Minutes of TEI-MTC liaison meeting.

On April 25, 1996, representatives of Tax Executives Institute held the organization's second annual liaison meeting with the Multistate Tax Commission. The meeting, which was held in Denver, was organized under the auspices of the Institute's State and Local Tax Committee, whose chair is Christopher W. Baldwin of TEI's Baltimore-Washington Chapter. The minutes of the meeting follow.

Tax Executives Institute's delegation to the meeting was chaired by TEI President Jack R. Skinner and by Christopher W. Baldwin, chair of the Institute's State and Local Tax Committee. The Institute's full delegation to the meeting is set forth in the accompanying box. The MTC's delegation was led by Bob Hanson, who is North Dakota's State Tax Commissioner, and by Dan R. Bucks, the MTC's Executive Director. The members of the MTC's delegation to the meeting are identified in the accompanying box.

Mr. Hanson called the meeting to order by thanking TEI's delegation for traveling to Denver. He said the meeting presented TEI and the MTC with a unique opportunity to explore issues of common concern; he added that taxpayers and tax administrators may not always agree with each other, but that did not mean they should be disagreeable. Mr. Skinner concurred. He said that the Institute's liaison relationships with the MTC, the Federation of Tax Administrators, and individual States were very important. Open communication was key to making progress on major issues of tax policy and administration.

Uniform Resale Certificate

Turning the agenda for the meeting, Mr. Bucks said that one area where tax administrators and taxpayers shared a common goal involved the development of a uniform resale certificate. If taxpayers were able to use a single form in all jurisdictions (and that form contained the information required by the jurisdictions), the overall cost of tax administration could be reduced. He said that the MTC was delighted that earlier in the year the States that had signed on to the MTC's Uniform Resale Certificate had acceded to changes necessary to make the form acceptable to California. The changes necessitated adjustments to (or the addition of) a number of footnotes on the form. At Mr. Buck's request, Michael Mazerov (the MTC's Director of Policy Research) reviewed the procedure for having proposed changes considered by the States. (The MTC's revised certificate, with the changes red-lined, is reprinted on CHANGES FROM VERSION OF CERTIFICATE INDICATED WITH STRIKE-THROUGHS AND DOUBLE UNDERLINE)

Mr. Bucks commended Mr. Mazerov for his efforts in broadening the acceptability of the model certificate and also commended the States for proving receptive to the California-supported changes. In total, 31 States had agreed to accept the model certificate.

Mr. Bucks acknowledged that TEI was desirous of other changes in the model certificate (for example, its expansion to include services), and that although such changes "should be easy" to effect, they often proved problematic. Although the model certificate was now accepted by States whose economy make up a significant percentage of the Gross Domestic Product, the MTC supported efforts to induce even more States to accept the model. He suggested that, for more progress to be made, the issue had to become "visible." He suggested that TEI (and its local chapters) could be effective in this regard, encouraging additional States to sign on to the model certificate. He commended the Institute's efforts to identify ways in which the model certificate could be expanded and simplified further.

Timothy J. McCormally said TEI was eager to increase the States' acceptance of the model certificate and, also, to work with the MTC in broadening the certificate. He asked for guidance from the MTC on which States should be targeted for action. Mr. Mazerov said that the States could be segregated into several categories. The first category -- consisting of Arizona, Connecticut, Florida, and Kentucky -- consisted of States whose laws and regulations seemingly permit the use of the model certificate without any change. The laws of two additional States -- Ohio and Pennsylvania -- permit the use of certificates "substantially similar" to the State's own form, and accordingly, the model certificate should prove acceptable in those States without any statutory or regulatory change.

The second broad category of States consisted of jurisdictions whose regulations require (or suggest) that the States' own form must be used. In these States, some administrative action is likely required before the States can accept the model certificate. Mr. Mazerov identified the following States as falling within this second category: Indiana, Louisiana, Massachusetts, New Jersey, New Mexico (other than with respect to drop shipments), New York, North Carolina, Virginia, and West Virginia.

The third category of States included those jurisdictions where a formal statutory change is required to make the model certificate acceptable.

Mr. McCormally suggested that a two-prong, coordinated approach be adopted: The MTC could encourage the States to accept the model certificate, and TEI could complement those efforts by contacting the States and underscoring the desirability of such action. TEI's communication, which might be coordinated by the Institute's local chapters, could state something like the following:

TEI is aware that the Multistate

Tax Commission has

modified its Uniform Resale

Certificate, with a view toward

making it more acceptable

to the States. The Institute

and its 5,000 members

believe there are substantial

benefits to be realized in using

a uniform, or model, certificate.

By reducing the administrative

costs associated

with qualifying for a resale

tax exemption, the States can

benefit both themselves and

the business community. Accordingly,

TEI encourages

the States to adopt whatever

administrative changes are

necessary in order to facilitate

the use of the Uniform

Resale Certificate.

