New York Tax Insights, Volume 5, Issue 1, January 2014

Author:Mr Irwin Slomka, Amy F. Nogid, Hollis L. Hyans and Kara M. Kraman
Profession:Morrison & Foerster LLP


By Irwin M. Slomka

The New Year 2014 is now upon us, and this is the time of year for "Top 10" lists. We now look back with our own list of the Top 10 New York tax highlights of 2013.

U.S. Supreme Court lets stand the Court of Appeals decision upholding the New York "Amazon" law. In what for now is the final word on New York's controversial "click-through" nexus law enacted in 2008, the United States Supreme Court declined to hear a facial constitutionality challenge brought by Internet sellers Amazon and Overstock., Inc. v. N.Y.S. Dep't of Taxation & Fin., No. 13-252 (Dec. 2, 2013); Amazon. com LLC v. N.Y.S. Dep't of Taxation & Fin., No. 13-259 (Dec. 2, 2013). Earlier in 2013, the New York Court of Appeals upheld the law, which creates a presumption of nexus in New York for sales tax purposes based on an out-of-state vendor's compensation arrangement with in-State residents for referrals of potential customers through a link on the resident's web site. The New York law has spawned similar laws throughout the United States, and the Supreme Court's refusal to hear the appeal, while having no legal significance on the merits, will likely encourage even more states to do the same. The next battle will be over whether Congress enacts federal legislation (currently known as the "Marketplace Fairness Act") that requires all but the smallest Internet retailers to collect sales tax. For now, however, what was once a "bright line" test for sales tax collection nexus under National Bellas Hess and Quill has become a lot blurrier. Governor Cuomo's Tax Reform Commission issues long-awaited report. In November 2013, New York Governor Cuomo's Tax Reform Commission, appointed in late 2012, submitted its report of recommendations for changes to the State's tax system and administration. The commission's mandate was to make a "revenue neutral" set of recommendations to reform the New York tax system. The report turned out to be fairly comprehensive, consisting of five "packages" of suggestions, covering sales tax, estate tax, corporate tax, real property tax and tax simplification. It provided the Governor with a broad-based "menu" of options, and it appears likely that the Governor will include at least some of those recommendations in his upcoming Budget Bill for the State's 2014-15 fiscal year. In December 2013, the Governor's other tax commission - the New York State Tax Relief Commission, formed just two months earlier — released its own report that contained just a few targeted tax relief proposals, none of which involved reducing New York's high personal income tax rates. Qui tam action allowed to continue against Sprint Nextel. A July 2013 decision served to confirm taxpayer concerns over the far-reaching consequences of the 2010 legislative expansion of the New York False Claims Act to include private whistleblower qui tam tax actions State of New York v. Sprint Nextel Corp., et al., 970 N.Y.S.2d.164 (N.Y. Sup. Ct., N.Y. County 2013). In this decision, a New York State Supreme Court judge ruled that State Attorney General Schneiderman could proceed with a $100 million lawsuit against Sprint Nextel for its alleged failure to collect sales tax on certain wireless calling plans. The suit, which began as a qui tam action filed by an unnamed whistleblower but has now been taken over by the Attorney General, is the first tax action brought under the New York False Claims Act. There remain deep concerns over the law, which subjects taxpayers that may have taken good faith filing positions, to potentially aggressive qui tam actions outside the normal course of established tax audit procedures, in a public record judicial proceeding, and without the normal protections of tax secrecy. By allowing the AG to proceed with the action against Sprint Nextel, the decision is a foreboding of what future tax administration may look like for some businesses, unless the False Claims Act is amended. In that regard, State v. Sprint Nextel, although still in its early stages, may be one of the most important cases to watch in 2014. Knowledge Learning decision raises questions about the ability to justify combination through actual distortion. One of the more problematic developments in recent years stems from the State Tax Department's efforts to decombine corporate filers under Article 9-A, where there are no substantial intercorporate transactions. Such decombination is sometimes pursued even where the same group has filed on a combined basis for many years. In the first decision issued by the Division of Tax Appeals interpreting the post- 2007 combined return law, an ALJ held that under the facts presented the corporate affiliates could not file combined returns. Matter of Knowledge Learning Corp., et al., DTA Nos. 823962 & 823963 (N.Y.S. Div. of Tax App., June 27, 2013). But it was the ALJ's response in a footnote to what she referred to as the taxpayer's "alternative argument" regarding actual distortion ("distortion is not the proper analysis in light of the 2007 statutory amendment") that generated the most controversy. Since the 2007 statutory amendments principally changed the law regarding the presumption of distortion, and did not change the law on actual distortion, the State Tribunal will undoubtedly be asked to clarify whether actual distortion continues to be a basis for combination, whether it is being advanced by the Department or by a taxpayer. New York courts uphold constitutionality of MTA Payroll Tax. Perhaps few were surprised this past June when the Appellate Division reversed a lower court decision and upheld the constitutionality of the MTA payroll tax in the face of an action by Nassau County claiming that the law was invalidly enacted without a "home rule" message. In October 2013, the Court of Appeals dismissed the appeal on the grounds that no constitutional issue was involved. Mangano v. Silver, et al., 107 A.D.3d 956 (2d Dep't 2013), appeal dismissed, 22 N.Y.3d 892 (2013). The Appellate Division, Third Department, has now rejected a separate challenge, this one brought by Rockland County, which claimed that the county did not receive MTA transit services commensurate with the tax being imposed...

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