TWIST - This Week in State Tax

Illinois: Department Addresses Tax Treatment when Mobile App Used to Purchase Fuel

The Illinois Department of Revenue recently issued two General Information Letters or GILs (ST-23-0036-GIL; ST-23-0037-GIL) addressing the tax treatment of sales of motor fuel made via a mobile app. The Company requesting guidance operated a mobile app that allowed truck drivers (operators) to purchase fuel at reduced prices from specified fueling stations. To purchase fuel at a participating stop, the app was used to obtain a numeric code, which would then be shown to the clerk to verify that the operator had the app. Once the fuel was pumped, the app charged the debit or credit card on file, and the operator could either obtain an emailed receipt or paper receipt from the stop. The Company requested guidance as to whether it was responsible for remitting Retailer’s Occupation Tax (sales tax) or motor fuels tax.  The Company suggested that it was not a marketplace facilitator because it merely provided a service to fuel stops by advertising their fuel. The fuel stations, the Company asserted, sold the motor fuel to operators, and collected, reported, and remitted all applicable sales tax. The Company was paid commissions by the fuel stops when operators used the app to purchase fuel from the stop.  The Department observed that recently it has encountered several arrangements in which companies are providing new services to established businesses using apps downloaded on mobile devices of consumers seeking, for example, hotel rooms, vacation rentals, and parking spaces. Because these new arrangements are unique, the Department requires a complete and thorough explanation of the contractual relationship between the parties. Based on the information presented, the Department could not determine the nature of the relationship between the fuel stop and the company. Without reviewing the contracts between the Company and the fuel stops, the Department concluded that it could not address the matter in a GIL. Rather, the Company should consider requesting a private letter ruling.  With respect to motor fuels tax, the taxpayer asserted that because it was not a “receiver,” “distributor,” or “supplier” of fuel, it should not be required to collect motor fuel tax or obtain a motor fuel tax license. Again, the Department declined to address the issue in a GIL and determined it needed to review the applicable contracts.  Please contact Drew Olson with questions. 

South Dakota: High Court Upholds Assessment of Use Tax on Equipment

The South Dakota Supreme Court recently upheld the assessment of use tax on construction equipment purchased out-of-state and brought into South Dakota for use in various projects throughout the three-year audit period. The taxpayer, a Minnesota-based company, did not pay sales tax on the equipment when it was purchased; the Department of Revenue subsequently assessed use tax on the depreciated value of the equipment when brought into South Dakota. The taxpayer objected to the imposition of the tax, arguing that some of the equipment at issue was used in South Dakota for one day only. The taxpayer subsequently filed suit alleging that imposition of the use tax violated the Commerce Clause because the tax was disproportionate to the taxpayer’s activity in South Dakota. The taxpayer also made a Due Process Clause argument, but the court noted that the Supreme Court has held that the Complete Auto test “encompasses due process standards.” In addressing the taxpayer’s constitutional challenges under the Commerce Clause, the court applied the four-part test set forth in Complete Auto.  The taxpayer agreed that two of the prongs of the test were not at issue. The taxpayer had nexus with the state, and the imposition of use tax did not discriminate against interstate commerce. However, the taxpayer asserted that the tax was not fairly related to any benefit it experienced because the equipment was used in South Dakota for a short period only. In other words, the taxpayer asserted it did not receive commensurate value for the tax it paid. The court disagreed, noting that the taxpayer enjoyed the same benefits as any other person or business present in the state. And, having paid the use tax on its equipment that had otherwise not been subject to sales or use tax in another state, the taxpayer was able to bring the equipment back to work on jobs in South Dakota where it would continue to enjoy the privilege of conducting its business without being subject to additional use tax.  The taxpayer also made a fair apportionment argument that the imposition use tax offended the external consistency test, which asks whether the state has taxed only the portion of the revenues from the interstate activity that reasonably reflects the in-state component of the activity being taxed. In the taxpayer’s view, the use tax was unreasonable because 90 percent of its activities occurred outside the state. The court observed that the taxpayer’s concept of external consistency appeared to mean that tax should be applied only when the property has come to rest in South Dakota, with “at rest” meaning that the property is in the state relatively permanently.  However, the taxpayer had not identified any authority to support its view of “at rest,” and what the court gleaned from other authorities was that tangible personal property is at rest when it is used and is no longer in transit through interstate commerce. The court also observed that the taxpayer’s challenge was to the constitutionality of the use tax statute, not whether the statutory text should be applied in a different manner. In conclusion, the court dismissed the taxpayer’s constitutional claims. Please contact Nicole Kirk with questions on Ellingson Drainage, Inc. v. South Dakota Dep’t of Rev. 

Delaware: Businesses May Receive an Invitation to Participate in Unclaimed Property VDA

The Delaware Secretary of State’s Office (Secretary) has confirmed that on or around February 23, 2024, it will be mailing letters to companies inviting them to join the state’s Unclaimed Property Voluntary Disclosure Agreement (VDA) Program. A second mailing will be sent on or around July 26, 2024. Companies that do not respond and enroll in the VDA Program within 90 days of the date of the letter will be referred to Delaware’s Department of Finance for audit. As such, it is imperative that companies be on the lookout for these mailings and respond in a timely manner.

Background

The VDA invitation letters are usually addressed to a company’s Chief Financial Officer or other high-level executive and can be easily overlooked. Companies at risk of receiving this outreach have historically ranged from middle-market companies through Fortune 100 companies, both privately and publicly held, across a wide range of industries including oil and gas, retail, banking, utilities, technology, media, healthcare, manufacturing, pharmaceutical, and consumer products. Companies that do not file unclaimed property reports, have not recently been audited by Delaware for unclaimed property, and/or have not recently completed a VDA with the state should be on heightened alert.

