Unitary Business
Department of Revenue Ruling, IT 95-42, (6/8/95); and Department of Revenue Ruling, IT 95-54, (7/21/95). The Illinois Department of Revenue ruled corporate entities seeking to obtain unitary status must exhibit strong centralized management before such a finding can be made. The Department said that in Illinois, a unitary group consists of persons related through common ownership and whose business activities are integrated with, and dependent upon and contribute to each other. These activities are illustrated where the members are in the same line of business, or are steps in a vertically structured enterprise whose members are functionally integrated through strong centralized management. No group may attain unitary status unless it is functionally integrated through strong centralized management. Centralized management is not supported by a showing that the requisite ownership percentage exists, nor is it proven by incidental economic benefit accruing to the group because such ownership improves its financial position.
Business/Nonbusiness Income
Ross-Araco Corp. v. Commonwealth, 90 M.D. 1994 (Pa. Sup. Ct. 4/18/96). The Pennsylvania Supreme Court upheld the ruling of the commonwealth court that the taxpayer's sale of undeveloped property located in New Jersey did not constitute business income and could not be apportioned to Pennsylvania. The taxpayer purchased the property in 1960. Three of the property's acres were used in the taxpayer's construction business, while the remaining acreage was left undeveloped. The taxpayer did not rent the remaining property; nor did it produce royalty income for the taxpayer. From time to time, the taxpayer did include the land as part of its assets pledged to support performance bonds for municipal projects. The taxpayer sold the property to an unrelated party in 1988, resulting in a gain of over $1 million, which was used to purchase federal treasury bonds. The Pennsylvania court ruled that the gain did not constitute business income to the taxpayer. Pennsylvania, the court explained, employs both the transactional and functional tests to determine whether a taxpayer's income is business or nonbusiness income. The gain failed to qualify as business income under the transactional test because the acquisition, management and disposition of real property was not an integral part of the taxpayer's construction business, as it did not regularly purchase or sell real estate parcels. The gain does not qualify under the functional test either, because it did not produce business income while it was owned by the taxpayer. The court found that the taxpayer's frequent pledge of the real estate along with the taxpayer's other assets was not material because the property carried a very low book value that was insignificant when compared to the taxpayer's other assets.
Apportionment
E.I. du Pont de Nemours & Co. v. State Tax Assessor, No. 7608 (Me. Sup. Jud. Ct. 4/9/96). Maine's highest court has determined that the state's use of the so-called "Augusta formula" (which allows the inclusion of foreign-source dividends in apportioning the income of a multijurisdictional enterprise) does not run afoul of the Foreign Commerce Clause of the federal constitution. The taxpayer is a multinational unitary business with nexus in Maine. During the period at issue, the taxpayer excluded from its apportionable income dividends received from its foreign subsidiaries. Using the "Augusta formula," the Assessor determined that these dividends should have been included in the tax base. The formula computes a multinational's unitary business's income tax liability by using worldwide combined reporting (WWCR) as a method of checking the fairness of the assessment. When foreign dividends are included in a taxpayer's income, the amount owed will not exceed the amount computed under the WWCR method. In this case, the Assessor determined that using WWCR resulted in a greater tax liability, and thus computed the taxpayer's liability using the water's edge method, which includes dividends received from foreign subsidiaries, but unlike WWCR, offers no factor relief for the foreign subs' operations. The state supreme court rejected the taxpayer's contention that the combined reporting method used by the state violates the Foreign Commerce Clause as articulated in the U.S. Supreme Court's decision in Kraft General Foods v. Iowa Department of Revenue and Finance, 505 U.S. 71 (1992). The court distinguished Kraft, noting that Iowa used a single entity reporting system, which contributed to the discrimination shown by the taxpayer. Maine's use of the water's edge combined reporting system, on the other hand, "provides a type of taxing symmetry that is not present under the single entity system." Even though dividends paid by a domestic subsidiary to its parent are not taxed, the apportioned income of the domestic sub is subject to tax in Maine. Because the income of unitary domestic affiliates is included in the Maine tax base, the inclusion of dividends paid by a foreign subsidiary does not constitute the kind of facial discrimination against foreign commerce invalidated in Kraft.
Apportionment Sales Factor -- "Throwback Rule"
Great Northern Nekoosa Corp. v. State Tax Assessor, No. 7639 (Me. Sup. Jud. Ct. 4/29/96). The Maine Supreme Judicial Court ruled that the taxpayer's sales in destination states where it was not taxable, but where one of its unitary affiliates was taxable, must nevertheless be thrown back to Maine and included in the sales factor of the taxpayer's apportionment formula as Maine sales. The taxpayer is part of a unitary group that under Maine law is required to file combined reports. During the audit period, the taxpayer made sales attributed to Maine, and also made sales in states where the taxpayer was not taxable individually, but in which an affiliated member of the taxpayer's unitary group was taxable. In filing its return, the taxpayer did not include in its sales factor sales made in destination states where taxpayer was not taxable but one of its affiliates was taxable. Upon audit, the State Tax Assessor determined that these sales must be "thrown back" to Maine and included in the numerator of the taxpayer's sales factor. The taxpayer argued that the term "taxpayer," as it is used in the Maine statute requiring combined reporting, refers to any entity in the affiliated group, not just the entity taxable in Maine. Thus, these sales could not be thrown back to Maine because even though the taxpayer was not taxable in the destination state, one of its affiliates was taxable in that state. The trial court agreed with the taxpayer.
The state supreme court reversed, noting that sales of an affiliate are included in the denominator of the sales factor of an apportionment formula not because any of the affiliates is a "taxpayer," but because it is constitutionally compelled. The application of the throwback rule, on the other hand, raises no constitutional questions. The rule as written and applied by the Assessor was consistent with the unitary theory of corporate taxation, the court said, especially since the taxpayer has not shown that the income from those sales made in destination states where the taxpayer itself is not subject to tax are otherwise taxed by the destination state.
Dividend Expense Deductions
SLI International Corp. v. Crystal, No. 15160, (Conn. Sup. Ct. 2/27/96). The taxpayer is a Delaware corporation with its principal place of business in Connecticut. The taxpayer's parent is a Florida corporation that does not do business in Connecticut. The taxpayer entered into an agreement with another of the parent's subsidiaries, a foreign sales corporation (FSC), to market and promote the taxpayer's products overseas. The FSC was duly qualified as such under the applicable provisions of the Internal Revenue Code. The FSC received commissions from the taxpayer with respect to the foreign sales of the taxpayer's products. The FSC paid dividends to the taxpayer in an amount equal to the commissions paid by the taxpayer. The taxpayer deducted the commissions from its state corporate return.
The Commissioner of Revenue Services disallowed a portion of the expenses paid to the FSC, on the theory that because the FSC was a mere paper corporation, the dividends paid by the FSC to the taxpayer should be treated as being paid directly by the taxpayer to its parent. The Connecticut Supreme Court held for the taxpayer, finding that as a matter of law, a valid FSC cannot be treated as a paper corporation because FSCs are required under federal law to engage in certain activities that give it economic substance. The Commissioner inappropriately used his authority under state law to ignore the existence of the FSC to adjust the taxpayer's income, because the arrangement between the taxpayer, the parent and the FSC was not primarily motivated by tax avoidance, especially taking into consideration that the FSC was duly organized to comport with federal law. The court went on to distinguish similar cases involving domestic international sales corporations (DISCs) in which the Commissioner's disallowance of such expenses were upheld, because a DISC, unlike an FSC, is not subject to federal economic substance requirements.
P.L 86-272
Brown Group Retail, Inc. v. California Franchise Tax Board, No. B081829, (Calif. Ct. App. 4/22/96). The California Court of Appeals ruled that a Missouri corporation was properly subject to the state's franchise tax due to its activities in the state. The taxpayer, a Missouri corporation with no property or other facility in California except automobiles leased for the use of its sales representatives in the state, challenged an assessment of franchise taxes imposed by California as violative of the prohibitions set forth in P.L. 86-272. The taxpayer did not make sales in California; all orders were sent to the home office which approved the orders and shipped the goods to its California customers via common carrier. Two of the taxpayer's employees were not, strictly speaking, sales representatives; their job was to assist independent retailers in launching a new store or to improve the performance of an existing establishment. These activities, the California appeals court opined, took the taxpayer outside the scope of the protections of P.L. 86-272 because these activities exceeded "mere solicitation," as interpreted by the U.S. Supreme Court in Wisconsin Department of Revenue v. William Wrigley Jr. Co., 112 S.Ct. 2447 (1992). Thus, the state's franchise tax was properly imposed on the taxpayer.
Matter of Gateway 2000, Inc., No. 95-24-6-0262 (12/14/95). The Iowa Department of Revenue and Finance has ruled that an out-of-state taxpayer's activities in Iowa are not immune from Iowa's income tax under P.L. 86-272. The taxpayer is a South Dakota purveyor of personal computers via the U.S. mail. Though the taxpayer does not have a physical location in Iowa, it does have employees in the state to conduct business activities on its behalf. The taxpayer maintains two interest-bearing bank accounts in Iowa, with sufficient funds to cover its Iowa operating expenses. The taxpayer's personnel travel daily to Iowa to make deposits or conduct other financial transactions with respect to the taxpayer's accounts. The taxpayer's employees also make daily use of the Sioux City, Iowa airport. The Department of Revenue and Finance determined that the taxpayer's daily use of the airport facilities should not be used to determine whether the taxpayer's net Iowa income is subject to tax, because such activities are not considered business activities under the state's Administrative Code. However, the taxpayer's other activities, such as attendance at trade fairs, and "college career days" does render the taxpayer's income subject to Iowa tax if the persons recruited at these fairs are not entirely ancillary to the taxpayer's requests for purchases. Additionally, sales made by the taxpayer at fairs and other Iowa events are subject to tax, and the activities associated with maintaining the taxpayer's bank accounts and shareholders' meetings also place the taxpayer outside the protections offered by P.L. 86-272.
