State Tax Cases, Issues and Policy Matters to Watch including Federal Legislation impacting SALT

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1 State Tax Cases, Issues and Policy Matters to Watch including Federal Legislation impacting SALT COST South-East Regional State Tax Seminar Atlanta, Georgia December 4, 2014 Fredrick J. Nicely Council On State Taxation Leah Robinson, Sutherland Asbill & Brennan LLP Eric Tresh, Sutherland Asbill & Brennan LLP

2 Agenda Explanation of Tax Geek Quiz State of the States Federal Legislation NY Tax Reform Use of State 482 Provisions Using Negotiated Credits/Incentives Unitary Combined Reporting Class Action/Qui Tam 2014 US Supreme Court Cases 2

3 Win a Prize! Prize given at the end for the person that gets the most points Points vary unless noted, 100 points per question Sorry, no corrections for incorrect correct answers just blame Fred Runoff if tie at the end 3

4 State of the States

5 State Fiscal Conditions and Policy Implications Just a blip? Income tax receipts balloon, deflate After 4 years of growth, state tax revenues collectively declined in the 1 st quarter of nd quarter figures suggest a further decline of 1.2% overall compared to the same quarter of 2013 Overall, state tax revenues decreased by 0.8% in the 1 st half of 2014 compared to 2013 Fiscal Analysis from Rockefeller Institute of Government, State Revenue Report, August 2014; Rockefeller News Release, April Surprises Left Many States with Bad News, September 17, 2014; State Revenue Report, November, 2014.

6 Quarterly Revenue by Major State Tax January-March, , Percent Change PIT CIT Sales Total GA 7.2% 21.3% (6.3)% 6.8% Southeast (AL, AR, FL, GA, KY, LA, MS, NC, SC, TN, VA, WV) (0.7)% 7.4% 4% 2% U.S. (1.2%) 1.4% 1.7% (0.3%) Fiscal Analysis from Rockefeller Institute of Government, State Revenue Report, August 2014 Council On State Taxation 6

7 Quarterly Revenue by Major State Tax April-June, , Percent Change PIT CIT Sales Total GA (1.3)% 4.7% 8% 3% Southeast (AL, AR, FL, GA, KY, LA, MS, NC, SC, TN, VA, WV) (5.9)% (2.1)% 3% 0% U.S. (6.6%) (2.7)% 4.1% (1.2%) Fiscal Analysis from Rockefeller Institute of Government, State Revenue Report, November 2014 Council On State Taxation 7

8 State Fiscal Conditions and Policy Implications What do businesses pay? Businesses paid close to $671B in U.S. state and local taxes in FY2013, an increase of 4.3% Accounts for 44.9% of all state and local taxes The business share nationally has been within 1% of 45% since 2003 Tax/benefit ratio across the US: 3.26/1 (1.2/1 if 50% of education spending benefits businesses) COST/EY Study, Total state and local business taxes: State-by-state estimates for fiscal year 2013, August 2014

9 State Fiscal Conditions and Policy Implications Relative share of total state and local business taxes for FY2013 COST/EY Study, Total state and local business taxes: State-by-state estimates for fiscal year 2013, August 2014

10 Business Taxes Per Capita (Population data derived from US Census Bureau - April 2010 Census Data) $2.54K $1.63K $2.27K $8.29K $2.3K $1.53K $1.88K $1.7K $2K $5.2K $2.33K $2.35K $7.83K $2.25K $2.22K $2.04K $1.89K $2.71K $2.38K 4.6% $2.23K $1.98K $1.42K $2.52K $1.47 K $1.62 K $1.79K $1.52K $1.5K $1.8 3K $1.87K $1.77 K 1.65% $1.48K VT $3.17K $2.04K $2K $1.71K $1.44K $1.57K $2K $3.45K $2K $2.3 8K CT $2.14K $RI 2.3K NJ $2.75K DE $2.44K MD $1.81K DC $6K LEGEND Low Mid High MA $2.4K $2.69K

