California sales tax

Local sales tax increase to reach ballot in Modesto, California

Local sales tax increase

Local sales tax increase

In November 2013, voters in the city of Modesto, California, defeated a proposed 1% increase in the local sales tax by just 507 votes. Undeterred by this narrow defeat, Modesto’s mayor and city council will again ask voters to approve a local sales tax increase on this November’s ballot, albeit only 0.5% this time. Recently, this new proposal – known as Measure G – survived a legal challenge by a local taxpayer group.

California imposes a statewide sales tax of 7.5%. Counties and cities may add their own tax on top of this rate. For example, sales in Modesto are presently taxed at 7.625%, although the city only receives 0.75%. The remainder goes to the state and Stanislaus County. Measure G would make the total sales tax 8.125%, raising Modesto’s share to 1.25%.Local sales tax increase

Modesto Mayor Garrad Marsh told the City Council in June additional taxes were necessary to provide “police and fire services and the rest on economic development and other essentials.” City officials estimate the 0.5% increase will yield an additional $14 million annual revenue. Steve Christensen, Modesto’s budget director, also told the council a 7.625% sales tax would not be out of line for California, as 84% of the state’s cities currently impose higher rates.

Needless to say, not all Modesto residents are eager to pay more in sales tax. The Stanislaus Taxpayers Association, which led the campaign to defeat the 1% increase in 2013, filed a lawsuit in early August, specifically challenging the ballot language of Measure G. When Modesto voters go to the polls in November, they will see a measure titled the “Safer Neighborhoods Initiative,” which promises “To make neighborhoods safer by restoring police patrols, crime prevention, gang suppression and youth development efforts; removing tagging; reducing nuisance properties; strengthening fire/emergency services; increasing neighborhood collaboration; and maintaining other general city services.”

The problem, according to the Stanislaus Taxpayers Association, is that nothing legally requires Modesto to dedicate the additional sales tax revenue to these purposes. Indeed, Measure G proposes a general sales tax increase, as indicated by the reference to “other general city services” in the language above. California law does authorize a city to collect a “special sales tax,” which must be used for a stated purpose. However, special sales taxes must be approved by a two-thirds vote, while a general increase only requires a simple majority.

The taxpayer association’s lawsuit argued the language of Measure G, which was prepared by the Modesto City Attorney’s office, would mislead voters into thinking they were voting on a dedicated, special sales tax rather than a general increase. The taxpayers association added it was inappropriate to refer to Measure G as an “Initiative,” which in California elections traditionally describe a voter-sponsored ballot question, not one placed by a city government. Accordingly, the group asked a judge to direct the city to either adopt different language or drop the ballot question altogether.

The judge did neither. On August 21, Stanislaus County Superior Court Judge Timothy W. Salter rejected the taxpayer association’s lawsuit. According to the Modesto Bee, Salter said changing or dropping Measure G at this point “would substantially interfere with the county election office’s ability to conduct the countywide November election,” and in any event, he was not convinced the language adopted by the city attorney was “false or misleading.”

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

Sales tax refund

Sales tax refund repayment case bounces around Minnesota courts

tax refund repayment

tax refund repayment

The only thing worse than owing sales tax is having to repay the same sales tax a second time. Several Minnesota electric cooperatives faced this scenario recently when the state’s Commissioner of Revenue said it “erroneously” provided a sales tax refund on taxes paid on their members’ monthly payments. The Minnesota Supreme Court ultimately sided with the commissioner’s re-interpretation of the law, although the justices said the change of heart may have come too late in some cases.

Connexus Energy v. Commissioner of Revenue

An electric cooperative is a membership association which purchases electricity from wholesale suppliers. Similar to a conventional utility, the cooperative bills each member monthly for their electric use. Where cooperatives differ is they distribute “capital credits” to members at the end of the year. These credits reflect any profits posted by the cooperative. The credits therefore represent the members’ equity in the cooperative.

Minnesota assesses sales tax on the purchase of electricity. The electric cooperatives in this case initially paid sales tax on the full amount billed to each member. But they later filed amended returns for the 2004, 2005 and 2006 tax years, claiming refunds for member payments later reclassified as capital credits.

At first, the commissioner agreed the cooperatives were entitled to refunds. But she later changed her mind and demanded the cooperatives return their refunds. The cooperatives appealed this action, first to Minnesota’s Tax Court and later the state’s supreme court. Both courts agreed the commissioner did not exceed her authority when she reassessed and rescinded the refunds.

