Most people’s understanding of the Internet extends about as far as their eyes can see. In other words, they know that if they type a few words into the little white box beneath the colorful Google logo, within a fraction of seconds, hundreds of thousands of (hopefully) helpful results will appear on the screen. And that’s awesome. But few people, myself included, fully understand what takes place beyond the keyboards, screens, and cords. In fact, many people are likely willfully blind to the back-end operations of the Internet.
There are always “traps” in the tax law, where taxpayers unwittingly walk into a tax problem that they didn’t see coming. In the residency area, some taxpayers often got trapped on a move-in or move-out situation, with the Tax Department taking the position that “statutory residency” trumps “domicile.” Thus, a taxpayer who didn’t move into New York until, say, August of a particular tax year still could be taxed as a full-year resident if he or she ran afoul of New York’s statutory residency test (i.e., the taxpayer maintained a permanent place of abode for almost the whole year and spent more than 183 days in the state). Indeed, the Nonresident Audit Guidelines (see page 64) contained a whole section about this.
Guess what? We may have closed this trap!
We recently authored an article in State Tax Notes analyzing New York’s complicated rules affecting sales taxation of contractor services and capital improvements. In this follow-up post, we want to highlight a few practical problems and issues that taxpayers frequently confront by taking a look at several recently litigated cases involving capital improvements.
Businesses become entangled in these rules quite often. The rules themselves are complicated, and the answer to the question “Is this subject to tax?” nearly always depends upon the specific facts. For anyone who is sitting down to perform a client’s or company’s weekly bookkeeping or, worse, for those who are facing an audit, we can draw a few useful lessons by looking at the recent misfortune of others. A quick survey reveals that, so far this year, at least four different cases involving claims of capital improvements went all the way to trial and were litigated in New York. In each case the auditor – not the taxpayer – won. Let’s take a quick peek at these cases to see why.
For those of us who regularly handle state audits, the focus is usually on the legal or factual arguments as to why no additional taxes are due. And it’s great when our clients can walk away with no additional taxes to pay. But in many cases, a “win” means negotiating a reasonable settlement of a difficult issue. In those cases, the final bill can come as a shock to taxpayers, once interest is included. Particularly with interest rates at historical lows, we expect those low rates to carry over to our tax bills. For the IRS and states that base their interest rate on the federal short-term rate or a similar metric, that’s true. The current IRS interest rate on individual underpayments and overpayments is 3%—not so bad.
But states are by no means required to follow the IRS on interest rates, although quite a few do. Some states may start with the IRS underpayment rate but then tack on a few percentage points (e.g. Virginia adds 2%). Other states, such as North Carolina (5%), Kansas (4%), Michigan (4.25%), and Oregon (4%), also keep their rates in line with overall interest rates.
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We have all heard the jokes. “How many lawyers does it take to screw in a light bulb?” “Why won’t sharks attack lawyers?” “What’s the difference between an accountant and a lawyer?” Or, “How many lawyer jokes are there?” Well, actually, the last one’s easy. Only three. The rest are true stories.
But despite the general public’s lampooning of attorneys, New York State taxpayers might have found a lawyer they can celebrate (in addition, of course, to their friends at Hodgson Russ). Meet Patrick J. Carr, a retired New York State attorney living in Florida. Last month, a state administrative law judge (ALJ) ruled that Mr. Carr did not have to pay a $68,000 tax bill for services rendered in Florida. Mr. Carr was a member of the New York and New Jersey state bars and was admitted pro hac vice in Florida (for non-lawyer readers, “pro hac vice” is a fancy Latin way of saying that an attorney who has not been admitted to practice in a certain jurisdiction is permitted to help litigate a particular case in that state). And although Mr. Carr did not perform any services or maintain any office in the state, New York attempted to tax his income solely because of his New York law license. Are you starting to root for Mr. Carr? Thankfully, however, ALJ Barbara Russo dismissed the state’s position and announced that “merely holding a license to practice in New York is not the equivalent of carrying on a profession in New York state.” So why did New York think that it had the right to tax Mr. Carr?
The term “cloud computing” is broad enough to cover a vast array of transactions, all of which use the Internet in some fashion. Two of the most prevalent forms of cloud computing are “software as a service” (SaaS) and “infrastructure as a service” (IaaS). SaaS refers to transactions where software is accessed by a customer remotely over the Internet. The customer does not receive a copy of the software, and the software does not reside on the customer’s hardware. Rather, the customer gains access to the software typically by using its own Internet browser. IaaS refers to transactions where a customer remotely accesses hardware over the Internet. The customer never takes physical possession of the hardware. Rather, the customer accesses the service provider's hardware instead of purchasing and maintaining its own hardware.
Piggy-backing on my colleague Drew’s sales tax update last week on new use tax rules for yachts already in effect, I’m writing with another timely update on New York’s soon-to-be-effective sales and use exemption rules for “general aviation aircraft”.
In less than 40 days, the exempt status previously reserved only for “commercial aircraft” will be extended to include “general aviation aircraft” in New York, which include recreational planes, private and corporate jets and helicopters, etc.—basically, aircraft used in civil aviation that aren’t “commercial aircraft.” As part of the 2015-2016 budget bill, the New York Legislature adjusted the rules imposing sales and use tax on nonresident—and resident—aircraft owners alike. The Legislature added a new exemption to Tax Law section 1115 for general aviation aircraft, which is defined to include all aircraft “used in civil aviation,” except commercial aircraft used to transport persons or property for hire. It joins the exemption already on the books for sales and use tax on commercial aircraft primarily engaged in intrastate, interstate, or foreign commerce. The new rule will also exempt sales of machinery or equipment installed on the aircraft. The rule does not exempt drones—sorry, all you early adopters out there.
Fourth of July has come and gone. This year, nonresidents (more on this later) who brought a new boat to New York for the first time were hit with a breath of fresh air—and I’m not talking about the fresh air from [insert any of New York’s many boater-friendly bodies of water]. In years past, nonresidents who purchased a boat outside of New York and later brought that boat into New York were hit with full New York use tax on the purchase price or fair market value of that boat. As part of its 2015 budget, the New York State Legislature amended the sales and use tax rules applicable to boats.
Earlier this year, Governor Cuomo announced that 28 district attorneys’ offices around the state would receive grants totaling nearly $15 million under New York’s Crimes Against Revenue Program (CARP), which provides substantial monetary grants to district attorneys’ offices in the state to investigate and prosecute crimes against the public fisc. Using CARP funds, DAs in cash-strapped counties can secure resources for staff and other expenses to investigate and prosecute tax crimes. From what we’re seeing, they’re doing just that.
Taxpayers tend to face a difficult road when litigating tax disputes. We recently wrote about that here. It can be even more challenging, and costly, for taxpayers when they have to deal with more than one taxing authority on the same issue. For example, a federal income tax audit that increases a federal tax liability may very likely trigger a corresponding increase in state income tax. Indeed, in New York, like in most states, taxpayers have an affirmative obligation to report a “federal change” to the Department of Taxation. If the Internal Revenue Service (IRS) uncovers additional revenue, New York wants to ensure that it gets its piece of the pie, too. Yet, one New York taxpayer just took this issue – the obligation to report a federal change – to court and won. And he did so in a case involving a tax shelter!