network of 60,000 devices. The devices can measure the foot traffic at malls and retail space in the top 54 largest markets for the United States. According to the article, the foot traffic plummeted some 28% in 2011, 16% in 2012, and another 15% in 2013. In total, the tracking network estimates that the foot traffic was down to about 17.6 billion from over 30 billion just three years ago. Further, the data also concluded that an average shopper visited 5 shops per mall visit in 2007 and only 3 this past season.

Another staggering statistic was observed by a study conducted by the CoStar Group. CoStar measured the amount of new retail space opened annually by square footage in the recent years. In the same 54 largest US markets, only 44 million square feet of new retail space opened in 2013. While it sounds like a lot in 2006 some 325 million square feet opened in the markets. This 87% decline also affirms that retailers are aware of the shift in shoppers’ habits.

Most Florida tobacco distributors are familiar with Micjo which was decided on February 1, 2012. Micjo would change the alcohol and beverage tax world in Florida forever. At issue was whether the taxpayer had to pay Florida tobacco tax on all of the invoice components, including shipping charges and federal excise tax or if the tax should only apply to the tobacco product itself, not the federal excise tax and transportation charges. For example, Micjo (or any tobacco distributor) gets an invoice from its supplier that says tobacco $100, federal excise tax $60, transportation charges $40, total invoice $200. Should the tobacco tax apply to the $200 or the $100? Of course, Florida’s Division of Alcoholic Beverages and Tobacco of the Florida Department of Business and Professional Regulation (“AB&T”) believed it was the $200 and Micjo believed it was the $100.

To AB&T’s disbelief, Micjo had the nerve to challenge AB&T. Perhaps even more surprising to AB&T, Micjo had the better argument and won the case. The Second District Court of Appeals looked to the statute at issue and determined that the tax should apply ONLY to the tobacco product itself. Since the case was decided, many tobacco distributors and manufacturers have been claiming refunds and getting them back. Well, until recently….

Recently, over the past several months, our firm has been receiving an increased number of calls from Florida tobacco distributors and manufacturers saying that AB&T has stopped issuing refunds on this issue. To my knowledge, there has been no change in the law and no new cases since Micjo. Rather the almighty AB&T simply believes the court in Micjo was wrong and has been denying refunds. That’s correct, despite an appellate court ruling clearing establishing how the law should be interpreted, AB&T has been completely ignoring the appellate decision.