Sales and Use Tax Litigation and Legislation Update

Transcription

1 Jonathan Feldman Madison Barnett Sales and Use Tax Litigation and Legislation Update Southeastern Association of Tax Administrators Atlanta, Georgia July 20,

2 Agenda U.S. Supreme Court: DMA and CSX Taxability of digital items and services Class action / qui tam Challenges to Communications taxes Other fun stuff 2

3 U.S. SUPREME COURT 3

4 Tax Injunction Act / Remote Seller Reporting Direct Marketing (SCOTUS) Taxpayer challenged Colorado sales / use tax remote seller notice and reporting law Federal district court enjoined (2012) enforcement of law on Commerce Clause discrimination grounds 10 th Circuit reversed (2013) on procedural grounds, finding that TIA barred federal jurisdiction TIA provides that federal courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such state Direct Mktg. Ass n v. Brohl, 135 S. Ct (Mar. 3, 2015) 4

5 Tax Injunction Act / Remote Seller Reporting (cont.) Direct Marketing (SCOTUS) HOLDING: TIA does not bar federal court jurisdiction over a suit brought by non-taxpayers to enjoin state sales/use tax informational notice and reporting requirements (unanimous) Assessment, levy, or collection does not refer to information notices or private reports of information relevant to tax liability Kennedy suggested whether Quill should be reconsidered now harms States to a degree far greater than... anticipated What does this mean for Quill? 5

6 Tax Injunction Act / Remote Seller Reporting (cont.) Direct Marketing (on remand) 10 th Circuit has requested briefing on the merits AND whether comity procedurally bars suit DMA says the state waived comity; Colorado agrees Briefing concluded; oral arguments set for 9/29/2015 Potential outcomes? Other effects? Louisiana affiliate nexus bill vetoed by Gov. Jindal (HB 555, vetoed 6/19/2015) On 6/12/2014, Colorado s State District Court issued a permanent injunction barring enforcement of the notice and reporting law based on the statute discriminating against interstate commerce. 6

7 4R Act / Discrimination CSX Transportation Alabama imposes sales / use tax on diesel fuel purchased by railroads, but exempts fuel purchased by competitors (while taxing them under other motor fuels taxes) SCOTUS A rail carrier can show discrimination under the 4R Act 49 U.S.C (b)(4) by demonstrating that it is subject to differential tax treatment from its competitors The tax disparity is permissible if the competitors are subject to another roughly comparable tax or if the state offers another sufficient justification CSX Transp., Inc. v. Ala. Dep t of Revenue, 135 S. Ct (Mar. 3, 2015) 7

8 4R Act / Discrimination (cont.) CSX Transportation (issues on remand) Is Alabama s sales tax on railroad diesel fuel roughly equivalent to the highway use tax imposed on motor carriers? Can Alabama justify the complete exemption for water carriers from any tax on diesel fuel? See also IL Central Railroad Co. v. Tennessee Dept. of Revenue, 969 F. Supp. 2d 892 (M.D. Tenn. 2013) (sales / use tax on diesel fuel purchased by railroads but not motor carriers is discriminatory), on appeal, No (6th Cir. 5/11/2015) (remanding case to district court in light of CSX) 8

9 TAXABILITY OF DIGITAL ITEMS AND SERVICES 9

10 Video Programming as TPP / Louisiana Cox Communications Parish attempted to impose sales tax on video-on-demand and pay-per-view programming as sales of tangible personal property Louisiana Court of Appeals held that VOD and PPV are nontaxable services Not taxable as tangible personal property under general perceptible to the senses definition or specific software definition Would be exempt as regular cable service to the extent otherwise taxable Normand v. Cox Communications La., LLC, No. 14-CA-563 (La. Ct. App. 12/23/2014), writs denied (La. 4/10/2015) 10

11 Video / Audio Programming as TPP / Alabama Alabama Rental Tax Regulation On 6/11/2015, Alabama amended a regulation to impose tax on digital transmissions as rentals of tangible personal property Lists as being taxable any rental of on demand movies, television programs, streaming video or streaming audio Would be effective prospectively on 10/1/2015 Review by Joint Committee on Administrative Regulation Review (JCARR) Amendment final 35 days after filing, if not vetoed Ala. Admin. Code r (amended 6/11/2015) 11

