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New York gets tough(er): Tax enforcement actions, fraud detection and license suspension, oh my!

Through a multifaceted approach, New York Gov. Cuomo and the New York Department of Taxation (Department) have increased tax collection efforts, penalties and criminal prosecution all in the name of collecting what is owed. New York is not alone in ramping up its efforts, as the trend in most states has been to increase tax collection efforts.

Enforcement actions, audit and collections

According to an announcement by Gov. Cuomo this week, the Department collected $3.9 billion in the past year through its wide array of tax enforcement programs. The $3.9 billion in evaded taxes collected is an increase of approximately $200 million over the amount collected last year. According to the announcement, 96 percent of the $87 billion in state and local taxes collected by the Department was voluntarily remitted. The enforcement programs were responsible for collecting the remaining four percent.

The $3.9 billion collected breaks down in large part as follows:

  • $1.75 billion from criminal investigations and audits. The Department’s Criminal Investigations Division often works closely with federal and local law enforcement in these actions.
  • $1.65 billion from collection activities. These activities include working with taxpayers to resolve tax debt through settlement or payment in full, entering into payment arrangements, and garnishing wages and/or seizing financial assets.

  • $413 million in additional savings due to stopping payment on approximately 255,000 fraudulently filed or erroneously calculated refunds.

  • $100 million due to a new requirement that taxpayers confirm their eligibility for the Basic Star exemption (relating to school district taxes).

  • $56.4 million in collections resulting from the state’s new driver’s license suspension law.

Tax fraud crackdown

In a separate release, the Department touted the results of its efforts to reduce fraudulent or inaccurate claims for tax refunds. In 2013 alone, the Department claims to have stopped 255,000 fraudulent and erroneous tax refunds, totaling more than $413 million. In 2014, the Department has already identified $287 million in questionable refunds.

The Department has accomplished this heighted level of fraud detection by utilizing a combination of technology and highly trained staff to review every return. The Department claims that of the roughly 10 million returns it receives each year, hundreds of thousands claim questionable refunds. The Department’s program was recognized with the Outstanding Technology Award from the Federation of Tax Administrators and has the potential to become a model for other states.

Driver’s license suspension for delinquent taxes

Last month, Gov. Cuomo announced that nearly 9,000 New Yorkers had their driver’s licenses suspended as a result of legislation signed into law last year, which allowed the Department to work with the New York State Department of Motor Vehicles to suspend the driver’s license of taxpayers who have delinquent tax liabilities to New York State in an amount equal to, or greater than, $10,000. As a result of the law, many delinquent taxpayers came forward to settle their tax debts.

In August 2013, more than 17,700 drivers were contacted by the Department, which also resulted in 6,500 tax debtors making payments or paying in full their tax debt. The Department told drivers with more than $10,000 in back taxes to settle their debt or face losing their driving privileges.

Ohio: A leader in local tax complexity

Ohio has long claimed the dubious distinction of being the state with the most complex local tax regime. According to the Columbus Dispatch, Ohio has more than 600 taxing jurisdictions which employ a total of more than 300 income tax return forms. No other state allows nearly as much local autonomy, diversity or complexity in tax administration due simply to the sheer abundance of independent tax jurisdictions. Ohioans are especially aware of this issue this week with filing deadlines falling on April 15. For Ohioans who work in a city different than their city of residence, most were required to file returns and pay income taxes in at least two municipalities.

The Ohio General Assembly has the power to rectify the local tax situation, however, none of its actions to date have gone far enough. Nonetheless, the issues Ohioans face today have frustrated taxpayers (and ambitious lawmakers alike) for many decades.

