Multistate Tax Update: October 8, 2015
Washington: Out-of-state trailer manufacturer subject to Business & Occupation tax
The Washington Department of Revenue (WADOR) has issued a Determination concluding that an out-of-state manufacturer is subject to the state’s Business & Occupation (B&O) tax because of its relationship with an independent, commissioned sales representative.
The Taxpayer is an out-of-state trailer manufacturer that sells its products to dealers. They, in turn, sell the trailers at retail to the end-users. The Taxpayer does not have a traditional physical presence, such as inventory, equipment, office or warehouse space, or the like, in-state.
In 1998, the Taxpayer hired an independent sales representative (Representative), based outside of Washington, to handle its sales. To this end, the Representative promotes the products via contact with potential and existing customers telephonically or in writing. The Representative works on a commission basis, earning a percentage of the sales he generates.
In 2007, the Representative formed a delivery company and purchased a vehicle from the Taxpayer’s principal shareholder. The Taxpayer’s logo remained on the truck after the sale. The delivery company contacted the Taxpayer’s customers to solicit business for itself, independent of its relationship with the Taxpayer as a sales representative. Also during 2007, the delivery company began delivering trailers in Washington on behalf of the Taxpayer. The Taxpayer’s customers could choose to utilize the delivery company or a third party firm for their trailer deliveries. Prior to the formation of the delivery company, the Taxpayer’s customers used third party firms.
In 2013, an employee of the WADOR noticed a delivery truck with the Taxpayer’s logo hauling trailers in Washington. This triggered the investigation into whether the Taxpayer had a sufficient physical relationship with the state to subject it to the contested B & O taxes. Concluding that the Taxpayer had created such nexus, the WADOR assessed tax, along with interest and penalties, for the four and one-half year period between January 1, 2009, and June 30, 2013. The Taxpayer appealed.
- The basis of the Taxpayer’s appeal was the following:The Representative did not visit Washington on the Taxpayer’s behalf;
- The majority of the Taxpayer’s customers were established before the Representative joined Taxpayer;
- The delivery company was an agent of the Taxpayer’s customers, not the Taxpayer; and
- The Representative, via the delivery company, took possession of the trailers outside of Washington before delivering them inside Washington.
The B&O tax and nexus
Washington levies its B&O tax on “every person that has a substantial nexus with this state a tax for the act or privilege of engaging in business activities.” The Determination explains that the B&O tax applies to inbound sales of personal property under certain circumstances, such as when the goods are received in-state, and the seller has nexus. In order for the B&O tax to apply to a particular sale, there must be both the receipt of the goods in Washington by the purchaser and the seller must have nexus.
A company has nexus when its activities are significantly associated with its ability to establish and maintain a market in Washington for its sales. Either physical presence in Washington or periodic visits can establish nexus. Accordingly, nexus can be established through employees’ or independent contractors’ continuous presence in the state or their periodic visits.
The WADOR concluded that the evidence, including statements from numerous Taxpayer’s customers, revealed that the “Taxpayer sends the Representative into this state to visit its customers and at least maintain its customer relations and answer questions.” Such activities are designed to ensure that the Taxpayer keeps its Washington customers, even if it is not necessarily there to directly solicit sales.
As for the delivery company that the Representative formed, the fact that the Taxpayer’s logo is on the truck is “another way in which [the] Taxpayer’s Washington market is being maintained or established through the Representative’s activities in Washington.” In addition, there was no evidence that the delivery company, or another third party delivery firm, accepted the trailers on the Washington retailers’ behalfoutside of Washington, had the authority to do so, or even inspected the trailers out-of-state.
Finally, the arrangement in which the Representative played a dual role as both a sales representative and a delivery agent cast doubt on whether the Representative actually could accept or reject the goods out-of-state.
For all these reasons, the WADOR concluded that the Taxpayer delivered its trailers into Washington, where its customers received the products. The WADOR thus denied the Taxpayer’s appeal and upheld the imposition of the B&O tax and related fines and penalties.
Massachusetts: Council approves 13 new projects for the Economic Development Incentive Program
In late September, the Economic Assistance Coordinating Council (EACC) granted tax incentives to 13 new projects under the state’sEconomic Development Incentive Program (EDIP). The 13 projects, covering a wide variety of sectors, are expected to create 717 new jobs and retain 935 existing jobs throughout Massachusetts, while leveraging approximately $172.6 million in private investment.
The EDIP awards the state and local tax incentives in exchange for job creation, job retention, and private investment commitments. These, in turn, stimulate business growth throughout the Commonwealth.
Governor Baker announced the projects in a press release, declaring that “[e]xpansion and hiring incentives are a cost-effective part of our push to make Massachusetts business friendly, and to catalyze significant, sustained economic growth across the Commonwealth.”
One high profile endeavor is the $2.5 million tax incentive package awarded to International Business Machines (IBM), which is headquartered in Armonk, New York. The plan includes locating a 165,000 sq. ft. facility in Cambridge, to house the firm’s Watson Health business unit. This unit is purposed in creating “a more complete and individualized system for personal health, powered by cognitive computing, [which] empowers individuals to understand more about their health, while allowing doctors, researchers, and insurers to make better, faster, more cost effective decisions.” On an expected investment of $51 million, IBM anticipates creating 500 new jobs with an average salary of $141,000.
Other projects include the following:
Somerset Industries Inc., in Lowell: Somerset Industries designs and manufactures professional grade bakery equipment for the food service industry. The 10-year tax incentive financing agreement (TIF), for $81,000, will finance the company’s relocation to Lowell, enabling the rapid expansion of their operation. Plans include making a $4 million private investment and increasing employee headcount by 18, bringing the total workforce to 58. In addition, the EACC Board approved $225,000 of EDIP investment tax credits, contingent upon a favorable vote on the TIF by the City of Lowell.