Ruling of Commissioner, No. PD-96-1 (1/4/96). The Commissioner of Taxation denied the taxpayer a refund of corporate income tax paid on sales made in Virginia because its activities in the state were not merely ancillary to the solicitation of sales and thus were not within the protections afforded by P.L. 86-272. The taxpayer, domiciled outside Virginia, manufactures tangible personal property. It has no office or place of business in the state, but does have sales representatives that reside in Virginia. The salesmen carry and distribute literature on company products but do not carry a stock of inventory. They also do not perform customer credit checks or approve customer orders. However, the salesmen sometimes, though infrequently, assist customers with repairs on company products, which are delivered into Virginia via common carrier. The Commissioner ruled that the taxpayer was taxable on its Virginia income. The salesmen's repair of company products for customers, even though infrequent, appears to have been conducted on a regular and continuous basis over a period of years. This activity, measured by customer satisfaction and value, may have had a significant impact on the taxpayer's Virginia business, even though the activity may be small-scale in comparison to its overall activity. In any event, the salesmen's repair activities exceed the mere "solicitation of orders" activity that the U.S. Supreme Court outlined in Wisconsin Department of Revenue v. William Wrigley Jr. Co., 112 S.Ct. 2447 (1992). Therefore, the taxpayer had sufficient nexus with Virginia to support the imposition of the state's corporate income tax.
Nexus
9.4 Percent Manufactured Housing Service v. Department of Revenue, No. Corp. Inc. 95-162 (Admin. Law Div. 2/7/96). An Alabama Administrative Law Judge (ALJ) dismissed the Department of Revenue's assessment against a taxpayer for corporate income tax on the grounds that the taxpayer was not subject to the state's corporate income tax because (1) it is not a corporation, and (2), even if the taxpayer was a corporation (and thus a taxable entity), the taxpayer does not have sufficient nexus with Alabama to support the imposition of the corporate income tax. The taxpayer is a Real Estate Mortgage Investment Conduit (REMIC) as defined under the Internal Revenue Code. The taxpayer purchases financing contracts and then sells interests in the pool of contracts through the sale of certificates. The taxpayer earns interest income from the contracts, which are passed through to the certificate holders. These contracts are secured through mortgages on manufactured homes, some of which are in Alabama. The taxpayer otherwise had no assets, employees or contacts in the state. The taxpayer voluntarily filed foreign corporation income tax returns for the years 1991 and 1992, using the three-factor apportionment formula of property, payroll and sales to apportion income to Alabama. The payroll and property factors were 0% on these returns. The Department excluded the payroll and property factors, which increased the taxpayer's Alabama apportionment factor.
On appeal, the ALJ determined that the taxpayer was not subject to tax in Alabama because it is a REMIC, not a corporation. REMICs are statutory entities created by Congress, and are not subject to federal income tax. A REMICs income is instead taxable to the certificate holder to which the interest income is passed through. Alabama income tax law does not contemplate the taxation of a REMIC. However, under the state's general income tax laws, the pass-through income of a REMIC, like at the federal level, is taxable to the certificate holders. Even if REMICs generally were taxable under Alabama law, the taxpayer in this case would still escape the corporate income tax because it does not have sufficient nexus with the state to support the liability. The taxpayer's only contacts with Alabama is that some of its financing contracts are secured by mortgages on property in the state. It is not certain that this indirect contact even satisfies the minimum contacts nexus required by the Due Process Clause, let alone the physical presence requirement demanded by the Commerce Clause (Quill v. North Dakota, 112 S.Ct. 1904 (1992)). In addition, the ALJ rejected Alabama's reliance on Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E.2d 13 (S.C.), cert. denied 114 S.Ct. 550 (1993) for the argument that the taxpayer's use of an intangible in the state supported nexus with the state. The ALJ distinguished Geoffrey, pointing out that the taxpayer in this matter is not licensing an intangible in Alabama. The ALJ further pointed out that in Alabama, the use or presence of an intangible in the state, without some physical presence is insufficient to establish nexus under the dictates of Quill. Therefore, because the taxpayer is not a corporation and does not have nexus with Alabama, the assessments were dismissed.
Pierce, et al. v. State of New Mexico, No. 22, 264, (N.M. Sup. Ct. 12/11/95). In response to the U.S. Supreme Court's decision in Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989), the state legislature repealed the income tax exemptions for state retirement pension income. The state retirees brought suit, alleging that the tax exemption was a part of their employment contract with the state, and the repeal of that exemption constituted an impairment of contract, in violation of the Contracts Clause of the federal constitution. The revenue agency countered with the argument that when enacted, the retirement exemption provisions were not considered contractual, "no matter how the court might today treat public retirement plans." The New Mexico court ruled in favor of the state, finding that the statutes creating the retirement plans were not contracts between the state and the retirees. These statutory plans, the court said, created vested property rights in certain benefits for retirees, which mature upon retirement. However, there was no vested right to the tax exemptions, the court said, explaining that "the power to tax is a fundamental government power that should not be diminished where there are other reasonable constructions of the statute."
Kerr v. Waddell, No. 1 CA-TX-92-0100 (Ariz. Ct. App. 4/23/96). Before the U.S. Supreme Court ruling in Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989), Arizona exempted the retirement contributions of state and local government employees from income tax but levied such taxes on the retirement contributions of federal employees. The taxpayer filed suit after the Court's Davis ruling seeking refunds and injunctive and declaratory relief under 42 U.S.C. §1983. The tax court granted the taxpayer's requests for relief on grounds that the Arizona income tax scheme violated the doctrine of intergovernmental tax immunity, and further granted relief under 42 U.S.C. §1983. On appeal, the state court of appeals found that the tax court erred in not dismissing the taxpayer's state law claims for failure to exhaust administrative remedies, but that the taxpayer need not exhaust its administrative remedies to bring its §1983 claim (Kerr I). While this holding was pending review by the Arizona Supreme Court, the U.S. Supreme Court released its opinion in National Private Truck Council v. Oklahoma Tax Commission, 115 S.Ct. 2351 (1995), in which the High Court ruled that state courts are without jurisdiction to hear §1983 claims when adequate remedies exist at state law. The Arizona Supreme Court remanded the matter to the court of appeals for redetermination in light of National Private Truck Council.
On remand, the appeals court vacated its earlier decision and held that the Tax Court should have dismissed the taxpayer's §1983 action because adequate remedies exist under Arizona law. Thus, the tax court's jurisdiction to hear state law tax claims and §1983 tax claims is subject to the exhaustion of administrative remedies. Because the taxpayer failed to exhaust these remedies before proceeding to tax court, its claims must fail.
Estate of Bohn v. Scott, No. 1 CA-TX 94-0009 (Ariz. Ct. App. 4/16/96). The Arizona Court of Appeals ruled that the dismissal of a taxpayer's refund claim for failure to exhaust administrative remedies also bars a related claim brought under 42 U.S.C. §1983. Following the U.S. Supreme Court's decision in Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989), the federal retiree taxpayer brought this claim contending that Arizona's income tax statute exempting only a portion of their retirement benefits from tax while exempting all benefits of state and local retirees was unconstitutional. In that case (Bohn v. Waddell, 790 P.2d 722 (Ariz. Tax Ct. 1990), vacated 848 P.2d 324 (Ariz. Ct. App. 1992), cert. denied 113 S.Ct. 3000 (1993) (Bohn I)), the taxpayer's refund claim was dismissed for failure to exhaust administrative remedies. After that case became final, the taxpayer appealed the tax court's dismissal of its §1983 claim on the grounds that its claim under the federal statute was jurisdictionally distinct from its claim for a tax refund. The court of appeals rejected this contention, finding that the dismissal of the taxpayer's claim for failure to exhaust administrative remedies also barred its claim for declaratory relief, because consistent with the U.S. Supreme Court's decision in National Private Truck Council v. Oklahoma Tax Commission, 115 S.Ct. 2351 (1995), relief under §1983 is not available in state court where state law provides an adequate legal remedy to a constitutional challenge of a state tax statute.
Finely v. Kentucky Revenue Cabinet, No. K95-R-34, (Ky. Board of Tax Appeals 2/29/96). The Kentucky Board of Tax Appeals ruled that a resident of Kentucky receiving retirement benefits from an Ohio state governmental pension system was not entitled to an exemption from Kentucky income tax. Kentucky exempts the pensions for federal, state and local government retirees, but does not extend this exemption to pensions received from other state retirement plans.
Van Aman v. Department of Revenue, No. 95-I-1219 (Wisc. Tax Appeals Comm'n. 3/13/96). The Wisconsin Tax Appeals Commission ruled that the taxpayer, a Wisconsin resident receiving pension benefits from the Illinois public employee retirement system, was not entitled to an exemption from Wisconsin income tax on his annuity, and that this treatment did not contravene the doctrine of intergovernmental tax immunity as described in Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989). The Tax Commission determined that the Davis rule was not applicable in this case, because the doctrine does not apply as between state governments. The Tax Commission further found that no equal protection violation existed, because the taxpayer did not show that subjecting him to the tax, but not other annuitants, constituted an unreasonable classification of taxpayers.