11 Business Taxes As a Share of Private Sector GSP, FY % 3.3% 4.6% 5.4% 6.7% 9.9% 4.5% 4.6% 4.5% 3.8% 5.8% 6.4 % 5.4% 4.5% 3.7% 4.8% 4.3% 4.7% 4.7% 3.5% 5% 3.7 % 4.7% 4.1% 6% 4.6% 3.8% 12% 5.1% 6.6% 5% 4.7% 4.2% % % 4.6% 4.5% 3.7% 3.4% 4.8% 5.5% LEGEND Lowest GSP Mid GSP High GSP 6.3% GSP = Private-Sector Gross State Product, i.e., total value of a state s annual production of goods and services in the private sector FY 2013 E&Y/COST Tax Burden Study Published 8/2014

12 2014 US Supreme Court Cases

13 2014 US Supreme Court Cases Comptroller of Maryland v. Wynne Docket , cert. granted 5/27/14 (from MD Court of Appeals, 431 Md. 147) Question Presented: Does the U.S. Constitution prohibit a state from taxing all the income of its residents-wherever earned-by mandating a credit for taxes paid on income earned in other states? Can individual residents of a state be taxed on their full income without the state apportioning or providing credit for taxes paid to other states? How far does this apply sales/use taxes, piggyback and nonpiggyback local income taxes, etc.?

14 Wynne Example S Corp. Owner Wages: $ 100, Dist. Share: $ 1,000, Taxable Income: $ 1,100, State Income Tax in Nonresident State Dist. Share 20%: $ 200, Tax (6% Rate): $ 12, State Income Tax in Resident State - 7% Total Rate 4% State Tax: $ 44, % Piggyback County Tax: $ 33, Total: $ 77, Tax Credit - State Only: $ (8,000.00) (4% on 200k) Tax Owed: $ 69, Total Tax Burden: $ 81, Tax Burden w/full Credit: $ 77, Eff. Tax Rate: 7.364% % Resident state (Maryland) is effectively imposing a 9% tax rate on the income earned in the nonresident state. 14

15 2014 US Supreme Court Cases Alabama DOR v. CSX Docket , cert. granted 7/1/2014 (from 11 th Cir. Ct. of Appeals, 720 F.3d 863) Several states impose a sales/use tax if motor fuel is not subject to the state s motor fuel excise tax. (Some states impose both!) Questions Presented: Does a state discriminate against a rail carrier in violation of the 4-R Act when the state generally requires businesses to pay a sales/use tax, but grants exemptions from the tax to competitors of the railroads? In resolving a claim of unlawful tax discrimination under 49 U.S.C (b)(4), should a court consider other aspects of the State s tax scheme rather than focusing solely on the challenged tax provision?

16 NY Tax Reform

17 Overview Repeal of Article 32 (tax on financial corporations) Within Article 9-A, changes to: Nexus Combined reporting Taxes bases: composition and computation Apportionment NOLs Credits Rates Most provisions effective for tax years beginning on or after January 1, 2015 Note: New York City s regime has not changed (yet) 17

18 Nexus Overview Economic Nexus ($1MM apportioned to NY) Inevitable Constitutional Challenges Groups with P.L Protected Members Corporate Partners Fulfillment Services Exception Repealed Alien Corporations 18

19 Tax Base and Income Classification Changes New law Current law: Article 9-A taxpayers (general corporations and banking corporations) pay: 1. Tax due on the highest of four three bases: Entire net (i.e., federal taxable) income (ENI now called business income base ) Capital (net) (until this base phases out in 2021) Minimum taxable income, and A fixed dollar minimum 2. Tax on subsidiary capital, and 3. Plus, in some cases, the temporary Metropolitan Transportation Business Surtax Current law, Article 32 taxpayers (banking corporations) pay: Tax due on the highest of two bases: ENI (the computation of which varies from the computation of ENI under Article 9-A), and Alternative minimum tax, which is paid on the highest of three bases: (1) taxable assets, (2) alternative ENI, and (3) a fixed dollar minimum) 19

20 Tax Base and Income Classification CURRENT Entire Net Income Base Modified federal ENI - Income from subsidiary capital less attributed expenses Deducted from ENI and not included in ENI base. Apportioned subsidiary capital is subject to a separate tax - Income from investment capital Less attributed expenses Apportioned by Investment Allocation Percentage (IAP) Result + = Business income Apportioned by Business Allocation Percentage (BAP) Result = taxable ENI NEW Business Income Base Modified federal ENI - Investment Income less attributed interest expense or 40% expenses - Other exempt income less attributed interest expense or 40% expenses = Business income Apportioned by Business Allocation Percentage (BAP) taxable ENI

