1999 NESTOA
Summary of Work Group
Session
The NESTOA-sponsored
Corporation Tax Working Group/ Training Session was held on October 26 and 27,
1999 in Hartford, Connecticut. NESTOA
Representatives met for two days to address Corporate Business Tax Issues
viewed as being current areas of concerns amongst the members. The agenda
consisted of the following eight topics:
States’ Updates Moderator
- George Boyajian, Connecticut
Each state discussed new tax
legislation, administrative announcements, recent court cases, and other issues
within their state. Fifteen minutes were allotted to each state. These discussions were informative and also
generated many questions.
Massachusetts' "single
factor sales apportionment" was one highlight. This provision was seen as taxpayer friendly. More states may follow due to possible
pressure from taxpayers and lobbyists, and the attraction (or retention) of
corporations to their states. A single
factor "sales" apportionment generally results in a lower
apportionment factor (and lower taxes) than the traditional three-factor
apportionment formula.
Recent court cases were
another highlight. Maryland's Tax Court
decided in favor of three taxpayers (MCI, Syl, and Crown) and New York City Tax
Appeals Tribunal decided in favor of one taxpayer (Toys R US). These cases
involved the passive investment companies, intercompany transactions, and
Internal Revenue Code 482 type issues.
All are being appealed to the next court level. These decisions have an impact on the
revenue generated from these types of adjustments and issues.
Donna Hockensmith, U.S. Treasury Representative Guest Speaker
We welcomed Donna
Hockensmith, an IRS Project Manager from Washington, DC. Ms. Hockensmith delivered a special
presentation of the Simplified Tax and Wage Reporting System (a.k.a. STAWRS
pronounced stars).
STAWRS has been under
development at the Federal level for a number of years. It offers states the opportunity to obtain
from a single source employer/employee wage data as it is associated or
attached to employment activity occurring within or among states. From a federal perspective, STAWRS’ mission
is to simplify record keeping and reporting requirements, hopefully by adoption
of uniform criteria acceptable to all states.
Ms. Hockensmith was very
appreciative for the opportunity to bring STAWRS to the NESTOA Working Group and promised to keep us informed of
the project status and the upcoming events.
STAWRS (W-2) Project Moderator
- Greg Skotnicki, Pennsylvania
Greg Skotnicki provided the
NESTOA prospective on the STAWRS
project, and its benefits for corporation tax nexus and apportionment
verification purposes. From a NESTOA
perspective, a single source data system provides the states with employee
wage, as well as employer data, which can assist states in the administration
of Personal Income Tax and Employer Withholding Tax. Such a system offers valuable sources of information, which can
confirm apportionment schedules or substantiate income activities for both
personal, and business nexus interests.
Taxation of Electronic Commerce Moderator
- Marlene Barnhart-Mohr, New Jersey
William Bryan, New Jersey
Marlene Barnhart-Mohr began
the session by giving an update of the Internet Tax Freedom Act and other
recent developments. ITFA, passed by
Congress in October of 1998, simply states that "information should not be
taxed." Highlights of the law
include: implementing a three year moratorium baring the taxation of internet
access; establishing a commission now known as the Advisory Commission on
Electronic Commerce (ACEC); no to allowing federal taxes on internet access or
e-Commerce and; declaring that the Internet should be a tariff-free zone.
The ACEC, comprised of 19
members and chaired by Dean Andal from California's Board of Equalization, was
established to study the question whether or not electronic commerce should be
taxed. The Commission has until April 21, 2000 to report its findings and
recommendations to Congress.
The outcome of the ACEC's
first meeting was the determination that there should be no tax breaks for
internet-based transactions. However,
the Commission offered no recommendations.
At it's second meeting held
in September, the ACEC determined that the current taxing system is
"unworkable" and called for a new system of taxing e-Commerce. There
are presently 7,500 taxing jurisdictions to which a digital provider/retailer
of goods and services might be subject.
In October 1999, the ACEC
made an announcement inviting interested parties to submit tax proposals
related to state and local taxation of Internet transactions and e-Commerce.