Mutual Funds
Ruling Request, No. 96-01, (1/26/96). The Rhode Island Division of Taxation ruled that interest or dividend income distributed to Rhode Island residents that is directly attributable to interest or dividend income earned by a fund holding obligations of the federal government is not subject to the state's income tax. The mutual fund is organized as a Massachusetts business trust, and invests only in securities issued or guaranteed by the federal government, its agencies or instrumentalities. Although Rhode Island imposes an income tax on its taxpayers at a percentage of the federal tax liability, a taxpayer's federal adjusted gross income is decreased for state income tax purposes by all amounts of interest or dividend income earned on obligations of the United States to the extent this income is includable in the taxpayer's gross income for federal tax purposes, but exempt from state income tax pursuant to federal law. Because the fund invests solely in federal obligations, any earnings from these obligations distributed to Rhode Island fund shareholders is exempt from state income tax.
Associated Industries of Missouri v. Lohman, No. 77885, (Mo. Sup. Ct. 3/26/96). On remand from the U.S. Supreme Court, the Missouri Supreme Court struck the state's additional 1.5% statewide use tax surcharge on goods purchased out of state, which was imposed in an effort to assist local government revenues. The U.S. Supreme Court determined that the tax discriminated against interstate commerce, thus contravening the Commerce Clause of the federal constitution, in those areas where the total use tax (comprised of the state's use tax of 4.225% plus the 1.5% surcharge) exceeded the combined state and local sales tax rates. However, the High Court did not strike the tax in its entirety, because in some jurisdictions, the combined use tax rate was not higher than the sales tax rate (and in some instances was actually lower). Since it is only the actual, rather than potential discrimination that "offends the Commerce Clause," the Court remanded the matter to the Missouri Courts to determine the appropriate remedy. The Missouri Supreme Court ruled that because the tax is meant to be applied to all transactions subject to the statewide use tax, and further, because the tax cannot be constitutionally applied to some transactions, the tax must be struck in its entirety.
Brown's Furniture, Inc. v. Wagner, No. 78195, (Ill. Sup. Ct. 4/18/96). The taxpayer is a Missouri furniture retailer whose customers frequently include Illinois residents. The taxpayer delivers goods purchased by Illinois customers in its own trucks, unloads the delivery from the truck and places the goods inside the customer's residence. The taxpayer did not collect sales or use tax on goods purchased by it's Illinois clientele. The state Department of Revenue assessed use tax, interest and penalties against the taxpayer for goods delivered into the state. The taxpayer contested the assessment, arguing that the Illinois use tax statute imposes a collection duty only on those retailers that maintain a place of business or otherwise operate in the state. Because the taxpayer does not maintain a place of business in Illinois, it is not required to collect the use tax from its customers. The Illinois Supreme Court rejected this contention, finding that the taxpayer's deliveries of goods into Illinois constitutes "operating" in the state within the meaning of the statute. The taxpayer's Illinois activities also satisfied the four-prong test of Complete Auto Transit v. Brady, 430 U.S. 274 (1977). First, the frequency of the taxpayer's deliveries in the state during the audit period was enough to establish a substantial nexus with Illinois. Second, the use tax was fairly apportioned because it could only be imposed by Illinois on Illinois purchases. Because the tax is imposed at the same rate as the retailers occupation tax, the use tax does not discriminate against interstate commerce. Finally, the use tax is fairly related to the services provided by the state, in that the taxpayer uses Illinois' public roads, police protection and a judicial system provided by the state.
Dahlberg Hearing Systems, Inc. v. Commissioner of Revenue, No. C2-95-1929, (Minn. Sup. Ct. 4/26/96). The Minnesota Supreme Court ruled that the taxpayer was not liable for use tax on computer equipment it purchased and had shipped into Minnesota by the vendor for software installation and testing, and subsequently re-shipped to the taxpayer's franchisees in other states. The taxpayer manufactures and markets hearing aids through franchises located throughout the nation. During the period at issue, the taxpayer purchased computer equipment for its franchisees. The computers were delivered to the taxpayer's facilities in Minnesota, where the taxpayer's employees unpacked the equipment, loaded software onto the hard drives and tested them extensively for proper functioning. The computers were then repacked and shipped to the franchisees via common carrier. Although the computers continued to be owned by the taxpayer, it assumed that the equipment would be retained by each franchisee for the duration of its useful life and would never be returned to Minnesota. The taxpayer paid use tax on its computer purchases, but later determined that it paid in error, and requested a refund on the grounds that it qualified for the "processing exemption" contained in Minnesota's use tax statute. The provision specifies that tangible personal property brought into the state for alteration and subsequent transport outside the state with the intention that the property will thereafter not be used in Minnesota is exempt from use tax. Reversing the Tax Court, the Minnesota Supreme Court ruled that the taxpayer's use of the equipment in the state clearly fell within the processing exemption provided in the statute. In reaching this conclusion, the court observed that while sales and use taxes are complementary, they are not interchangeable. The only party liable for failure to pay the appropriate taxes in this matter is the vendor, who should have charged Minnesota sales tax on the purchase since it had a Minnesota office and was registered as a vendor in the state for sales tax purposes. Minnesota, the court said, "cannot force [the taxpayer] to pay a use tax simply because [the vendor] failed to pay sales tax. For tax purposes, [the taxpayer] is not its brother's keeper."
Search and Seizure -- Federal Native Americans
Kaul v. Stephan, Attorney General, No. 94-3428 (10th Cir. 4/30/96). The 10th Circuit ruled that a search conducted by the former Kansas Attorney General of a retailer's place of business on an Indian reservation did not violate her Fourth Amendment guarantee against unreasonable search and seizures by government officials. The taxpayer filed a state business tax application with the Kansas Department of Revenue before opening her business, claiming a sales tax exemption because she was operating on Indian land. The revenue agency's policy at that time was to exempt retailers operating on Indian land from the sales tax, although the exemption was not contained in the state's sales tax code or any of the Department's published regulations. After several months, Department officials met with the Attorney General to request assistance in prosecuting the taxpayer for failure to collect sales taxes. The Department did not inform the Attorney General of the Department's informal policy not to tax reservation sales or that it had not issued a tax identification number to the taxpayer because she was considered exempt. The Attorney General obtained search warrants, duly executed in his presence, and seized thousands of cartons of untaxed cigarettes. The state indicted the taxpayer for failing to make a sales tax return and for possession of cigarettes that did not exhibit the required tax stamp. The state voluntarily dismissed the failure-to-file charge and a jury acquitted the taxpayer of the tax-stamp charges. The taxpayer then sued the Attorney General for damages, but the district court granted summary judgment in favor of the Attorney General.
The 10th Circuit upheld the dismissal, concluding that the Department's unwritten policy was irrelevant and of no legal effect in the face of the Attorney General's mandate to enforce the laws of the state as they appeared in the state's statutes. Thus, probable cause existed to believe that the taxpayer had violated state criminal statutes, in that the seized cigarettes had been observed in plain view at a store that did not have a valid sales tax registration certificate.
Telecommunications
American Telephone and Telegraph Co., et al. v. Clark, No. A.A. 94-15 (R.I. D.C. 4/24/96). The taxpayer provided interstate long-distance telecommunications services to its customers in Rhode Island, through the use of WATS, WATS 800 and PLS services. The taxpayer did not bill sales tax to its Rhode Island customers for the fixed monthly service charges, access charges and other charges for equipment, installation and telecommunications services. The taxpayer challenged the revenue agency's assessment of sales tax on these charges, and also protested the assessment of a gross receipts sales tax on surcharges imposed by the taxpayer on its WATS, WATS 800 and PLS customers. The taxpayer argued that when the statute imposing sales tax on telephone services was enacted in 1956, the legislature could not have intended to include interstate telephone calls in the term "long distance" because at that time, state taxation of business conducted in interstate commerce was not permitted under federal law. Therefore, the term "long distance" must be limited to in-state, long-distance calls. The district court disagreed, noting that the relevant U.S. Supreme Court case law ranging from Spector Motor Service v. O'Connor, 340 U.S. 602 (1951) to Goldberg v. Sweet, 488 U.S. 252 (1988) indicate an on-going struggle between state authority to tax interstate businesses and federal restrictions on that authority. This observation, the court determined, leads to the conclusion that the state legislature in 1956 could not have intended to restrict the meaning of the term "long distance" to intrastate telephone calls and possibly forego arguably permissible revenue from interstate calls. Therefore, the court concluded, the legislature meant to give the term "long distance" its ordinary meaning and usage, which would include both intra- and interstate business. Thus, the statute does not exclude the taxpayer's long-distance services during the period at issue.
Prescription Drug Samples
American Cyanamid Co. v. Tax Commissioner, No. 94-1869, and Boehringer Ingelheim Pharmaceuticals Inc. v. Tax Commission, No. 94-1241, Ohio Sup. Ct. (2/7/96). In both of these cases, the Ohio Supreme Court ruled that the taxpayers, pharmaceutical manufacturers, are liable for use tax on samples of prescription drugs manufactured outside the state and sent to their field representatives for free distribution to Ohio physicians. In American Cyanamid, the taxpayer argued that because the raw materials used to manufacture the drugs would be exempt from sales and/or use tax under state law if the products had been manufactured in Ohio, the use of the finished products in the state should likewise be exempt from tax. The Boehringer plaintiffs made the additional argument that the sales and use tax exemption should apply based on the testimony of one of the physicians receiving the free samples: he either gave them to patients to try before purchasing a prescription, or he gave them to indigent patients.
