Nevada enacts 'commerce tax'

Nevada has signed into law (SB 483) the imposition of a new 'commerce tax' on each business entity engaged in business in Nevada whose gross revenue in a fiscal year exceeds $4 million. 

The Nevada gross revenue is determined by taking gross revenue and making specific adjustments.

Note: there is no adjustment for cost of goods sold.

Revenue is sitused to Nevada differently depending on the source of revenue (i.e., tangible property, real property, services, etc.).

Note: Services are sitused using market-based sourcing methodology (i.e., where the purchaser receives the benefit of the service).

The tax rate will vary based on the industry of the taxpayer.

The tax year begins July 1, 2015 and the first report is due 45 days following June 30, 2016.

Bottom Line

Taxpayers are now subject to a new tax in Nevada, similar to Texas' gross receipts tax, Washington's Business & Occupation Tax or Ohio's Commercial Activity Tax, but with deviation.

Taxpayers must prepare to comply, budget and navigate this new tax (burden).

the 'upfront' Minnesota capital equipment exemption

Companies that make capital equipment purchases in Minnesota will no longer have to go through the pain of paying sales tax, and then filing refund claims. Minnesota legislation (enacted in 2014) changing the capital equipment exemption to an 'upfront' exemption goes live July 1, 2015.

According to Minnesota Sales Tax Fact Sheet No. 103, taxpayers must give a supplier a completed Form ST3, Certificate of Exemption and use the code, "Capital Equipment" to claim the exemption.

This is welcome news for taxpayers in Minnesota. The process of filing refund claims was not only costly (causing taxpayers to pay the tax first), but created a burden on taxpayers to jump through 'hoops' to identify eligible purchases, gather the paperwork and file the claims. 

the usual suspects rise again: economic nexus, combined reporting, market-based sourcing

State legislatures and governors continued to move in the same direction this week - economic nexus, combined reporting, and market-based sourcing. The usual suspects popped up everywhere.

1. Tennessee enacted the "Revenue Modernization Act" (HB 644 and HB 291) - implementing economic nexus (effective for tax years beginning on or after January 1, 2016), and market-based sourcing (applicable to tax years beginning on or after July 1, 2016); the bills also make changes to the affiliated intangible expense addback (applicable to tax years beginning on or after July 1, 2016) and impose a new use tax on cloud computing starting July 1, 2015.
2. Tennessee Supreme Court heard oral arguments in the alternative apportionment Vodafone case (see prior posts for details). The case may be impacted by the Revenue Modernization Act's enactment of market-based sourcing.
3. Connecticut Senate proposed mandatory combined reporting (HB 7061). General Electric and Aetna, Inc. publicly communicated their disapproval by stating they would actually consider moving their operations out of state if the bill is signed by the Governor.
4. Virginia workgroup met to discuss enacting market-based sourcing.
5. Maryland Tax Court continued to use unitary principle to establish nexus (Staples Inc. v. Comptroller).
6. California Court of Appeals held that allowing only intrastate unitary taxpayers to make a separate or combined filing election was discriminatory (Harley-Davidson, Inc. v. Franchise Tax Board).
7. New York Tax Appeals Tribunal reversed an administrative law judge's determination and decided that affiliated corporations were entitled to file on a combined basis (SunGard Capital Corp).

does state sovereignty allow states to overreach?

"Substantial nexus," "economic nexus," "physical presence nexus" - who will win?

Federalism and state sovereignty - are they in conflict or can they work in concert?

"Substantial nexus" used to mean a seller had to have a physical presence in a state before they were subject to taxation. Now, more and more states are leaning on economic nexus standards which essentially say a seller can be subject to tax simply if they have customers in a state or direct some type of activity towards the state to create or maintain a market (vague, I know). Some states have taken it a step further (to make it less vague), and have instituted "factor presence" nexus standards which simply provide 'bright-line' thresholds. Meaning, these states maintain that a seller is subject to tax in their states if the seller has a specific amount of sales, property or payroll in their state. For example, the thresholds may be $50,000 of property, $50,000 of payroll or $500,000 of sales. Some state thresholds are lower for sales, such as $350,000 in Michigan or $250,000 in Washington. Regardless of the threshold limit, factor presence nexus standards and economic nexus is the trend as states look to maintain services and their budgets while imposing tax on non-voters (out-of-state taxpayers).

This discussion regarding nexus standards and the ability of the federal government to create legislation to 'big brother' the states was the subject of the June 2, 2015 Hearing before the U.S. House Subcommittee on Regulatory Reform, Commercial and Antitrust Law. Several government officials and interested parties presented testimony either for or against the 3 pieces of federal legislation currently under review:

1. The Mobile Workforce State Income Tax Simplification Act of 2015 (HR 2315)
2. The Digital Goods and Services Tax Fairness Act of 2015 (HR 1643)
3. The Business Activity Tax Simplification Act of 2015 (HR 2584)

The title to this post insinuates that states are using economic nexus to reach (or overreach) beyond their borders and tax out of state companies based on standards that are arguably unconstitutional. Regardless of that debate and regardless of which side of the fence you stand, states do have the right to determine 'how' and 'who' they tax inside their state as long as they stay with the boundaries of the U.S. Constitution and other applicable federal laws, such as P.L. 86-272. Companies and individuals have the right to conduct business across state lines without concern that they will be subject to tax when their activities are de minimus or do not reach significant (substantial) levels. Otherwise, the burden on interstate commerce is unnecessary and misplaced.