Guidelines for proposals include simplification, nexus issues, economic
presence, privacy, sovereignty of states, and constitutionality.
As a practical matter, the
NESTOA states were not going to resolve all the questions the rest of the
country was wrestling with relating to e-Commerce. Therefore, the group
considered and discussed the following three immediate areas of impact:
1.
Where
are states seeing an impact of e-commerce on current corporate income tax
filings? There are many unanswered
questions as to how income should be apportioned and how receipts should be
assigned for corporate tax purposes. We discussed the problems and proposed
solutions regarding receipts when treated as the sale of property or sale of
service. These discussions included allocation, apportionment,
delivery, destination, and situs of service performed issues. We reviewed the
Ohio Board of Tax Appeals decision in The
Reynolds and Reynolds Company vs. Roger W. Tracy, Tax Commissioner of Ohio,
January 29, 1999, Case No. 96-P-447
2.
Are
states experiencing an exodus of “storefront” businesses? Should there be parity between what creates
nexus when a business enters a state versus what terminates nexus when a
business leaves a state?
3.
Are
states experiencing an increase of “virtual” businesses? A lack of physical presence can result in
lack of nexus, and no taxation in those states. Can physical nexus be
attributed to “virtual” businesses that exist across state lines?
We discussed what states
have done to protect against "revenue drain".
·
Massachusetts
Ruling 99-5, "Nexus based on the presence of leaseholds in
Massachusetts", issued February 3, 1999. (http://www.magnet.state.ma.us/dor/rul_reg/lr/99/lr99_5.htm)
·
New
York – Governor’s Task Force on New Media and the Internet
(http://www.tax.state.ny.us/pdf/stats/newmedia.pdf)
William Bryan presented an
analysis of the impact and distortion that internet sales had on the receipts
factor. Because of the difficulty
determining the situs or assignment of the internet sales, taxpayer's may not
assign (or properly assign) the internet sales to any state. Therefore, these so called
"nowhere", "other", "unknown" or
"unassignable" sales would be excluded from the numerator of the
receipts factor, but included in the denominator. This results in a lower sales
factor (and lower taxes). This issue will have a greater impact in the future
with the predicted increases in internet sales.
Suggestions/Recommendations
·
The
general consensus was to establish a NESTOA committee to develop a regulation
dealing with the assignment of the e-commerce receipts.
·
It
was also recommended to "throw out" (remove) these sales from the
computation (both the numerator and denominator) of the receipts factor for
apportionment purposes.
·
William
Bryan was asked to develop an allocation/ apportionment formula that would be
used in determining receipts that cannot be accounted for by traditional
methods and were lost via virtual sales.
·
Each
state was asked to track the number of new businesses entering their state as
well as the number of businesses leaving their state over the next year.
·
NESTOA
will continue to be the clearinghouse for State tax cases, laws, regulations,
rulings, etc. that relate to e-Commerce.
·
Isolate
and address apportionment and nexus issues at future NESTOA workshops.
·
Develop
a uniform position regarding the assignment of receipts and tangible property
for state apportionment purposes.
· Forming a sub-working group to monitor and report on current events which impact state taxation in the area of e-commerce. NESTOA should be the clearinghouse for state tax cases, laws, regulations, rulings, etc. that relates to e-commerce.
·
To
make contact with the “IFTA Advisory Commission” to establish a method of
monitoring the recommendations being considered and to offer input on such
recommendations that will impact state and local taxation. The Commission’s mandate is to study and
make recommendations on a broad range of e-commerce tax issues, including federal
taxation, cross-border taxation, taxation in other countries, and state and local taxation. A key issue will be the Commission’s consideration of whether the
states may compel out-of-state vendors, both Web-based and traditional
mail-order, to collect sales and use tax.
Taxpayer Claimed Nexus Moderator
- Chuck Redfern, New Hampshire
Maurice Gilbert, New Hampshire
New Hampshire Form AU-24
Chuck Redfern opened the
presentation with a review of New Hampshire Form AU-24, "Declaration to
Support Claim of Taxability in Other State". This form was adopted for use in New Hampshire after
participating in a limited MTC project, which concluded in 1990.