Finding that the taxpayers were liable for the use tax, the state court noted that the tax was not assessed on purchases of the raw materials that were used to make the drugs; rather, the tax was assessed against the finished personal property after being brought into Ohio. Additionally, the use tax is imposed on the consumer, who under Ohio law is defined as "any person who has purchased tangible personal property for use in the state." The term "purchase" also encompasses the production of tangible personal property, even though the article is used, stored or consumed by the producer. In the present case, the taxpayer, by means of manufacturing and using the drug samples, became the consumer of the finished product and was therefore subject to tax. Finally, the drugs were not exempt from use tax under the state's exemption statute for prescription drugs, because in order for the exemption to apply, must have been sold to consumers by a registered pharmacist upon the order of a licensed physician in the state. In both cases, the drugs were given away to physicians without consideration, were not dispensed by registered pharmacists, and were not distributed under a prescription from a licensed physician. Therefore, the drugs were not "sold" within the meaning of the statute, and the exemption does not apply.
The dissent wryly observed that "if you sell it, we don't tax it, if you give it away, we do?"
Amusements
La Crosse Queen, Inc., v. Wisconsin Department of Revenue, No. 95-2754, (Wis. Ct. App. 4/4/96). The taxpayer operates an excursion vessel that carries passengers on sightseeing tours and dinner cruises on the Mississippi River, an interstate waterway. The vessel plies the river between Wisconsin and Minnesota, crisscrossing the boundaries between the two states; however, all passengers (three-quarters of whom are from outside Wisconsin) embark and disembark in Wisconsin. The taxpayers challenged the Wisconsin's sales tax imposed on tickets sales on the grounds that the levy was an unconstitutional burden on interstate commerce. The state Tax Commission determined that the vessel was not engaged in interstate commerce because the rides were purely recreational and not an essential part of the passenger's interstate travel. The Wisconsin Court of Appeals disagreed with the Tax Commission, finding that though the trips were not an integral part of the passenger's interstate travel, the vessel nevertheless travels in interstate commerce when it crosses the boundary between Wisconsin and Minnesota on its excursions. The matter was remanded to the Tax Commission for a finding on whether the vessel was engaged primarily in interstate commerce.
Val-Pak of Omaha, Inc., v. Department of Revenue, No. S-94-428 (Neb. Sup. Ct. 4/5/96). The Nebraska Supreme Court ruled that the taxpayer, a direct mail advertising agency, was liable for use tax on purchases of advertising materials and services from an out-of-state printing and distribution business that printed the taxpayer's advertising materials out of state and mailed them to Nebraska residents on grounds that the taxpayer was the ultimate consumer of the materials and services. The taxpayer, located in Nebraska, helped to plan and prepare draft copies of the advertising materials, which were sent to its out-of-state printer for proofs, mailed back to the taxpayer for final acceptance, and, upon approval by the taxpayer's customers, were returned to the printer for printing and distribution to Nebraska residents in areas designated by the taxpayer. The court ruled that the fact that the taxpayer did not have any right or power over the materials once distributed from out of state did not alter the taxpayer's position of control over the preparation and distribution of the advertising materials. The court continued with the observation that an advertising agency is the ultimate consumer of all materials and services it purchases and uses in providing services to its customers and is liable for tax on the costs of providing the services, regardless of the relationship between the agency and its customers. However, charges for services that are not part of the sale of tangible personal property or do not represent labor or service cost in the taxpayer's production of any tangible personal property are exempt from tax.
Newspapers -- Sales to Federal Government
Revenue Cabinet v. Kentucky New Era, Inc., No. 94-CA-0791-MR, (Ky. Ct. App., 7/14/95). The Kentucky Court of Appeals determined that the taxpayer was not liable for use tax on paper and ink purchased out of state to publish a "free" newspaper. The taxpayer was under contract to the U.S. Army to publish and distribute the Fort Campbell Courier. The newspaper was delivered and distributed free of charge on the Fort Campbell military base. The taxpayer did have, however, exclusive rights to sell advertising space in the newspaper; indeed this was the only source of revenue earned by the taxpayer to produce and distribute the product. The terms of the contract, as well as military regulation, specified that the newspapers became the property of the military upon delivery to the base. The taxpayer did not pay sales or use taxes on paper and ink purchased to publish the newspaper, arguing that it was effectively making a sale to the federal government, and therefore was exempt from tax. The appellate court agreed, finding that the control the Army maintained and exerted over the publication and delivery process was such that the newspaper was essentially published by the Army.
Newspapers -- First Amendment
Newton v. State of Connecticut, No. 554824 (Conn. Sup'r. Ct., Tax Session, 4/29/96). The superior court ruled that the state's imposition of sales tax on newspaper sales did not run afoul of the 1st Amendment's guarantee of freedom of the press. The taxpayer purchased three newspapers on which he paid sales tax. The taxpayer filed a refund claim with the state revenue agency, which was denied. The taxpayer then filed suit in the superior court, arguing that the imposition of the tax is inconsistent with the freedom of the press guaranteed by the 1st Amendment of the federal constitution. The superior court disagreed. In order to run afoul of the 1st Amendment, the court said, a tax must differentiate among speakers based on content. The tax at issue does not violate this standard, because it is generally applied to newspapers and other commodities. The Amendment is also not violated because newspapers sold by subscription are exempt from tax, because the exemption is not based on content. Here, the legislature rationally determined that the administrative expense involved in collecting tax on newspapers sold by subscription would be uneconomical, and therefore exempted subscription sales.
R.R. Donnelley & Sons Co., v. Fuchs, No. 95-769 (Fla. D.C. 3/5/96). A Florida district court has ruled that Florida's denial of a sales tax exemption to printers and publishers does not violate the freedom of the press as guaranteed by the 1st Amendment to the federal constitution. The taxpayer is a printer of books, magazines, financial materials advertisements, telephone directories and catalogues. In 1991, the taxpayer opened a plant in Daytona Beach, and expanded that plant in 1993. The taxpayer purchased capital equipment for both the opening of the plant and its expansion. Florida provides a sales tax exemption for capital equipment purchases used to start an operation and a partial refund for sales taxes paid on machinery purchased to expand an existing operation that manufactures tangible personal property for sale. However, this exemption and/or partial refund does not apply to printers and publishers and certain other businesses. The taxpayer challenged the Department of Revenue's denial of a sales tax refund under the 1st Amendment freedom of the press and the equal protection clauses of the federal constitution. The court explained that the denial of a tax exemption will fall under a 1st Amendment challenge if it singles out the press. However, in the present case, other businesses besides the printing and publishing industry were denied the exemption, such as restaurants, mining and gas exploration concerns and utilities. Because other industries were denied the exemption, the court could not rule as a matter of law that the inapplicability of the exemption singled out the press. The court further rejected the taxpayer's equal protection argument, noting that the state legislature could have easily determined that industries offering certain benefits to the state, such as promoting job creation, increased spending in local communities and the like, should get the benefit of an exemption from certain taxes while others that do not give Florida a particular advantage should not. For example, the court noted, though a printing plant such as the taxpayer's requires a large investment in machinery, it is highly automated. This state of facts, the court said, supports a conceivably rational basis for the legislature's decision not to extend the exemption to the taxpayer.
Newspapers -- Exemptions
Matter of Iowa Legislative News Service, Inc., Declaratory Ruling No. 95-30-6-0150 (8/10/95). The Iowa Department of Revenue and Finance ruled that the taxpayer's publications are not newspapers within the meaning of Iowa's statutory and case law, and therefore are not exempt from sales and use tax. The taxpayer is an Iowa corporation with its principal place of business in Des Moines. The taxpayer has two publications, a legislative news service (detailing information pertaining to the state legislative, judiciary and executive branches), and a legislative status sheet. The news service is published weekly while the legislature is in session and usually biweekly for the remainder of the year. The status sheet is published weekly during the legislative session. The material is printed on plain white paper, and may be received via first class mail, via fax or via modem. The format of the taxpayer's news service does not display its information in narrow vertical columns (like newspapers), nor does it state that it is published at any particular interval. The taxpayer has approximately 250 subscribers, and all of the taxpayer's revenues are generated from these subscriptions, rather than through advertising.
The director ruled that the taxpayer's publications do not qualify as newspapers as interpreted under Iowa law. First, the publications are not published at regular intervals. They are not printed on newsprint, nor do they use newspaper ink. The information is not arranged in narrow vertical columns, and the publication contains no photographs. The publications are mailed first-class, as opposed to second class, and there is no indication that a particularly large cross-section of the population reads the publications.
42 U.S.C. §1983
Jade Aircraft Sales, Inc. v. Crystal, No. 15131 (Conn. Sup. Ct. 4/23/96). Connecticut's highest court has ruled that a state superior court did not have subject matter jurisdiction to hear a taxpayer's claim brought under 42 U.S.C. §1983 challenging the constitutionality of the state's assessment against the taxpayer for unpaid use tax. The Department made the assessment based on the taxpayer's in-state use of an aircraft purchased out of state. The taxpayer brought suit under 42 U.S.C. §1983, alleging violations of various provisions of the federal constitution, including the Commerce Clause. The trial court dismissed the action for lack of subject matter jurisdiction. The state supreme court affirmed, noting that state courts do not have jurisdiction to entertain §1983 tax challenges if the taxpayer is afforded an adequate remedy at state law. In the present case, state law grants taxpayers a procedure for appealing orders of the Department to the state superior court within one month after a taxpayer has been served with such an order. One month, the court ruled, is an adequate period of time for taxpayers to appeal a Department order, and further, the non-availability of attorneys fees under the state statute is not a requirement for the adequacy of a state- provided remedy.