Friendly Fruit, Inc., doing business as Sid Wainer & Son, New Bedford: This firm supplies specialty produce to over 30,000 restaurants, hotels, gourmet shops, retailers, and caterers around the world. It plans to expand its existing 125,000 sq. ft. facility by 55,000 sq. ft. Friendly Fruit sought a 5-year Special Tax Assessment for the existing building, valued at $523,000, and a 10-year TIF on the new addition, valued at $270,000.
In return, the company intends to create 10 new jobs while retaining 351 existing employees and making an $11 million private investment. The EACC Board awarded $75,000 in EDIP investment tax credits contingent upon a favorable vote on the TIF by the city of New Bedford.
Darn It!, Inc. / 88-90 Hatch Street, also in New Bedford: Darn It! offers outsourcing services, like garment re-work, shoe storage, toy inspection, apparel laundering, spot cleaning, and post-production repair, warehousing, and distribution services, among other things. Its customers include global retailers, catalogue companies, manufacturers, and wholesalers.
By way of its own $800,000 investment, Darn It! plans to renovate 30,000 sq. ft. of currently vacant space, and is also purchasing a partially leased building. It intends to retain all 30 existing tenants, and create at least 15 more units for small businesses and artist studios. At issue was a $64,000 Special Tax Agreement to be voted on by the City of New Bedford.
Globus Medical, Inc., in Methuen: Globus is a medical device company focused on products that promote healing in patients with musculoskeletal disorders, such as fibromyalgia, carpal tunnel syndrome, and sciatic pain. Globus recently acquired property for its research and development, manufacturing, and distribution needs. The new facility will house the company's Robotics, Imaging, and Navigation Division. The latter is currently working on the development of a surgical robotic positioning system.
This project will result in the creation of 20 new positions, retention of 26 existing jobs, and a private investment of $8.7 million. The City of Methuen approved a TIF of approximately $206,000.
New England Die Cutting, Inc., also in Methuen: The company provides gaskets manufactured by conventional die cutting, laser cutting, and water-jet cutting, and seals, to the military and medical industries. It plans to privately invest $5.4 million, add 13 new employees, and retain 31 existing employees.
With its move to a state-of-the-art facility of 101,000 sq. ft. in Methuen, the firm will be able to expand by 15 percent annually. The city of Methuen awarded the company a TIF agreement valued at approximately $98,000.
The Boston Globe revealed that some criticized the IBM project. Cambridge’s “high tech-hotbed” in which IBM will locate is known as the “single most expensive office market on the East Coast outside of Manhattan.” Despite the cost, a senior research analyst at the Lincoln Institute of Land Policy in Cambridge suggested that IBM would have chosen the location without the tax incentives, so the incentives did nothing but create “a windfall for the company that most businesses are not in a position to receive.”
But a research director at the Pioneer Institute thought that incentives like the one IBM received “can be effective in the context of national competitions… [i]f this was a key element in convincing IBM to locate in Kendall Square, then it’s not a bad thing to do.”
Colorado: Taxpayer Bill of Rights Law requires refund despite expected shortfall
Colorado’s economy is strong and resilient
In 2013 and 2014, Colorado had one of the fastest growing economies in the nation; employment, wages and salary income were expanding, and the housing market improved. Part of this vigor came from oil and gas development, though lower oil prices caused firms in this sector to back off on their investment and development activities in 2015. This led to a reduction in employment, which the state as a whole is tolerating because of its diverse economy, and the underlying strength in other areas. Overall, economists expect Colorado’s economy to continue its upward trajectory.
Tax Refund triggers
Colorado has a Taxpayer Bill of Rights (TBOR) law that can produce quirky results. In theory, TBOR is designed to limit a state’s annual revenues or spending to certain inflation and population metrics, according to the Center on Budget and Policy Priorities. Any revenue that the state receives above the inflation/population computation triggers a Taxpayer refund.
The surplus revenue received from the tax on marijuana is one example of a TBOR payback. As we explained a month ago, these revenues have been sufficiently high in Colorado to require a TBOR based Taxpayer refund, unless voters approve of a ballot measure that would allow the state to keep the excess revenues. Governor Hickenlooper approved of the ballot question in early June.
Now, the TBOR has produced another quirky situation in which the state will likely owe Taxpayers a refund despite an expected budget shortfall at the end of fiscal year 2016. In the September 21, 2015, Economic and Revenue Forecast, the Colorado Legislative Council revealed that fiscal year 2014-15’s general fund had a surplus of $65.5 million above the required amount to fund the budget and satisfy the reserve requirement, prompting a $153 million TBOR refund, of which $85.7 million will flow back to Taxpayers by way of the Earned Income Tax Credit, and $67.9 million via a sales tax refund on individual income tax returns filed for tax year 2015.
However, in fiscal year 2015-16, General Fund revenue is expected to be $220.4 million, or 2.1 percent lower than the required amount to fund the budget and fulfill the reserve mandate. Thus, even though economists expect a shortfall next year, Colorado will be required to issue the refund on this year’s windfall.
In reporting on this “financial contradiction,” the Denver Post quoted lawmakers who warned that “pretty significant cuts” are in store for the next year. Governor Hickenlooper’s office predicted that it would take $338 million to maintain education spending at current levels.
One of the democratic budget writers lamented the situation, characterizing it as “confounding that tax refunds will be issued when we still do not have the ability to properly fund our public schools.” However, one of the Republican budget writers cheered, claiming that his “voters are happy with the fact they are getting refunds."