Thursday, December 26 2013
Valuation Evidence was Untimely Filed in Violation of the Tax Tribunal’s Prehearing Order
In Adelman v. Township of West Bloomfield, Michigan Court of Appeals, No. 312435, December 17, 2013, the Michigan Tax Tribunal did not abuse its discretion in precluding the admission of a taxpayer’s valuation evidence in a case originating from the taxpayer’s appeal to the tribunal challenging a township’s property tax assessments of his real property because the valuation evidence was untimely filed in violation of the tribunal’s prehearing order. The taxpayer’s failure to comply with the Tax Tribunal’s prehearing order was in the nature of a discovery violation. A Michigan court rule governed discovery procedures and allowed the imposition of sanctions for a party’s failure to comply with a discovery order, including precluding a party from introducing expert testimony or evidence at trial.
The taxpayer’s failure to timely file his valuation disclosure was not accidental. The Tax Tribunal issued its prehearing order on July 21, 2011, requiring the parties to file and exchange their valuation disclosures by April 2, 2012. Yet the taxpayer waited until March 5, 2012, which was more than seven months after the issuance of the order to retain an appraiser and less than one month before the April 2, 2012, filing date ordered by the Tax Tribunal, despite the fact that his appeal involved numerous tax years and an extensive multi-million dollar property.
In addition to the taxpayer’s failure to comply with the filing date of the valuation disclosure at issue, the taxpayer failed to timely comply with the township’s discovery request for documents. The record also indicated that the taxpayer did not comply with the Tax Tribunal’s prehearing order by failing to file his prehearing statement by April 2, 2012, as required. Moreover, the taxpayer did not attempt to file his valuation disclosure until June 21, 2012, which was after the discovery period closed and within only one month of the scheduled hearing, thereby precluding the township from conducting discovery regarding the valuation before the hearing.
Tuesday, December 24 2013
Final 2013 Legislative Action on Tax Related Matters
Senate Bill 64 - Reform of Corporate Officer Liability. Passed with bi-partisan, unanimous support in both the House and Senate. Treasury strongly opposed efforts to have the legislation apply to open assessments. Both the House and Senate believed that this was the fairest approach to protect individuals. A veto threat is looming. The House unanimously passed a version that applies the limitation to Trust Taxes prospectively.
Senate Bill 337 - Timeliness of Audits, Written Waiver for Statute of Limitations, Refund Approval, Tax Clearance. Passed out of the House committee. Pending on the House floor. The bill would require Treasury to complete audits within one year unless both the department and the taxpayer agree to extend the running of the statute of limitations.
Other Tax Related Bills Will Be Addressed in 2014
House Bill 4003 - Offer in Compromise. Reported out of the House Tax Policy committee. Pending on the House floor.
Senate Bill 327 - Mandates Independence, Prohibits Collection Goals/Budgets. Passed in the Senate. pending in the House Tax Policy Committee.
Monday, December 23 2013
Passes in the House, Must be Reconciled With The Senate Version
A bill has passed the Michigan House of Representatives that would revise the corporate income tax law to allow "affiliated groups" to elect to file combined returns. In general, the term "affiliated group" would be defined as it is in IRC §1504, except that it would include all United States persons that are corporations, insurance companies, or financial institutions (other than a foreign operating entity) that are commonly owned, directly or indirectly, by any member of the affiliated group and other members of the group of which more than 50% of the ownership interest with voting rights or ownership interests that confer comparable rights is directly or indirectly owned by a common owner or owners.
A taxpayer that is part of an affiliated group would be allowed to elect to have all members of the affiliated group treated as a unitary business group. This group would then file a combined return for 10 years, with the option to renew the election once for another 10 years. The election would be irrevocable and would remain in effect for the time during which ownership requirements are met irrespective of whether the federal consolidated group to which the unitary business group belongs stops filing a federal consolidated return or whether the common parent changes due to a reverse acquisition or acquisition by a related person.
The definition of "unitary business group" would be revised to include an affiliated group that makes the election to file as a unitary business group.
If enacted, the bill would be effective for tax years that begin after 2012.