Gross Earnings Tax
Koch Fuels, Inc. v. Clark, No. 93-714 M.P. (R.I. Sup. Ct. 5/30/96). The Rhode Island Supreme Court ruled that the taxpayer, a Delaware seller of fuel oil, is liable for the state's gross earnings tax. The taxpayer sold fuel to utilities customers in Rhode Island for use in generating electricity in the state. Having no in-state employees, offices, or real property, these were the only instances where the taxpayer had contact with Rhode Island. However, the fuel oil contracts provided that title, possession and risk of loss regarding the shipments passed to the buyer in Rhode Island. The taxpayer was registered to do business in Rhode Island, and paid other corporate taxes in the years it sold fuel oil to the Rhode Island utilities. The state supreme court ruled that the imposition of Rhode Island's gross earnings tax on the taxpayer's fuel sales in the state did not violate the Commerce Clause of the federal constitution The taxpayer's complete control over the shipments, the nature of the contract and the cargo and the fact that the sales were consummated upon delivery in Rhode Island, the court reasoned, are activities that created a physical presence in the state for all practical purposes. Thus, the taxpayer had the requisite nexus with Rhode Island to support the imposition of the tax. Because the tax could be best characterized as a sales tax, there was no issue involving fair apportionment. Further, the taxpayer failed to prove that the tax discriminated against out-of-state petroleum companies in favor of in-state sellers. Additionally, the tax was fairly related to the services provided by the state, because the state provided the shipping facilities and maintained the necessary equipment in the event of a spill.
Catalogue Mailings
Matter of Service Merchandise of Fishkill, DTA Nos. 812709 and 812710, (Div. of Tax Appeals 3/21/96). An Administrative Law Judge ruled that the taxpayer was not liable for New York use tax on catalogues mailed to New York residents. The taxpayer was a Tennessee corporation and a subsidiary of Service Merchandise, Inc. (SMI) until the taxpayer merged with another subsidiary of the parent. The parent was also a Tennessee corporation, and did not have any offices, employees, or place of business in New York; nor did it rent or own real or tangible personal property in the state. The taxpayer, however, owned and operated 18 retail stores in New York. The parent maintained the taxpayer's books and records, and operated a mail-order division as well as its own retail stores. During the audit period, the taxpayer's parent published catalogues and flyers, which were sent by the parent's printers to customers all over the United States, including New York residents. The taxpayer's name does not appear on the contracts with the printers; nor do the contracts indicate that the work was being performed on behalf of the taxpayers. All decisions regarding the catalogues, from printing to distribution, were made from the parent's headquarters in Tennessee.
The New York ALJ ruled that the parent, and not the taxpayer, was the purchaser of the catalogues and flyers in question. The ALJ further concluded that the parent was not the taxpayer's agent in the publishing, purchasing or distribution of the catalogues and flyers. The taxpayer had no control over the parent, nor was it involved in any of the decisions concerning the publishing, printing and mailings. The ALJ noted the existence of the parent-subsidiary relationship between the parties involved, but opined that the fact of such a relationship does not create an agency relationship such that the parent is subject to the control of its subsidiary. Therefore, the taxpayer was not responsible for use tax on the catalogues mailed into New York.
Country Clubs
Findlay Country Club, No. 94-H-1307 (Ohio Bd. of Tax Appeals, 2/23/96). The Ohio Board of Tax Appeals ruled that a one-time required contribution to a country club, for the express purpose of constructing a new clubhouse and fully refundable upon the termination of membership in the club, was not subject to sales tax because the contribution was not an ongoing obligation such as a monthly membership fee, which is subject to tax. Under Ohio law, transactions by which a club membership is granted, maintained or renewed is subject to sales tax, which would include initiation fees, monthly membership dues and/or renewal fees.
Direct Broadcast Satellite Television Services
Letter Ruling, No. 8692 (1/24/96). The Missouri Department of Revenue ruled that the taxpayers, direct broadcast satellite (DBS) service providers, are not liable for the state's sales tax on the provision of DBS services to Missouri customers. The taxpayers are California and Minnesota corporations that own no property in Missouri. The taxpayers' customers purchase the requisite hardware to receive the taxpayers' programming from independent retailers, which becomes the customers' property. The taxpayers beam the transmission signals through satellites above the U.S. to earth stations outside Missouri. These signals are then broadcast to consumers within the state. Because neither taxpayer is a retailer of tangible personal property under Missouri law, and because the provision of satellite programming is not considered a taxable service in Missouri, the fees earned by the taxpayers for the provision of such services are not subject to sales tax.
Leased Equipment
John Fabick Tractor Company v. Director of Revenue, No. 95-000597RV (Admin. Hearing Comm'n. 1/3/96). The Administrative Hearing Commission ruled that the taxpayers are liable for use tax on leases of equipment used by the lessees in another state. The taxpayers are Missouri corporations with offices in Missouri. The taxpayers lease tractors and other heavy equipment to customers in Missouri and Illinois. The equipment is not meant to be used for the transportation of persons or property, and is only incidentally used on the highways. The taxpayers collected sales tax on those equipment leases where the equipment was to be used in Missouri, but did not collect Missouri use tax on those leases of equipment to be used in Illinois. The Hearing Commission ruled that the leases for equipment used in Illinois were consummated at the lessor's place of business in Missouri, despite the fact that the equipment was used out of state, because the lease transactions were not "in commerce" for purposes of applying the exemption. Thus, the taxpayer should have collected sales tax on the leases.
Membership Fees
Advisory Opinion, No. TSB-A-96(15)S (2/28/96). The New York State Department of Taxation and Finance issued an advisory opinion stating that the membership fee charged by a taxpayer that entitles members to receive discounts at various retail establishments is not subject to sales and use tax. Membership in the taxpayer's company entitles members to receive discounts at certain places of business. The taxpayer's members are provided with a list of participating vendors, and are furnished with a membership card, which must be shown to participating vendors in order to receive the discount. The Department determined that the sale of the membership represents the right to receive discounts on other merchandise, which is an intangible not subject to New York sales and use tax. However, the Department ruled, the taxpayer must pay sales and use tax on the materials consumed in its production of the vendor lists and the membership cards.
Native Americans
Ruling No. 95-11 (11/29/95). The Connecticut Department of Revenue Services ruled that the direct sale or rental of construction equipment to a federally-recognized Indian tribe for use on the tribe's reservation is not subject to sales and use taxes. The taxpayer in this matter rents construction equipment for use on tribal land either to the tribe itself, or to individual members of the tribe. Sometimes the company rents or sells equipment to other contractors that are not connected with the tribe for use on tribal property in fulfilling contractual obligations with the tribe. The Department of Revenue Services ruled that sales and rental of equipment directly to the tribe for use on tribal lands is exempt from sales tax when title to the property passes within Indian country. However, even purchases made by the tribe or its members within Indian country are not exempt from use tax if the property is intended to be used in Connecticut outside Indian country at the time of the sale and is actually used in that manner. Finally, the Department determined that sales and rentals of equipment to non-Indian contractors are exempt from tax if title to the equipment passes within Indian country, the entire cost of the equipment is passed on to the tribe or its members, and the equipment is to be used exclusively and permanently within Indian country.
Nexus
Matter of Telefile Computer Products, Inc., DTA No. 809607, (N.Y Div. of Tax App., Tax Appeals Tribunal 4/25/96). The tribunal affirmed an Administrative Law Judge's ruling that an out-of-state computer company, whose field personnel traveled to New York State to install and service its computers, had sufficient nexus with New York State to warrant the imposition of an obligation to collect taxes on the sales of its computers to New York customers. The company had no employees, offices, or sales personnel in New York State. Its customer orders, resulting from direct mail and telephone solicitations, were approved in California, and title to equipment passed to its customers in California.
Citing Orvis and Vermont Information Processing, the division concluded that the company's physical presence was more than the "slightest presence" necessary for nexus. Although the company failed to quantify the number of service visits made by its field personnel to New York, the company's sales to New York customers of over $2 million during the audit period, in the absence of other relevant evidence by the company, supported a finding of sufficient nexus.
Matter of the Petition of NADA Services Corp., DTA No. 810592, (N.Y. Tax App. Tribunal 2/1/96). Employees and an independent contractor, associated with an out-of-state corporate subsidiary of a car dealers' association, did not establish the nexus required for imposition of New York sales tax collection obligations by their attendance at seminars and sporadic visits to sell NADA publications. Relying on Quill v. North Dakota, 112 S.Ct. 1904 (1992), the ALJ found that the nature of the 35 visits to New York State was too minimal and removed from the tax obligation at issue to establish more than the "slightest physical presence" within the state. The ALJ also refused to impute the presence of the NADA parent to its corporate subsidiary as an alter ego sufficient to establish nexus with New York.
Union Carbide Corp. v. Indiana, No. 95-2396, (7th Cir. 11/16/95). The 7th Circuit ruled that an Indiana statute permitting the state government to collect property taxes on rail property rather than the local government does not violate the anti-discrimination provisions of the 4-R Act. The statute allows the state to assess railroad rolling property, as well as the property of airlines and public utilities. The latter taxpayers, however, are exempt from tax. The taxpayer railroad challenged the statute as unlawful, arguing that an assessment jurisdiction may not collect tax on rail transportation property at a rate that exceeds that applicable to other commercial and industrial property in the same jurisdiction. The court ruled that the state's property tax assessment methods may only be attacked by comparing the effective burden on rail property with the effective burden on other property, an issue the taxpayer did not raise. Instead, the taxpayer averred that allowing cities and counties to collect taxes on other property while requiring the state to collect the tax on railroads was per se unlawful. The 7th Circuit further rejected that taxpayer's assertion that the state violated the Act by estimating the value of rolling stock in the state on the assessment date. The appeals court ruled that to make a precise count of railcars present in the state on the assessment date is a "superhuman task," and would only invite taxpayers to "play a shell game with the states."
