If at First You Don’t Succeed . . .

Rusty Little

The battle between online travel companies (“OTCs”) such as Expedia, Inc. and state taxing jurisdictions over the taxability of their “facilitation fees” has been raging for quite some time now. At issue is whether the service or facilitation fee that the OTC charges hotels for finding a customer and booking a room is subject to any applicable hotel occupancy tax. When this issue has been litigated, the OTCs have had mixed results in various jurisdictions all over the country but in most cases, the courts have ruled that the facilitation fees are subject to tax based on interpretations of individual state or local statutes.

On November 29, 2011, the Appellate Division of the Supreme Court of New York reversed a lower court’s order which had allowed New York City to change its hotel occupancy tax rules to tax the entire amount paid by a customer for a hotel room (including the portion attributable to the OTC’s facilitation fee). (See Expedia, Inc., et al. v. City of New York Dep’t of Finance, 2011 NY Slip Op 08648 (App. Div. 1st Dep’t, Nov. 29, 2011)).

The Appellate Division unanimously ruled that the statute (Local Law 43 enacted in 2009) violated the New York Constitution. The Appellate Division noted that “the plain language of the enabling legislation did not clearly and unambiguously provide the City with broad taxation powers with respect to imposing a hotel occupancy tax. Rather, it permitted the City to impose the tax on ‘hotel occupants.’” In other words, the statute permitted tax to be assessed on the charges for the room but not on the facilitation fees, and the City should not be allowed to arbitrarily expand the definition of the tax base.

Not surprisingly, the City has filed a motion to re-argue and/or appeal the case and “try again.” Among the City’s arguments is one that the Appellate Division “overlooked or misapprehended the facts or law” in its reversing decision. The City also argues that the statute changed the method of calculating the occupancy tax and that the tax is based on the full price of the room “regardless of whether such an amount is received from a hotel occupant by a hotel operator, or a room marketer.”

With regard to post-2010 facilitation fees, the motion filed by the City is somewhat of a moot point anyway because legislation was passed in 2010 that does in fact give the City the right to subject the facilitation fees to tax. Regardless of the outcome of this case, this is another example of a taxing jurisdiction pushing their existing tax statutes to the limit and/or enacting new tax statutes, to target business models which would otherwise legitimately avoid tax.

State Tax Alerts - This Week's Stories Worth a Second Look

Rusty Little

In case you missed them, the following is a summary of a few key state tax developments, news articles, and observations during the past week:

• Simon Property Group sues Indiana over e-commerce sales tax – from Bloomberg Businessweek
• Here's the latest on the Enzi-Alexander sales tax bill (the 3rd online sales tax bill) – from CBS News
• New York Public Employees Federation agrees to wage and benefits concessions. 37 of the 42 New York Department of Taxation and Finance attorneys were to be laid off which would have greatly affected many functions in the Department of Taxation including petitions for advisory opinions - from the New York Times
• Colorado Voters Reject Income and Sales Tax Increase – from the Denver Post
• Illinois H.B. 3869 is introduced to repeal click-through nexus law – from Illinois Representative Dave Winters
• More taxpayers are now eligible for North Carolina VDA program and lookback period changed from 4 years to 3 years – from NCDOR
• Ohio proposed rule on amnesty payment plan is revised – from CCH
• Rhode Island Proposed Reg CT 11-15 requires proforma combined reporting disclosure (even though Rhode Island is separate return state) – from CCH
• Texas: Constitutional challenge to franchise tax filed – from CCH

State Tax Alerts - This Week's Stories Worth a Second Look

Rusty Little


In case you missed them, the following is a summary of a few key state tax developments, news articles, and observations during the past week:

• Still Alive and Kickin’: “Cost of Performance” Sourcing for Sales - While many states are moving away from the cost of performance approach in favor of marketplace sourcing, cost of performance is still alive and kickin’. Re-discover some of the benefits and considerations of using cost of performance and examine whether an opportunity still exists to take advantage. Read entire SALT To Taste article here.
• The Marketplace Equity Act was introduced to Congress this week. This new online sales tax collection bill differs from the Mainstreet Fairness Act in many ways – from the Tax Foundation Tax Policy Blog
• eBay Voices Disapproval of Current Internet Sales Tax Bills – from eBay’s public policy blog
• The New York Department of Taxation and Finance will eliminate 37 of its 42 in-house legal counsel positions (no, that’s not a typo – this will have major ramifications in a lot of areas) – from timesunion.com
• How will the IRS amnesty program to convert independent contractors to employees affect the state treatment? Article from Forbes
• Harrisburg, Pennsylvania Files for Bankruptcy – from Businessweek

State Tax Alerts - This Week's Stories Worth a Second Look

Rusty Little

In case you missed them, the following is a summary of a few key state tax developments, news articles, and observations during the past week:

Groupon and Living Social are two popular Internet companies offering online discount vouchers for deals at your favorite business establishment.  This business model opens up a can of worms for sales tax - Opening Up A Can Of Worms 
 
The US Supreme Court declines to hear the KFC Corp v. Iowa and Lamtec v. Dept of Rev. of Washington cases - from the Tax Foundation
 
California FTB issues guidance on series LLCs - from TEI's blog
 
SEC/EDGAR filing is considered a "telecommunications service" in Tennessee - from the CCH Community blog

The latest with Amazon:

• Amazon to collect Tennessee sales tax beginning in 2014 and will add 2,000 full-time jobs at new distribution centers - from The Charlotte Observer
• Pennsylvania introduces click-through nexus bill (H.B. 14) - from CCH

Opening Up A Can Of Worms – Groupon, Living Social, et al.