21 Tax Base and Income Classification MTA Surcharge Current law: Temporary metropolitan transportation business tax surcharge has been imposed on New York taxpayers with activities in the metropolitan commuter transportation district since 1982 Surcharge is imposed at a rate of 17% of the tax computed on the highest of the four bases (using 1998 tax rates) after any credits are applied New law: Metropolitan transportation business tax surcharge: Becomes permanent Is assessed based on economic nexus standards Continues to use three-factor apportionment Is computed on the metropolitan commuter transportation district s portion of the highest of the tax bases before credits (instead of after), and Is computed at a rate that is adjusted annually (the rate for tax years beginning after January 1, 2015, but before January 1, 2016, is 25.6% of the tax imposed on business income) 21

22 Combined Reporting Determining the Combined Group New law: Related corporations are required to file a combined report if: Engaged in a unitary business with the taxpayer More-than-50% direct or indirect common ownership test is met (measured by voting power of capital stock) Distortion (hard or soft) is irrelevant 22

23 Combined Reporting Determining the Combined Group Prior and current law: No election to file combined New law: Corporations may elect to be treated as a combined group Must meet the more-than-50% common ownership test (same ownership as mandatory combined filing) Need not be conducting a unitary business Election Must be made on an original timely filed return Irrevocable for seven taxable years Any corporation entering the commonly owned group while the election is in effect is automatically included in the combined group (regardless of unitariness) Election is automatically renewed for another seven taxable years unless affirmatively revoked Once revoked, a new election is not permitted for any of the three immediately following taxable years 23

24 Apportionment New Apportionment Provisions New law: Retains the receipts-only apportionment scheme under Article 9-A Moves from cost of performance sourcing to market-based sourcing Expands the categories of receipts for which sourcing is specifically addressed and provides guidance on how to apply the sourcing rules Hierarchies determine where to assign particular receipts A taxpayer is required to exercise due diligence under each method before rejecting it and moving to the next method in the hierarchy Example: Sourcing digital products (e.g., electronically available games, computer software, audio works, and books) Taxpayer must first source to the location of primary use and then to the location where the digital product is received by the customer How does a taxpayer determine the location of primary use? What if the taxpayer s customer orders a software program that will be used by its employees at several office locations? With respect to location of receipt, it is unclear if this would be determined by the customer s mailing address or some other method There may be several instances where the location of receipt will not be the location at which the customer actually uses the digital products 24

25 Net Operating Losses New Current Year NOL Deduction Current law: NOL deduction for Franchise Tax purposes is generally the same as the federal NOL deduction computed pursuant to IRC 172, with some modifications NOLs are computed and carried forward on a pre-apportionment basis, and the NOL deduction is applied on a pre-apportionment basis New law: NOL Deduction computation is decoupled from the federal computation; the NOL is the amount of business loss incurred in a tax year multiplied by the taxpayer s apportionment percentage for that year. Business loss is not defined in the new law but it most likely means the entire net income less investment income and other exempt income as each term is defined in the bill NOLs are computed and carried forward on a post-apportionment basis, and the NOL deduction is applied on a post-apportionment basis New law provides a 20-year carryforward period for NOLs, with NOLs to be deducted on a first in, first out basis New law also allows a taxpayer to carryback the NOL for up to three tax years, but not to any years starting before January 1,

26 Net Operating Losses Combined Group NOLs The NOL Deduction for a combined group is equal to: Amount of combined NOLs that are carried forward to a particular income year with those NOLs determined based on the combined business loss incurred in a particular taxable year Multiplied by the combined apportionment fraction for that year Combined NOL is determined as if the combined group is a single corporation Rules and limitations apply when computing the NOL Deduction on a combined group basis Federal separate return limitation year (SRLY) rules apply when a combined group in an NOL Deduction year differs from the group in the year in which the NOL was generated 26