Federal Deposit Insurance Corporation
Old Bridge Owners Cooperative Corp., et al. v. FDIC, 914 F.Supp. 1059 (N.J. D.C. 1/11/96). A federal district court ruled that the FDIC was liable for local property tax, water and sewerage charges because the federal statute creating the FDIC requires it to pay taxes on property in which it has an interest, and such an interest arises when the property is held in receivership. The FDIC held a mortgage on the subject property as receiver since 1992. Property taxes, sewerage and water charges had accrued on the property from 1990 through 1995, and remained unpaid. The township and utilities therefore filed superior tax, water and sewerage liens against the property. The court ruled that federal law requires the FDIC to pay taxes on real property that it holds in receivership so as not to deprive municipalities of the revenues it would have collected had the property been privately owned. Though the federal statute does not apply to water and sewerage charges, the court noted, no federal statute exempts the FDIC from paying these charges. Therefore, water and sewerage charges that continued to accrue on property while held in receivership by the FDIC were payable by the entity. The court further ruled that the real property tax, water and sewerage liens that arose before the FDIC took over as receiver attached and ran with the property, though the property could not be foreclosed upon by the local government without the FDIC's consent. While the property is in receivership, however, a lien for taxes, water and sewerage charges may not attach. Rather, the FDIC is personally liable for the unpaid taxes and other charges, though federal law exempts the FDIC from penalties and fines arising from the unpaid taxes. Therefore, liens for real property tax and water and sewerage charges that arose before the property was taken into receivership attached to the land and remained on the property; no lien for these charges attached while the property was in receivership, but payment could be sought from the FDIC personally rather than from the subsequent purchaser of the property.
Economic Incentives
Maready v. Winston-Salem, No. 95-CVS-623, (N.C. Supr. Ct. 8/25/95). The Forsyth County Superior Court struck a North Carolina statute authorizing local governments to make grants from property tax funds to attract business and industry through economic incentive programs as violative of the state constitutional proscription against expending public funds for private purposes. In the late 1980s a group of private individuals formed a non-profit corporation, Winston-Salem Business Inc. (WSB), for the purpose of attracting business to the City of Winston-Salem and Forsyth County. The corporation, acting as an arm of the City Chamber of Commerce, negotiated with other private corporations to locate or expand business activities in the City and County. These enterprises were induced to locate in the area through means of cash incentives offered by WSB. These monies were provided to WSB by the City and County from the general property tax fund. The guidelines followed by the City and County gave them virtually unlimited discretion with respect to the amounts and purposes for which City and County funds could be paid to private corporations for economic incentive purposes.
In striking the state statute granting localities such authority, the trial court found the statute unconstitutional because it permitted the expenditure of public funds for private purposes in violation of the North Carolina Constitution. In addition, the City and County produced no evidence of economic distress in the City or County, no evidence to show that the incentives paid or committed improved the unemployment rate, resulted in meaningful economic enhancement, or reduced the net cost of government or resulted in a reduction of property taxes to the City or County citizens. Even if the statute met the public purpose test, the court continued, it is still otherwise unconstitutional due to its ambiguity and vagueness, in that it does not contain any reasonably objective standards for the expenditure of public funds and is incapable of reasonably certain interpretation.
42 U.S.C. §1983
General Motors Corp. v. City of Linden, No. A-66/109 (N.J. Sup. Ct. 2/29/96). The New Jersey Supreme Court ruled that the taxpayer cannot maintain a §1983 action against the municipality, the tax assessor and an appraiser because such actions involving state and local taxes are not cognizable in federal or state court where an adequate remedy is provided at state law. The taxpayer claimed that the City and its employees discriminated against it by assessing its automobile assembly plant at an excessive value in retaliation for the taxpayer's appeals from prior assessments. The New Jersey Supreme Court ruled that under the U.S. Supreme Court's decision in National Private Truck Council v. Oklahoma Tax Commission, 115 S.Ct. 2351 (1995), Congress did not intend for §1983 to apply to state tax matters, even if suit is brought in state court, where there exists an adequate remedy at state law. In the present case, the court ruled that an adequate remedy existed at New Jersey law, because there are several opportunities for a taxpayer to raise constitutional objections to assessments before administrative and judicial bodies. The availability of these procedures are adequate to preclude §1983 suits in either federal or New Jersey courts.
Governmental Immunity
City of West Branch v. Miller, et al., No. 94-95-305 (Iowa Sup. Ct. 4/17/96). The Iowa Supreme Court ruled that a county's participation in an insurance pool that purchased a policy for its public officials' errors and omissions waived the governmental immunity of two county officials. In 1987, the voters of the City of West Branch approved the involuntary annexation of certain real property into the city. The County Board of Supervisors certified the election results and issued a final order certifying the annexation of the property. A county auditor and the county assessor failed to add the annexed property to the property tax base for the city, resulting in reduced property tax revenues to the city over a 4-year period. The omission was discovered in 1994.
In 1988, the county joined an insurance risk pool, of which only counties were permitted to be members. The pool self-funded certain risks, and contracted through private carriers for insurance against other kinds of liabilities, including errors and omissions of public officials. Upon discovering the omission in its property tax base in 1994, the city sued the county assessor and auditor, alleging that they had failed to correctly assess and collect taxes for the city. The city also claimed that the county officials had waived immunity from suit for their actions through the county's purchase of the errors and omissions liability insurance. The district court granted the officials claim of immunity, and granted the county's motion for summary judgment.
The Iowa Supreme Court reversed, explaining that mere participation in a risk pool does not constitute a waive of governmental immunity, but that the procurement of an errors and omissions policy for the county casts the matter in a different light. Under Iowa law, a municipality may purchase liability insurance, and an official's immunity is waived to the extent stated in the policy. The procurement of private policies by the pool is the equivalent of a policy that a municipality might procure from an agent. Because the act of procuring a private policy from an agent waives immunity, the court ruled that the same rule should apply where the private policy is procured by a risk pool. Thus, the county's purchase of liability insurance waived the county official's governmental immunity against claims in connection with the assessment or collection of taxes.
Intergovernmental Immunity
U.S. v. Matanuska-Subsitna Borough, et al., No. S-6128, (Alaska Sup. Ct. 12/8/95). The Alaska Supreme Court ruled that state law authorizes municipalities to tax property foreclosed on by the federal Farmers Home Administration (FmHA). Under Alaska law, local governments may levy property taxes on real properties retained as an investment by state agencies. The FmHA foreclosed on a number of properties located within the municipal borough, and before reselling them to new owners, the FmHA held title to those properties. The FmHA refused to pay taxes on these properties, claiming that (1) it was not retaining the properties for investment for profit, but only holding title temporarily until the properties could be resold and was therefore outside the scope of the state law provision authorizing local taxation of such properties; and (2) the doctrine of intergovernmental tax immunity prevents any taxation of FmHA property.
The Alaska Supreme Court ruled in favor of the borough. The federal laws creating the FmHA provide that the federal agency is permitted to make loans to individuals wishing to purchase property and that it also may foreclose on these properties if the borrowers fail to make the agreement payments. The provisions and regulations also specifically provide that land acquired by the FmHA is subject to state and local property taxes in the same manner and to the same extent as other property is taxed, unless specifically exempted by State law. Thus, the doctrine of intergovernmental tax immunity is not applicable. In addition, the court noted that the Alaska statute permitting the taxation of real property held by state and federal agencies, while not explicitly referencing properties held for resale, must be construed according to the common meaning of the words used. In that light, the court accepted the borough's argument that property acquired by a government agency through foreclosure and held for resale is held for investment purposes and is therefore taxable. Further, the legislative history of the Alaska statute authorizing the tax supported the borough's position. Finally, the agency's properties held for resale received the benefits and protections of services provided by the local governments, such as police, emergency services, fire, water, sewerage, etc., and public policy dictates that such properties acquired through foreclosure should pay its share of the costs of these services.
Native Americans
Op. Att'y. Gen., No. 96-2 (4/18/96). The Idaho Attorney
General issued an opinion that land located on Indian reservations
but owned individually by tribal members is subject to county
property taxes, unless the land is held in trust by the federal
government or otherwise subject to restrictions on alienation. The
U.S. Supreme Court ruled in 1992 that land patented to individual
tribal members pursuant to the General Allotment Act of 1887, under
which allotted parcels of land were held in trust for individual
Indians for a period of 25 years and then devolved to the individual
in fee simple, is subject to property tax by state and local
governments. Based on this decision, and on a series of decisions in
other jurisdictions, the Idaho Attorney General reasoned that state
taxation is not limited to lands patented under the Act but includes
all lands held by Native Americans as long as there are no restraints
placed upon the parcel's alienability. Additionally, nothing in the
Idaho constitution or statutes prevents the state from taxing
reservation lands owned by individual Indians. The Idaho constitution
provides that only land owned or reserved by the federal government
for its own use is not subject to state taxation. State statutory law
prohibits taxation only of land held in trust by the U.S. or land
that is otherwise subject to a federally imposed restriction against
alienability.
