TWIST - This Week in State Tax

New Jersey: Court Rejects Challenge to Sales Tax Refund Claim Regulations

In two recent decisions, the New Jersey Superior Court addressed challenges to the regulations governing the requirements needed to substantiate sales and use tax refund claims. For instance, the taxpayers objected to the requirement that a taxpayer provide bank statements if payments were made electronically and asserted that the regulatory requirement that refund claims with 25 or more transactions be submitted with a spreadsheet did not conform to modern business practices. The taxpayers were affiliates that filed refund claims with the Division of Taxation for certain sales and use taxes paid on manufacturing equipment, repair parts, and supplies used in the production of chemicals. The Division denied most of the requested refunds because it could not determine that sales tax was actually paid to vendors, or that use tax was accrued and remitted. Part of the issue was that the taxpayer accrued use tax on certain items and then took credits against the accrued tax before it was remitted. The Division could not reconcile the transactions in the refund claim against those for which a “self-help” credit may have been taken. Ultimately, the Division denied most of the refunds. The taxpayer protested, and the matter went to the tax court. The tax court concluded the Division properly denied the refunds, and the taxpayers appealed.

On appeal, the taxpayers challenged the regulations on the basis that they limited the types of proof that could be presented to support a refund claim and were arbitrary and capricious because they unreasonably “restricted taxpayers” ability to prove that tax was erroneously collected or paid. For example, N.J.A.C. 18:2-5.8(d)(3)(i), states that a sales tax refund claim form “must be” filed with certain “documents, such as invoices, receipts, proof of payment of tax, and exemption certificates. The taxpayers argued that the regulation's use of the word “must” was unduly restrictive. Similarly, the regulation stated that the Division “will” accept cancelled checks as proof of payment, and the taxpayer argued this limited them to providing cancelled checks. The court rejected the taxpayer’s arguments, noting that the statute was silent as to the documentation requirements for refund claims; therefore, the regulations did not exceed the scope of the statute. Further, the statute empowered the Director of the Division of Taxation to adopt regulations addressing the evidence required. The court further rejected the taxpayers’ arguments that the regulations should be invalidated because they do not comport with modern business practices or promote uniform remedies and procedures for refunds. The regulations, the court found, were flexible and expressly permitted a taxpayer to submit “alternative proof.” A review of the record showed that the refunds at issue were denied because of the insufficiency of the proof provided and the fact that the taxpayers failed to reconcile their use tax accruals to their use tax remittances. Please contact Steve Carlozzi with questions on Solvay Specialty Polymers, LLC v. Director, Division of Taxation; Solvay Solexis, Inc. v.  Director, Division of Taxation. 

Washington: Taxpayer Owes B&O on Reimbursements

A Washington court of appeals recently addressed whether amounts paid to one party under a purported joint venture were subject to B&O tax. The parties at issue were beer and wine distributors that entered into an agreement under which the beer distributor agreed to provide services to the wine distributor. Per their agreement, the beer distributor providing the services (including the sale and marketing of wine, warehousing and delivery and administrative services) was entitled to receive reimbursements for the costs incurred. The payments ranged from $36 to $85 million, depending on the tax year. Following an audit, the Department of Revenue determined that B&O tax was owed by the beer distributor on the reimbursed amounts under the B&O’s service and other classification. The two tax assessments totaled almost $9 million. The beer distributor taxpayer argued that the payments it received were reimbursements for the wine distributor’s share of the expenses of a joint venture that were not subject to B&O tax.

Under B&O law, a taxpayer owes tax on all income received from the rendition of services, unless an exemption or deduction applies. There was no relevant exemption or deduction in this instance, and the court concluded that the reimbursed amounts were “gross income” of the taxpayer’s business received as compensation for services rendered. The court rejected the taxpayer’s classification of the payments as expense reimbursements, noting that the agreements expressly and repeatedly referred to the services provided by the taxpayer for the benefit of both businesses. “No amount of legal or financial gymnastics can remove those reimbursement payments from the expansive reach of Washington’s B&O tax statutes.”  The court determined that, even if a joint venture existed, the payments at issue were subject to the B&O tax. As such, it did not address whether the agreement between the parties was a contract for services or formed a joint venture. Please contact Michele Baisler with questions on Coho Distributing LLC v. Washington State Department of Revenue.

Wisconsin: Commission Addresses Use of Pre-Combined Reporting NOLs

The Wisconsin Tax Appeals Commission recently addressed whether certain losses incurred in years before Wisconsin moved to combined reporting beginning with the 2009 tax year could be shared with new combined group members. More specifically, the legal issue in the case was whether pre-2009 net business losses (NBLs) incurred by entities that were members of a combined reporting group beginning in 2009 could be shared with members of a new combined group when the entities incurring the NBLs left the former combined group and joined a new combined group. The Department of Revenue argued that entities that have NBLs on their books while they are members of a combined group are prohibited from sharing such losses with members of a new combined group, regardless of when the losses were incurred. The Department’s position was supported by Wis. Admin. Code §Tax 2.61(9)(e). This administrative rule allows a departing member of a combined group to share its pre-2009 NBL carry-forward with another corporation if both entities departed the combined group at the same time and either 1) formed a new combined group, or 2) together joined an existing combined group. In those two scenarios, such businesses can share their remaining sharable NBL carry-forwards attributable to the former combined group only with one another, not with other businesses associated with the new combined group. The taxpayer’s position was that this administrative rule was applicable to only post-combined reporting NBLs and did not apply to limit NBLs generated before combined reporting was implemented.  The Commission disagreed, finding that the rule applied to both pre- and post-combined reporting NBLs. The taxpayer further supported its position based on a statute providing that if a corporation is no longer included in the “combined group …, the corporation's pre-2009 net business loss carry-forward shall be available only to that corporation.” The taxpayer argued that this language restricted the use of NBLs by other members of the combined group which the corporation has left. The Department argued that language restricted the use of NBLs by the corporation that left the group. Since NBLs are tracked and carried forward separately by each group member and essentially belong to each individual member, the Commission determined that the taxpayer’s position made the statutory language a nullity, which was to be avoided: former group members could never use a departed member's NBL carryforward as they would have no tax documentation regarding the amount of NBL available. The Commission concluded that the NBLs at issue could not be shared with new combined group members. Please contact Brad Wilhelmson with questions on Lincare Holdings, Inc. v. Wisconsin Department of Revenue.