The bill’s definition of "affiliated group" is revised slightly from the Senate-passed version. In the Senate-passed version, the bill did not provide that the election would be irrevocable.
Friday, December 20 2013
New Developments for Tax Year 2013, Michigan Department of Treasury, December 2013
The Michigan Department of Treasury has addressed various personal income tax developments for tax year 2013. The annual mailing of tax instruction booklets is limited to those taxpayers filing paper returns; however, all forms and instructions are available online.
The developments highlighted include the following:
The tax rate for 2013 is 4.25%.
The 2013 personal exemption allowance is $3,950, and the special exemption allowance is $2,500.
Available for taxpayers age 68 and over, the dividends, interest and capital gains deduction is limited to $10,767 for single filers and $21,534 for joint filers and must be reduced by the pension subtraction.
Pension and retirement benefits are taxed differently depending on the birth year of the recipient.
Modification lines are added to the tax form for oil and gas expenses and income.
Same-sex couples filing a joint federal return must file as single in Michigan.
If military members are serving in a combat zone on April 15, 2014, then they will have 180 days after leaving the combat zone to file a tax return without interest and penalty.
The standard allowances and income ceilings for the home heating credit are provided.
Taxpayers are reminded that they have until April 15, 2014, to file or amend 2009 tax year returns.
Thursday, December 19 2013
National Publication Applauds Legislation That Protects Taxpayers and Ensures Fairness
The American Legislator, A Forum for Legislative Debate by the American Legislative Exchange Council in Arlington, Virginia published on December 12, 20134 an article by Will Freeland titled: Michigan: Protecting Taxpayers from Unfair Audits
The entire article can be downloaded from the following website:
Following are selected excerpts from the article which might be interesting reading:
Michigan has recently undertaken substantial audit reform that makes the state a shining example and leader in audit policy that protects taxpayers, ensures fairness, and doesn’t push businesses out of the state in the face of overbearing audits.
A Crain’s Detroit Business article covered the issue in depth and came to a similar conclusion. In short, the states audit process has at times been opaque, arbitrary, lacked substantive guidance to taxpayers, and frequently ignored the most accurate taxpayer records. This has led to huge headaches for taxpayers, lost productivity due to work hours spent complying with difficult and opaque audits, and expensive litigation to rebut poorly executed and decided audits.
A package of bills is being considered in the state that is designed to address these shortcomings and ensure audits are performed in a fair manner that utilizes the most correct information. Consistency, transparency, and fairness are the guiding principles of these reforms. Michigan HBs 4288-4292 provide formal, statutory guidance to the Department of Treasury on audit procedures; it publishes guidance manuals and documentation of audit processes for taxpayers; give taxpayers the right the right to use their own bookkeeping to rebut auditor findings; and provides taxpayers with more transparent information and up to date documentation from the treasury on their own individual audit as it occurs. The bills essentially serve as a taxpayer “bill of rights” with respect to the state’s audit policy.
Michigan Representative Aric Nesbitt, a key architect and proponent for the package of bills, similarly shared regarding transparency and the Department of Treasury’s guidance, “Nobody likes tax time, which is why we shouldn’t be leaving taxpayers in murky waters when it comes to audit standards and procedures. Allowing the taxpayer to access and understand the ‘hows’ and ‘whys’ of the auditing process is simply good public policy.”
Nesbitt further noted that with regard to the use of sampling and extrapolation methods (as opposed to using a taxpayer’s own books), “We don’t want state auditors to become increasingly reliant on the use of circumstantial evidence during their sampling process when taxpayers have done their part in maintaining adequate records to determine tax liability. Codifying common sense standards for using these sampling processes treats tax payers fairly and prevents unnecessary government action.”
The package is a huge step forward for more fair, balanced, and accountable audits, and an important step for states to take in their effort to protect taxpayers. ALEC model policy outlines the importance of taxpayer transparency, audit simplicity, sound tax tribunals, and reasonable processes for government recovery audits for overpayments of tax dollars. States would be wise to consider these model policies and the example Michigan has set in creating a “bill of rights” for taxpayers facing audits.