In re Alternative Minimum Refund Tax Cases, Nos. C2-95-1588 and C5-95-1715, (Minn. Sup. Ct. 4/12/96). The Minnesota Supreme Court ruled that the state's alternative minimum tax (AMT) for franchise tax purposes was not unconstitutional under the Commerce Clause of the federal constitution. Minnesota's AMT was imposed on corporate taxpayers at a rate of 0.1% of a corporation's property, payroll and sales in Minnesota. Taxpayers were required to pay total franchise taxes in an amount equal to the greater of the factors-based AMT and the income-based 9.5% tax. The AMT was intended to make all corporations doing business in Minnesota pay their fair share for the services provided by the state in proportion to their business activities in the state. The taxpayers challenged the AMT as being unfairly apportioned and discriminatory against interstate commerce under the four-part test for Commerce Clause constitutionality set forth in Complete Auto Transit v. Brady, 430 U.S. 274 (1977). The state supreme court analyzed the AMT for fair apportionment using the internal and external consistency tests as established by the U.S. Supreme Court in Container Corp. v. Franchise Tax Board, 463 U.S. 159 (1983), by which a taxpayer could prove that the operation of a state's tax, if applied by every state, results in more than 100% of the taxpayer's income being taxed. The taxpayer tried to prove its contention by presenting mathematical models and expert testimony to the effect that a hypothetical taxpayer could pay significantly more franchise taxes under the AMT if it operated within and without Minnesota than a taxpayer that operated solely within the state. The court rejected the taxpayer's evidence, noting that presenting a hypothetical taxpayer in a hypothetical tax situation has never supported the invalidation of a state tax law under the internal consistency test. By failing to show that there existed an actual taxpayer operating under the same financial circumstances as the taxpayer's hypothetical, the court found that none of the parties to this case suffered the same constitutional violations, and upheld the tax.
The court also rejected the taxpayer's argument that the tax discriminated against interstate commerce because it granted a credit to those corporations that paid income taxes to Minnesota, but not to corporations that paid income taxes to other states. The court pointed out that there is no constitutional requirement that a credit be granted for taxes paid to other states. Moreover, the tax was simply a means by which to ensure that corporations operating in Minnesota paid either the generally applicable income-based tax, or the AMT, whichever was greater.
Ontario Trucking Association, et al. v. State Department of Taxation and Finance, No. 7912-92, (N.Y. Sup. Ct. 1/19/96). The New York Supreme Court ruled that the state's franchise tax on issued capital stock and gross earnings of foreign transportation and transmission companies does not violate the Foreign Commerce, Import-Export, Supremacy or the Equal Protection or Due Process Clauses of the federal constitution. The taxpayer argued that the franchise tax did not satisfy the four-part test articulated in Complete Auto Transit v. Brady, 440 U.S. 252 (1977) and therefore impermissibly infringed on interstate commerce. Looking to a 1982 case involving the same tax, the court found that the tax did in fact satisfy the Complete Auto test because (1) adequate nexus existed; (2) the tax was fairly apportioned according to mileage in New York State; (3) the tax did not discriminate against interstate commerce; and (4) the tax was fairly related to services provided by the state. The additional requirements of the Foreign Commerce Clause were satisfied because (1) the tax did not expose foreign commerce to multiple taxation since it was based on gross earnings as apportioned to the state based on revenue miles in New York; and (2) the tax did not interfere with the federal government's ability to speak with one voice in foreign commercial matters because the tax did not contravene any existing treaty between the U.S. and Canada. Because the tax did not violate any existing treaty, it also did not violate the Supremacy Clause. No Import Export Clause violation existed, because the tax did not draw revenue from the import process, and did not divert import revenue from the federal government. The tax was not imposed on trucks transporting imported goods, nor on the goods themselves; the tax was levied on the privilege of doing business in the state. The tax further satisfied the minimal connection and rational relationship requirements of the Due Process Clause, since the taxpayer availed itself of the safe business environment, physical infrastructure and other protections afforded by the state. That the taxing formula was based on mileage in the state provided a rational relationship between the income attributed to the state and the intrastate value of the taxpayer's enterprises. Finally, no Equal Protection Clause violation existed, because there was a rational basis for imposing the tax.
Sinclair Paint Co. v. California Board of Equalization, No. C021559, (Calif. Ct. App. 4/30/96). The California Court of Appeals invalidated a state statute imposing fees on manufacturers of products containing lead because the fees were in reality a tax, and the statute imposing the levy was not passed by a two-thirds vote of the legislature as required by the California constitution. In 1991, the California legislature enacted the statute by a simple majority vote to provide evaluation, screening and medical follow-up services to children at risk for lead poisoning. This program was to be wholly funded by fees imposed on manufacturers of commercial products containing lead. The plaintiff challenged the fees on the grounds that they were really taxes, because the statute imposing the levy was passed without a two-thirds majority vote as required by the state constitution. The Court of Appeals agreed, noting that there was nothing on the face of the statute to show that the fees collected were used in any way to regulate the plaintiff's activities, and the statute does not require the plaintiff to satisfy any other conditions. The only activity the regulatory authority connected with the plaintiffs' business, involved the calculation of the plaintiff's share of the program. Additionally, the court noted, the fees cannot be considered payment for a government benefit or service, because the funds are used to benefit children exposed to lead, not the plaintiff or others in similar positions.
Franchise Tax -- Nexus
Cerro Copper Products, Inc. v. Alabama, No. F. 94-444 (Admin. Law. Div. 12/11/95). The taxpayer, a Delaware corporation with principal offices in Illinois, manufactures and sells copper tubing and other copper products. Although qualified to do business in Alabama, the taxpayer had no property or employees and maintained no manufacturing facilities in the state. The taxpayer solicited sales in Alabama via direct mail, telephone and telecopier from outside the state. All Alabama orders were subject to approval in Illinois, and all goods were delivered to Alabama customers by third-party commercial carriers. All other customer activities, such as billing, credit decisions and accounts receivable, were performed or maintained in Illinois. The taxpayer paid franchise tax to Alabama during the years at issue, and subsequently filed for a refund on the basis that it did not have substantial nexus with Alabama, was not doing business in Alabama, and did not have capital employed in Alabama during those years, all or one of which are needed to be subject to Alabama tax liability under the state's franchise tax statute.
The ALJ first determined that the taxpayer did not have the requisite Commerce Clause nexus with Alabama as required by Quill v. North Dakota, 112 S.Ct. 1904 (1992), because it did not have physical presence in the state. The ALJ opined that Quill was not limited by the U.S. Supreme Court to the sales and use tax area, as the Department of Revenue contended. Rather than limiting Quill to sales and use taxes, the ALJ pointed out, the U.S. Supreme Court left the issue open "by stating that silence does not imply repudiation of the Bellas Hess (physical presence) test concerning other taxes." Thus, the ALJ reasoned, Quill prevents a state from taxing an out-of-state taxpayer unless the taxpayer has at least some physical presence in the taxing state. As a practical matter, the ALJ continued, if the taxpayer does not have physical presence in the state for sales and use tax purposes, it clearly does not have physical presence for purposes of the franchise tax. "The same benefits of a bright-line, physical presence test cited in Quill for sales and use tax purposes would also apply equally to other types of taxes."
The ALJ further rejected the Department's contention that sufficient nexus existed between the state and the taxpayer due to the presence of intangible accounts receivables in the state, based on the South Carolina Supreme Court's reasoning in Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E.2d 13 (S.C. S.Ct.) cert. denied 114 S.Ct. 550 (1995). The ALJ agreed with the South Carolina court's decision that Geoffrey availed itself of the South Carolina market to support a finding of due process nexus, but disagreed with that court's analysis of the Commerce Clause issue. The ALJ declined to support the view that receivables generated by a taxpayer's activities in a state are necessarily located in that state, and also disagreed with the notion that the use or presence of intangibles is, by itself and without some physical presence, sufficient to establish substantial nexus for purposes of the Commerce Clause. Indeed, the ALJ pointed out, even if he could agree with the South Carolina court's analysis of the Commerce Clause issue, Geoffrey can be factually distinguished from the matter at hand because the taxpayer in this case was not licensing an intangible, unlike the taxpayer in the Geoffrey case.
In Re ***, Hearing Nos. 27,905 and 32,453 (Admin. Law Dec. 4/1/96). An Administrative Law Judge denied the taxpayer's claim that it is exempt from the state's franchise tax because it is engaged solely in interstate commerce. The taxpayer is a Kansas corporation with its principal place of business in that state. The taxpayer's main customer is located in California, who operates an overnight air-freight service based in Ohio. Another company owned by the taxpayer's customer contracts with the U.S. Postal Service to perform overnight freight transportation. The taxpayer operates several aircraft on subcontract from these companies but does not own any aircraft itself. The aircraft are maintained and piloted by the taxpayer, but no loading or unloading services are provided. The taxpayer employs Texas mechanics to service the aircraft operating in that state. Additionally, the taxpayer rents a small storage area at each airport where its employees work in Texas.
The ALJ rejected the taxpayer's assertion that it is engaged wholly in interstate commerce and is therefore not subject to the state's franchise tax. The ALJ noted that the taxpayer employs six people who are based and work in Texas, whose job is to maintain and service the aircraft the taxpayer flies in and out of the state in fulfillment of its contractual obligations with its customers. In addition, the taxpayer rents property in Texas to support the services provided in Texas. In order to be exempt from the franchise tax, the ALJ suggested, the taxpayer must first prove that the franchise tax, as applied, violates the test for Commerce Clause constitutionality outlined in Complete Auto Transit v. Brady, 430 U.S. 274 (1977).