Where appropriate, moreover, the Institute's communication could emphasize that the MTC certificate could probably be viewed as "substantially similar" to the State's own form.

Fred H. Montgomery continued that TEI was interested in not only advancing the use of the MTC's current form, but of expanding the model certificate to encompassing not only sales for resale but also (where appropriate) a State's machinery and equipment exemption as well as the sale of services for resale. He inquired whether the MTC thought such an effort was worth pursuing.

Mr. Mazerov replied that the MTC and TEI staffs had discussed such an initiative earlier in the year. He said that although there was some support for expanding the certificate, there was also concern about going back to the States so soon after the California-induced changes were presented for acceptance. Ultimately, however, the MTC would support efforts to expand the scope of the certificate.

Wade Anderson of Texas suggested that some changes may prove relatively easy to implement. For example, the model certificate could be expanded to include services by changing the term "products" to the term "items." Mr. Anderson continued that revising the form to take into account manufacturing and equipment exemptions would doubtless prove "trickier" than expanding the certificate to take into account services.

Mr. Bucks suggested that, rather than proceeding piecemeal, it might be desirable to form a small group of state officials to work jointly with a delegation from TEI in reviewing the model certificate. He said that the group could work not only with the MTC's May 1, 1995, draft but also with the model certificate that the Institute submitted to the MTC and FTA on December 5, 1995. Mr. Bucks continued that TEI and the MTC could pursue a two-track approach:

* They could jointly seek to maximize the number of states accepting the idea of a uniform certificate (using the MTC's May 1 draft as the focal point); and

* They could seek to expand and further reform the uniform certificate.

Mr. Anderson agreed that the MTC should avoid repeatedly going back to the States for approval, adding that he "would like to see the 'services change' made before [the MTC] go[es] out to other States." Mr. Bucks agreed, but inquired whether adding services to the certificate would be seen as a major change (possibly requiring significant time to approve). Mr. Mazerov responded that adding services would likely require additional footnotes, but that the proliferation of footnotes might be a price worth paying (to expand the coverage of the uniform certificate). There followed a discussion of how generic a footnote disclaimer could be. For example, would it be sufficient to provide that a State's acceptance of the form would not excuse a user from complying with the laws of a particular State?

Switching gears, W. Val Oveson of Utah said that the States and taxpayers had a common interest in moving toward the greater use and acceptance of electronic records. He referred to the efforts of the FTA's Electronic Data Interchange Task Force, in which representatives of the MTC, TEI, and other organizations are involved. He suggested that the development of an electronic exemption certificate would be a natural extension of the FTA's efforts. Mr. Oveson added that an electronic certificate could accommodate state-by-state exemptions, obviating multiple footnotes on the certificate. Mr. Mazerov added that States had to deal with issues relating to electronic signatures, but noted that the issues permeated the EDI area and were not confined to the exemption certificate area.

Mr. Hanson said that, if possible, the model certificate should be revised to encompass services before any effort were undertaken to expand the acceptance of the certificate by additional States, and such a revision would require the approval of the States that have currently adopted the uniform certificate. Mr. Anderson opined that the change might require but a single footnote. Mr. Mazerov agreed that it made sense to make the services change -- and to gain the acceptance of the current signatories -- before going out to other States. Noting that it took more than three months for the California-inspired changes to be approved by the other States, he cautioned against over-optimism in respect of whether and how quickly the change would be approved. Because of this strategy, it was agreed that TEI's involvement with the issue -- its urging other States to adopt the model certificate -- should be deferred until existing States had agreed to the services changes.

In summarizing the discussion of the uniform resale certificate, Mr. Bucks said the MTC staff would conduct a quick survey of States to determine whether the addition of a single footnote would permit the States to accept the expansion of the model certificate to services. If a significant number of States objected to the expansion of the form, the MTC would so inform TEI and the Institute would proceed to promote the wider acceptance of the current form. If expansion of the form to encompass services seemed easily attainable, the form would be so revised, and the Institute would then rev up its efforts. Regardless of when the project moved forward, an important second step would be to discuss potential additional changes in the model certificate.

Mr. Baldwin said that TEI appreciated the MTC's desire to work together to reduce taxpayer burden, and looked forward to working with Mr. Mazerov and other members of the staff on the project. He said TEI would await word from the MTC on when to proceed with its proselytizing efforts.

Nexus Guidelines 

Lester D. Ezrati stated that taxpayers were concerned about the MTC's issuance of Nexus Bulletin 95-1, relating to whether nexus is established for income, franchise, and sales and use tax purposes where a computer manufacturer or marketer provides in-state repair services through third-party service providers. Mr. Ezrati explained that the bulletin seemed as much "advocative" as it was "reportorial," and asked what its issuance portended for the future. Were similar bulletins under consideration?

