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Michigan: Law reforms corporate officer and business purchaser’s liability for unpaid taxes

On Feb. 6, 2014, Michigan Governor Rick Snyder signed legislation (Senate Bill 337), which reforms corporate officer and business purchaser’s liability for unpaid taxes and improves the efficiency of the tax auditing and refund processes.

Michigan’s corporate officer liability law

Michigan’s previous corporate officer liability law provided that any officer, member, manager, or partner, who the Michigan Treasury Department (Department) determines has control or supervision of, or responsibility for, making the returns or payments is personally liable if the business does not file such returns or make such payments.

The new law addresses concerns that officers who did not hold a position of responsibility or were not at the business when the liability was incurred were being left with personal liability when former officers who were in charge or responsible at the time the liability was incurred left the company. The new law solves this problem by adding a definition of “responsible person” for purposes of liability for a business’ unfiled returns or unpaid taxes to include only “an officer, member, manager of a manager-managed limited liability company, or partner for the business who controlled, supervised, or was responsible for the filing of returns or payment of...taxes…during the time period of default” and who “willfully” failed to file such returns or pay such taxes.

In a statement released on Feb. 6, 2014, Governor Snyder stated, “I am confident the changes in this bill will bring more fairness to the process [referring to Michigan’s corporate officer liability law] and help establish a more positive business tax environment, which will help our economy grow and thrive.”

Business purchaser’s liability law

Michigan law currently requires purchasers of businesses to escrow a sufficient amount of money to cover the amount of any unpaid taxes, interest and penalties of the business being purchased until the former owner produces a receipt from the Department showing the taxes are paid or not due.

Senate Bill 337 modifies this law by requiring the Department, upon the business owner’s written waiver of confidentiality, to provide to the purchaser of the business the known or estimated tax liability of the business within 60 days of the request. The purchaser will not be held liable for any unpaid taxes of the business that were not paid by the former owner if the Department has failed to provide the requested tax liability information within such 60 day period.

In addition, the new law clarifies that if the purchaser of the business complies with the already existing escrow requirements, then the purchaser will not be held liable for more than the known or estimated tax liability disclosed by the Department.

Other reforms included in Senate Bill 337

The new law also includes provisions requiring the Department to complete audits within specified time limits, and provides that if a tax refund claim is not approved by the Department within one year it can be considered denied (at the taxpayer’s option) to allow the taxpayer to make an appeal.

Click here to read the full text of Senate Bill 337, now Public Act 3 of 2014.

Colorado: Proposed law would cast a wide web of out-of-state retailer sales tax nexus

A new bill (H.B. 1269) titled the Marketplace Fairness and Small Business Protection Act was introduced last week in the Colorado House of Representatives that may go one step further than your average “Amazon tax” or affiliate nexus law, including “transitory physical presence” and component member nexus (each explained further below). To be clear, this bill is entirely aimed at nexus for sales tax purposes. This bill appears to not only tread along common notions in its attempt to obligate remote sellers to collect and remit taxes on retail sales into the state, but also contains ambiguous “catch all” language which may cause many businesses to question whether they have sales tax nexus with the state.

For example, H.B. 1269 includes fairly typical affiliate nexus language:

Presumptive physical presence—resident of the state refers customers to retailer. (I) Except as provided in subparagraph (III) of this paragraph (e), a retailer that does not collect Colorado sales tax is presumed to be doing business in this state through an independent contractor or other representative if such retailer enters into an agreement with a resident of this state under which the resident, for a commission or other consideration based on completed sales, directly or indirectly refers potential customers, whether by a link on an internet web site or otherwise, to the retailer that does not collect Colorado sales tax, and if the cumulative gross receipts from sales by the retailer that does not collect Colorado sales tax to customers in the state who are referred to such retailer by all residents with this type of agreement with the retailer that does not collect Colorado sales tax is in excess of ten thousand dollars during the preceding twelve month period.

But has somewhat ambiguous so-called “transitory physical presence” nexus language:

Transitory physical presence with solicitation. The regular or systematic solicitation, promotion, or facilitation, whether direct or indirect, within the state of business from sales and purchases of tangible personal property or taxable services to persons residing in this state and by reason thereof receiving orders from, or selling or leasing tangible personal property to, such persons residing in this state for use, consumption, distribution, and storage for use or consumption in this state.

Based on this transitory physical presence provision, it is unclear what would constitute indirect regular or systematic solicitation, promotion or facilitation in the context in which the bill presents such language. What the law does provide is that it does not extend sales tax nexus further than that which is constitutionally permissible.

In fact, it has been argued that affiliate nexus laws may be outside the bounds of constitutionally permissible nexus. However, to date, the U.S. Supreme Court has not ruled on such affiliate nexus or “Amazon tax” laws.