Following is a brief summary of each bill and its current status:
House Bill 4288, Amends the General Sales Tax Act, addresses taxpayer recordkeeping requirements and indirect audit procedures. Passed out of the House Tax Policy Committee. Pending on the House floor.
House Bill 4289, Amends the Uniform Unclaimed Property Act, addresses audit standards, indirect audit procedures, sampling and sample projections. Enacted as Public Act 148 of 2013.
House Bill 4290, Amends the Revenue Act, addresses transparency issues. Passed in the House. Pending in the Senate Finance Committee.
House Bill 4291, Amends the Revenue Act, addresses promulgation of audit standards in rules and requires the department to provided the audit report of findings and workpapers to taxpayers. Passed the House. Pending in the Senate Finance Committee.
House Bill 4292, Amends the Use Tax Act, addresses taxpayer recordkeeping requirements and indirect audit procedures. Passed out of the House Tax Policy Committee. Pending on the House floor.
Wednesday, December 18 2013
Case Remanded Back to the Tax Tribunal to Determine When the Department Provided the Taxpayer with Actual Notice of the Final Assessment
In Geldhof Enterprises, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 313142, December 10, 2013, a Michigan Tax Tribunal decision granting summary disposition to the Department of Treasury was reversed and remanded because the department did not provide sufficient notice of its final sales and use tax assessment and deprived the taxpayer of an opportunity to appeal. An appeal to the Tax Tribunal must be made within 35 days after the assessment. MCL 205.28 requires the department to provide a taxpayer notice by "certified mail addressed to the last known address of the taxpayer." However, the department did not mail the final assessment to the correct address. Though the taxpayer was in receipt of the order of determination, it did not receive the assessment, and therefore was unaware that the 35-day period had passed. Furthermore, the department failed to take reasonable follow-up measures to notify the taxpayer of the final assessment when it discovered the mail was undelivered. On remand, the Tax Tribunal must determine when the department provided the taxpayer with actual notice of the final assessment, and address the appeal if the date falls within 35 days of the date the taxpayer filed his appeal.
Tuesday, December 17 2013
Employees Were Employed of a Professional Employer Organization
Court of Appeals Reverses the Tax Tribunal on Award of Costs
In Adamo Demolition Co. v. Department of Treasury, Michigan Court of Appeals, No. 312667, December 10, 2013, the Court of Appeals affirmed the Tax Tribunal determination that the Department of Treasury incorrectly attributed compensation that two service providers paid to the employees of a demolition company, resulting in an increased assessment to the company of single business tax (SBT), because the service providers were professional employer organizations that had the power to hire, fire, direct, and control employees, including the company’s owner.
The Tax Tribunal had determined the Department of Treasury acted in a frivolous manner and awarded costs. The Tax Tribunal said "Respondent's continued attempts to challenge the ability of operating companies to use PEOs for the employment of both their officers and employees, when such use had been specifically authorized by the Legislature enacting MCL 208.4(4) into law (MCL 208.4(4) was amended by Public Act 603 of 2002 on December 20, 2002, and took immediate effect), in what appeared to be in direct response the Court of Claim's decision in Bandit Industries, and Respondent's apparent, purposeful avoidance of its duty to follow judicial precedent by ignoring the clear guidance provided by the Court of Appeals in the published Herald Wholesale decision, is devoid of arguable legal merit and as such, the Tribunal finds that awarding costs to Petitioner is appropriate. See MCR 2.625, MCL 600.2591, and TTR 145." However, the Court of Appeals reversed the Michigan Tax Tribunal’s finding that the department’s action was frivolous as not supported by the evidence.
In this case, the demolition company entered into professional employer organization agreements with the two service providers, outsourcing its human resource operations to them. Pursuant to these agreements, the demolition company’s employees became the service providers’ employees, which they then leased back to the demolition company. The demolition company’s owner provided management and administrative services to the company. The service providers paid all the employees’ salaries, including the owner’s salary, and withheld federal income taxes from the salaries.
