State & Local Tax Alert

Transcription

1 State & Local Tax Alert Breaking state and local tax developments from Grant Thornton LLP Wisconsin Court of Appeals Confirms Pollution Remediation Services Taxable The Wisconsin Court of Appeals recently affirmed a Wisconsin Circuit Court decision which held that the activity of separating material dredged from a river into its constituent parts was subject to tax as processing of tangible personal property. 1 The Department was not precluded from raising an alternative legal basis for taxation before the Wisconsin Tax Appeals Commission (WTAC), even though such position was not first asserted in the Department s written notice to the affected businesses. Notably, the Court of Appeals relied upon the WTAC s interpretations of relevant state statutes, finding them entitled to great weight deference. Background In 2007, the Environmental Protection Agency ordered several Wisconsin paper companies to remediate the environmental impact caused by the companies release of polychlorinated biphenyls into the Fox River. The paper companies responded by creating Fox River Remediation LLC (Fox River) to focus on this task. Fox River hired Tetra Tech EC, Inc. (Tetra Tech) as its general contractor to facilitate the remediation process. Tetra Tech in turn hired Stuyvesant Dredging, Inc. (SDI) as one of its subcontractors. Specifically, SDI was hired to separate the dredged material from the river bed into its constituent components so that those components could be further processed and remediated by Tetra Tech. During 2010, the Department audited both Fox River and Tetra Tech. Upon completion of the audit, Fox River and Tetra Tech were issued written notices indicating that they owed tax. In particular, Tetra Tech owed sales tax on the portion of its sale of remediation services to Fox River that represented SDI s activities. Fox River owed use tax on the portion of its purchase of remediation services from Tetra Tech which represented SDI s activities. Both written notices indicated that SDI s activities were taxable under Wis. Stat. Sec (2)(a)(10). 2 No further statutes were cited by the Department in support of the taxability conclusion. Release date January 24, 2017 States Wisconsin Issue/Topic Sales and Use Tax Contact details Steven Koritzinsky Milwaukee T E steve.koritzinsky@us.gt.com Jay Baehman Appleton T E jay.baehman@us.gt.com Jamie C. Yesnowitz Washington, DC T E jamie.yesnowitz@us.gt.com Chuck Jones Chicago T E chuck.jones@us.gt.com Lori Stolly Cincinnati T E lori.stolly@us.gt.com Priya D. Nair Washington, DC T E priya.nair@us.gt.com 1 Tetra Tech EC, Inc. and Lower Fox River Remediation LLC v. Wisconsin Department of Revenue, Wisconsin Court of Appeals, No. 2015AP2019, December 28, Subject to exception, this section imposes sales and use tax on the repair, service, alteration, fitting, cleaning, painting, coating, towing, inspection and maintenance of all items of tangible personal property..

2 Grant Thornton LLP - 2 In 2011, Fox River and Tetra Tech filed petitions for redetermination with the Department with respect to the taxability of SDI s services, which were denied. Subsequently, Fox River and Tetra Tech requested that the WTAC review the determinations. In its move for summary judgment from the WTAC, the Department asserted that the remediation services performed by SDI were taxable pursuant to Wis. Stat. Sec (2)(a)(10) or, alternatively, as processing of tangible personal property under Wis. Stat. Sec (2)(a)(11). 3 The WTAC found the services taxable under the latter statute and rejected Fox River and Tetra Tech s claim that the Department was precluded from raising this alternate basis for taxation by Wis. Stat. Sec (3). 4 The Circuit Court affirmed the WTAC s decision, which resulted in this appeal. Finding As the material facts were undisputed, including the determination that the sediment dredged from the river bed, subject to SDI s services, was included in the definition of tangible personal property, 5 the Appeals Court addressed the appropriate deference standard. Deference In Wisconsin, the Appeals Court is generally tasked with reviewing the original WTAC decision, rather than the Circuit Court decision. 6 In conjunction with evaluating the WTAC s interpretation or application of a statute, the Court must choose to apply one of three levels of deference: great weight, due weight or no deference. 7 The highest level of deference, great weight deference, is appropriate when: (i) the agency was charged by the legislature with the duty of administering the statute; (ii) the interpretation of the statute is one of long-standing; (iii) the agency employed its expertise or specialized knowledge in forming the interpretation; and (iv) the agency s interpretation will provide uniformity and consistency in the application of the statute. 8 Notably, the Court of Appeals found great weight deference appropriate and rejected Fox River and Tetra Tech s contention that the legal conclusions of the WTAC should receive no deference. 9 Consequently, under the great weight deference standard, the Court needed 3 Subject to exception, this section imposes sales and use tax on [t]he producing, fabricating, processing, printing or imprinting of tangible personal property for a consideration for consumers who furnish directly or indirectly the materials used in the producing, fabricating, processing, printing or imprinting. 4 Tetra Tech EC, Inc. and Lower Fox River Remediation LLC v. Wisconsin Department of Revenue, Wisconsin Tax Appeals Commission, Dockets No. 12-S-192 and 193 (Dec. 30, 2014). The statute referenced by the taxpayer requires that a written notice of a tax liability determination be given by the Department to a taxpayer. 5 As defined during the tax years at issue in WIS. STAT (20). 6 Xerox Corp. v. Department of Revenue, 772 N.W.2d 677 (Wisc. App. 2009). 7 Wisconsin Department of Revenue v. A. Gagliano Co., 702 N.W.2d 834 (Wisc. App. 2005), citing Zip Sort, Inc. d/b/a Federal Mailing Systems v. Wisconsin Department of Revenue, 634 N.W.2d 99 (Wisc. App. 2001). 8 Xerox Corp. v. Department of Revenue, 772 N.W.2d 677 (Wisc. App. 2009). 9 Specifically, the taxpayers argued that the WTAC exceeded its authority by converting the narrow and selective sales and use tax on specific, enumerated retail services into a general sales and use tax on all retail services. Also, the Court declined to consider the taxpayers second argument, which was raised for the first time in their reply brief, based on a well-established rule.

