Ambiguous receipts cost thrifty couponers

refund of sales taxes

refund of sales taxes

PA-lgSales tax rules often confuse customers and businesses alike. Perhaps the only thing more perplexing is the process of seeking a refund of sales taxes from the state when customers are overcharged. A group of Pennsylvania customers of the popular BJ’s Wholesale Club learned this lesson recently when a state appeals court threw out their lawsuit seeking such a refund.

The BJ’s customers purchased various items from the wholesaler using coupons. But BJ’s assessed state and local sales tax based on the non-discounted price of the items. The total sales tax paid was relatively low – about $3.50 per item – but the customers argued they should have paid less after taking the coupons into account.

The customers initially filed a class action against BJ’s in a Philadelphia court. But in Pennsylvania, customers must take their case for a refund of sales taxes directly to the state’s Department of Revenue. Although the customers initially asked for a hearing before the department, for some reason they withdrew this request and instead sent a letter to the agency’s chief counsel, seeking clarification of the applicable sales tax rules.refund of sales taxes

The chief counsel responded the customers were not entitled to a refund. Under department regulations, the chief counsel said, “amounts representing manufacturer’s coupons or discounts shall be excluded from the taxable purchase price of a product if both the items purchased and the coupons are described on the cash register tape.” In other words, the coupon had to be linked to a specific item; otherwise, the customer owed sales tax on the full purchase price of the item. Here, BJ’s receipts only listed a “scanned coupon” without linking it to any particular item.

The customers asked the Board of Finance and Revenue, another agency within the department, to review and reverse the chief counsel’s determination. The board replied it was powerless to do so, as the chief counsel’s letter was merely a statement of “the Department’s position on an issue,” not a final administrative order subject to appeal. The customers then appealed to the Pennsylvania courts, which were similarly unreceptive. The Commonwealth Court of Pennsylvania, in a November 24 opinion, agreed with the department and a lower court there was no procedure under state law “for an appeal of an advisory opinion.” This means the customers must begin anew and directly ask the department for a refund of sales taxes, which the agency is likely to deny given its advisory opinion.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info

Washington State sales tax held hostage

Conditional legislation holds the fate of the Washington state sales tax

Washington voters recently approved an unusual ballot initiative which effectively holds the state sales tax hostage unless legislators propose a separate constitutional amendment related to future tax increases. Assuming the initiative survives an ongoing court challenge, the Washington legislature has until next April to approve a second referendum for the 2016 election. Otherwise, residents will see an immediate 1% cut in the statewide sales tax.

state sales taxMany states allow voters to enact legislation directly through an initiative process. In Washington, voters may initiate ordinary legislation but not amendments to the state’s constitution, which must be proposed by the legislature. This has frustrated efforts by anti-tax activists in the state to legislate a “supermajority” requirement for tax increases. A “supermajority” means each house of the Washington legislature would have to approve any future tax increase by a two-thirds vote rather than a simple majority. Although voters have passed a number of supermajority initiatives in recent years, they have either been suspended by the legislature or struck down as unconstitutional by the Washington Supreme Court. In a 2013 decision, the court held any supermajority rule required a constitutional amendment.

Since the legislature will not approve such an amendment on its own, supermajority proponents switched tactics. They proposed a new initiative, I-1366, which mandates a 1% cut in the state sales tax – reducing it from 6.5% to 5.5% – unless the legislature “first proposes” an amendment to the state constitution which would “require that for any tax increase, either the voters approve the increase or two-thirds of each house of the legislature approve the increase.” The initiative sets an April 15, 2016, for the legislature to act.

In the recent Nov. 3 election, Washington voters approved I-1366 by a margin of about 45,000 votes. But that does not mean the controversial measure will become law. Opponents of the law, including many local governments, have already filed a lawsuit challenging the initiative’s constitutionality. Specifically, opponents claim I-1366 is “beyond the scope of the people’s initiative power.” This past August, a Seattle judge declined to remove the measure from the ballot. On Sept. 4, the Washington Supreme Court upheld that decision.

The Supreme Court did not settle the underlying constitutional challenge to I-1366. Rather, it held the purpose of the measure was “not sufficiently clear” enough to warrant injunctive relief before the election. The lack of clarity refers to the dispute over what I-1366 actually proposes. Opponents argue it is an improper attempt to amend the state constitution by initiative. But proponents claim it is merely “conditional legislation” whose primary purpose is to cut the sales tax.