The Michigan Court of Appeals concluded that the service providers compensated the owner for his management and administrative services to the demolition company, not his services as an owner. Nothing in the service providers’ agreements indicated that they required the company’s consent to hire or fire employees, including the owner, or provided that they could not replace the owner with someone else who would provide the same services. Similarly, the service providers’ contracts did not exclude the owner from the employees over whom they had the right to direct or control.
Monday, December 16 2013
Court of Appeals Requires that the Entities Must Be Unitary Before Combined Filing Allowed
In Winget v. Department of Treasury, Michigan Court of Appeals, No. 302190, December 5, 2013, the Michigan Court of Appeals held that the taxpayers were not permitted to combine business income from separate entities for personal income tax purposes because the entities were not unitary. As an individual, the husband-taxpayer was the sole shareholder in several S corporations, some of which had multistate operations. On remand from the Michigan Supreme Court, the Court of Appeals affirmed the Tax Tribunal, which had determined that the taxpayers should calculate and apply separate apportionment percentages to each S corporation.
The Michigan Supreme Court had vacated the earlier Court of Appeals decision. The taxpayers argued that apportionment may be calculated by adding the property, payroll, and sales of multiple S corporations to establish a single property factor, a single payroll factor, and a single sales factor. The court acknowledged that this apportionment method was valid, but only if the multistate businesses were unitary.
In Malpass et al. v. Department of Treasury, the Michigan Supreme Court answered the question of whether the income tax act prohibited individual taxpayers from using combined reporting; however, the court did not eliminate the requirement that the businesses be unitary in order to apportion income. In this case, because there were no facts supporting a conclusion that the entities were unitary, combined reporting was not allowed.
Friday, December 13 2013
Parol Evidence Could Be Used to Determine Taxpayer Status
Waiver o a Negligence Penalty (10%) and Fraud Penalty (100%) was Upheld
Attorney Fees and Costs Were Awarded to the Taxpayer
In Beacon Enterprises, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 308170, December 3, 2013, the Michigan Court of Appeals held that the Tax Tribunal erred as a matter of law when it focused exclusively on a taxpayer’s client service agreements and refused to use parol or extrinsic evidence to determine if a taxpayer was properly classified as a payroll service company or as a professional employer organization under the Single Business Tax (SBT). This was a critical distinction as payroll service companies were not required to include compensation paid to serviced employees in the SBT base, while professional employer organizations were required to include such compensation in the tax base.
Under audit, the Department of Treasury determined that the taxpayer was a professional employer organization and thus subject to additional tax. The Tax Tribunal looked at the client service agreements, which contained an integration clause, and refused to use parol evidence to look outside the four corners of the documents.
The Court of Appeals reasoned that extrinsic evidence may show that agreements between the taxpayer and the clients were different from those suggested by the language used in the client service agreements, and thus reversed and remanded the case back to the Tax tribunal for further proceedings.
The Court of Appeals affirmed the Tax Tribunal on its refusal to allow the negligence and fraud penalties to be imposed. It also awarded attorney fees and costs to the taxpayer.
Thursday, December 12 2013
Michigan Compensation to Be Based on Formula of Michigan Compensation to Total Compensation
The Michigan Business Tax Act provides a credit for employing people in Michigan, the compensation credit. A business which operates in and out of Michigan would receive a credit for its Michigan payroll, but not for payroll in other states. The law appears to be clear an unambiguous. However, the Department of Treasury has taken the position that the compensation of an employee who works both in and out of Michigan is not eligible for any credit at all.
Taxpayers have argued that it would seem logical that if 80% of the employee’s work/earnings is in Michigan, then 80% of that employee’s compensation should be eligible for the credit. Treasury’s position is that none of the compensation is eligible, that essentially the employee has been somehow tainted by stepping outside of Michigan.
This issue is currently being appealed by two taxpayers at Informal Conference. In those cases, both hearing referees found for the taxpayer. Both hearing referees concluded that the statute was unambiguous. The files are now in Tax Policy Division for a rebuttal review. The Tax Policy Division will be concurring with the referees’ results. The Department of Treasury will be issuing a revised FAQ that states that the credit will be calculated based on the proportionate number of days compensated in Michigan versus compensated outside of Michigan.