The purpose of this form was
to facilitate the exchange of information from the state of "sales
origin" after a taxpayer was determined to be taxable in a destination
state, but lacked filing compliance in the destination state. For apportionment purposes, New Hampshire is
one of twenty-five states with a sales throwback provision.
The taxpayer is asked to
complete and/or sign this form acknowledging that nexus was verified during an
examination by the origin state's audit staff or during the appeals
process. The completed form is then
submitted to the Director of Audit for dissemination to a destination state(s)
under the existing information exchange agreements.
MTC "Uniform Form to
Establish Taxability for Throw-back Purposes"
Recently, the MTC Uniformity
Committee-Income/Franchise Tax Subcommittee ("Subcommittee")
determined that the original draft model form was never adopted or widely
disbursed to other states beyond the immediate states involved with the
project.
To promote greater awareness
of this form, the Subcommittee re-established a Working Group consisting of
" Joseph Thomas-CT, Kim Ferrell-UT, Chuck Redfern-NH, and Paul Mines-MTC. The Work Group was asked to update the form
and consider broadening its application to include service industries and to
determine if and how the form should be introduced to potentially interested
states.
The Working Group
acknowledged that specific elements of the form would need to be customized by
each interested state to ensure flexible administrative implementation. A consensus existed among members of the
subcommittee that state tax administrators would need to carefully access the
best method for implementation of the form.
Alan Friedman, MTC Special Counsel noted that a state may simply chose
to use the form as an audit tool. He
expressed the opinion that most states would not have a taxpayer's signature
requirement or reference to any penalties, unless the form was adopted formally
by state rule or regulation.
Uniform Form for NESTOA
purposes
The status of the proposed
NESTOA Working Group Resolution #2- dated November 1996 was discussed. It was noted that further action was required.
As a result, this section of
the program covered special features of the New Hampshire form, which may be
transferable to a suggested model form. Other than a few typographical changes,
no further suggestions were made to the form.
One Change that was requested was to add Maine as a throwback origin
state to the NESTOA Working Group Statement.
Members suggested procedures
to implement the form following observations offered by the MTC Subcommittee.
Exchange of information
between NESTOA states
The group reviewed the FTA,
NESTOA, and MTC Exchange agreements and procedures. Each NESTOA state has a
contact person to communicate and exchange information between the member
states. The NESTOA member state's contact person is aware of each other state's
contact person.
The NESTOA Referral Form was
the suggested avenue to facilitate exchanges of information.
Stuart Gollinger,
representing Connecticut, discussed three primary uses to promote the exchange
of information between the states: (1)
Referral (2) Verification, and (3)
Cooperation. Referral is where a state provides valuable information to another
state. Verification is where a state
can verify information and facts with another state. Cooperation is where (an uncooperative taxpayer refuses to
provide requested information) a state can then request the necessary
information from another state. General
Consensus among the members was to keep the exchange cost down and the time
effective by not requiring a state to respond or follow up on the outcome. A state would have the right to act or not
act upon a request.
The Southeastern Association
of Tax Administrators "SEATA" nexus questionnaire was distributed and
discussed.
Each NESTOA state's nexus
questionnaires were distributed and discussed. These questionnaires ask the
taxpayer to provide information of the its activities performed outside of its
state. Connecticut was the only state
that had a "Nexus Questionnaire".
This questionnaire asks the taxpayer to provide information of the its
activities performed in Connecticut (within its state).
·
Establish
a working group of NESTOA members to develop a uniform form for NESTOA purposes
using the New Hampshire AU-24 form as a model.
·
NESTOA
states draft and adopt a uniform form for NESTOA purposes, which must be
completed by taxpayers claiming nexus in a state other than the taxing
jurisdictions.
·
NESTOA
states implement a form under distinctive state headings, decide if taxpayer
signature is required for their state and if penalty references should be
included; determine nexus in accordance to the standards of the destination
state for throwback purposes; and utilize existing state exchange agreements to
facilitate transmittal.