Indeed, conditional legislation is a common governmental practice. Congress often uses such legislation to condition federal funds on certain acts by states or private parties. For example, states raised their legal drinking age to 21 after Congress made it a condition for continuing to receive federal highway funds. But this is likely the first time a voter initiative has conditioned a state’s ability to collect taxes on a future legislative action.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info

No preferential tax treatment for DC TV station

preferential tax treatment

preferential tax treatment

Many states and cities offer preferential tax treatment to certain types of businesses. This often includes a temporary exemption from collecting sales and use taxes. Recently the District of Columbia successfully opposed an effort by a no preferential tax treatmentlocal television station to qualify for such a tax break.

In 2000, the Council of the District of Columbia, which exercises legislative power for the nation’s capital under a congressional mandate, adopted the “New E-Conomy Transformation Act.” This act authorized preferential tax treatment for businesses classified as “Qualified High Technology Companies” or QHTCs. Among other benefits, a QHTC is temporarily exempt from collecting the District’s 5.75% sales and use tax.

The act defines a QHTC as any individual or entity doing business in the District of Columbia with at least two employees and “deriving at least 51% of its gross revenues earned in the District” from one of five classes of high-technology activity. For example, a company providing “Internet-related services” such as web design would qualify as a QHTC.

Another qualified class includes “Information and communication technologies.” It was this classification which prompted the recent litigation. WRC-TV, the NBC television affiliate in Washington, DC, claimed it was as a QHTC and therefore entitled to a sales and use tax exemption. The District’s Office of Tax and Revenue (OTR) disagreed and assessed a “deficiency” of more than $78,000 against the television station. An administrative law judge upheld this assessment, prompting WRC to seek review in the District of Columbia Court of Appeals.

The court affirmed the OTR’s assessment in an October 22 decision. The core of WRC’s argument was it “generated”

at least 51% of its local revenues from “information and communication technologies.” That is to say, WRC purchased and “used” such technologies to produce its television programming. Like most broadcast television affiliates, WRC actually sells advertising, not tangible products or information technology services.

The Court of Appeals agreed with the OTR the District’s QHTC law “requires a much closer nexus” between “information and communications technologies” and the revenues generated by WRC’s advertising sales. As the court explained, “If WRC’s sale of advertising via technology-enabled television programming counts as a QHTC activity…then so would a similar technology-intensive provision of services for fees (in place of advertising) by, for instance, accounting, brokerage, or even law firms, with the resulting danger of a tax exemption swallowing up the taxation rule.” The court said the DC government clearly intended the QHTC designation apply to companies “engaged in the development and marketing of high technology systems,” rather than businesses, like WRC, which merely purchase such technology in order to produce and sell other services. Accordingly, the court affirmed the OTR’s decision and ordered WRC to pay $78,784.84  in back taxes.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info

NY v Sprint lawsuit for false sales tax returns progresses

sales tax returns

sales tax returns

sales tax returns

A whistle blower initially sued Sprint Nextel on the state’s behalf in what is known as a “qui tam” action. These lawsuits claim the defendant has defrauded the government and if a monetary judgement ensues, a portion is usually awarded to the whistle blower.

The New York Attorney General’s office recently won a major procedural victory in a four-year-old lawsuit accusing Sprint Nextel of filing false sales tax returns. New York’s highest court ruled state law “unambiguously” requires collection of sales tax on the full price flat-rate wireless telephone plans, even when charges for interstate calls are “unbundled” and stated as a separate item. The court’s decision may ultimately cost Sprint Nextel several hundred million dollars.

This is an unusual sales tax lawsuit. Normally a state’s revenue department assesses a delinquent taxpayer who must then seek a refund through the courts. But in this case New York’s attorney general, rather than the state’s tax department, sued Sprint Nextel. And in fact, a third party company initially sued Sprint Nextel on the state’s behalf before the attorney general later intervened. This is known as a “qui tam” action. These are basically lawsuits brought by whistleblowers who claim the defendant has defrauded the government in some way. If the government takes over the lawsuit and wins, the whistleblower usually receives a share of any monetary judgment.

Here, the attorney general alleges Sprint Nextel filed false sales tax returns. Specifically, Sprint Nextel did not collect (or report) sales tax for its flat-rate wireless plans “on the portion that it attributed to interstate and international calls.” The attorney general said this attribution was “arbitrary” and Sprint Nextel should have collected sales tax – which is 4% on mobile telecommunications services – on the full price of its plans. This is consistent with the New York Tax Department’s rules and the practice followed by Sprint Nextel’s competitors. Sprint Nextel argued the sales tax law was ambiguous on this issue and it relied on its own “reasonable interpretation” of the statute, so it should not be penalized.

