Tax Tips – March 2010

Nexus News

CT, IL, IA

Since last month’s newsletter, three mores states (Connecticut, Illinois, Iowa) have introduced nexus presumption bills with language similar to the New York “Amazon” law. Additionally, there has been legislative action regarding several of the bills previously introduced:

California
A tax bill (AB 8) introduced in January’s Extraordinary Session, which expands nexus for sales & use tax purposes through so-called “Amazon” provisions, was passed by the California Senate in mid-February. The bill was sent to the Assembly for concurrence on February 17, 2010. However, this bill died on March 11, 2010, when the Extraordinary Session of the California Legislature adjourned without further action taken on the bill.

Colorado
The governor signed the nexus presumption bill passed by the State’s legislature. The law, which is effective March 1, 2010, imposes a sales tax on out-of-state online retail sales in the same way online sales made by retailers with physical locations in Colorado are subject to sales tax.

Virginia
The nexus presumption bill (SB 660) was tabled by the House of Delegates Committee on Finance on February 24, 2010. The bill had been passed by the Virginia Senate earlier in the month.

What’s a tax audit without a Penalty? (Rare)

CA, NY

Enormous state budget deficits may be influencing the growing disposition of state auditors to impose penalties on tax underpayments. In more affluent times, auditors appeared to take a broader view of the circumstances that would meet their respective states’ standard of “reasonable cause”.

So what is not “reasonable cause”?

California
Mistake: The appellant contended that it made a mistake in reading that a Demand Letter applied to a year which the appellant thought had been “taken care of”. The Board of Equalization “sympathizes with appellant, but a clear reading of appellant's Demand Letter states that it is for the 2005 tax year. . . Thus, in this appeal, this Board believes that had ordinary business care and prudence been exercised, appellant would not have misread its mail and would have realized the tax year at issue and the possibility of various penalties.” In the Matter of the Appeal of Dot.org, Inc., California State Board of Equalization, No. 450405, December 15, 2009.

Information not available: The appellant argued that it was unable to obtain the information necessary to complete and file the Form 592 by the due date. Appellant asserted that because it is an investment partnership it requires numerous Schedule K-1s to determine income or loss, and that it must wait until each Schedule K-1 is received from every investment before it can prepare its own filings. The Board was unconvinced by the appellant’s argument, as the appellant had not presented any evidence that it attempted to contact the underlying partnerships or took any other steps to determine or estimate the amount of income by the applicable deadline. In the Matter of the Appeal of Bakal Company Limited Partnership, California State Board of Equalization, No. 395917, December 15, 2009; released February 2010.

New York
Reliance on the Vendor: Petitioner maintained that the purchase price of a yacht included sales tax as the broker, Northeast Yacht Sales, informed petitioner that the purchase price of the vessel, $497,800.00 was an “all-inclusive” price. The Administrative Law Judge found that petitioner knew that the tax had not been paid. The Administrative Law Judge also considered petitioner's reliance on Northeast Yacht Sales representation that boats in excess of 40 feet need not register with DMV, which was contrary to Vehicle and Traffic Law § 2251, to be “nothing more than ignorance of the law, which is not a valid excuse or defense.” The Tax Appeals Tribunal affirmed the decision of the Administrative Law Judge that petitioner had failed to meet his burden to demonstrate that his failure to pay sales or use tax to New York State on his purchase was due to reasonable cause and not willful neglect. Krohnengold, New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No. 821884, January 28, 2010. Affirming, Division of Tax Appeals, Administrative Law Judge Unit, February 26, 2009.

The “narrowing” of reasonable cause for underpayment of tax is a key factor to consider in your overall tax strategy. It may be advantageous, in circumstances where taxability is uncertain for example, to pay tax up front and ask for a refund later. This approach would mitigate the risk of incurring both an underpayment penalty and high assessment interest rates.

Net Operating Losses and the 2009 Worker Act

For federal income taxes, the Worker, Homeownership, and Business Assistance act of 2009, enacted November 6, 2009 (2009 Worker Act) allows all businesses to carryback Net Operating Losses (NOL) for up to five years for losses incurred in 2008 or 2009. Generally, the election to carryback a net operating loss can only be made for 1 of the 2 years, either 2008 or 2009. Small businesses that elected an extended carryback for 2008 under the American Recovery and Reinvestment Tax Act of 2009 can also elect an extended loss carryback period for a 2009 NOL. The election to carryback the NOL five year is limited to 50% of the company’s taxable income for the fifth taxable year preceding the loss. The unused loss can be used offset 100% of the income for the remaining four years.

The news is not so good for the carryback of net operating losses for state income taxes. Many taxpayers will not be allowed to utilize the extended federal NOL carryback for state income taxes. Only a few states, Alaska, Delaware and New York conform to the extended carryback period. However, Delaware and New York limit the NOL carryback to $30,000 and $10,000 respectively. Oklahoma and West Virginia state legislatures have not yet addressed conformity with the 2009 Worker Act. Some states, Georgia, Hawaii, Idaho, Indiana, Louisiana, Maryland, Mississippi, Missouri, Montana, Utah and Virginia will allow a 2 or 3 year NOL carryback. Most states with an income tax have either suspended or do not allow NOL carrybacks. Consideration should be given to the respective state NOL carryback periods when projecting cashflows from utilizing NOL’s and preparing state income tax returns for 2009.

NEW: State Amnesty Programs At-a-Glance, updated monthly.

¹ Streamlined Sales Tax amnesty program does not include
use tax due on purchases or any other taxes.

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