State Tax Litigation State Tax Litigation Landscape Landscape Landscape Landscape Helen Hecht, Tax Counsel Helen Hecht, Tax Counsel Federation of Tax Administrators Federation of Tax Administrators
Where is the forest? Where is the forest?
Big picture. Big picture. Worst period on record for state revenues. Worst period on record for state revenues. Revenues not expected to recover to 2008 levels until 2013. States were not prepared. Majority states had to revise revenue estimates in 2009 and 2010 – downward – more than once. Reluctance to increase taxes during difficult economic times.
What can we see? What can we see? Big policy trends-- � Increases in personal income tax rates – especially at the high income levels – usually temporary � Increases in sales tax rates – with some, but not much expansion of the base. � Talk – but not much action – on raising business and corporate income taxes. � Mandatory combined � Mandatory combined – � Single sales-factor � Tobacco tax increases
More details. More details. Other approaches – Amnesties (both carrots and sticks) Targeted credits for jobs, renewable energy, economic investment, etc. Targeted credits for jobs, renewable energy, economic investment, etc. Talk – but not much action – on tax reform. Substantial budget contraction – cuts in programs and services. S b i l b d i i d i Talk of further tax increases.
Recent Litigation* Recent Litigation* • Sales & Use Taxes Sales & Use Taxes – – emerging transactions & nexus emerging transactions & nexus • Property Tax – Property Tax – charitable exemptions charitable exemptions • Personal Income Tax Personal Income Tax – – domicile (the tax haven problem) domicile (the tax haven problem) • Business & corporate Business & corporate income tax income tax – – stemming stemming the tide of tax planning the tide of tax planning • Cigarette tax avoidance Cigarette tax avoidance • Online travel companies Online travel companies – lodgers tax lodgers tax • Retroactive taxes Retroactive taxes * With tax policy implications.
Lessons from other states Lessons from other states
Tax policy Tax policy • Principles: P i P i Principles: i l i l • Adequacy Adequacy • Low • Low Low-rates broad bases Low-rates, broad bases rates broad bases rates, broad bases • Fair and equitable toward similar taxpayers Fair and equitable toward similar taxpayers • Easy to administer and comply with Easy to administer and comply with
Sales & use taxes Sales & use taxes • Everyone’s waiting for the E E Everyone’s waiting for the Amazon.com ’ ’ i i i i f f h h A Amazon.com decision (and the decision (and the d d i i i i ( ( d h d h next appeal) next appeal) • Amazon.com A Amazon.com v v. Lay . Lay • Sales tax Sales tax – – where there’s a line, there’s litigation. where there’s a line, there’s litigation. • The fewer lines, the less litigation. The fewer lines, the less litigation. • Even courts have problems Even courts have problems
Cases Cases • Nexus N N Nexus – telecommuting employee (New Jersey case) t l telecommuting employee (New Jersey case) t l ti ti l l (N (N J J ) ) • Mixed transactions Mixed transactions – – goods and services taxed differently goods and services taxed differently – Examples: Examples: Examples: Examples: • Noble Energy Inc. Noble Energy Inc. v v. Dep't of Revenue, . Dep't of Revenue, Colorado Court of Colorado Court of Appeals, 09CA0426, 4/15/2010. Appeals, 09CA0426, 4/15/2010. • Western Blue Print Co. . Dir. of Revenue, Supreme Court of S S Supreme Court of C C f f Western Blue Print Co. v. Dir. of Revenue, W W Bl Bl P P C D f R C D f R Missouri, No. SC 90172, 4/20/2010. Missouri, No. SC 90172, 4/20/2010. • Midwest Bus Corporation Midwest Bus Corporation v v. Dep’t of Treasury . Dep’t of Treasury , Michigan Court , Michigan Court of Appeals, No. 288686, 3/16/2010. of Appeals, No. 288686, 3/16/2010. f A f A l l 288686 3/16/2010 288686 3/16/2010 • Combs . Chevron USA, Inc., Court of Appeals of Texas, Third Third Combs v v. Chevron USA, Inc., Court of Appeals of Texas, District, Austin, No. 03 District, Austin, No. 03- -07 07- -00127 00127- -CV CV , 2/5/2010. , 2/5/2010. • Indiana Indiana – – online access software is a taxable good online access software is a taxable good
Policy questions: Policy questions: q • Can states continue to collect the typical sales tax? C C Can states continue to collect the typical sales tax? i i ll ll h h i i l l l l ? ? • Quill – USSC said USSC said – – sales and use taxes are burdensome sales and use taxes are burdensome Quill – • What’s the solution • What s the solution What’s the solution – Simplification What s the solution Simplification. Simplification Simplification. • How many lines do you want to draw How many lines do you want to draw – – considering considering that line drawing creates litigation issues? that line drawing creates litigation issues? that line drawing creates litigation issues? that line drawing creates litigation issues? • Do you want a form driven tax or one that treats all Do you want a form driven tax or one that treats all similar transactions and businesses equitably? similar transactions and businesses equitably? similar transactions and businesses equitably? similar transactions and businesses equitably?