The 1965 Ohio Supreme Court decision of Thompson v. Cincinnati, 2 Ohio St.2d 292, which is still valid today, summarily outlines the problem and the solution. As the court stated in 1965, “[t]he General Assembly may pass laws providing for the taxation of incomes[.]...However, until the state enters the field of income taxation as authorized by the Ohio Constitution, municipalities have within their general power of taxation the power to tax incomes.” 2 Ohio St.2d at 295 (emphasis in original). Under Section 13, Article XVIII and Section 6, Article XIII of the Ohio Constitution, the General Assembly may pass laws limiting the municipalities’ power to levy taxes for local purposes and may restrict the municipalities’ power of taxation so as to prevent the abuse of such power. The court further noted that both judicial precedent at that time and the constitution “clearly indicate that a municipality has the power to tax incomes subject to all lawful restraints imposed by the General Assembly.” Thompson, 2 Ohio St.2d at 295-96.

While Chapter 718 of the Ohio Revised Code does impose some restrictions on what and how a municipality may tax income, it does not go nearly far enough to place Ohioans on par with other states concerning local income tax complexity. Ohio remains on an entirely different spectrum than the rest of the country. In fact, individuals and businesses alike in Ohio are often responsible for multiple local tax returns, often filing in jurisdictions where they are unable to vote or have any say in how the locality taxes them.

In Thompson, the court addressed the following question: Can the City of Loveland levy an income tax on the wages of a resident, where such wages result from employment within another municipality and are subject to an income tax in that other municipality? The taxpayer in Thompson argued that to impose two municipal income taxes upon his wages was discriminatory. The taxpayer reasoned that the municipal tax was discriminatory because residents of Loveland who work in Cincinnati (which was the case of the taxpayer) are subject to two taxes. Conversely, residents of Cincinnati who work in Loveland are subject to only one municipal income tax. The difference in taxation was the result of Cincinnati’s allowance of a tax deduction for all of its residents who must pay an income tax on their wages from work performed outside the city, while Loveland did not have such a deduction.

Fortunately, Ohio lawmakers have recently revisited the issue of simplifying the state’s local tax regime. The Multistate Tax Update previously covered H.B. 5, a bill that seeks to cut through much of the complexity and push the state’s localities in the direction of uniformity. While this is not the first time simplification has been approached in either House of the General Assembly, it is our hope at the Multistate Tax Update that meaningful discourse in this area continues to ensue and that a simple and elegant solution is passed. In the meantime, we are here to help with any local tax issue that may arise for your business.

Indiana: No income tax nexus for out-of-state wholesaler

In a Letter of Findings (02-20130167.LOF), the Indiana Department of Revenue (Department) found that an out-of-state wireless communications equipment wholesaler (Taxpayer) did not have nexus for state income tax purposes because its activities in Indiana were protected by Public Law 86-272. Public Law 86-272 prohibits states from imposing a net income tax on a foreign taxpayer if the foreign (i.e., out-of-state) taxpayer’s only business activity within that state is the mere solicitation of sales.

The Taxpayer filed its first Indiana sales tax returns and payroll withholding tax return in 2005, but did not file a state income tax return until 2009. During an audit the Department initially determined the Taxpayer had income tax nexus, based on the limited information the Taxpayer provided. The Taxpayer protested the imposition of state income taxes for the tax years 2005 through 2008 and argued its activities were protected by Public Law 86-272.

The Department evaluated the totality of the Indiana business activities of the Taxpayer to determine whether such activities were protected by Public Law 86-272. During the audit period, the Taxpayer’s in-state activities were limited to shipping products from its Illinois distribution center to customers in Indiana via common carrier and employing one sales employee who sometimes worked out of a home office located in Indiana when he was not travelling on out-of-state sales calls. The Indiana sales employee's target customers were located solely outside the state. The Indiana sales employee only solicited orders for products, not any services provided by the Taxpayer. All orders were approved and fulfilled out-of-state.

The Department determined the Taxpayer presented sufficient documentation to establish that during the audit period, its Indiana business activities either related to the solicitation of orders or were non-solicitous activities that did not rise above a de minimis level, and consequently were protected by Public Law 86-272. Therefore, the Department concluded the Taxpayer did not have income tax nexus with Indiana during the audit period.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall

Susan Millradt McGlone

Jeremy J. Schirra

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.