If alternative apportionment is wide open and anything goes, why have statutes?
Are we moving from apportionment to allocation when we use single-sales factor apportionment and market-based sourcing?
Is single-sales factor apportionment 'fair apportionment'? It moves income to customer states, not to states where the activities occurred that generated the income. Income is not based solely on sales.
Are throwback and throwout rules unconstitutional because they look beyond the borders of the state?
Should states be able to enact retroactive legislation to protect the state budget from financial loss?
Should retroactive legislation be limited to a state's statute of limitations?
Should judicial decisions only apply to the taxpayer involved in the litigation if it involves a refund?
I just finished reading the transcripts for the Oral Arguments in the Wayfair v. South Dakota (U.S. Supreme Court case). Despite all of the arguments, discussion and debate, one practical, simple matter came into focus - this whole thing is about whether a business (small or large) will have to complete sales tax compliance in 45 states (plus D.C.) or simply the one state it has a physical presence in. Obviously, the facts differ by company as some have a physical presence in several states or all states. But I am talking about those companies who have a physical presence in 1 or a handful of states. If South Dakota wins this case, that company's sales tax compliance burden goes from 1 state to 45 states (plus D.C.). And since most businesses (yes, even brick and mortar businesses) have a website, the sales tax compliance burden will increase on ALL businesses. Does that meet constitutional muster? Does that NOT increase burdens on interstate commerce?
As some of the Justices said - this is not a physical presence problem, this is the state's inability to collect use tax problem. I urge the Court to not transfer the state's problem, and burden Internet commerce. If states can't collect the tax, maybe they should impose a different tax they can collect.
P.S. - I have been reading lots of articles, posts about the case and the Oral Arguments. I have also read all of the briefs. If you would like more resources regarding this issue, check out the LEVERAGE SALT Linkedin group for several resources.
State tax developments are everywhere. They happen daily. The question is - are we just reporting them or are we challenging them?
This legislative season has seen crazy proposals to raise revenue, balance budgets - all influenced by political pressures and confusion. We have policy organizations submitting reports and studies asserting that certain proposals are ridiculous or would either be unfair or detrimental to the state and specific taxpayers. This complexity not only applies to state tax legislatures, but also the federal government - as we know. The problem is that states generally have to balance their budgets every year to operate (although apparently that doesn't apply to Illinois).
One thing I noticed is that state legislative sessions are focused on raising revenue. Always asking what can or should be taxed? What new forms of business do we need to tax? What tax revenue are we missing out on?
I think those are the wrong questions. The questions we should be asking are:
- What services should the state or federal government provide?
- To what extent ($$) should the government provide those services?
- How do we prioritize those services?
- What is the cost/benefit of providing those services?
- At what point does the provision of those services cause detriment to citizens and our economy?
- What oversight will each service have to avoid waste and efficient use of taxpayer dollars?
We don't always need more revenue. We need to rethink and revamp the purpose of government. Our governments should be lean and efficient. They should provide us with what we need most - not more or less. It's not about tax revenue, it's about efficient government. It's about the health and wealth of our country - financially, physically and spiritually.
If we never ask the right questions, we won't get the right answers.
I apologize for not writing more over the past couple of weeks, but I've been busy with client work. Regardless, I wanted to touch base and send you a link to a couple of items that you might find interesting.
Second, COST has also published a list of 2017 state tax amnesty programs. Always a useful tool. When it comes to amnesty, continue to weigh the cost/benefits between amnesty and voluntary disclosure agreements before choosing to move forward with an amnesty application.
My recent posts have contained some of my notes and questions I recorded from attending the Paul J. Hartman State and Local Tax Forum last week. This is my last post which lists 20 takeaways or 'food for thought.'
- The Organisation for Economic Co-operation and Development (OECD) does not identify tax havens, so why are the states?
- Discretionary Authority is no warning. It doesn't allow taxpayers to know what a state will do (i.e., using alternative apportionment or combined reporting to force a taxpayer to deviate from the standard apportionment formula; or modifying a costs-of-performance statute to get a market-based sourcing result).
- International taxation is starting to use state tax concepts such as combined reporting and apportionment.
- "Are 'bright-line' tests knee-jerk reactions?" - quote from one of the speakers
- "Tax Haven legislation should be trashed. Tax haven legislation picks winners and losers." - quote from one of the speakers
- The only way to fight retroactive legislation is to monitor it and lobby against it before it is enacted.
- Should states be able to enact retroactive legislation to protect the state budget from financial loss?
- Should judicial decisions only apply to the taxpayer involved in the litigation if it involves a refund?
- Retroactive legislation should not be able to increase revenue.
- Ask yourself, if a 'technical correction' is creating new law or changing the interpretation of the law from the original interpretation that has been followed by taxpayers for years. If the answer is yes, do something.
