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Top Ten Issues At Massachusetts DOR for 2011-2012

1)Governor Patrick appoints Amy Pitter new Commissioner of DOR

The Patrick-Murray Administration announced the appointment of Amy Pitter as the new Commissioner of the Department of Revenue (DOR). Pitter succeeds Navjeet K. Bal, who is returning to the private sector as an attorney with the firm of Nixon Peabody.

" Pitter has extensive public and private sector experience. A lawyer and accountant, she worked for DOR from 1991 to 2000, serving as Deputy Commissioner of Taxpayer Services and later as Deputy Commissioner of Child Support Enforcement.

"I am honored to have been chosen to be part of the Patrick-Murray Administration in this important role," said Pitter. "This is a critical period for DOR as it embarks on the implementation of two new core processing systems for tax administration and child support, while continuing to provide outstanding service to taxpayers. I’ve spent the past 10 years working to help other public sector agencies achieve their visions, and it's a thrill to return to the public sector and bring my experience back home to the Department of Revenue."

2)DOR Directive 11-4 Clarifies the sales tax implications for Photographers 

Very few industries have undergone such drastic changes as has the photography industries over the last few decades.  The DOR has issued many rulings and directives in this area but because of changes in the way the industry works many of these rulings are not useful.

This Directive states that charges of a professional photographer are generally subject to Massachusetts sales tax where the final product is delivered to the purchaser in a tangible medium, regardless of whether those service charges are separately stated from the charge for the tangible item.[1] Separately stated charges for services, such as “sitting fees”, provided to a customer who is obligated to pay for those services but not obligated to purchase any tangible personal property as part of the transaction will not be subject to Massachusetts sales tax.

     Docket No. C293831 Promulgated: June 8, 2011

This case is one of the very few cases dealing with the corporate excise calculation of the sales factor for sales of services.  Sales of services are allocated to a state utilizing “income producing activity based on cost performance”  AT&T maintained that its phone charges for long distance calls were not Mass sales for purpose of the factor

AT&T contended that its income-producing activity was the operation of its long-distance telecommunications net work, which consisted of interconnected equipment located in every state of the United States and with both its Global Network Operations Center and administrative headquarters located in New Jersey (“operational approach”).  In contrast, the Commissioner determined that AT&T’s income-producing activity was each individual long-distance transmission placed by a customer (The Transactional Approach)

“The Board found and ruled that the operational approach (versus the Transactional Approach suggested by DOR) was the proper method for determining AT&T’s costs of performance for purposes of calculating its sales factor.  Under the operational approach, the greater proportion of AT&T’s costs was incurred in New Jersey, not in Massachusetts.  Therefore, the Board found and ruled that AT&T met its burden of proving that the Commissioner improperly denied its abatement application for the tax years at issue.

4)Charles Devens, Jr. vs. Commissioner of Revenue   Docket # C304976 

The ATB has ruled on August 2, 2011 that Mr. Devens  was domiciled in Florida as of October 3, 2005.  While the ATB has not issued a finding of fact yet, they have stated in the order that:

“The Board finds and rules that any income other than Massachusetts source income realized by Mr. Devens after October 3, 2005 was not Massachusetts taxable income.” 

The significant part of this decision is that in 2005 Mr. Deven had a presence in Massachusetts in excess of 183 days.  The hope is that the ATB is saying that, by law, the 183 day rule only applies to non-residents and since Mr. Deven was a resident prior to October 3, 2005 those days do not count towards the 183 total needed.  This reading of the law is of course contrary to the DOR’s position in the regulations.

The ATB initially issues a one page decision for the Commissioner or for the Taxpayer.  A finding of fact (the actual reasoning of the case) is only issued at the request of either parties after the decision.  I am sure the parties will request a finding and it will be very interesting to see the reasoning in this important case..

5)Interest Reduction

Chapter 62C, Section 32 has been amended to provide that where an audit has begun and a Notice of Intention to Assess has not been issued within 18 months of the opening conference in Field Audit or the initial letter from Desk Audit the DOR must reduce the interest rate it charges by 2 to 2.5 percentage points.
There is a requirement that the taxpayer must have cooperated.  If the DOR decides not to grant this reduction that issue is appealable

6)Exemption of Breast Pumps from Sales Tax 

The Legislature has amended Chapter 64H, section 6 (Sales Tax Exemptions) to exempt “physician-prescribed, medically necessary breast pumps.”  The DOR had done several audits of medical supply companies and had argued that breast pumps were not covered under prior law, even though they were prescribed by a physician and paid for via insurance or in many cases Medicare. 