12 Computer-Related Services / Tennessee IT Staffing Agency Services IT staffing agency s computer-related services provided on an hourly basis generally subject to sales tax Nontaxable services determined to be taxable because the true object of the overall IT project was to provide taxable services related to the sale or creation of software Optional Software-Related Services Tenn. Ltr. Rul. No (10/30/2014) Software seller provided optional additional services: training, configuration, project management, data conversion, documentation, testing and report writing Taxability of optional services varied based on each customer contract; services taxable if provided as a required or integral component of a taxable software installation contract or a software customization contract Tenn. Ltr. Rul. No (10/13/2014) 12

13 Digital Items and Nexus / South Carolina South Carolina Revenue Ruling Activities not creating nexus: Licensing software to an in-state customer where delivery is electronic (compare below) Selling digital content downloaded by in-state customers Activities creating nexus: Licensing software to an in-state customer where delivery is by physical means (e.g., disk; but what about Quill?) Owning a computer server in-state to host a website S.C. Rev. Rul. No (9/10/2014) 13

14 Trade-in Credits / Louisiana GameStop Video game retailer accepted customers used video game trade-ins by crediting the amount on a stored value card for use by the customer at a later date; when card used, charged sales tax on sales price less the trade-in amount Parish asserted trade-in could not offset the taxable sales price because it did not occur simultaneously with the sale Court held for taxpayer Department s regulation requiring simultaneous trade-in and sale impermissibly expanded the applicable statute GameStop, Inc. v. St. Mary Parish Sales & Use Tax Dep t, No CA-0878 (La. Ct. App. Mar. 19, 2015), writs denied (La. 6/1/2015) 14

15 CLASS ACTION / QUI TAM 15

16 Class Actions and Qui Tam Cases Fundamental Question: Should taxpayers have to negotiate / litigate tax liabilities with third parties or only with tax administrators? Qui Tam / False Claims Act (FCA) Typically claims for under collection of sales tax State laws mirror federal FCA law designed to encourage whistleblowers to expose fraudulent government claims Insiders (mostly plaintif attorneys by practice) bring claims for treble damages, per-occurence fines and attorneys fees Class Actions Typically claims for over collections of sales tax Class action attorneys and plaintiffs bring actions against retailers for a huge number of small alleged overcharges 16

17 Class Action Lawsuits / Florida Papa John s Three individuals filed a class action lawsuit against Papa John s claiming it improperly charged Florida sales tax on pizza delivery fees Papa John s removed the case to federal district court on 5/22/2014; in December 2014, Papa John s motion to dismiss was denied and plaintiffs motion for class certification was granted Parties reached settlement in principle in February 2015, and case was remanded to state court for finalization of settlement Schojan v. Papa John s Int l, Inc., No. 8:14-cv-1218-T33MAP (M.D. Fla.) 17

18 False Claims Act / DC District of Columbia 911-Fee Suit Complaint filed on behalf of the District of Columbia against several telecommunication service providers for failure to pay all 911 taxes on all active service lines provided in the District Complaint states that small telephone service providers typically do not pay 911 tax at all, while other companies classify telephone services in a way that evades the tax Case pending motion to dismiss filed 4/9/2015 Phone Recovery Services LLC v. Verizon Washington DC Inc., et al., No. 14-CA (D.C. Super. Ct., filed 4/11/2014) 18

19 False Claims Act / Mississippi Mississippi HB 246 Would have allowed false claims suits for state tax matters with some limitations Only allowed claims against persons with sales or net income >$1M per year Introduced on 1/12/2015 Died in committee 19

20 CHALLENGES TO COMMUNICATIONS TAXES 20

21 Tennessee Sales Tax DirecTV Tennessee Satellite TV provider suit alleging TN sales tax exemption violated Commerce Clause TN sales tax applies to telecommunications services, including cable and satellite TV subscriptions First $15 is exempt for cable customers, but not satellite TN Court of Appeals upheld the $15 exemption Different tax treatment of cable and satellite is justified Not substantially similar entities for Commerce Clause purposes, citing significantly different regulatory burdens Consistent with cases in KY, OH, MA, NC, UT Petition for certiorari at SCOTUS (along with MA) pending DIRECTV, Inc. v. Roberts, No. M COAR3CV, 2015 WL (Tenn. Ct. App. 2/27/2015) 21

22 Florida Communications Services Tax (CST) DirecTV Florida Satellite TV provider refund suit alleging FL CST s differential tax rates violated Commerce Clause FL CST rate on cable is 6.65%; satellite is 10.8% However, locals may also impose CST on cable, but not satellite, at a rate up to 5.1% FL Court of Appeal held CST s lower rate on satellite violated Commerce Clause and ordered refund Held that tax has a discriminatory impact because it favors communications services that use local infrastructure Offsetting local CST on cable not enough no guarantee that the local governments charging [4%] will continue to do so On appeal to FL Supreme Court DIRECTV, Inc. v. State, Dep't of Revenue, No. 1D , 2015 WL (Fla. Dist. Ct. App. 6/11/2015) 22

23 OTHER FUN STUFF 23

24 Statute of Limitations / Florida Verizon FL DOR issued sales tax NOPA to taxpayer 51 days prior to expiration of statute of limitations NOPA becomes a final assessment after 60 days Taxpayer asserted tax was assessed beyond the statute of limitations and invalid Florida Circuit Court of Appeal held NOPA was invalid because issuance of NOPA did not toll statute of limitations, only a final assessment is an assessment Also held that a waiver applied to all tax periods covered rather than just the first month Verizon Bus. Purchasing, LLC v. Fla. Dep t of Revenue, No. 1D , 2015 WL (Fla. 1st DCA 6/11/2015) 24

25 Temporary Storage / Georgia Inglett & Stubbs Taxpayer was U.S. government contractor Assessed use tax on property purchased out-of-state and temporarily held it in GA prior to shipping it overseas for use in military construction projects in Afghanistan Georgia Tax Tribunal upheld tax Contractors per se consumers of TPP and thus ineligible for resale exemption and temporary storage exclusion Department disavowed its temporary storage exclusion regulation ( ) as being unsupported by statute This case is thus illustrative of the dangers of unthinking reliance on the language of a regulation or undue deference to asserted administrative expertise Inglett & Stubbs Int l, Ltd., v. Riley, No. Tax-IIT (Ga. Tax Trib. 2/11/2015), appeal docketed, No CV (Fulton Super. Ct.) 25

26 Manufacturing Exemption / Georgia Georgia Power Refund suit for use tax paid by electric utility on distribution and transmission equipment Taxpayer asserted equipment qualified for GA s expanded integrated plant manufacturer s exemption as part of a single integrated plant with the generation facilities Tribunal held equipment was not exempt Electricity manufacturing process was completed at the generation plants and the distribution system was used only to distribute (not manufacture) the product Georgia Power Co. v. MacGinnitie, No. Tax-S&UT (Ga. Tax Trib. 1/5/2015), appeal docketed, No CV (Fulton Super. Ct.) 26

27 Tax Reform Georgia H.B. 170 Replaces sales tax on fuel with excise tax Creates new tax reform study committee: Special Joint Committee on Georgia Revenue Structure Required to introduce tax reform legislation during the 2016 legislative session Louisiana H.B. 471 Creates the Sales Tax Streamlining and Modernization Commission Required to study sales and use tax system and make suggestions for broadening the tax base and lowering the tax rate Report due January 1,

28 R&D Exemption / Tennessee H.B. 291, 18 TN expanded its industrial machinery (manufacturing) sales tax exemption to include machinery and equipment necessary to and primarily for the purpose of research and development Enacted as Tenn. Laws 2015, ch. 504 (eff. 7/1/2015) Similar expansion in Georgia? H.B. 415 passed out of the Sales Tax Subcommittee of the House Ways and Means Committee in 2015 Will be considered by full Committee in

29 Parting Thoughts Jonathan Feldman (404) Madison Barnett (404)

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