Justice David Stras, writing for a unanimous Minnesota Supreme Court, said cooperative members’ monthly payments and their later receipt of any capital credits “were separate and distinct transactions.” In other words, when members paid their cooperative bill each month, that represented a single “retail sale of electricity” subject to sales tax. As Stras noted, the once-a-year allocation of capital credits “take place on different cycles and involve different subjects” than the monthly electricity usage bills.

That said, Stras added the commissioner waited too long before seeking repayment of some of the erroneous refunds. Under Minnesota law, “An assessment of a deficiency arising out of an erroneous refund may be made at any time within two years from the making of the refund.” Four of the cooperatives in this case said the commissioner waited until after this two-year period expired before making her assessment. In response, the commissioner noted state law also allows her to “assess additional taxes” within a 3 1/2-year period after a tax return is filed. Since she changed her mind within this time limit, she argued the four cooperatives still had to pay back the erroneous refunds.

On this point, the supreme court sided with the cooperatives. Stras explained while “either provision conceivably applies” here, the court must apply the “specific” rule over the “general” one. In this case, the 3 1/2-year limit is the general rule, as it applies to all tax assessments, while the two-year limit specifically applies to erroneous refunds.

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

Illinois sales tax

Illinois sales tax on advertising proposal hits resistance

Illinois sales tax

Illinois sales tax

Illinois Gov. Bruce Rauner won election last year on a platform of reducing the tax and regulatory burden on business. Yet he has also proposed what would be the nation’s only sales tax on business advertising. In an effort to “modernize” the Illinois sales tax system – and address a $4 billion budget deficit – Rauner has proposed eliminating exemptions for a variety of previously untaxed services, including billboards and radio and television advertising. In his budget blueprint, Rauner argued, “Illinois lags behind all of its neighboring states when it comes to the tax treatment of goods compared to services.”

Illinois sales tax

Groups like No Ad Tax Illinois have mobilized in opposition of Gov. Rauner’s proposed Illinois sales tax on business advertising and other formerly exempt services.

Yet no state currently collects a sales tax on business advertising. Florida attempted to do so in 1987, but abandoned the effort after only six months when national advertisers boycotted the state, according to an editorial in the Quincy Herald-Whig arguing against Rauner’s proposed tax. The editorial further noted, “The advertising industry alone accounted for $267 billion in revenue in 2014, or 17.3 percent of Illinois’ economic activity.”

Not surprisingly, the advertising industry – which includes the state’s newspapers and television stations – have quickly mobilized against the governor’s proposal. A group called No Ad Tax Illinois has published a website and video decrying the impact an advertising tax would have on small businesses. “From the family owned and operated car dealership in Joliet to the real-estate agent in Chicago, small businesses rely on advertising to drive sales,” the group argued, adding less advertising “will mean less sales and people will lose their jobs and their businesses.”

An advertising tax also raises constitutional issues. The Northwest Herald noted advertising revenue “makes it possible to finance our journalistic work to keep the community informed.” A tax might therefore run afoul of the First Amendment’s protection of freedom of the press.

Rauner has already modified his proposal in the face of criticism. Originally, he proposed a 10% advertising tax, which he claimed would provide the state with approximately $10 million per year in additional revenue. According to the Herald, the governor has since lowered the proposed tax to 6.25%, which would match the Illinois sales tax rate statewide.

Ultimately, the proposed advertising tax is just one part of a much larger political dispute. Illinois has operated without a budget since the start of its fiscal year on July 1. Rauner, a Republican, has been unable to negotiate a new budget with the Democratic-controlled state legislature.

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

Dormant Commerce Clause debated in Florida discriminatory sales tax case

commerce clause

commerce clause

FloridaThe war between cable and satellite television providers recently had a battle on the sales tax front. On June 11, a Florida appeals court held the state’s sales tax regime – which imposes a higher rate on satellite providers – violated the United States Constitution’s Commerce Clause. While the court’s decision is unlikely to be the final word on the subject, it nonetheless represents an important victory for satellite providers and their customers.