Franchise Tax, Apportionment, Sales Factor -- Throwback Rule
In Re ***, Hearing No. 30, 634 (Admin. Law Dec. 12/8/95). The taxpayer, a Texas corporation, manufactures kitchen cabinets. The taxpayer shipped its products all over the Nation via common carrier. During audit, the state auditor determined that the taxpayer did not have nexus with at least six of the states to which the taxpayer shipped its products, and applied the throwback rule to include the taxpayer's receipts for these sales into its Texas receipts for purposes of the franchise tax. The taxpayer conceded that it did not have nexus with three of the named states, but argued that it did have nexus with the remaining three. Therefore, the receipts from sales in those states should not have been thrown back to Texas for inclusion in its Texas receipts. The taxpayer pointed out that it had representatives soliciting sales on its behalf in the three disputed states, and that its solicitation activities were sufficient to establish constitutional nexus. The Administrative Law Judge rejected this contention, noting that there was no evidence that the taxpayer actually solicited sales of its products in two of the three states (even though sales were made there) and that there was no evidence that the taxpayer solicited sales for its products for two of the three report years in the third state. (For the third year, the ALJ allowed the sales to be removed from the throwback rule's reach because the taxpayer was able to provide sufficient evidence to establish nexus for that year.)
Business License Tax
City of Winchester v. American Woodmark Corp., No. _____, (Va. Sup. Ct. 6/7/96). The Virginia Supreme Court upheld the ruling of the trial court that the City of Winchester's Business, Professional, and Occupational License (BPOL) tax violates the Commerce Clause of the federal constitution because the tax is not fairly apportioned. The taxpayer, a Virginia corporation, maintains its headquarters in the City of Winchester, but operates a number of manufacturing, storage and distribution facilities throughout the Nation. None of these facilities are located in Virginia. The city commissioner of revenue assessed a BPOL tax on the taxpayer on 100% of the taxpayer's revenue. The taxpayer complained that the tax was not fairly apportioned, and was therefore a local restraint on interstate commerce. Analyzing the tax under the external consistency test for fair apportionment, the state supreme court explained that the BPOL would only pass muster if the assessment was fairly reflective of the taxpayer's in-state activities. The court determined that the taxpayer presented clear and cogent evidence that the assessment bore no rational relationship to the income attributable to the state and the intrastate value of the taxpayer's enterprise. A great deal of the taxpayer's activities took place outside of Virginia, and there was no question that these activities were revenue producing for the taxpayer and greatly enhanced the value of the taxpayer's business product. Therefore, basing the assessment on 100% of the taxpayer's revenues, which included revenue realized in other jurisdictions, fails the fair apportionment requirement for constitutionality under the Commerce Clause.
Motor Vehicles -- Native Americans
Cree, et al. v. Waterbury, et al., No. 95-35102 (9th Cir. 3/6/96). The plaintiffs in this case challenged the State of Washington's attempt to impose state truck license and permit fees on members of Yakama Indian Tribe using federal and state highways to conduct their logging business. The tribe claimed that the fees violate their right to use the public highways as granted under the Yakama Treaty of 1855. The 1855 Treaty between the federal government and the tribe allowed roads to be run through the reservation, and provided that the right-of-way, with free access to the nearest public highway, is granted to the tribal members "in common with" all other U.S. citizens. The U.S. Supreme Court, in interpreting that portion of the treaty dealing with fishing rights, determined that the tribe's treaty rights preempts the state from imposing generally applicable regulations on individual tribal members, such as the imposition of fees for fishing with nets. The district court held that the U.S. Supreme Court's analyses and rulings on the tribe's fishing rights equally applied to the tribal member's use of public highways, and therefore preempted the state's authority to impose licensing and permit fees on tribal truckers.
The 9th Circuit reversed the district court, reasoning that when examining the rights of an Indian Tribe under a treaty, a court must not only look to the treaty language itself, but also to its historical context and the conduct of the parties since the treaty's signing to ascertain the parties' intent, especially as it relates to the Indians' understanding of the meaning of the treaty terms. In analyzing the fishing rights cases, the U.S. Supreme Court found that the Yakama tribe enjoyed special rights with respect to fishing despite the "in common with" language found in the treaty, because in 1855, the tribe understood the treaty to permit them to continue to use the same age-old fishing practices on waterways that were no longer located on land belonging to them. This understanding formed a material and basic part of the treaty, and of the Indians' understanding of the treaty. In contrast, the appeals court noted, there has been no finding on what the Indians understood to be their rights in using government-built highways. Thus, the lower court erred in relying on the fishing rights cases to find for Tribe in the present matter. Because no factual inquiry had been made as to the parties' intent and understanding at the time the treaty was signed as to the tribe's highway rights, the court reversed and remanded the case to the district court for a determination of the precise scope of the tribe's highway rights.
Motor Vehicles
Buckley Powder Co., v. Department of Revenue, No. 94CA1584, (Colo. Ct. App., 3/7/96). The Colorado Court of Appeals determined that a lower court's ruling that certain state motor vehicle taxes were unconstitutional but did not provide a remedy for the taxpayer was improper, because the decision denied the taxpayer's request for class certification of vehicle owners entitled to refunds, referred the matter of remedy to the taxing agency, and failed to grant a declaratory judgment for the taxpayer. The lower court denied the taxpayer's request for class certification because the taxpayer failed to show there was a need for certification. The appellate court found that Colorado's Rules of Civil Procedure do not require a showing of need before class certification can be granted. The appeals court also ruled that the lower court erred in allowing the Department of Revenue to determine the remedy for the unconstitutional tax, saying that the question of a proper remedy was not one the court could delegate. Finally, the lower court's failure to grant the taxpayer declaratory relief was improper because that court's determination that the tax statutes were unconstitutional required the granting of such relief.
Drug Taxes
McMullin v. South Carolina Department of Revenue and Taxation, No. 24409 (S.C. Sup. Ct., 4/15/96). In February, 1994, the taxpayer was arrested for possession of cocaine and crack cocaine. The drug containers bore no tax stamps or other indicia of payment of the state's drug tax. The taxpayer was convicted of possession and distribution of illegal narcotics. After the taxpayer's conviction, the Department of Revenue and Taxation issued the taxpayer a notice of assessment for over $105,000 in unpaid taxes, penalties and interest for the drugs found in his possession. The taxpayer appealed, arguing that the assessment violated his 5th Amendment right against double jeopardy for the same offense, because the state had previously imposed a criminal penalty for possession of the illegal drugs. The South Carolina Supreme Court upheld the assessment. Examining the U.S. Supreme Court's decision in Montana Department of Revenue v. Kurth Ranch, 511 U.S. ____ (1994), the court determined that the "unusual features" of Montana's drug tax statute that rendered it unconstitutional were not present in South Carolina's statute. Unlike Montana's statute, South Carolina's law imposes the tax whether or not the taxpayer has been arrested, meaning that the class of taxpayers subject to the tax "is not determined by the actions of law enforcement personnel." Therefore, the tax does not constitute a punishment and the double jeopardy prohibition does not apply.
Ward v. Comptroller, Nos. 01-93-00294-CR and 01-93-00301-CR (Tex. Ct. App. 1/29/96). The Texas Court of Appeals dismissed criminal indictments against an individual for marijuana possession on which no tax had been paid because the individual had already been assessed the Texas controlled substances tax, which constitutes a punishment within the meaning of the Double Jeopardy Clause of the 5th Amendment to the federal constitution. Following the U.S. Supreme Court's analysis in Montana Department of Revenue v. Kurth Ranch, 511 U.S. ____ (1994), the appeals court determined that the tax was a punishment because it was conditioned on the commission of a crime; was assessed on goods that the taxpayer neither owned nor possessed when the tax was imposed even though the tax was purported to be a property tax; was imposed at an excessively high rate; and was assessed in most instances after the trafficker was arrested and the goods confiscated, despite the law's provision that the tax was payable prior to (or in the absence of) an arrest. Additionally, the court found that the right to collect the tax was subordinate to the right of law enforcement agencies to seize, forfeit and retain property, which indicated that there existed a close connection between the taxing and prosecuting authorities and further suggested that the tax was intended as a punishment rather than a method of raising revenue.
In response to the U.S. Supreme Court's decision in Fulton v. Faulkner, 516 U.S. ___ (1996), where the Court struck North Carolina's intangibles tax on corporate shares as discriminatory under the Commerce Clause of the U.S. Constitution, the Georgia General Assembly has repealed its intangibles tax, effective immediately. The tax was levied on stocks, bonds, cash, certificates of deposit, accounts receivables, mutual funds and similar holdings. Taxpayers who have not filed their 1996 Intangibles Tax Return need not do so, the state Department of Revenue announced.
The Vermont General Assembly has passed, and the Governor has signed into law, S. 337 which permits the Vermont Tax Commissioner to use private collection agencies for collecting any tax against delinquent taxpayers. The law previously restricted the use of private collection agencies only to nonresident taxpayers, or to those who owed one of the trust fund taxes (sales and use, income tax withholding, meals and rooms tax) for 540 days or more. The law also applies sanctions to any employee of a private collection agency for violation of the state's confidentiality laws, including being barred from state contracts or employment for 5 years. Vermont hopes to collect $1.5 million before July 1, 1996, and an additional $9 million the next fiscal year. The law is scheduled to sunset in 1998.