Mr. Bucks responded that the purpose of Bulletin 95-1 was to bring some clarity to the area. He said that the States had adopted a facts-and-circumstances approach to the nexus implications of repair services and that the approach had been applied through enforcement activity during the previous five years. He suggested that there had been a widespread misunderstanding of the case law as applied to various fact patterns, and that the bulletin was intended to correct that misunderstanding. Mr. Bucks explained that Panel Publishers had previously developed a survey related to third-party maintenance contracts, and that information advisories and similar documents had been issued during the previous decade (including proposed guidelines under Public Law No. 86-272). Notwithstanding the States' outreach, there was a significant tax gap in respect of the nexus established by instate repair services.

According to Mr. Bucks, the question was whether the States should continue to act primarily through enforcement activity -- which could be characterized as part of a "gotcha" approach to tax administration -- or whether a taxpayer-education effort would be more efficacious. Stated differently, the MTC concluded that it would be inefficient to proceed with an enforcement-only approach and decided to proceed with an "instruction booklet" approach that would secure compliance more efficiently.

Mr. Bucks emphasized that Bulletin 95-1 did not constitute an MTC recommendation to the States. He added that the MTC and signatory States intended to provide industry with an opportunity to comment on the bulletin and that, pending the outcome, the States would likely restrain their enforcement activity. Mr. Bucks continued that the computer industry had proven to be quite dynamic and, further, that its high level of noncompliance was evidence that the "playing field" was not level (between those companies that comply and those that do not). By identifying the applicable standards (for both the States and taxpayers), the MTC intended to mitigate the unfair competition enjoyed by (noncomplying) companies. Mr. Bucks added that, even if Bulletin 95-1 prompted enforcement action, the affected taxpayers would raise the ordinary defenses to such activity (i.e., they could dispute the application of the law to their fact situations). Mr. Bucks concluded that the public policy underlying the bulletin -- bringing certainty to an area plagued by uncertainty--was laudable, and that he was baffled by the level of controversy surrounding the bulletin.

Mr. Anderson stated that in Texas the department had undertaken to clarify the law without regard to Bulletin 95-1. The purpose of the exercise, he explained, was to inform taxpayers of the risk they were running if they ignored the applicable rules and regulations.

Mr. Ezrati thanked Messrs. Bucks and Anderson for their comments. He added that there were really two issues: First, whether the legal conclusions expressed in Bulletin 95-1 were supportable; and secondly, whether the reaction to Bulletin 95-1 suggested that the MTC should modify the process for developing such guidance. In this regard, Mr. Ezrati noted that in California in particular Bulletin 95-1 had been criticized as a "midnight regulation"; although characterized as a discussion draft, many people (both in and out of government) had interpreted the bulletin as a regulation.

Mr. Hanson said that people erred in characterizing Bulletin 95-1 as a regulation. He said the Bulletin should properly be viewed not as making law but merely stating what the law is. He said that he was baffled by the criticism being leveled at Bulletin 95-1 because he believed the bulletin furthered the common goal of uniformity and responded to the frequent request for guidance. He repeated that the MTC believe there was benefit in working cooperatively to identify the applicable rules rather than resorting to enforcement activity, which by necessity would be retrospective in nature.

Mr. Ezrati said he appreciated the MTC's goals in developing Bulletin 95-1, but suggested that the tone and specific wording of the bulletin left something to be desired. Mr. Anderson responded that, in retrospect, it may have been prudent to have approached the development and issuance of the bulletin differently. He said that the MTC should have considered approaching the major players (i.e., the companies with significant interest in the bulletin's subject matter) and inviting their participation in a project not to "create" the rules, but to "define" them. Mr. Bucks explained that the MTC did undertake to involve major taxpayers in the review process, but he acknowledged that the process could likely be expanded and improved. Mr. Oveson agreed the ground rules for developing bulletins should be refined and he invited TEI to submit its suggestions for improvement.

Alan Friedman, MTC Special Counsel, said that the core issue underlying Bulletin 95-1 linked back to Public Law No. 86-272, and the States' effort to let taxpayers know what their view of the law was. The goal was to inform taxpayers, because it was important for taxpayers to know the States' interpretation of the law (even if taxpayers disagreed with that interpretation). He reiterated that " [taxpayers'] ignorance is not bliss," adding that the States wanted to eschew a "gotcha" approach to nexus. He concluded by disputing the claim that Bulletin 95-1 constituted an "underground regulation."

Michael J. Murphy asked what, given the MTC's stated goals, went wrong in the issuance of Bulletin 951. Why did taxpayers respond so negatively? Mr. Bucks responded that the MTC apparently did not do an adequate job of explaining why the development of the bulletin was viewed as superior to the States' continued emphasis on traditional enforcement activity. June Summers, Director of the MTC's National Nexus Program, noted that TEI and the Committee on State Taxation had been provided with advance copies of Bulletin 95-1, but acknowledged that outside stakeholders could have been brought into the process earlier. Mr. Oveson agreed that the MTC erred in not bringing TEI into the process until the day before the bulletin was issued.