·
NESTOA
states request taxpayers to complete this form during the audit examination or
the appeals process.
·
NESTOA
states submit this completed form to the Director of Audit for dissemination to
a destination state(s) under existing information exchange agreements.
·
For
informational purposes only, provide a list of the contact persons within each
state along with their contact information to NESTOA members. They are designated as the NESTOA member
state's contact person to answer and exchange information between member
states. NESTOA members should contact
their state's designated contact person to communicate and exchange information
between the member states.
·
The
NESTOA member states adopt Connecticut's "Nexus Questionnaire" as
model for their state.
Furnitureland South, Inc Moderator - Mary Evans,
Maryland
Keith Akers, Maryland
An update was presented on
the Circuit Courts decision in Furnitureland, South Inc. (Furnitureland) and
Royal Transport, Inc.(Royal). The
Circuit court found that both companies have nexus with Maryland and are
obligated to collect the state's use tax.
This was a sales tax case and the basis of our discussions were the
nexus implications for Corporate Income Tax based on the facts presented in the
trial.
Royal was performing
services for Furnitureland. Royal
delivered furniture, collected payments, set-up, repaired and returned damaged
furniture for Furnitureland. Through
these services a Corporate Income Tax Nexus may be created for Furnitureland.
This sales and use tax case
directly and indirectly affected many states that this taxpayer did business
in. This case also has an impact on Corporation tax nexus for other taxpayer's
with similar facts.
Currently, New Jersey is the
only state to be pursuing both Sales and Use Tax nexus and Corporate Income Tax
nexus for this taxpayer. Maryland has
not pursued Corporate Income tax nexus. The decision to pursue, however, is
pending.
·
NESTOA
states should review this case for corporation and sales and use tax nexus for
these taxpayers and other taxpayers with similar facts.
Audit Selection Moderator - Steve Gavrilles, Massachusetts
This part of the session
dealt with audit selection and how the Internet can be used for nexus/company
research. The methods and programs the states are using to select audits were
discussed.
Most states have a group
dedicated to audit selection and some states also have a “discovery” unit that
investigates new and different areas to identify audit candidates. New Hampshire, New York and Connecticut were
states that allocated personnel to audit selection and had individuals that
look for new areas that need to be investigated for audit compliance.
Almost every attendee
indicated that they had access to the Internet on their desktop PCs. Two documents received from the MTC on how
the Internet can be used to conduct nexus/company research were distributed and
discussed. It was agreed that the
initial step in every audit should involve researching a company’s home page to
obtain information on company contacts, company overview, financial data,
relevant historical information, subsidiary information, and all information
regarding nexus creating or taxability activities. If the company is public, the company website may include more
extensive information, including its Annual Report and possibly links to its
SEC filings.
A list of the websites that
can be used to obtain helpul information was provided.
·
A
newly formed NESTOA Working Group is being set up for audit selection and it
was suggested that all states be represented at these meetings.
·
It
was also suggested that the referral process be streamlined to encourage and
facilitate the exchange of information between the states.
·
It
was recommended that audits should include using the internet to research a
company’s home page to obtain information on company contacts, company
overview, financial data, relevant historical information, subsidiary
information, and all information regarding nexus creating or taxability activities. If the company is public, the company
website may include more extensive information, including its Annual Report and
possibly links to its SEC filings.
Electricity Deregulation Moderator -
Greg Skotnicki, Pennsylvania
A spirited discussion
occurred among New England states with a history in deregulation. There are
issues and problems balancing utility transition to an open, competitive market
with a simultaneous recovery of stranded costs. The role of independent
contractors performing such traditional functions as meter reading,
installation, or billing has presented new concerns for tax administration and
compliance interests.
In Pennsylvania, electricity
came first and gas is scheduled for deregulation during 2000. Local real estate taxation and funding for
local governments and school districts have experienced major
rearrangements. The appellate process
is currently very busy, both at the local and state levels.
·
Maurice
Gilbert, representing New Hampshire, announced that a utility deregulation
subcommittee to the Corporate Working Group has been recommended for the
purpose of developing recommendations for uniform nexus standards and
apportionment provisions for the income taxation of deregulated electric utilities.