Members of the industry worked closely with the legislators to correct this mistake and now prescribed breast pumps are exempt.   

7)Equitable Estoppel  

In the Hillside Country Club partnership case the taxpayer claimed that:

a) “the duty to collect and remit sales tax on the rental of golf carts has not been adequately publicized to country club taxpayers,”
b) that the DOR is responsible for educating taxpayers as to their tax
obligations that the DOR failed in its duty to educate as evidenced by the fact
that other Massachusetts country club taxpayers known by Mr. Cardono are also
unaware that they are required to charge sales/use tax on golf cart rentals,

c)“that Mr. Cardono was “ambushed” after his sale of the business by the liability for a tax he had no knowledge existed”

d) Finally, the appellant claims that, by accepting its returns as filed for an almost-20-year period, and by not assessing other country club taxpayers, the DOR has failed to enforce uniformly the sales tax on golf cart rentals.

The ATB found against the taxpayer ruling that 1) “The Commissioner’s past failure to assess a tax against the appellant thus does not forever bar future assessment where the item is subject to tax under the applicable statutory provision.” and 2) that with respect to the question of fairness “the Supreme Judicial Court ruled that the Board lacks the authority to grant an abatement based on principles of equitable estoppels”

8)Sales/Meals tax on Third Party Coupons  DD 11-xx  

The internet has provided a great number of challenges to the application of Sales Tax.  A common transaction these days is to buy a coupon on the internet that entitles you to a meal at a discount price.

The example provided in the Directive is a $40 restaurant certificate that is sold by a third party for $ 20   The third party and the restaurant each get $ 10., nevertheless the Directive tells you that because the restaurant receives other services (advertising) the meals tax would fall on the full price of $40.

Docket No. C298158

The issue in this case is whether or not a corporation that was involuntarily dissolved is liable for the corporate excise.  In the present case the ATB found that the corporation continued to be active and was liable for the tax.  However in a very important decision the ATB stated that  

“Where there is no evidence that the corporation or its officers acted in a corporate capacity during its period of dissolution, the corporation may not be liable for corporate excises.  Urban Computer, Mass. ATB Findings of Fact and Reports at 1988-292-293.  Conversely, if there is evidence of “any active business . . . carried on in the name of the corporation,” or “any known acts . . . of its officers, directors, or stockholders purporting to act as such,” the corporation is liable for corporate excises.  Id.

10)Adjustment of the refund and abatement statutes 

While the abatement statute of the 3-2-1 rules remain the same, that is the later of:
a)There years from  the due date of the tax return
b)Two years from the date assessed  or
c)One year from the date of payment

The legislature has added  that the three year rule will now consider the due date of the tax return as including the extended due date.  It appears that the statute allows an abatement to be filed anytime within three years from the date the return was actually filed.  Previously the legislature had extended the 2 year abatement period to the period in which the taxpayer is available for audit taking into consideration any waivers executed by the taxpayer.

Additionally any refunds due under Section 36 of 62C ( ordinary refunds from tax returns for instance) may now be claimed within three years of the due date once again including the extended due dates.

Top Ten Follow-up:  

In 2010 the McTygue decision by the ATB was one of the cases listed in the “Top Ten”.  This case has been appealed and the Appeals Court has affirmed the decision by the ATB.  Here is my write-up from 2010:

The McTygue case      Docket # C287781        April 20, 2010
  In a case dealing with interest from an installment sale of stock the ATB found that this interest was taxable in Massachusetts for the McTygues who were non-residents.    The ATB found that the interest, even though it was from the sale of stock,  was derived from or effectively connected with Mr. McTygues Massachusetts trade or business.  As part of the sale Mr. McTygue had executed an employment contract.  The ATB cited to language in the contract to tie the sale to the employment.  Specifically the ATB found that:

“Mr. McTygue entered into an employment agreement with BSI (“Employment Agreement”), which explicitly provided that “as a condition to the consummation of the Acquisition, [Mr. McTygue] is to remain employed by the Company.” (emphasis added).”

While I can see the reasoning, I find the decision a bit surprising.