Image via photobucket.com

Rusty Little

A can of worms to be used as bait by a fisherman is easy to open, but not so easy to close. Once the wriggling worms discover the opportunity to escape, it is difficult to contain them.

Groupon and Living Social are two of the most popular Internet companies offering online discount vouchers for deals at your favorite restaurant, golf course, auto mechanic, or other local business. Since Groupon is the largest and most popular, we’ll use it here as an example.

Snapshot of how it works:

• Groupon sends an e-mail alert notifying the customer that a restaurant has posted a $20 voucher for sale at a price of $10.
• Customer goes online and purchases the $20 voucher for $10.
• Customer dines at restaurant and incurs a bill of $25 (ignore sales tax for the time being).
• Customer gives the $20 voucher to the restaurant along with $5 cash for the difference.
• Restaurant notifies Groupon that the voucher has been redeemed; Groupon sends 70% of the $10 voucher purchase price to the restaurant; and Groupon retains 30% as a “promotion and distribution fee.”
• At the end of the day, Groupon has received $3; the restaurant has received $12; and the customer has paid $15 for the meal.

(For more details, you can review the Groupon Merchant Account Terms and Conditions here).

That all seems straightforward enough until you consider the can of worms it opens up for sales tax purposes. What is the purchase price of the meal? Is it the $25 on the total bill? Is it the $15 the customer actually paid? Is it the $12 that the restaurant ultimately received? Is the discount voucher being offered by the restaurant or by Groupon (possibly similar to a third party coupon)? Is this simply a reduction in sales price by the restaurant? Is this really a gift certificate? What is really happening here?

New York and Massachusetts attempted to address these issues recently in TSM-M-11(16)S and Working Draft Directive 11-XX, respectively. Even in the titles of these two state releases, there are notable differences in semantics with New York referring to them as “prepaid discount vouchers” and Massachusetts calling them “third party coupons.”

Not surprisingly, both New York and Massachusetts determined that sales tax should be based on the $25 in the example above. New York stated that it will treat the discount certificates as stated face value vouchers and, although no statutory basis for its conclusion was provided, that the gross sales price is the taxable amount. Massachusetts essentially classified the “third party coupons” as gift certificates based on its statutory definition of gift certificates and determined that the gross sales price in a purchase is subject to sales tax accordingly.

However, another worm that attempts to wriggle out of the can is the fact that many (possibly most) Groupon deals are for a specific item or service and are not denominated in dollars. The Groupon may be “$20 for two seafood dinners,” “$20 for a one hour massage,” or “$50 for a one-night hotel stay.” Interestingly, New York did address specific product offers such as these and reached a contradictory conclusion. For specific product vouchers, the taxable value is the amount paid for the voucher and not the value of the product (assuming the product or service is taxable in New York). How can New York tax the entire “value” of the meal in our example above, but only tax the amount paid for the certificate if the deal had been denominated by the product and not in dollars?

Regardless of the conclusions reached by New York and Massachusetts, there is a good case to be made that the $15 price in our example is the taxable amount. The terms of the Groupon Agreement are too extensive to restate here but, in a nutshell, the merchant is the party that makes the offer for a discount deal and not Groupon. It seems clear under the terms of the agreement that the “deals” are nothing more than the merchant choosing to offer a discount on its prices, and it is the discounted price, therefore, that should be subject to sales tax.

In addition, if the merchant chooses to do so, a deal does not go “live” unless a minimum number of purchases are made. This is the group buying power model that Groupon was built on, and a “negotiated” lower price should be the amount subject to sales tax. If a merchant chooses to reduce its sales price because of the buying power of its customer(s), then the discounted sales price has always been the sales tax base for sales tax purposes. But as discussed in our recent SALT To Taste article, the states have already proven in the recent highly publicized discount travel company cases that they are willing to recharacterize what is being sold (and by whom) for their benefit.

The can of worms opened with the Groupon business model is not just limited to sales tax issues. Unclaimed property comes immediately to mind, but we’ll save that discussion for a later day.

State Tax Alerts - This Week's Stories Worth a Second Look

Rusty Little

In case you missed them, the following is a summary of a few key state tax developments, news articles, and observations during the past week:

• SALT To Taste: Missouri Got It Right, But Will It Be Of Any Use? - In a recent decision, the Supreme Court of Missouri ruled in favor of a group of travel companies on a sales tax issue for which the travel companies have had limited success in other states.  Although this was a favorable decision, it is a reminder that these internet service business models are susceptible to attack. See full text of article here.
• California Governor Jerry Brown signs bill (AB 155) to delay "Amazon Law" until September, 2012 - from the LA Times
• Massachusetts and New York address sales tax issues relating to Groupon/Living Social arrangements - Massachusetts Working Draft Directive 11-XX and New York TSB-M-11(16)S
• Colorado amnesty program begins October 1 and runs to November 15 - details from their website

Amazon.com Click-Through Nexus Case Remanded

On November 4, 2010, the Appellate Division of the New York Supreme Court remanded a sales and use tax case involving Amazon.com, LLC and Overstock.com, Inc. for further discovery.  The Appellate Division remanded the case back to the lower court primarily due to a lack of factual information needed to determine if New York's "click-through nexus" statute violates the Commerce and Due Process Clauses "as applied" to the Plaintiffs' facts.  The decision also provided additional insight regarding the court's view of Internet activities that constitute solicitation for sales tax purposes.

Read entire SALT To Taste newsletter here.