Controlled group nexus

H.B. 1269 also includes provisions aimed at triggering nexus for out-of-state retailers who are members of a “controlled group” with “component members” in the state in numerous ways. A “controlled group” is essentially a parent-subsidiary structure, common ownership group of two or more brother-sister companies (both subject to certain ownership thresholds), or a combination of the former two classes. See § 1563(a) of the Internal Revenue Code for the definition of “controlled group.” A component member is generally a member corporation of a controlled group. See § 1563(b) of the Internal Revenue Code for the definition of “component member.”

Under H.B. 1269, some ways in which an out-of-state retailer can incur sales tax nexus where a component member has physical presence in the state include:

  • Where a component member sells under the same or similar business name similar taxable property or services as the out-of-state retailer;
  • Where the component member facilitates delivery of the out-of-state retailer’s product through its in-state real estate; and
  • Where the component member uses similar or substantially similar trademarks, service marks or trademarks as those used by the out-of-state retailer.

However, most troubling is the ambiguous provision that causes the out-of-state retailer to have sales tax nexus in the state if a component member “conducts any other activities in this state that are significantly associated with the ability of the retailer that does not collect Colorado sales tax to establish and maintain a market in this state for sales of tangible personal property or taxable services.”

Businesses currently structured in a manner in which certain component members are deemed not to have sales tax nexus in the state while other related component members have nexus would potentially be challenged if this law were to be enacted. Therefore, it is advisable for such businesses to preemptively review their structure and arrangements to ensure that the structure properly accomplishes the businesses’ goals and objectives.

The Marketplace Fairness and Small Business Protection Act in a nutshell

Ultimately, state lawmakers may have provided equivalent clarity if the nexus expansion provisions contained in the Marketplace Fairness and Small Business Protection Act are enacted: Out-of-state retailers are required to collect and remit sales taxes on taxable sales to state residents if:

  1. They engage in affiliate nexus programs with state residents with aggregate annual sales to state residents in excess of $10,000;
  2. Are a component member of a controlled group (as such terms are defined under § 1563 (a) and (b) of the Internal Revenue Code); or
  3. If the U.S. Constitution so permits.

New York: Substitute irrevocable trust property and be subject to sales tax?

Late last month, the New York Department of Taxation and Finance (the Department) issued Advisory Opinion TSB-A-14(6)S (the Advisory Opinion). In the Advisory Opinion, the Department addresses whether the substitution of property between an individual and his irrevocable trust is subject to sales and use tax in New York.

In the Advisory Opinion, the petitioner (the Settlor') created an irrevocable trust (the Trust) pursuant to a trust agreement between the trustees and the Settlor. The Settlor is deemed to own the Trust’s property for New York and federal income tax purposes (as provided under §§ 671-679 of the Internal Revenue Code). Pursuant to the trust agreement, the Settlor has the right to reacquire trust property by substituting property of equivalent value at any time.

In the Settlor’s case, the Settlor wished to substitute tangible personal property that he owns for trust property other than tangible personal property having an equivalent value.

The Department examined the facts:

  • The Settlor created an intentionally defective grantor trust.
  • The Settlor maintained the power to reacquire trust property by substituting property of equivalent value at any time without the approval of a trust fiduciary.
  • For estate tax purposes, upon Settlor’ death, the property is no longer considered to be part of the Settlor’s estate.

The Department analyzed the transfer between the Settlor and the Trust as that between an individual and a separate entity. For income tax purposes, there would be no tax consequences for the transfer, as the income of the Trust is includable in the Settlor’s income while the Settlor maintains non-fiduciary dominion and control over the income produced by the Trust and can enter into transactions for his benefit. However, even where there is no income tax consequence, the exchange between the Settlor and the Trust can still constitute a taxable exchange for sales tax purposes.

In this Advisory Opinion, the Settlor posited that because he could exchange property with the Trust without negotiation or bargaining of any kind, a taxable sale did not occur. Opposing the Settlor’s conception of the transaction, the Department reasoned, negotiation or bargaining was not necessary, only consideration need be present. Thus, so long as the individual receives something of value in the transfer, or consideration, a sale has occurred.

In New York, sales tax is imposed on retail sales of tangible personal property, which such sales are defined, in part, as a sale “for any purpose other than...resale as such[.]” N.Y. Tax Law § 1101(b)(4). The Department did indicate that the Settlor’s original purchase of the tangible personal property may have been exempt from sales taxes upon purchase under the resale exemption. However, the Settlor’s intent at the time of the purchase of the tangible personal property may be relevant to determine whether his purchase would qualify for the resale exemption.

In the end, the Department held that the Trust must pay sales tax on the tangible personal property transferred to it in the absence of an applicable exemption from sales tax. The outcome of this Advisory Opinion should serve as a reminder to individuals who plan to exchange property of substantial value with a related trust to seek professional advice before consummating their transaction.

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.