A trial court denied Sprint Nextel’s motion to dismiss the case. An intermediate appeals court upheld that decision but asked the New York Court of Appeals, the state’s highest court, to review the case. On October 20, the Court of Appeals, by a 4-1 vote, agreed with the two lower courts.

Chief Judge Jonathan Lippman, writing for the majority, said New York law imposes tax on “voice services” sold for a monthly charge. The law makes no distinction between in-state and interstate (or international) calls. The statute is not ambiguous, Lippman said, nor is it preempted by federal law governing state-level taxation of mobile services. To the contrary, federal law provides “the only state that may impose [such] a tax is the state of the customer’s ‘place of primary use’.”

Lippman also said the attorney general pleaded sufficient facts to charge Sprint Nextel under New York’s False Claims Act. That said, the attorney general “has a high burden to surmount in this case,” as he must prove Sprint Nextel “knew the AG’s interpretation of the statute was proper, and that Sprint did not actually rely on a reasonable interpretation of the statute in good faith.” These will be issues for the trial court to resolve.

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog PrivyCouncil.info

California software is nontaxable as intangible personal property

AT&T to BOE “Can you hear me NOW?” California’s 25 million sales tax appeal denied

Software is nontaxableOn October 8, a California appeals court rejected the state’s effort to collect an additional $25 million in sales taxes on specialized computer equipment used by telephone and data networks. This was not the first time California officials tried to collect such taxes, nor the first time the appeals court determined these actions were illegal. As a result, the court also ordered the state to reimburse the equipment manufacturer’s attorney fees and litigation costs, which were reportedly more than $2.5 million.

Telephone switches are computers used to route data and provide other telecommunications services such as voicemail. AT&T manufactured switches until 1996, when it spun the business off into Lucent Technologies. AT&T/Lucent continued to develop not only the physical switches but their underlying software. This software includes both copyrighted and patented material. When a telephone company purchased a switch from AT&T/Lucent, it included the right to copy and use this proprietary software. But as anyone who has ever owned a Windows computer knows, that does not mean the purchaser “owned” the software; it merely acquired a “license” to use the program on that particular switch.

AT&T/Lucent only collected sales tax on the physical equipment sold, not the software licenses. The California State Board of Equalization (SBE), which oversees sales and use taxes in that state, claimed this was an incorrect reading of the law. It assessed additional sales tax liability of approximately $24.7 million to cover the software licenses.

software is nontaxable

This map, courtesy of the Tax Foundation, shows the different sales tax treatments of different types of software by state. Orange indicates taxable, blue indicates tax exempt. (1: triangle) pre-made “canned” software purchased in the form of tangible property like a disk or CD; (2: square) canned software downloaded directly onto a computer; (3: circle) custom software purchased on a disk or CD; (4: starburst) custom software downloaded; and (5: star) custom software customized by the user for their use.

AT&T/Lucent paid the sales tax under protest then filed a court challenge. A trial judge ruled for the manufacturers and not only awarded a full refund but an additional $2.6 million in “reasonable litigation costs.” The SBE appealed.

But the California Court of Appeal, Second District, upheld the trial judge’s decision. As the appeals court explained, “transactions not involving tangible personal property, such as the sale of services or the sale of intangible personal property, are not subject to the sales tax.” With respect to software, the “default rule” in California held when a seller “grants an intangible license to copy copyrighted material” through tangible media, the transaction is not taxable provided the physical media itself is “not essential” to the buyer’s ability to use the program, in other words, software is nontaxable.  This was an “all-or-nothing” rule, according to the appeals court. So in 1993, the California legislature amended the default rule such that when a seller licenses a copyrighted or patented product, the seller must then separate the tangible and intangible portions of the sale and pay tax on the former.

Which is exactly what AT&T/Lucent did here. Nevertheless, the SBE argued the switch software should still be treated as “tangible” property because it was physically transmitted on magnetic tapes. (Essentially, the SBE claimed AT&T/Lucent sold magnetic tapes that happened to include software.) The Court of Appeal said this argument was not only “inconsistent with precedent,” but “leads to an absurd result,” because it would mean AT&T/Lucent owed an additional $25 million merely because it transmitted the software on tape and not electronically.

Indeed, the SBE was well aware of “precedent.” In January 2011, the same appeals court rejected the same argument from the SBE when it tried to assess sales tax on switching software sold by Nortel Networks, Inc. The SBE actually asked the court to overrule its Nortel decision. It declined to do so, noting the earlier case relied on a California Supreme Court decision, which the intermediate court was “not at liberty to disregard.” And since the Nortel decision “foreclosed” the SBE’s arguments in this case, the trial judge was within his authority in ordering the state to pay AT&T/Lucrent’s litigation costs.

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