27 Net Operating Losses Conversion Subtraction Conversion Subtraction provides taxpayers with the ability to reduce taxable business income using NOLs generated (and calculated on a pre-apportionment basis) in years beginning before the new law applies to the taxpayer (i.e., January 1, 2015, for calendar year filers) However, such prior year NOLs are not simply carried forward; they are transmuted from former year-of-deduction apportionment to year-of-generation apportionment, and they are grossed-up to avoid loss of value due to the rate reductions First, the taxpayer determines the amount of NOL carryforward it would have had on the last day of the base year using the current (i.e., 2014) Tax Law, including all limitations applicable under the current law (the unabsorbed NOL ) Next, the taxpayer determines its apportionment percentage (i.e., its BAP) for that base year, again using the current (i.e., 2014) Tax Law; this is the BAP reported on the taxpayer s Franchise Tax report for the base year Third, the taxpayer multiplies the amount of its unabsorbed NOL by its base year BAP and then multiplies that amount by the tax rate that would have applied to the taxpayer in the base year The resulting amount is divided by 6.5 percent ( qualified New York manufacturers use 5.7%; the percentages are the current year business income tax rates). Result of these computations will be called the Conversion Subtraction pool 27

28 Net Operating Losses Conversion Subtraction Amount of a taxpayer s Conversion Subtraction will be a portion of its Conversion Subtraction pool computed above. Applying the Conversion Subtraction and carrying forward any balance: Standard rule is one-tenth of the Conversion Subtraction pool, plus, in subsequent years, any amount of unused Conversion Subtraction from prior years, may be deducted Any unused Conversion Subtraction may be carried forward until tax years beginning on or after January 1, 2036 (unless the two-year election was made) New law provides a one-time election, which must be made on a timely filed return for the tax year beginning on or after January 1, 2015, but before January 1, 2016, to deduct up to half of the Conversion Subtraction pool in each of the first two tax years beginning on or after January 1, 2015 If a taxpayer makes this election, that taxpayer cannot carryforward any unused amount of the Conversion Subtraction beyond that twoyear period. Conversion Subtraction must be applied before any post-2014 NOL Deduction is taken (i.e., the deduction for NOLs generated in taxable years beginning on or after January 1, 2015, as discussed below) 28

29 Credits Qualified New York Manufacturer (I) Receipts and Property Test for Qualification; (A) and (B) must both be satisfied. (A) Receipts portion of the test requires that the corporation be principally engaged in manufacturing. Principally engaged in means that during the taxable year, more than 50% of the gross receipts of the taxpayer are derived from the sale of goods produced by the activities listed in the next paragraph. For purposes of determining whether a combined group of corporations qualifies as a manufacturer, the same list of activities is used and the same 50% test is applied, but in computing the group s gross receipts, intercompany transactions are eliminated. Qualifying activities are the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming agriculture, horticulture, floriculture, viticulture, or commercial fishing. Generation and distribution of gas, steam, and electricity are excluded from the definition. Thus, a corporation (or combined group) must receive 50% or more of its gross receipts from sales of goods produced by those qualifying activities. (B) Property portion of the test is satisfied if: (1) corporation has property eligible for the investment tax credit, Property eligible for the investment tax credit includes tangible personal property, buildings and structural components of buildings that are: depreciable; have a useful life of at least four years; are acquired by purchase; are located in New York; and are principally used in the production of goods by manufacturing. and (2) corporation meets either of two additional requirements. (a) adjusted bases of the corporation s New York property (for federal income tax purposes) is at least $1MM measured on the last day of the tax year, or (b) all of the corporation s real and personal property is located in New York. (II) Employment and Property Test for Qualification If a corporation (or combined group) fails the 50% test for being principally engaged in manufacturing (above), it can still be a Qualified New York Manufacturer if the corporation (or its combined group) employs at least 2,500 employees in manufacturing and the corporation (or its combined group) have manufacturing property in New York worth at least $100MM. ** The Department of Taxation and Finance will release guidance on the Qualified New York Manufacturer Credit this fall. 29

30 Use of State 482 Provisions

31 The Use of State Section 482 Provisions as Tool for Expense Disallowance Most states have statutory provisions similar to IRC 482. See e.g.: Ala. Code 40-2A-17 Fla. Stat Ga. Code Ann Tenn. Code Ann N.C. Gen. Stat. Ann

32 The Use of State Section 482 Provisions as Tool for Expense Disallowance Litigation Pending and settled cases in Louisiana Pending 482 Litigation State does not argue that taxpayer s intercompany transactions are not at arm s length no arm s length analysis conducted State cannot afford to engage in full transfer pricing evaluation State essentially argues intercompany pricing, by definition, cannot be at arm s length and must be disregarded under its 482 statute Deduction of intercompany expense must be disregarded in order to prevent evasion of taxes 32

33 MTC Transfer Pricing Initiative Arm s-length Adjustment Service Advisory Group tasked with devising how, and to what extent, the MTC can incorporate transfer pricing services to member states In October, the Group met with 7 firms to discuss use of 3 rd party firms in transfer pricing audits 3 rd Party groups may also assist with audit selection, staff training, and economic analysis Firms may support their economic analysis at the audit, negotiation, and litigation levels 33

34 Using Negotiated Credits/Incentives

35 Using Negotiated Credits and Incentives Several recent cases highlight tax authorities challenge to negotiated credits and incentives James Square Assoc. LP v. Mullen, 993 N.E.2d 374 (N.Y. 2013) Legislative Amendments to Enterprise Zone incentives program retroactive to 2008 state revoked certificate of eligibility Takings clause theory not upheld on appeal Businesses prevailed because retroactive revocation of certificates violated due process rights Business not adequately forewarned Length of retroactive period was excessive Raising revenue with unexpected shortfall insufficient reason for retroactive taxation 35

36 Using Negotiated Credits and Incentives Several recent cases highlight tax authorities challenge to negotiated credits and incentives North Carolina Dept. of Rev. v. Bill Davis Racing, 684 S.E.2d 914 (N.C. Ct. App. 2009). Taxpayer operated three NASCAR teams with two facilities; employed 133 employees; owned nearly $2.0M in machinery and equipment NC Sec. of State issued Taxpayer certificate of eligibility for tax credits under Taxpayer s new NAICS code On audit, NC DOR disallowed credit because it determined Taxpayer to be in business of racing not manufacturing Parties eventually settled after years of litigation 36

37 Using Negotiated Credits and Incentives Several recent matters highlight tax authorities challenge to negotiated credits and incentives New Jersey BEIP Grant issues Oregon s Central Assessment cases 37

38 Using Negotiated Credits and Incentives How to Limit Your Risk of Losing Your Tax Incentive Representations of Authority Development authorities often may not have the authority to grant the incentive they are offering. Agreement should have a representation that they have the authority to grant the incentive and damages (or alternative relief) provisions for breach of representation Letter Rulings Other assurances/guidance from state and local tax administrators 38

39 Unitary Combined Reporting

40 Has the Tide Begun to Shift Away from Forced Unitary Combination? ComCon Production Services I, Inc. v. California Franchise Tax Bd., Case No. BC (Los Angeles Super. Ct. Mar. 6, 2014) The court held that Comcast was not unitary with its subsidiary, QVC Testimony from C-level executives described separate management of Comcast and QVC The court held that none of the unitary tests were satisfied Controlling interest alone not sufficient to require combination The court held, however, that Comcast s receipt of a $1.5 billion termination fee constituted business income

41 Has the Tide Begun to Shift Away from Forced Unitary Combination? AIG Insurance Mgmt. Services, Inc. v. Vermont Dept. of Taxes, No (Vt. Sup. Ct. July 30, The court held that state unconstitutionally applied the unitary business principle to AIG and its subsidiary a ski resort The Department of Taxes argued the following transactions created a unitary relationship between AIG and the ski resort: Some intercompany loans Marketing support through ski resort discounts to AIG employees Some intercompany services, namely AIG s assistance with asset management and financial expertise But Court found that the Department s findings far outrun the evidence the mere presence of some intercompany transactions insufficient Uncontradicted evidence of key executives described the operation of two discrete business enterprises 41

42 Has the Tide Begun to Shift Away from Forced Unitary Combination? Rent-a-Center Inc. v. Dep't of Revenue, TC-MD D (OR Tax Ct. 2014). The court held that a wholly-owned operating subsidiary was not unitary with its parent. Companies had separate, competing brands and businesses. No unitary business despite parent s performance of non-operational back-office tasks for subsidiary such as processing payroll, administering benefit plans, sweeping cash, and guaranteeing loans. The court also held that the subsidiary lacked Oregon corporate excise tax nexus. Subsidiary earned revenue through the sale of rental inventory to and the receipt of royalties from its franchisees. Despite receiving royalty income, the taxpayer did not engage in activities ris[ing] to the level of doing business in Oregon[,] as required under the statute. o Employees visited Oregon for portions of 8 days. o Franchise consultant conducted an undefined 3 day training in Oregon. o CEO held a one day meet and greet session with franchisees 42

43 Unitary Combined Reporting: NY Matters of Knowledge Learning Corp. & Kindercare Learning Centers, Inc., NY Tax Appeals Tribunal, 9/18/14 NYS Dept. of Taxation and Finance de-combined affiliated companies because the companies allegedly failed to support the existence of substantial intercorporate transactions. The Tax Appeals Tribunal reversed the Administrative Law Judge in holding that taxpayers were permitted to file a combined report in New York. Taxpayer demonstrated substantial intercorporate transactions Transactions had economic substance and entered into with valid business purpose. Tribunal further held that combined report may still be permitted in the absence of substantial intercorporate transactions Division continues to actively seek to de-combine taxpayers, especially where decombination produces a benefit. Effect of NY Tax Reform? 43

44 Class Action and False Claims Act ( FCA ) Litigation

45 False Claims Illinois State of Illinois ex rel. Schad Diamond & Shedden v. National Business Furniture, LLC, No WL (Ill. Cir. Ct. Oct. 23, 2014). The court did not need to rule on whether sales tax actually applied to shipping charges Issue whether the taxpayer intentionally, knowingly, or recklessly concealed from the Illinois Department of Revenue that it was not collecting tax on its shipping charges IL DOR previously audited taxpayer and did not assess additional tax for shipping and handling charges Taxpayer s employees gave very effective testimony about the audits and the issue IL s FCA was not intended to penalize frank differences of opinion or innocent errors nor does it encompass negligence. Brian Hamer, IL Rev. Director, states that IL has nearly 400 of these cases 45

46 False Claims Illinois Illinois courts are starting to unseal approximately 50 new qui tam suits filed under the state s FCA Initial wave of suits aimed at out-of-state sellers failure to collect and remit sales tax Second round targeted out-of-state sellers failure to collect and remit sales tax on shipping and delivery charges The latest group of FCA suits claim that out-of-state sellers commit fraud against Illinois by failing to collect and remit the state s liquor excise tax on alcohol purchased online and shipped to IL customers Complaints also allege out-of-state wine sellers fail to collect and remit use tax Can registration requirements under a state s excise tax create nexus for sales tax purposes? 46

47 False Claims Act Litigation State of New York v. Sprint-Nextel Corp., et al., No /11 (N.Y. App. Div. 1st Dep t June 12, 2014). NY s False Claims Act (FCA) was revised in 2010 to permit whistleblowers claims NY s FCA is the only one of its kind that expressly covers tax fraud. Sprint-Nextel was the first NY FCA claim filed by the NY AG - alleged underpayment of $130M in tax; the FCA lawsuit seeks to require Sprint pay three times this amount plus other penalties. Alleged underpayment based on taxability of bundled wireless interstate communication charges. Sprint argues: 1) it was already under audit, 2) there was no FCA violation, and 3) that the FCA does not apply to periods prior to amendment (2010). The New York Court of Appeals (NY s highest Ct) agreed to review the Appellate Division s denial of Sprint s motion to dismiss 47

48 False Claims New York New York ex rel. Moore v. Lantheus et al., No /2012 (NY Sup. Ct., New York Cnty.) (filed May 2012) (settled June 2014). Lantheus and former parent Bristol-Myers Squibb recently agreed to a $6.2 million settlement to resolve qui tam action alleging failure to pay $2.2 million in NY State franchise taxes The New York FCA suits are expressly applicable to tax cases and allow for civil penalties and treble damages Whistleblower was a tax services provider NY s FCA allows awards up to 30 percent of recovered proceeds Whistleblower here received approximately $1.1 million resulting from settlement