Taxpayers who followed the Treasury FAQ will be entitled to possible refunds for taxes paid on returns within the four year statute of limitations.
Wednesday, December 11 2013
Property Tax Appeal Denied by the Tax Tribunal – Taxpayer Failed to Protest to the Board of Review
In Abundant Life Christian Center v. Charter Township of Redford, Michigan Supreme Court, No. 147708, order issued November 25, 2013 the Michigan Supreme Court has denied an application for leave to appeal because the court was not persuaded that the questions presented in a property tax case should be reviewed by the court. The religious organization’s ad valorem property tax exemption claim was dismissed by the Michigan Tax Tribunal due to lack of jurisdiction because the taxpayer was statutorily required to first make a protest to the Board of Review.
Tuesday, December 10 2013
Comparable Properties Were Not Accepted Because They Were Smaller and Were Distressed Sales
In McDonald v. Township of Kawkawlin, Michigan Court of Appeals, No. 312502, November 26, 2013, a taxpayer’s challenge to the equalized value of his residential property for Michigan property tax purposes was properly denied because the Tax Tribunal’s findings were supported by competent, material, and substantial evidence. The Tax Tribunal determined that the taxpayer’s comparable properties in the appraisal report were smaller than the property at issue and that two of the comparable properties were distressed sales. Furthermore, the Tax Tribunal concluded that the property record card accurately described the property and complied with the State Tax Commission’s cost calculation instructions.
Monday, December 09 2013
Appeal to the Tax Tribunal Must be Filed Within 35 Days of the Date on the Assessment
In Dovitz v. Department of Treasury, Michigan Court of Appeals, No. 314059, November 26, 2013, the Court of Appeals affirmed the Tax Tribunal’s grant of the Michigan Department of Treasury’s summary disposition motion. The Court of Appeals held that a taxpayer’s Michigan Business Tax (MBT) assessment was final because it was not timely appealed. By law, the taxpayer was a responsible corporate officer for the company, which was issued a final MBT assessment for tax, penalty, and interest. State law permits assessments to be appealed to the Tax Tribunal within 35 days or to the Court of Claims within 90 days. Here, the final assessment was issued March 28, 2011, and the taxpayer appealed to the Tax Tribunal on September 28, 2012. Thus, the assessment was final and could not be challenged.
Friday, December 06 2013
Exemption Limited to Tangible Personal Property Installed as a Component Part
In Lifting Gear Hire Corporation v. Department of Treasury, Michigan Tax Tribunal, No. 448531, October 17, 2013, the Tax Tribunal held a subcontractor that sold lifting equipment to Detroit Edison Company’s (DTE) general contractor on a power plant project was not eligible for a Michigan sales tax refund because its equipment did not qualify for the air pollution control exemption or the industrial processing exemption.
Michigan law exempts tangible personal property "installed as a component part of ... an air pollution control facility." The taxpayer’s equipment did not qualify for exemption as it was not fixed as a constituent or essential element into position for use at the project. The exemption does not include equipment that assists in the installation of component parts. Though the taxpayer relied on guidance issued by the Department of Treasury (RAB 1999-2) and the Department of Environmental Quality (Tax Exemptions for Air Pollution Control), neither document is a properly promulgated rule and therefore both are only explanatory. Furthermore, both instances of departmental guidance conflict with the statutes that limit the exemption to tangible personal property installed as a component part.
Assuming that DTE was an industrial processor, the taxpayer’s sales did not qualify for the industrial processing exemption. The taxpayer sold its equipment to the general contractor, not to DTE, and the contractor was not an industrial processor. Even if it was determined that the taxpayer ultimately sold its tangible personal property to DTE for use at the power plant, DTE did not use the lifting equipment to convert or condition property for sale at retail or to generate electricity or produce gypsum. Moreover, the taxpayer did not perform an industrial processing activity for DTE.
Thursday, December 05 2013
Nonprofit Hospital Exemption Flows Through to Property Collectively Owned by Hospitals
In Michigan Co-Tenancy Laboratory/Trinity Health v. Pittsfield Charter Township, Michigan Court of Appeals, No. 310376, November 14, 2013, the Court of Appeals held the property that was collectively owned by the taxpayers’ nonprofit hospitals under an arrangement consisting of co-tenant hospitals was exempt from local Michigan property tax as personal property of a charitable institution and as real or personal property owned and occupied by a nonprofit charitable institution because the taxpayers were charitable institutions. Each of the nonprofit hospitals possessed, as tenants in common, an undivided interest in laboratory medical testing equipment. The operating agreements gave no ownership interests to any other party or entity. The laboratory itself was managed by a third-party contractor that was paid by the co-tenants to provide laboratory management services.
The township argued that the property was not solely used for charitable purposes because excess capacity of the laboratory was leased to a partnership that occasionally sold it to for-profit hospitals. However, the non-charitable use occurred only when the property would otherwise go unused, and the non-charitable use actually benefited the charitable use of the property by reducing the cost per unit of testing. Further, the lease of the excess capacity was at all times subordinate to the co-tenant’s use of the property.
Wednesday, December 04 2013
Court Determined Sale of Service/Sale of Tangible Personal Property
Taxpayer’s Sales Characterized as Sales of Tangible Personal Property
In Michigan Production Machining, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 312224, November 12, 2013, affirming the Tax Tribunal, the Michigan Court of Appeals held that a taxpayer’s sales were properly characterized as sales of tangible personal property under the former single business tax (SBT). The taxpayer manufactured and distributed parts to "tier-one" automotive manufacturers both inside and outside of Michigan. Occasionally, large customers negotiated a lower price for raw materials and the taxpayer took possession of the materials to make the products. The Department of Treasury argued that the taxpayer was providing a service (and not the sale of tangible personal property) when the taxpayer used customer-purchased materials for its products. Under the former SBT law, sales of tangible personal property were in Michigan if the property was shipped or delivered to a purchaser in Michigan. Sales of other than tangible personal property, including the sales of the performance of services, were sourced to Michigan if the business activity was performed in Michigan. In this case, the taxpayer transferred possession of property that was held for sale to customers in the ordinary course of business, and the court noted that the statute did not require that legal title be held by the taxpayer. The sourcing of and legal title to raw materials did not constitute the proper basis by which to classify certain sales as sales of tangible personal property and certain other sales of identical products as being sales of a service.
Taxpayer’s Sales Characterized as Sales of Services
In Peaker Services, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 313983, November 26, 2013, the Michigan Court of Appeals found that sales of engine remanufacturing contract services were properly sourced to Michigan under the former single business tax (SBT) for sales factor apportionment purposes. A Michigan company, the taxpayer was in the business of selling engine and generator parts to various industries. A portion of sales involved the sale of engine parts plus installation; this allowed the customer to have an extended life on locomotive engines. The court noted that the case turned on whether the mixed transaction was properly characterized as a sale of tangible personal property or as a sale of a service.
The Department of Treasury argued that, because the sales of services and parts were inseparable, the sale was properly characterized as a sale of a service and should be apportioned to Michigan under the costs of performance rule. Using the incidental-to-service test provided in Catalina Marketing Sales Corp. v. Department of Treasury, 470 Mich. 13; 678 N.W.2d 619 (2004), the court looked objectively at the entire transaction to determine if the transaction was principally the transfer of tangible personal property or the provision of a service. The court noted that this case was legally indistinguishable from Midwest Bus Corporation v. Department of Treasury, Michigan Court of Appeals, No. 288686, unpublished March 16, 2010, approved for publication May 4, 2010, and any factual differences were irrelevant.
In this case, the taxpayer’s customers wanted to extend the life of the locomotive engine and thus sought the service of rehabilitating the engine. For example, the Amtrak contract involved disassembling the engine, diagnosing problems, cleaning, reconditioning, repairing, welding, and painting. Thus, because of the extended engine life, the proceeds of the remanufacturing contracts were properly characterized as sales of services and sourced to Michigan.