States argue that taxpayers will avoid (evade) paying taxes if the nexus standard or threshold is too high. However, states should only be able to tax what they legally can tax. Then they should seek to adjust their rules to tax who they can tax. Consequently, avoiding taxes that taxpayers shouldn't have to pay in the first place, really isn't evasion.

The states keep wanting to change their rules so they can tax more taxpayers because the economy changes (i.e., impact of Internet, remote sellers, service companies). Fine, change your rules, just don't exceed your authority and taxpayers will comply. Taxpayers deserve clarity, and to be treated within the boundaries of the law (both federal and state), so they can function and operate effectively in what is already a multi-jurisdictional, non-uniform, complex playing field.

have you read the Wynne case?

By now, you have most likely heard about the U.S. Supreme Court case regarding Wynne. The along awaited verdict. It was close (5-4 vote), but the taxpayer won. There are many publications by several firms and the media talking about the ruling and what it means, not only for taxpayers in Maryland, but other states as well. Regardless of what each firm or publication has said, have you read the case for yourself? I encourage you to do so. Especially state tax practitioners. 

Most of the discussion in the ruling is around the application, existence and authority of the dormant Commerce Clause. The majority supports and utilizes the dormant Commerce Clause to rule in the taxpayer's favor. The minority appears to believe the dormant Commerce Clause has been twisted into something it was not created to be, and thus, the ruling is misled.

The ruling defines the purpose of the 'dormant Commerce Clause' as:

"prohibiting certain state taxation even when Congress has failed to legislate on the subject."

The majority of the Court said the following about the dormant Commerce Clause:

1. The clause "precludes states from discriminating between transactions on the basis of some interstate element."
2. "States may not tax a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the state."
3. "We must consider not the formal language of a tax statute, but rather its practical effect."

Justice Scalia said the following in his dissenting opinion:

1. The "negative Commerce Clause is a judicial fraud."
2. "The clearest sign that the negative Commerce Clause is a judicial fraud is that utterly illogical holding that congressional consent enables States to enact laws that would otherwise constitute impermissible burdens upon interstate commerce."
3. "Neither the Constitution nor our legal traditions offer guidance about how to separate improper state interference with commerce from permissible state taxation or regulation of commerce."
4. "Change is almost the doctrine's natural state as it is the natural state of legislation in a constantly changing national economy."
5. "Balancing the needs of commerce against the needs of state governments. That is a task for legislation, not judges."

The Ruling holds the following keys (that other firms and the media have seemed to latch onto):

1. There is no distinction between a tax on gross receipts or a tax on net income when it comes to the application of the dormant Commerce Clause.
2. There is no distinction between taxing individuals or corporations when it comes to the application of the dormant Commerce Clause.
3. The Maryland taxing regime fails the "internal consistency test" of the dormant Commerce Clause by resulting in double taxation of out of state income and discriminating in favor of intrastate over interstate economic activity.

What do I think?

I think the case is an interesting discussion about the application of the Due Process Clause (the state's sovereign right to tax), and the limitations (or lack thereof) on a state's ability tax from the dormant (negative) Commerce Clause.

I think the case has ramifications for taxpayers across the country, including corporations and individuals. I am sure some lawyers and firms will extend the ruling's verdict to other fact patterns and litigation will ensue. 

I think Quill and P.L. 86-272 may need to be re-examined as a result of this case. 

What do you think?

Read the case and let me know.

be imbalanced, but make it matter

Happy Memorial Day! 

I spend my days in the technical 'weeds' of multistate taxation, and today I felt like writing about a non-technical matter (especially, since most of you probably aren't working today).

Does success require imbalance? 

If you look at those that are successful in their career, they usually spend more time focused on it than they did on other things, such as their family. We don't like it when people sacrifice their families for their careers, yet we celebrate those who achieve success - strange? Maybe.

For years we have had discussions, seminars, books, and human resources pushing the need for 'work/life balance.' To many in the 'real world,' work/life balance seems unobtainable. Especially with our 24/7 technology. If anything, work has taken up more of our lives, not less. This is why we need to be disciplined in what we say 'yes' to. We can't say yes to everything and hope to spend our time on what matters most - it is impossible. If we do, we will be busy all the time and not accomplish anything.

I think the key to success is imbalance - doing more than what is expected. Spending more time doing something, practicing, etc. than others. However, that imbalance doesn't mean doing busy work or just being busy. It means you are working on something specific - your main objectives and priorities. Thus, when you are spending extra time on your unique goal, talent, pursuit, you will actually make progress to being the best at it.

Don't let your life be unbalanced without gaining ground. So many of us are so busy, we feel like a pin ball. Unfortunately, when that happens, we are busy, but not accomplishing anything.

Let yourself be imbalanced in a disciplined manner. Also, let yourself become imbalanced towards your family as well. The pendulum doesn't always need to swing towards work to be successful. Actually, if you say 'no' to the things that don't matter, then you will only be saying 'yes' to work that matters, giving you more time for family.

Success requires discipline, imbalance and family. When the pendulum swings towards work - make it matter.