49 False Claims New York Danon v. Vanguard Group, Inc., N.Y. Sup. Ct. (filed 2013). Alleges that Vanguard illegally evaded more than $1 billion in federal and state taxes over the past decade Danon was previously an in-house attorney at Vanguard Group Inc. Unsealed by Danon in 2014 after the New York Attorney General's Office chose not to prosecute Vanguard Danon may continue the case as a civil lawsuit Seeking a court judgment for treble damages, plus a civil penalty of $6,000 to $12,000 for each action in violation of the FCA Requesting 15 to 30 percent of the money recovered by state and local governments But see Schlicksup v. Caterpillar, Inc., No. 09-CV-1208, 2011 WL (Sept. 9, 2011). Sen. Levin asks PCAOB to review Caterpillar s tax advisory/auditing firm See also State of Delware et al. v. Card Complaint LLC et al., Case No. 1:14-cv (unsealed May 2014). 49

50 False Claims District of Columbia Phone Recovery Services LLC v. Verizon Washington DC Inc., No (D.C. Sup. Ct. 2014). Complaint recently filed in a Qui Tam action 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 Providers were sued by Phone Recovery Services LLC in District of Columbia Superior Court for failing to pay over $29 million in 911 taxes The 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 50

51 False Claims MTC Response Tax Undercollection Class Action & Tax Overcollection False Claims Act Work Group Draft Model Statute Tax Bar to FCA Suits Broad scope regarding false claim But only applicable to transactional taxes Initial draft will be modeled after MA and MT statutes The Massachusetts exception will start as the model: (d) Sections 5B to 5O, inclusive, shall not apply to claims, records or statements made or presented to establish, limit, reduce or evade liability for the payment of tax to the commonwealth or other governmental authority. Mass. Gen. Laws 12 5B(d). Montana s tax bar also excludes payments to a governmental authority from its FCA Why limit the carve-out to transactional taxes? 51

52 Federal Legislation

53 Federal Legislation Marketplace Fairness Act of 2013 (MFA) Would require collection on all sales shipped to the 23 states that are "Full Members" of the Streamlined Sales and Use Tax Agreement (SSUTA). In March, 2014, the House Judiciary Committee held a hearing Exploring Alternative Solutions on the Internet Sales Tax Issue The bill overwhelmingly passed the Senate in May, 2013 The Multistate Tax Commission is designing plan to conduct Marketplace Fairness Act's single audits. 53

54 Federal Legislation Internet Tax Freedom Act (ITFA) H.R. 434 / S. 31, introduced January 2013 (also S & H.R. 3086) The bills would make permanent the existing ban on state or local taxes on internet access and on multiple or discriminatory taxes on e-commerce originally expired 11/1/ H.J. Res. 124 extended it to 12/11/2014. Current grandfathering provisions allow states and local jurisdictions that implemented taxes on internet access before 1998 to keep them (HI, NM, ND, OH, SD, TX, WA, WI) - Wisconsin asserts this is a $100 million per year revenue issue; STN indicated this was over a $560 million per year issue for all the grandfathered states; $6.5 billion in potential state and local taxes for all states. Commination of MFA and ITFA to MITFA? S Marketplace and Internet Tax Fairness Act, introduced 7/15/2014.

55 Federal Legislation Mobile Workforce State Income Tax Simplification Act of 2013 (MWF) On April 29, 2014, the House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law held a hearing on H.R The bill creates a bright-line 30 day threshold to determine nonresident income tax liability Similar legislation has previously passed in the House H.R has broad support in both the House and Senate (as S. 1645) Many industry members and organizations support the bill. 55

56 Federal Legislation Business Activity Tax Simplification Act (BATSA) H.R Bill modernizes P.L Expands beyond sales of tangible personal property Applies more broadly than just net income taxes imposed by the states Puts in a bright line 14-day presence test, with exceptions, before an entity is subject to a state s business taxes.

57 QUESTIONS? THANK YOU! Leah Robinson Partner Sutherland Asbill & Brennan LLP Eric Tresh Partner Sutherland Asbill & Brennan LLP Fred Nicely Senior Tax Counsel Council On State Taxation