Tuesday, December 03 2013
High Court Rejects Legal Challenge by Amazon and Overstock
Michigan Taxpayers Reminded of Applicability of Use Tax to Online Purchases
In a press release dated November 27, 2013 The Michigan Department of Treasury reminds taxpayers that purchases made online remain subject to Michigan use tax. Use tax applies to transactions where the retailer does not collect sales tax, such as those between a consumer and a mail-order outlet, Internet retailer, or television shopping network. Taxpayers may report use tax annually when filing their Michigan individual income tax returns.
On Cyber Monday, the U.S. Supreme Court declined to intervene in the long-running battle over whether states can force online retailers to collect sales taxes, leaving consumers in many states to enjoy tax-free Internet shopping while others must pay up when they buy goods on sites like Amazon.com Inc. and Overstock.com.
The Supreme Court on Monday turned down a constitutional challenge by Amazon and Overstock to a 2008 New York law aimed at collecting sales taxes on online purchases by state residents, an issue that has pitted brick-and-mortar retailers against online companies as Internet shopping has surged.
The U.S. Supreme Court denied a request to review a ruling by the New York Court of Appeals which held that online retailers who sold their products solely through the Internet failed to demonstrate that a statutory provision that required out-of-state Internet retailers with no physical presence in New York to collect sales and use taxes was facially unconstitutional under either the Commerce Clause or the Due Process Clause. The statute at issue created a rebuttable presumption that a retailer solicits business in New York if any in-state entity was compensated for directly or indirectly referring customers to the retailer, whether by a link on an Internet website or otherwise, and the cumulative gross receipts from these and other New York affiliate referrals exceeded $10,000. The taxpayers both offered programs through which third parties (affiliates), who were compensated on a commission basis, agreed to place links on their own websites that directed users to the taxpayers’ websites.
New York's law, upheld by the New York Court of Appeals, was among the first to target collection of sales taxes from out-of-state sellers and has been duplicated by at least a dozen other states. Amazon, the nation's leading online retailer, and Overstock argued in court papers that New York's approach imposes tax-collection requirements that stunt growth in online commerce.
The Supreme Court's avoidance of the dispute comes as the prospect for a national online bill dimmed in Congress. The Senate earlier this year approved legislation to make it easier for states to collect online sales taxes. But the effort has since languished in the House amid criticism from tax opponents and resistance from some players in the online retail industry.
The high court's move to sidestep the issue sets no legal precedent, but it does suggest states can impose tax-collection requirements even in the absence of congressional action. State courts have issued divergent rulings on when state taxing authorities can require Internet retailers to collect sales taxes.
Amazon, seeking to avoid a piecemeal approach by the states, has thrown its support behind national legislation. "Congress can and should act to resolve" the sales-tax issue, a company spokesman said Monday. The company currently collects sales taxes from residents in 16 states, including populous states like California, New York and Texas, according to its website. Overstock is opposed to the Senate effort, saying the legislation doesn't do enough to prevent states from adopting a variety of tax approaches.
Online retailers can be forced to collect sales taxes from consumers in states where the retailer has physical operations. But a 1992 Supreme Court ruling held states couldn't compel an out-of-state vendor to collect taxes unless the vendor has a physical presence in the state.
New York's law makes it easier for the state to require online retailers to collect sales taxes even if they don't have an in-state physical presence. A key provision of the law focuses on marketing arrangements of online retailers. It says tax-collection responsibilities apply to Internet retailers that pay commissions to in-state websites that post links steering consumers to online stores.
New York residents owe state taxes on out-of-state online purchases, even if retailers don't collect the taxes. The state said in court papers taxes on most of those purchases are never reported or collected.
The state said its law helps it collect some of that revenue, while also restoring a competitive balance between Internet-only retailers and in-state brick-and-mortar stores that have always collected sales taxes.
Overstock.com, LLC v. New York State Department of Taxation and Finance, U.S. Supreme Court, Docket 13-252, Petition for Certiorari denied December 2, 2013; Amazon.com LLC v. New York State Department of Taxation and Finance, U.S. Supreme Court, Docket 13-259, Petition for Certiorari denied December 2, 2013