TWIST - This Week in State Tax

Welcome to TWIST for the week of March 06, 2023, featuring Sarah McGahan from the KPMG Washington National Tax state and local tax practice.

On February 28, 2023, the United States Supreme Court issued a unanimous opinion in an unclaimed property case that pitted the State of Delaware against almost 30 other states. The question before the Court was which state has the right to escheat the proceeds of certain abandoned prepaid financial instruments used to transfer funds to a named payee.   The Court ruled against Delaware when it concluded that escheatment of these instruments was governed by the federal Disposition of Abandoned Money Orders and Traveler’s Checks Act because the instruments in question were similar to money orders in both function and operation.  Accordingly, the instruments were escheated to the state where they were purchased, rather than to Delaware.

In other court news, the District of Columbia Court of Appeals concluded that a hospital was not entitled to a refund of sales taxes paid on purchases of meals that were later resold to others.  The hospital timely filed a claim for a refund of the sales tax, but the Office of Tax and Revenue denied the claim on the basis that the hospital had not provided the seller with a valid resale certificate when it purchased the meals. The appeals court agreed with the District, finding that the relevant statute specified a clear procedure for purchasers that wished to avoid sales tax on the ground that the purchaser intended to resell the purchased items. Namely, at the time of the purchase, the purchaser must provide the vendor with a certificate stating that the purchased items are intended for resale. 

Finally, we have an update on certain states have corporate surcharges or surtaxes in place.   Recently, Governor Murphy released his proposed budget and confirmed that he does not plan on seeking an extension of the 2.5 percent corporation business tax surtax. In contrast, some neighboring states are considering extending surtaxes or surcharges on corporate income. In New York, the Governor has proposed extending the additional corporate franchise rate that applies to taxpayers whose business income base exceeds $5 million for three years.  Finally, in Connecticut the ten percent corporate surtax that had been in place for a number of years expired at the end of 2022. Governor Lamont has proposed extending the surtax for three additional years. Stay tuned to TWIST for updates on these surcharges.

District of Columbia: Hospital Not Entitled to Refund When it Did Not Provide a Resale Certificate at Time of Purchase

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The District of Columbia Court of Appeals recently concluded that a hospital was not entitled to a refund of sales taxes paid on purchases of meals that were later resold to others.  The hospital timely filed a claim for a refund of the sales tax, but the Office of Tax and Revenue denied the refund on the basis that the hospital had not provided the seller with a valid resale certificate when it purchased the meals. After a trial court affirmed the denial of the refund claim, the taxpayer appealed. The appeals court observed that, in its view, the matter was one of statutory interpretation. The relevant statute specified a clear procedure for purchasers that wished to avoid sales tax on the grounds that the purchaser intended to resell the purchased items. Namely, at the time of the purchase, the purchaser must provide the vendor with a certificate stating that the purchased items are intended for resale.  The statute also set forth a clear consequence for failing to follow the procedure— the purchases at issue “shall be deemed taxable.”

The hospital made eleven arguments in support of its position that a purchaser that fails to provide the required certificate can later obtain a refund by proving that the items were intended to be resold and in fact were resold. However, the court rejected each of the hospital’s arguments, many of which were based on language in other statutes that it asserted supported its position. The taxpayer also argued that not allowing a refund in this instance resulted in double taxation because the hospital paid sales taxes on its meal purchases and later collected sales taxes when it resold the meals. In the court’s view, the fact that the hospital paid taxes it was not required to pay was a consequence of its failure to follow the required procedures. Another argument advanced by the hospital was that it was absurd that it should pay taxes on transactions that were, in reality, exempt. The court determined that it did not “view it as at all absurd for the legislature to determine that any claim of exemption from sales tax must be supported by certificates presented to the vendor at the time of purchase. Requiring a contemporaneous resale certificate appears to us to be a reasonable approach to the problem potentially presented by trying to verify the purpose of numerous transactions entirely after the fact.” Please contact Jeremy Jester with questions on District Hospital Partners, LP v. District of Columbia.

Multistate: Corporate Surcharge Updates

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There are a few states that currently or recently had surtaxes or surcharges in place that have or are set to expire. In New Jersey, legislation that was enacted in 2018 imposed a 2.5 percent surtax on Corporation Business Tax taxpayers with allocated New Jersey net income in excess of $1 million. During the COVID-19 pandemic, the 2.5 percent surtax was extended through December 31, 2023. When added to the regular CBT rate, the total rate imposed on New Jersey corporate taxpayers subject to the surtax is 11.5 percent.  Recently, Governor Murphy released his proposed budget and confirmed that he does not plan on seeking an extension of the surtax. In contrast, some neighboring states are considering extending surtaxes or surcharges on corporate income. In New York, Governor Hochul is proposing to extend the 0.75 percent additional corporate franchise rate that applies to taxpayers whose business income base exceeds $5 million.  This 7.25 percent (6.5 percent plus 0.75 percent) rate is currently scheduled to sunset at the end of the 2023 tax year; the Governor seeks a three-year extension.  Finally, in Connecticut the 10 percent corporate surtax expired for tax years beginning on or after January 1, 2023. Governor Lamont has proposed extending the surtax for three additional years. Stay tuned to TWIST for updates on these surcharges.

Multistate: U.S. Supreme Court Rules Against Delaware in Dispute of Escheatment of Certain Financial Instruments

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On February 28, 2023, the United States Supreme Court issued a unanimous opinion in a case that pitted the State of Delaware against almost 30 other states¹.  The question before the Court was which state has the right to escheat the proceeds of certain abandoned prepaid financial instruments issued by MoneyGram that were used to transfer funds to a named payee. 

As background, Delaware had argued that these instruments should be escheated under the general rules set forth in Texas v. New Jersey. Applying these rules to the instruments in question resulted in them being escheated to Delaware, MoneyGram’s state of incorporation. A collective of other states argued that the rules set forth in Texas did not apply, and the Disposition of Abandoned Money Orders and Traveler’s Checks Act (FDA) governed the matter.  The FDA provides that if the books and records of a banking or financial organization or business association show the state in which a money order, traveler’s check, or similar written instrument (other than a third-party bank check) was purchased, that state is entitled to take custody of the sum payable on the instrument if it ended up being escheated.  As such, the dispute was whether the two types of MoneyGram issued  instruments were “similar” to a money order so that they were covered under the FDA and escheated to the state where the instruments were purchased.   

A Special Master was appointed by the Court to review and report on the case. The Special Master initially agreed that the MoneyGram instruments fell under the FDA.  However, after an initial set of oral arguments, the Special Master reversed his initial conclusions in part.   

In its opinion, the Court rejected the arguments advanced by Delaware and the Special Master and held that the instruments in question were similar to money orders in both function and operation.  Notably, they were prepaid written instruments used to transmit money to intended payees. The instruments were also similar to “money orders” because, as with the circumstances giving rise to the FDA, they too would escheat inequitably to the state of incorporation of the company holding the funds because such companies do not maintain records of the last known address of the purchasers of such instruments.

This decision may have deeper implications, as it may extend other financial products, such as cashier’s checks.   For more information on Delaware v. Pennsylvania and Wisconsin, please contact Will King | +1 (214) 840-6107 | williamking@kpmg.com or Marion Acord | +1 (404) 222-3053 |marionacord@kpmg.com

¹ Delaware v. Pennsylvania and Wisconsin AND Arkansas, et. al. v. Delaware, 598 US (2023)