DirecTV, Inc. v. State of Florida

Prior to 2001, Florida imposed a uniform sales tax rate of 6% on all cable and satellite television commerce clausepurchases. The Florida legislature subsequently adopted a new scheme which resulted in a significantly higher increase for satellite than cable. As of 2015, the tax on cable service in Florida is 6.65%, while it is a whopping 10.8% on satellite television.

Understandably, the satellite companies and their customers object to this state of affairs. Two lawsuits were filed challenging the constitutionality of the discriminatory tax rules. A trial judge sided with the State of Florida and its Department of Revenue, holding the higher satellite rates were constitutional. The plaintiffs then appealed to the Florida’s First District Court of Appeal in Tallahassee.

A divided three-judge panel reversed the trial court and ordered judgment for the satellite companies and their customers. Chief Judge L. Clayton Roberts, writing for the majority, said Florida’s tax regime violates what is known as the “dormant Commerce Clause.” The Commerce Clause gives Congress the exclusive authority to regulate interstate and foreign commerce. The dormant Commerce Clause refers to the judiciary’s longstanding practice of interpreting this to mean individual states may not discriminate against out-of-state businesses in an effort to aid local “economic interests.” The discrimination need not be intentional; a court may hold a policy unconstitutional if it produces a discriminatory effect.

“Here,” Roberts said, “the sales tax [] is discriminatory in effect because it affects similarly-situated entities, cable and satellite companies, by imposing a disproportionate burden on satellite service and conferring an advantage upon cable services, which use in-state infrastructure.”

The state argued its policies were not discriminatory because cable providers were still subject to local sales taxes, which in some counties meant the rates paid by each were roughly equal. (Federal law exempts satellite providers from local taxes.) Roberts said “this method of attaining a semblance of equality is untenable,” because there was nothing to prevent counties from eliminating their local tax in the future.

Judge Simone Marstiller dissented from the majority’s opinion. She argued the dormant Commerce Clause did not apply here, because the satellite providers were not really out-of-state businesses. She noted the satellite companies have employees and contractors in Florida, and while the cable providers – none of whom are actually based in Florida – may rely more on such “in-state infrastructure,” that does not mean the state’s tax rules unfairly discriminate in favor of “in-state economic interests.”

Marstiller’s dissent is no doubt encouraging to state tax officials, who have already appealed Roberts’ decision to the Florida Supreme Court.

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

Connecticut

Sales tax audit leads to litigation between state and town

tax audit

tax audit

The Connecticut Supreme Court recently decided an unusual sales tax case. The allegedly delinquent taxpayer was actually a town that challenged the state’s decision to collect sales tax on fees charged for municipal waste removal services. Connecticut imposes a 6.35% sales tax on the “rendering of any services constituting a sale.” The town argued its “services” were not taxable in this context since it did not actually profit from providing waste removal services.

Groton v. Commissioner of Revenue Services

Groton is a town of about 40,000 people. In 1985, Groton joined a regional authority which operates a waste facility. Groton is contractually obligated to provide a certain amount of waste to the regional waste facility for a per-ton fee. Three years later, in 1988, Groton created a town authority which provides waste removal services to “end users,” including industrial, commercial and rental properties in the town.sales tax audit in Groton, CT

The town authority uses a private contractor to serve as an intermediary, picking up waste from end users and delivering it to the regional facility. The regional authority and the private contractor each charge the town authority, which pays the bills and then invoices the end users for the total cost. The town authority adds a small per-ton charge to cover its overhead and administrative costs, so the entire program is “break even” for Groton.

In 2011, Connecticut’s Commissioner of Revenue Services performed a sales tax audit on the town of Groton and declared it owed over $240,000 for unpaid sales taxes dating back to 2007. The commissioner said Groton failed to charge sales tax on the “services” it provided, namely its invoices for waste removal. Groton argued since end users merely reimbursed the town authority for its costs in administering the waste removal program, there was no “sale of services” as required by the sales tax law.

A trial court rejected the town’s argument and upheld the state’s sales tax assessment. On appeal, the Connecticut Supreme Court reversed and entered judgment for the town. Writing for a unanimous court, Justice Richard A. Robinson said while Connecticut law subjects private waste removal contracts to state sales tax, the same is not true for municipal agreements. Robinson said the “true object” of Groton’s town authority was promoting “safe and efficient waste disposal,” as opposed to making a profit by competing with private waste removal companies. In other words, Groton carried out a purely governmental function when it billed end users for waste removal.

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

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