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

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

San Mateo County seeks to stretch the California sales tax cap

San Mateo County

Voters in San Mateo, a city in the heart of California’s Silicon Valley, will decide in November whether to retain a 0.25% sales and use a tax approved in a prior referendum six years ago. If adopted, “Measure S” would extend the local tax until March 2048. San Mateo City Manager Larry Patterson said in an interview posted to the city’s website the additional sales tax revenue is necessary to make up for shortfalls in the city’s budget. “Since 1990, the State has taken nearly $50 Million from San Mateo to address its own budget deficit,” Patterson said, adding San Mateo “has over $35 Million dollars in critical street and road repairs with no available funding sources.”

sales tax cap

San Mateo County seeks to break California’s sales tax cap to support transportation projects

Indeed, even if voters keep the current 0.25% surcharge – which keeps San Mateo’s overall sales tax at 9.25% – it may not be enough to satisfy local demands for additional funds. According to the San Mateo Daily Journal, the county’s transportation authority would like to consider an additional 0.5% sales tax increase to finance additional road and public transportation projects. Together with Measure S, this would bring the sales tax within the City of San Mateo to 9.75%.

California law presently sets a statewide sales tax rate of 7.25%. Cities and counties may add up to an additional 2 percentage points, making the maximum allowable sales tax cap in any California jurisdiction 9.5%. This would obviously prevent San Mateo officials from seeking an additional 0.5% increase, as that would bring the total rate above the statewide maximum.

To that end, the California legislature adopted a bill on September 11 which would grant San Mateo County the ability to adopt the additional 0.5% increase without running afoul of the statewide sales tax cap. The provision specifically applies to San Mateo. (A second provision authorizes Monterey County, located to the south of San Mateo, to adopt a 0.375% increase). Such special legislation is generally prohibited under California’s constitution, but the legislature said the “unique fiscal pressures experienced by the San Mateo County Transportation Authority in providing essential transportation programs” justified the county-specific measures.

Earlier this year, the legislature did approve an increase in the statewide sales tax cap on local surcharges from 2% to 3%, which would have eliminated the need for the special San Mateo legislation. But Gov. Jerry Brown vetoed that bill on August 17. “Although I have approved raising the limit for individual counties,” Brown said in his veto message, “I am reluctant to approve this measure in view of all the taxes being discussed and proposed for the 2016 ballot.” As of this writing, Brown has yet to sign or veto the proposed increase for San Mateo and Monterey counties.

If Brown signs the bill, San Mateo voters will likely face a second referendum in November 2016 on a new 0.5% sales tax increase. Unlike this year’s vote on the 0.25% extension, which requires a simple majority, the new tax must be approved by a two-thirds majority, because it is a special tax for transportation purposes.

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

Fate of community improvement district hangs on a single vote

Fate of community improvement

community improvement district defeated by one voteMOThey say one vote can make a difference. That is especially true when there is only one person voting in an election. Property owners in the Business Loop 70 section of Columbia, Missouri, learned that lesson the hard way as their efforts to impose a half-cent sales tax increase have stalled due to resistance from a local college student – who happens to be the only registered voter in the area.

Missouri allows cities and counties to establish “community improvement districts.” Local property owners petition the city to form such districts, which if approved can levy their own property and sales taxes. These revenues are then used to finance infrastructure improvements within the districts. It is largely up to the people seeking to form a district to define its precise boundaries. Missouri law only requires its boundaries be contiguous and that the petition is signed by a majority of the property owners.

Columbia previously established a community improvement district for its downtown. Earlier this year, a group of property owners located in nearby Business Loop 70 submitted a petition to form their own district, which the city council approved in April. The new district’s leaders planned to raise $50,000 in new property taxes and approximately $220,000 through the proposed sales tax increase.

A potentially costly drafting mistake

Under state law, the sales tax increase must be approved by the “qualified voters” of a community improvement district. This means anyone living in the district who is registered to vote in state elections. If nobody actually lives in the district, then the vote takes place among the “the owners of one or more parcels of real property located within the district.”

Business Loop 70 owners thought they had defined the boundaries of their district to exclude any residential properties. This would allow them to approve the sales tax increase without difficulty. But it turned out they made a mistake. A single University of Missouri guest house remained within the district. The house’s resident, Missouri student Jen Henderson, registered to vote in February, making her the sole “qualified voter” under state law.

Henderson indicated she might oppose the proposed sales tax increase, noting it could raise prices for poorer residents who have to buy groceries within the improvement district. She said district leaders tried to “manipulate” her, asking her to “unregister” her vote so they could proceed with the sales tax increase unopposed. At an August 31 meeting attended by Henderson, the district’s board of directors decided to postpone the vote for now.

But this is not the end of the matter. The improvement district said it cannot raise sufficient revenue from property taxes alone to finance its planned improvements. And the district is already over $100,000 in debt, primarily because it must reimburse the city for the cost of certifying its petition. According to the Columbia Daily Tribune, the district’s board said it would continue to “work with Henderson and her attorney to find a mutually agreeable way to pass a sales tax.”

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

Online Travel Companies found to owe back sales taxes to D.C.

back sales taxesOnline travel companies (OTCs) faced another setback last month as the District of Columbia’s highest court held Expedia and its competitors owed back sales taxes dating to 1998 on their “retail margins” for hotel rooms sold in the district. Washington, D.C. assesses a 14.5% sales tax on the “gross receipts” charged for the sale of lodgings to “furnished to transients.” The term “gross receipts” refers to the “sales price” of the hotel room, which is “the total amount paid by a purchaser to a vendor as consideration for a retail sale.”

OTCs typically function as middlemen. A traveler books a room through an online travel website and pays the OTC for the room. The OTC then remits a lower rate back to the hotel. The difference is the OTC’s “retail margin” or profit.

The OTC also assesses a separate “tax recovery charge” to the traveler. This recovery charge includes both the OTC’s service fees and the local sales tax owed by the hotel on its portion of the sales price. For example, let’s say a traveler books a hotel room in Washington through an OTC for $150 per night. If the hotel receives $100 of that, the OTC’s tax recovery charge would include $14.50 to cover the District’s sales tax, plus any additional service fees.

D.C. argued it was entitled to sales tax on the entire price paid by the traveler, including the OTC’s retail margin. The OTCs disagreed, maintaining they did not “furnish” hotel rooms, as required by D.C.’s sales tax law at the time. In 2011, D.C. amended its laws to expressly extend the sales tax to OTCs, so the dispute here is only whether the companies owe back sales taxes for pre-2011 sales.

The D.C. Court of Appeals found that the OTCs must pay thirteen years’ worth of back sales taxes

The D.C. Court of Appeals sided with the district. In a July 23 opinion, a three-judge panel held “the structure and purpose of the District’s sales tax law evince Congress’s intent to tax the full amount that customers pay for hotel rooms in the District of Columbia.” (Although the district is self-governing, Congress retains constitutional authority to legislate for the city.) And while the original district sales tax law – adopted in 1949 – could not have imagined a world where travelers purchased rooms over the internet, Congress “did know what a middleman was,” and the legislative history demonstrated legislators always intended to tax the full price paid by travelers, not just the portion remitted to the hotel.

The court did, however, side with the OTCs on one issue. D.C. argued it was also entitled to sales tax on the OTC’s recovery charges – that is, the reimbursements paid to the hotel for its share of the sales tax. D.C. argued this charge was subject to tax because the OTC did not separately state the sales tax paid to its customers. Instead, the recovery fee combined the sales tax paid and the OTC’s own service charges. The court said the district was nitpicking here, and the OTCs were “substantially compliant” with the law’s separate-statement requirements.

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

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