3 Grant Thornton LLP - 3 to uphold the WTAC s conclusion of law only if it is reasonable and not contrary to the clear meaning of the applicable statutes, even if another conclusion is more reasonable. 10 Processing of Tangible Personal Property In considering the reasonableness of the conclusions reached by the WTAC, the Court focused first on whether SDI s activities properly constituted processing of tangible personal property under Wis. Stat. Sec (2)(a)(11). As the term processing is undefined by statute, the WTAC had relied upon a dictionary definition of the term to reach its conclusion. Specifically, the term meant to put through the steps of a prescribed procedure; or, to prepare, treat, or convert by subjecting to a special process. 11 The Court found this conclusion reasonable, noting that the use of a dictionary is a well-established practice in statutory interpretation. 12 Fox River and Tetra Tech had argued that the WTAC s conclusion that SDI s activities constituted processing was unreasonable because it: (i) relied on an overly broad definition of processing ; (ii) found that SDI separated the dredged material into its constituent parts, and attempted to tax separation, a service not included as a listed service under Wis. Stat. Sec (2)(a); 13 (iii) ruled in a manner that was inconsistent with one of the Department s administrative rules; 14 and (iv) interpreted processing in a manner that rendered the remaining language in Wis. Stat. Sec (2)(a)(10) and (11) superfluous. 15 Alternative Basis for Taxation Finally, Fox River and Tetra Tech contended that the Department was barred by Wis. Stat. Sec (3) from raising an alternative legal basis for taxation before the WTAC which was not included in the original notices of determination. Specifically, they argued that the Department s assertion that SDI s services were taxable pursuant to Wis. Stat. Sec (2)(a)(11) at the WTAC level violated due process, as well as the statutory requirement that the determination of the tax liability of a person... shall be in writing. 10 Id. 11 Webster s Third New International Dictionary 1808 (unabr. 1993), which defined processing as to subject to a particular method, system, or technique of preparation, handling, or other treatment designed to effect a particular result or put through a special process ). Notably, the taxpayers did not offer the Court any alternative definition of the term. 12 Xerox Corp. v. Department of Revenue, 772 N.W.2d 677 (Wisc. App. 2009). 13 Notably, the taxpayer argued that there was ambiguity and doubt that SDI s activity is taxable. The Court countered that [i]f ambiguity and doubt existed any time a taxable service was using words not explicitly contained in the statute, taxpayers would be able to achieve tax avoidance by dictionary. 14 Specifically, the taxpayers contended the conclusion was inconsistent with WIS. ADMIN. CODE TAX 11.38(2), which sets forth a number of non-exhaustive, illustrative list of services that constitute either fabricating or processing of tangible personal property under WIS. STAT (2)(a)(11). 15 Notably, the Court found these two sections implicitly disjunctive and noted that, although the terms may overlap in their application, each relevant term has independent meaning. Thus, the Department s interpretation of processing did not render the remaining language superfluous.

4 Grant Thornton LLP - 4 Notably, Fox River and Tetra Tech were unable to cite any specific language in Wis. Stat. Sec (3) requiring the Department to provide every possible statutory or legal basis for taxation in its notice of determination. Instead, the Court noted that the Department s general practice of including the legal theory on which the tax liability was based to be simply a practice, not a legislative requirement. In finding for the Department, the Court noted that since taxpayers are generally permitted to raise new issues before the WTAC it would be incongruous to forbid the Department to do the same. 16 The Court declined to consider Fox River and Tetra Tech s due process argument, finding it conclusory and inadequately developed. Commentary This decision, which Fox River and Tetra Tech may appeal to the Wisconsin Supreme Court, raises a few interesting implications. First, the Court s explicit determination that both a taxpayer and the Department may raise alternative arguments or issues at the WTAC venue is important. Taxpayers should be aware that the Department is not limited to its initial determination(s) disclosed on the written notice of adjustment. Also, the Court affirmed the Department s interpretation of processing to include remediation services. This conclusion represents a potential expansion of enumerated services subject to Wisconsin sales tax. Taxpayers providing any services related to tangible personal property should consider possible implications. From a procedural standpoint, the Court spent a significant amount of time discussing the various levels of deference that could be afforded a state agency. The related discussion is particularly enlightening in that it clearly establishes a preference by the Court to afford the WTAC a great deal of deference in interpreting tax statutes. Taxpayers should be aware of this preference in dealing with the Department, especially when considering an appeal of a WTAC decision. The information contained herein is general in nature and based on authorities that are subject to change. It is not intended and should not be construed as legal, accounting or tax advice or opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to or suitable for specific circumstances or needs and may require consideration of nontax and other tax factors. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Grant Thornton LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, re-keying or using any information storage and retrieval system without written permission from Grant Thornton LLP. This document supports the marketing of professional services by Grant Thornton LLP. It is not written tax advice directed at the particular facts and circumstances of any person. Persons interested in the subject of this document should contact Grant Thornton or their tax advisor to discuss the potential application of this subject matter to their particular facts and circumstances. Nothing herein shall be construed as 16 Midwest Track Assocs. v. Wisconsin Department of Revenue, Wisconsin Tax Appeals Commission, No. 03-S-50, May 10, 2005.

5 Grant Thornton LLP - 5 imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed.