New Directions for Indirect Taxes

Transcription

1 W. Scott Wright Sutherland Asbill & Brennan LLP Zachary T. Atkins Sutherland Asbill & Brennan LLP TEI Atlanta Half-Day SALT Seminar June 3, 2014 New Directions for Indirect Taxes 1

2 Overview An influx of False Claims Act litigation Digital goods/cloud computing developments Attacks on the use of sales acceptance offices Status of the Marketplace Fairness Act Property tax developments 2

3 FALSE CLAIMS ACT LITIGATION 3

4 False Claims Act Litigation Federal False Claims Act State False Claims Acts Enacted in 1863, serves as model for many states Most cases involve health care fraud Permits qui tam actions but contains tax bar Adopted by 29 states, the District of Columbia, the City of Chicago, and Allegheny County, Pennsylvania Eight jurisdictions permit claims involving any type of tax; three jurisdictions bar only claims involving income taxes Remaining 21 jurisdictions either bar claims involving taxes or limit to Medicaid-related claims 4

5 False Claims Act Litigation People v. Sprint Nextel Corp., 980 N.Y.S.2d (App. Div. 2014) New York amended state False Claims Act (FCA) in 2010 to allow qui tam actions against taxpayers for false claims under state tax law Trial court denied Sprint s motion to dismiss complaint alleging Sprint knowingly filed false tax returns and undercollected sales tax on fixed-rate periodic charges for wireless plans Court rejected argument that Sprint reasonably interpreted state law when it determined that it could unbundle portions of its fixed monthly charges attributable to interstate voice services 5

6 False Claims Act Litigation State of New York v. Sprint Nextel Corp., 980 N.Y.S.2d 769 (App. Div. 2014), cont. Trial court rejected Sprint s arguments concerning effect of Mobile Telecommunications Sourcing Act and Ex Post Facto Clause of U.S. Constitution In February 2014, appellate court upheld trial court s denial of Sprint s motion to dismiss the complaint; thus, qui tam action allowed to continue Anonymous v. Anonymous, No /2012 (N.Y. Sup. Ct.) In March 2014, New York Attorney General announced settlement of qui tam action filed against Lantheus Medical Imaging and Bristol-Meyers Squibb for underpaying taxes 6

7 False Claims Act Litigation Hobbs v. Verizon California Inc., No. B249131, 2014 WL (Cal. Ct. App. Feb. 26, 2014) (unpublished) Relator, a former auditor and serial plaintiff, filed suit on behalf of five California cities alleging that wireless provider undercollected local utility user taxes from customers Relator learned about alleged undercollections during course of audit assigned to him by supervisor Court dismissed action for lack of jurisdiction since relevant transactions were already in the public domain and relator could not prove he was the original source of the underlying allegations 7

8 False Claims Act Litigation Phone Recovery Services LLC v. Verizon Washington DC Inc., No (D.C. Sup. Ct.) Relator, a New Jersey LLC, filed a complaint on behalf of the District of Columbia against 14 telecommunications services providers alleging that the providers failed to pay 911 taxes on all active service lines provided in the District Relator alleges that providers not only intentionally and/or knowingly misclassified or failed to report the type and amount of services they provide but also concealed their misconduct, depriving the District of approximately $29M in 911 taxes 8

9 DIGITAL GOODS/CLOUD COMPUTING DEVELOPMENTS 9

10 Digital Goods/Cloud Computing Changes to Georgia High-Tech Exemption for Facility-Based Claims Statute. Exemption applies to sale or lease of computer equipment to be incorporated into a facility or facilities in this state to any high-technology company classified under [one of the specified NAICS codes] where such sale of computer equipment for any calendar year exceeds $15 million.... O.C.G.A (68). Intercompany receipts limitation. Statute provides that any entity which qualifies for the exemption and is affiliated with a nonqualified entity must conduct at least a majority of its business with unaffiliated entities 10

11 Digital Goods/Cloud Computing Changes to Georgia High-Tech Exemption for Facility-Based Claims, cont. Facility-Based Claims. Regulations and application forms recognize availability of a facility-based claim in addition to a company-wide claim 2002 Policy Statement. The eligibility requirement for a high-technology company to be doing a majority of its business with nonaffiliated entities shall not apply to any exemption issued on a company facility basis Change in Policy. DOR withdrew policy statement and is reevaluating permissibility of and requirements for facility-based claims 11

12 Digital Goods/Cloud Computing VA MI Recent Developments in the Digital Economy Commissioner determined that: (1) manufacturing exemption can apply to sales of computer software that is used directly in the production process (i.e., indispensable and immediate part of actual production process); and (2) clouding computing services are exempt from sales and use tax because they do not involve tangible media and because they qualify as a nontaxable service under exemption for electronic transfers of software Michigan trial court held that cloud computing is a nontaxable service, not a taxable use of prewritten software. Va. Pub. Doc. Rul. No (Mar. 20, 2014) Auto-Owners Ins. Co. v. Dep t of Treasury, No MT (Mich. Ct. Cl. Mar. 20, 2014) 12

13 Digital Goods/Cloud Computing GA Recent Developments in the Digital Economy Department of Revenue ruled that: (1) sales of downloaded software, including software enhancements, are not subject to sales and use tax when the software is not available on tangible media; and Ga. Letter Rul. SUT No (Feb. 20, 2014) (2) Sales of monthly cloud subscription services are not subject to sales and use tax because the sales do not involve the transfer of tangible personal property and are not treated as taxable services **As a reminder, the Department of Revenue is now publishing letter rulings 13

14 SALES ORDER ACCEPTANCE LITIGATION 14

15 Sales Order Acceptance Litigation Hartney Fuel Oil Co. v. Hamer, 998 N.E.2d 1227 (Ill. 2013) Taxpayer established sales acceptance office in municipality that imposed no Retailers Occupation Tax (ROT), while corporate offices remained in high-tax municipality The Illinois Department of Revenue, despite long-standing regulations adopting a bright-line test based on the place of sales order acceptance for sourcing sales, argued that the taxpayer s sales should be sourced to its home office based on the totality of the circumstances Trial court applied bright-line test and held that taxpayer s sales must be sourced to its sales office in low- or no-tax municipality; rejected suggestion that the arrangement was a sham 15

16 Sales Order Acceptance Litigation Hartney Fuel Oil Co. v. Hamer, 998 N.E.2d 1227 (Ill. 2013), cont. Supreme court invalidated sourcing regulations on the grounds that they were inconsistent with the tax statutes they were meant to implement According to the supreme court, the legislature intended to tax the entire business of selling ; thus, sourcing should be based on a totality of circumstances analysis that considers all sales-related activities Court ultimately abated $23M assessment against taxpayer based on the state taxpayer bill of rights, which relieves taxpayers of liability if they rely on erroneous written information advice from Department 16

17 Sales Order Acceptance Litigation Hartney Fuel Oil Co. v. Hamer, 998 N.E.2d 1227 (Ill. 2013), cont. Department issued press release after decision advising taxpayers with selling activities in more than one jurisdiction to carefully consider how they source sales For purposes of determining whether to bring an enforcement action, the Department will be considering extent to which taxpayers made a reasonable, prompt, good faith effort to comply with supreme court s decision In February 2014, Department promulgated regulations that established four primary factors and five secondary factors to determine where sales should be sourced 17

18 Sales Order Acceptance Litigation Regional Transp. Authority v. United Aviation Fuels Corp., No. 13 CH 1023 (Ill. Cir. Ct. Apr. 25, 2014) Taxpayer, a subsidiary of United Airlines that purchases jet fuel, entered into economic development agreement with City of Sycamore and established a sales acceptance office in the city; taxpayer and city agreed to share city s portion of state and home rule ROT under contractual formula Regional Transportation Authority (RTA) filed suit against taxpayer on the grounds that all of taxpayer s sales should be sourced to Chicago, a comparatively higher-tax jurisdiction, because that was the location of all genuine sales activity 18

19 Sales Order Acceptance Litigation Regional Transp. Authority v. United Aviation Fuels Corp., No. 13 CH 1023 (Ill. Cir. Ct. Apr. 25, 2014), cont. RTA argued that the court could impose a constructive trust on the payments flowing from the city to the taxpayer under the economic development agreement without ignoring Hartney; the idea being that taxes that should have been paid to the RTA for prior periods were misallocated to Sycamore Court held that there could be no misallocation of tax that was never due or paid; however, court denied taxpayer s motion for judgment on the pleadings because genuine issues of material fact existed as to the place of sales order acceptance 19

20 MARKETPLACE FAIRNESS ACT 20

21 Marketplace Fairness Act Intended to address state taxation of online sales; authorizes states to require remote sellers to collect sales and use taxes Introduced in February 2013 in the U.S. House and Senate as S. 336 and H.R. 684, reintroduced as S. 743 in April 2013 U.S. Senate voted in favor on May 6, 2013, but currently stalled in House Judiciary Committee 21

22 Marketplace Fairness Act Be a member state under SSUTA, provided postenactment changes to SSUTA do not conflict State must publish intent to collect tax with 180 days notice Authority to Require Collection of Sales and Use Taxes on Remote Sales OR (1) Enact legislation to exercise authority (2) Such legislation must specify taxes to which authority applies, and products/services to which authority does not apply (3) Implement certain minimum simplification requirements Begins no earlier than 6 months after enactment starting on first day of calendar quarter 22