- Should retroactive legislation be limited to a state's statute of limitations?
- Prior legislatures can't bind future legislatures.
- New legislatures can't determine, or know, the intent of prior legislatures. Shouldn't be able to unbind or unwind prior legislation.
- "Retroactive legislation is telling you what the law was." - quote from one of the speakers
- Are we moving from apportionment to allocation when we use single-sales factor apportionment and market-based sourcing?
- Is single-sales factor apportionment 'fair apportionment'? Moves income to customer states, not to states where the activities occurred that generated the income. Income is not based solely on sales.
- "Throwback and throwout rules are unconstitutional because they look beyond the borders of the state." - quote from one of the speakers
- If alternative apportionment is wide open and anything goes, why have statutes?
- "To gain true insight, read the entire case - don't just read the blurb. See what it says and what it doesn't say." - quote from one of the speakers. Get creative. See the case, the issue from a different perspective. Ask "why not."
- Does common sense apply? If so, is your definition of 'common sense' the same as mine?
Obviously, I obtained all of the thoughts above from the Forum. Some are quotes from speakers, some are ideas paraphrased from a speaker's discussion, and others are personal reflections.
Regardless of whether you have been following Dot Foods v. Washington Department of Revenue cases for the last several years, we need to pause and review.
According to the decision, Dot Foods 1 involved Dot Foods utilizing an exemption from the Washington Business & Occupation (B&O) tax for many years (note: the statute was originally enacted in 1983). Dot Foods facts changed from 1997 to 2000, but Dot Foods interpreted the exemption to still apply. In 1999, the state revised its interpretation of the statute to narrow the exemption, under which, Dot Foods would no longer qualify.
Washington later audited and assessed Dot Foods additional tax for the 2000 to 2004 tax years based on the state's revised interpretation. Dot Foods paid the tax, and filed a refund claim, eventually winning in the Washington Supreme Court in 2009. In simple terms, the court held the state's new interpretation was incorrect, and the state simply can't change it's long-standing interpretation of a statute without changing the legislation itself. The court said:
"The Department's argument for deference is a difficult one to accept, considering the Department's history interpreting the exemption. Initially, and shortly after the statutory enactment, the Department adopted an interpretation which is at odds with its current interpretation. One would think that the Department had some involvement or certainly awareness of the legislature's plans to enact this type of statute. As a general rule, where a statute has been left unchanged by the legislature for a significant period of time, the more appropriate method to change the interpretation or application of a statute is by amendment or revision of the statute, rather than a new agency interpretation."
While Dot Foods 1 was going on, (2005 to 2009), Dot Foods paid tax under the state's new interpretation of the statute to avoid penalties and interest. When Dot Foods 1 was decided in 2009, Dot Foods filed a refund claim for the 2005 to 2009 tax years.
Washington amended the statute in 2010 after Dot Foods 1 was decided in 2009, and applied the amendment retroactive to when the statute was originally enacted in 1983. According to the Washington State Budget and Policy Center's report in May 2010,
"the legislature enacted technical corrections and clarifications to state tax laws that will prevent steep revenue losses in the current year and in future years. This includes the legislature’s response to a recent State Supreme Court case that greatly expanded an exemption originally intended only for companies such as Avon and Mary Kay that sell products solely through door-to-door salespersons (Dot Foods decision). Without legislative action, the state would have lost about $151 million in the current biennium due to refunds and new firms claiming the exemption."
Under the authority of the retroactive amendment to the statute, Washington denied Dot Food's 2005-2009 refund claim (note, some of these tax years have been settled). Dot Food's challenged the ability of Washington to change the statute retroactively (Dot Foods 2). The Washington Supreme Court ruled in the state's favor in March 2016 holding that the legislature's amendment which retroactively narrowed the exemption and prospectively repealed the exemption, did not violate a taxpayer's rights under the Due Process Clause of the U.S. Constitution, collateral estoppel, or separation of powers principles. The court said:
"Retroactive application of the amendment did not violate due process protections because the amendment served a legitimate legislative purpose and was rationally related to the legitimate legislative purpose. The amendment prevented large revenue losses and removed preferential tax treatment for out-of-state businesses. In addition, the requirements of collateral estoppel were not met because collateral estoppel does not apply to subsequent taxing periods that were not previously adjudicated. Finally, since the taxpayer could not point to any evidence that the legislature intended to affect or curtail a prior judgment in the case, retroactive amendment did not violate the separation of powers doctrine."
Dot Foods requested the U.S. Supreme Court to review the case. We are waiting to learn if the Court will. Here are links to briefs filed by various organizations in support of Dot Foods:
Note: I am working on a more in-depth article for my column in Tax Analysts State Tax Notes.