Further, we have observed a marked increase in the receipt of audit notices and other state correspondence by companies that either (A) have a long filing history but may have made recent acquisitions that caused them to acquire liabilities, (B) have inadvertently excluded certain categories of property typical of their industries, or (C) companies that have formed within the last ten years but have experienced growth that has outpaced their compliance programs (e.g., start-ups that have recently gone public, software-as-a-service companies, and companies with online and transient customer bases such as payment processers and online marketplaces). While many of these companies may believe they have minimal unclaimed property exposure, providing records for the entire VDA lookback period and completing the program is often challenging.

In both unclaimed property audits and the VDA Program, Delaware law requires a look-back period of 10 report years, plus the 5-year dormancy period for most property types, which equates to a 15-year transactional review period. With many companies unable to readily produce complete accounting records for the entire lookback period due to constraints like system limitations and record retention policies, both types of reviews can be challenging. Further, Delaware law authorizes the use of an estimate to account for periods in the review where complete books and records are not available. In many instances, there is a risk that estimation (a liability typically not already accounted for on a company’s balance sheet) may be necessary.

Considerations for Businesses Receiving an Invitation Letter & Benefits of the VDA Program

While both programs share the same lookback period, there are significant benefits to enrolling in the VDA Program versus being selected for audit, which include but are not limited to:

•       Waiver of Delaware’s statutory penalties and interest charges. All penalties and interest are waived for companies that complete the VDA Program in good faith. By contrast, the State Escheator’s authority to waive penalties and interest for companies under audit is limited. For audits authorized on or after August 1, 2021, a 20 percent assessment of interest on past due property uncovered (including estimated amounts) is now considered “un-waivable,” unless a company elects participation in an “expedited audit” option, which contains its own risks and an “un-waivable” one percent interest assessment.

•       More favorable review criteria. A 90-day aging criteria for voided disbursement checks applies under the VDA Program, while a normal audit uses a 30-day period and presumes that all checks voided more than 30 days after issuance are unclaimed property liabilities unless the company under audit can prove otherwise. This can provide a substantial benefit in terms of reduction of volume of checks requiring review, as well as the associated dollars of potential exposure.

•       Control over the process. Under the VDA Program, a company is allowed to perform a “self-review” of its own records to identify and remediate areas of exposure. This contrasts with a standard audit in which third-party auditors will review all records and entities that they determine are “in-scope,” can require extensive supporting documentation to support any claims that assessed items are not unclaimed property liabilities, and can calculate their own assessments of liability that must then be refuted by the company under audit.

•       Limited options. As previously noted, businesses that do not enroll in the VDA Program may be selected for audit by Delaware’s Department of Finance and State Escheator. For audits authorized after August 1, 2021, businesses may request an “expedited” audit program. Considerations related to the “expedited” audit program include:

•        Expedited audit requests by businesses are granted or denied at the sole discretion of the State Escheator within 60 days of the request. If accepted, a holder must provide “sufficient responses” to auditor requests within prescribed timeframes generally following an 18-month timeline. If a holder provides sufficient responses during the expedited audit, the Escheator must provide an audit report within two years, as compared to historical audits that have typically taken three to five years (or more) to complete.

•        The State Escheator cannot waive the 20 percent assessment of interest on past due property for audits authorized on or after August 1, 2021. However, if a business elects to resolve an examination through the expedited audit process, it may only be subject to a reduced one percent interest assessment.²

KPMG Observations

Holders of unclaimed property that receive audit notices from Delaware are often companies that did not respond to an invitation to participate in Delaware’s VDA Program or were undergoing a multi-state unclaimed property audit. Delaware’s unclaimed property law allows the state to initiate audits of companies without first sending a VDA invitation if (A) an audit was initiated by another state, (B) the company applied for or entered into a VDA with Delaware prior to June 30, 2012, or (C) the company enrolled but later withdrew from Delaware’s VDA program on its own or was removed from the program due to not working in good faith to complete the program.

There are many companies receiving audit notices right now that did not respond to VDA invitation mailings in previous months. Companies receiving audit notices should consider the following:

•       Securing a non-disclosure agreement with Delaware or—most often—the third-party audit firm conducting the audit on behalf of multiple states, prior to disclosing any information to the auditor.

•       Requesting a list of states invited to participate in the audit—as well as copies of all state audit notices sent—from the third-party audit firm conducting the audit to confirm the auditor is indeed authorized to be conducting the audit on behalf of the state.

•       How the company’s fact pattern may limit the scope of the audit (e.g., entities divested via stock acquisition, entities that underwent bankruptcies, etc.) and whether the auditors are entitled to receive all information being requested (e.g., data requests extending beyond the lookback periods employed by the states, etc.).

•       The periods for which records are available and/or researchable, which will be important as the auditors will use certain “base years” to develop error ratios for the calculation of potential estimated assessments for the state(s) of incorporation participating in the audit.

Companies that receive a VDA invitation letter, a compliance review notice, or an unclaimed property audit notice from Delaware or other states must evaluate next steps and risk areas related to unclaimed property non-compliance. Additionally, companies that are incorporated in Delaware but are not in compliance and have not yet received an invitation should proactively assess their overall compliance with unclaimed property requirements and consider enrolling in Delaware’s unclaimed property VDA Program.

Contacts

For more information, contact a member of KPMG’s National Unclaimed Property Team:

Will King | +1 (214) 840-6107 | williamking@kpmg.com

Marion Acord | +1 (404) 222-3053 | marionacord@kpmg.com

Ryan Hagerty | +1 (267) 256-3389 | rhagerty@kpmg.com