23 Marketplace Fairness Act Minimum Simplification Requirements (1) Implement centralized administration (1 entity, 1 audit, 1 return) (2) Ensure uniform sales and use tax base within state (3) Implement destination sourcing (4) Provide information regarding taxability/non-taxability of products and services, rates and boundary database, and free software to calculate tax due and file returns (5) Relieve remote sellers, certified software providers, or both of liability for incorrect collection, remittance, or noncollection of taxes in certain circumstances (6) Give 90-day notice of any rate changes within state 23

24 Marketplace Fairness Act Small Seller Exception (1) No authority to require a remote seller to collect sales and use taxes if gross annual receipts in total remote sales in U.S. < $ 1M (2) Aggregation rules 24

25 Marketplace Fairness Act Does the Marketplace Fairness Act have legs? Some view it as a drastic expansion of stating taxing powers Could create significant administrative issues Open questions regarding financing Are there legitimate alternatives? Status quo Origin sourcing Consumer reporting system Meanwhile, Amazon is currently collecting tax on purchases shipped to 21 states 25

26 PROPERTY TAX DEVELOPMENTS 26

27 Property Tax Developments Newton Timber Co., L.L.L.P. v. Monroe Cnty. Bd. of Tax Assessors, 755 S.E.2d 770 (Ga. 2014) Taxpayers appealed 107 real property assessments on separate parcels over five-year period Appeals were consolidated for purpose of BOE hearing; after hearing, taxpayers treated consolidated appeals as single civil action did not pay separate filing fees for each of the 107 appeals Court held that BOE must receive filing fee before appeal can be certified to superior court; cases consolidated at BOE for purposes of hearing are not necessarily consolidated for purposes of appealing to superior court 27

28 Property Tax Developments Georgia H.B. 755, effective July 1, 2014, modifies property tax appeals procedure For superior court to have jurisdiction over appeal, taxpayer must pay lesser of: (1) taxes assessed against property for last year for which taxes were finally determined to be due; or (2) amount of temporary tax bill issued for current tax year If tax bills issued before an appeal has been finally determined, board of tax assessors must specify to the county tax commissioner the lesser of the valuation in the last year for which taxes were finally determined to be due, or 85% of the current year s value, which amount shall be the basis for a temporary tax bill 28

29 Property Tax Developments Georgia H.B. 755, effective July 1, 2014, modifies property tax appeals procedure, cont. For nonhomestead owner of single property valued at $2M or more, owner may elect to: (1) pay temporary tax bill which specifies 85% of temporary tax bill; or (2) pay Δ between 85% tax bill based on current year valuation and tax bill based on valuation from last year for which taxes were finally determined to be due on the property Δ will be held in escrow account to be released to prevailing party once appeal is concluded 29

30 Property Tax Developments Georgia H.B. 755, effective July 1, 2014, modifies property tax appeals procedure, cont. Refunds owed to taxpayer must still be paid within 60 days from date of final determination of value Interest accrues from Nov. 15th of tax year or date final installment was due or was paid, whichever is later, through date on which refund is paid or 60 days from date of the final determination, whichever is earlier $5000 cap on interest paid for nonhomestead property, unless refund paid after 60th day If additional tax owed on property, taxpayer is afforded 60 days from postmark date of revised tax bill to make full payment of adjusted bill and interest 30

31 Property Tax Developments Bresnan Commc ns, LLC v. Mont., Dep t of Revenue, 315 P.3d 921 (Mont. 2013) Cable television systems are locally assessed as class 8 property taxed at 3%, but allocations of telecommunications services companies are centrally assessed as class 13 property taxed at 6% Montana Department of Revenue reclassified all of cable provider s property as telecommunications services property Cable provider prevailed in trial court; determined to be a locally assessed cable television system on bulk of its assets despite offering VoIP service 31

32 Property Tax Developments Bresnan Commc ns, LLC v. Mont., Dep t of Revenue, 315 P.3d 921 (Mont. 2013), cont. Supreme court reversed, holding that all of cable provider s property was class 13 telecommunications services property and upholding retroactive assessments Court refused to consider evidence of use and productivity of cable provider s network; instead, court focused on network s two-way capability Dissent calls majority s opinion highway robbery perhaps the first case of information superhighway robbery by the tax authorities. 32

33 Property Tax Developments Bresnan Commc ns, LLC v. Mont., Dep t of Revenue, 315 P.3d 921 (Mont. 2013), cont. Charter, which acquired Bresnan in 2013, submitted proposed ballot initiative in March 2014 to undo the supreme court s ruling; initiative would retroactively amend definitions of class 8 and class 13 property Montana Attorney General issued decision on April 30, 2014, concluding that initiative, as revised by his office, met legal requirements for getting on the ballot Labor union filed petition in Montana Supreme Court challenging legal sufficiency of Charter s ballot initiative, but Montana Supreme Court allows initiative to proceed 33

34 Questions? W. Scott Wright Partner Sutherland Asbill & Brennan LLP Zachary T. Atkins Associate Sutherland Asbill & Brennan LLP

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