Property tax Property tax • Lots of smaller cases Lots of smaller cases – because of the change in values Lots of smaller cases Lots of smaller cases because of the change in values because of the change in values because of the change in values resulting from the housing bubble. resulting from the housing bubble. • Big cases are in Big cases are in – Big cases are in Big cases are in • Charitable exemption Charitable exemption – – charitable use of property charitable use of property • Definition of charity Definition of charity
Cases Cases • Examples of charitable use exemption denied: Examples of charitable use exemption denied: p p p p • In the Matter of Lake Forest Senior Living Community, Inc. In the Matter of Lake Forest Senior Living Community, Inc. v v. Assessor . Assessor of the City of Plattsburgh, N.Y N.Y . Appellate Division, 4/15/2010. (See . Appellate Division, 4/15/2010. (See of the City of Plattsburgh, also PA case also PA case CHF so so c se C c se Kutztown LLC. ) C ) CHF-Kutztown LLC. • International Schools Services, Inc. International Schools Services, Inc. v v. West Windsor Township . West Windsor Township , Superior , Superior Court of New Jersey, Appellate Division, Docket No. A Court of New Jersey, Appellate Division, Docket No. A- -4911 4911- - 08T1, 4/20/2010. 08T1, 4/20/2010. 08T1, 4/20/2010. 08T1, 4/20/2010. • Provena . Dep’t of Revenue, Supreme Court Supreme Court Provena Covenant Medical Center Covenant Medical Center v v. Dep’t of Revenue, of Illinois, Docket No. 107328, 3/18/2010. of Illinois, Docket No. 107328, 3/18/2010. • Other: Other: • Louisiana case Louisiana case – – Transcontinental Gas Pipeline Transcontinental Gas Pipeline – – discrimination discrimination • Oklahoma case • Oklahoma case Oklahoma case – Missouri Gas Energy Oklahoma case Missouri Gas Energy Missouri Gas Energy – Commerce Clause (cert Missouri Gas Energy Commerce Clause (cert Commerce Clause (cert Commerce Clause (cert denied) denied)
Policy questions: Policy questions: q • Is the tax going to be related to value of the property or I h I h Is the tax going to be related to value of the property or i i b b l l d d l l f h f h not? (Residential property issue.) not? (Residential property issue.) • What justifies a charitable use exemption What justifies a charitable use exemption – is it being h h j j ifi ifi h h i bl i bl i i i i b i i i b i is it being applied equitably? applied equitably?
Personal income tax Personal income tax • States increasing audits of “non States increasing audits of “non- g - resident” filers resident” filers • If the claimed state of residence is a If the claimed state of residence is a non non-tax state non non tax state tax state tax state • Federal legislation Federal legislation • Military spouses Military spouses Milit Milit • Mobile workforce issue Mobile workforce issue • Looking at oversees income (tag Looking at oversees income (tag- L L ki ki i i ( ( - along to IRS efforts). along to IRS efforts).
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