·
Establish
a working group of NESTOA members to develop recommendations for uniform nexus
standards and apportionment provisions for the income taxation of deregulated
electric utilities.
This
forum provided the states the opportunity to discuss topics, ask questions, and
exchange information. The discussions
covered many areas, were informative, and provided the attendees an opportunity
to explore many areas.
1999 NESTOA
Suggestions/Recommendations
Summary
Taxation of Electronic Commerce
·
The
general consensus was to establish a NESTOA committee to develop a regulation
dealing with the assignment of the e-commerce receipts.
·
It
was also recommended to "throw out" (remove) these sales from the
computation (both the numerator and denominator) of the receipts factor for
apportionment purposes.
·
William
Bryan was asked to develop an allocation/appropriation formula that would be
used in determining receipts that cannot be accounted for by traditional
methods and were lost via virtual sales.
·
Each
state was asked to track the number of new businesses entering their state as
well as the number of businesses leaving their state over the next year.
·
NESTOA
will continue to be the clearinghouse for State tax cases, laws, regulations,
rulings, etc. that relate to e-Commerce.
·
Isolate
and address apportionment and nexus issues at future NESTOA workshops.
·
Develop
a uniform position regarding the assignment of receipts and tangible property
for state apportionment purposes.
· Forming a sub-working group to monitor and report on current events which impact state taxation in the area of e-commerce. NESTOA should be the clearinghouse for state tax cases, laws, regulations, rulings, etc. that relates to e-commerce.
· To make contact with the “IFTA Advisory Commission” to establish a method of monitoring the recommendations being considered and to offer input on such recommendations that will impact state and local taxation. The Commission’s mandate is to study and make recommendations on a broad range of e-commerce tax issues, including federal taxation, cross-border taxation, taxation in other countries, and state and local taxation. A key issue will be the Commission’s consideration of whether the states may compel out-of-state vendors, both Web-based and traditional mail-order, to collect sales and use tax.
Taxpayer Claimed Nexus
·
Establish
a working group of NESTOA members to develop a uniform form for NESTOA purposes
using the New Hampshire AU-24 form as a model.
·
NESTOA
states draft and adopt a uniform form for NESTOA purposes, which must be
completed by taxpayers claiming nexus in a state other than the taxing
jurisdictions.
·
NESTOA
states implement a form under distinctive state headings, decide if taxpayer
signature is required for their state and if penalty references should be
included; determine nexus in accordance to the standards of the destination
state for throwback purposes; and utilize existing state exchange agreements to
facilitate transmittal.
·
NESTOA
states request taxpayers to complete this form during the audit examination or
the appeals process.
·
NESTOA
states submit this completed form to their state exchange of information
personnel for dissemination to a destination state(s) under the existing
information exchange agreements.
·
For
informational purposes only, provide a list of the contact persons within each
state along with their contact information to NESTOA members. They are designated as the NESTOA member
state's contact person to answer and exchange information between member
states. NESTOA members should contact
their state's designated contact person to communicate and exchange information
between the member states.
·
The
NESTOA member states adopt Connecticut's "Nexus Questionnaire" as
model for their state
Furnitureland South, Inc
·
NESTOA
states should review this case for corporation and sales and use tax nexus for
these taxpayers and other taxpayers with similar facts.
Audit Selection
·
A
newly formed NESTOA Working Group is being set up for audit selection and it
was suggested that all states be represented at these meetings.
·
It
was also suggested that the referral process be streamlined to encourage and
facilitate the exchange of information between the states.
·
It
was recommended that audits should include using the internet to research a
company’s home page to obtain information on company contacts, company
overview, financial data, relevant historical information, subsidiary
information, and all information regarding nexus creating or taxability
activities. If the company is public,
the company website may include more extensive information, including its
Annual Report and possibly links to its SEC filings.
Electricity Deregulation
·
Establish
a working group of NESTOA members to develop recommendations for uniform nexus
standards and apportionment provisions for the income taxation of deregulated
electric utilities.