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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 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 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?

Published on: July 10, 2014

COLORADO “AMAZON TAX” CASE TO BE HEARD BY SUPREME COURT

By Jerry Donnini, Esq.

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.

Published on: July 1, 2014

Masterworks on Loan – Love of Art or Sales Tax Savings?

By Jerry Donnini, Esq.

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.
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Published on: June 19, 2014

States Turn to Technology to Narrow Tax Gap by Targeting Small Business

By Jerry Donnini, Esq.

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.

Published on: June 3, 2014

Global Distributor Expands Micjo Decision

By Jerry Donnini, Esq.

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.
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