James R. Murray expressed the view that TEI could perform a valuable service to the tax community by facilitating communication between the MTC and the affected taxpayers. Ms. Summers agreed that TEI could be helpful, and she repeated the MTC's desire to inform taxpayers of areas where major compliance problems have been identified.

As for the tone of Bulletin 95-1, Mr. Ezrati suggested that the MTC could have avoided the perception that it was issuing regulations by framing its guidance as a survey of the States. Ben Miller of the California Franchise Tax Board agreed. He noted that the form of Bulletin 95-1 caused as many problems as its substance. Les Sorenson of the California Board of Equalization noted that although California had backed away from the "enforcement" of the bulletin, its audit positions were consistent with the rules summarized in Bulletin 95-1. He suggested that, by bringing the taxpayer community into the process, the MTC could avoid perceptions that the Commission is issuing underground regulations. Mr. Bucks continued that the MTC learned from its experience with Bulletin 95-1, including that words do make a difference. Mr. Bucks added that a number of practitioners, who said they could not be publicly identified, had commended the MTC for issuing the bulletin.

Mr. Bucks said another emerging nexus issue relates to the training and seminar industry. Where vendors at a trade show sell materials to program participants, the traditional requirements of nexus (people and tangible personal property) are satisfied. Enforcing the nexus rules by a traditional enforcement activities -- i.e., on a program-by-program basis -- would not be very efficient. He said that the MTC was considering issuing a bulletin, outlining what the applicable rules are and affording taxpayers to come into compliance.

Timothy J. Leathers of Arkansas expressed frustration that industry "wants a regulation that they can first argue about and then urge us to apply on a prospective basis." Such an approach, however, is difficult to accept, however, where the application of traditional nexus standards clearly demonstrates the taxpayer's liability for tax. Mr. Hanson agreed that the granting of "amnesty" was not appropriate, for it effectively rewarded aggressive taxpayer behavior and penalized taxpayers that endeavored in good faith to comply with the applicable rules.

Federal Tax Restructuring 

Mr. Murray explained that TEI was grappling with how to respond to the various proposals to reform or restructure the federal tax system. He explained that the Institute's diverse membership virtually precludes TEI's taking a position on one form of tax versus another, but that the Institute continued to believe it could contribute to any restructuring debate by urging policymakers to pay proper heed to administrative and transition issues. As for the state tax implications of the various proposals, the Institute believes that it is critical to keep the lines of communication open.

Mr. Bucks responded that some of the proposals currently under consideration could be made to work at the state level; some might represent an improvement over the current tax system; and some would pose monumental problems. He observed that the States were having a hard time convincing people that there is considerable interaction between the federal and state tax systems. It is critical that this difficulty be overcome, especially given the transfer of government responsibilities from the federal government to the States. He added that, as States scurry to compensate for any loss of revenue flowing from changes to the federal tax system, a likely target may be business. For this reason, the business community and the States have a shared interest in assuring that ample consideration is given to the state tax implications of federal reform.

Mr. Murray agreed and committed TEI to keeping the MTC informed of the Institute's educational activities in respect of federal restructuring proposals. Mr. Bucks made a similar commitment on the MTC's behalf.

Update on Uniformity Projects

Mr. Bucks briefly summarized a number of the MTC's ongoing uniformity projects. He began by noting that the MTC's financial institutions project had proven quite successful because the MTC had worked jointly with industry in developing draft regulations. He said that the MTC believed the project could serve as a useful model of other initiatives. Mr. Bucks then referred to projects related to the unitary business principle, the distinction between business and non-business income, sales and use tax nexus, and the state tax implications of electronic commerce (including, but not limited to, the taxation of information services).

With respect to the last item, Mr. Bucks expressed the view that the tax system needed to be updated to reflect changes in how the economy operates; it is not realistic to continue to tax "on the basis of the number of horses or number of gas lights" a taxpayer owns. He assured the group from TEI that the MTC wanted to develop a tax system that works in the context of the global economy

Mr. Montgomery suggested that it may be easier for industry and the States to reach a consensus on the distinction between business and nonbusiness income than to resolve whether the definition of unitary business requires the application of the functional or transactional test.

Conclusion

On behalf of TEI, Mr. Skinner thanked the representatives from the MTC for meeting with the Institute. He said the meeting had been quite productive in identifying areas where the two organizations could work together. Mr. Hanson agreed that the liaison meeting was worthwhile and expressed the desire to hold similar meetings in the future.

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RELATED ARTICLE: TEI Delegation

Jack R. Skinner of Halliburton Company (Dallas Chapter), International President James R. Murray of PacifiCorp (Oregon Chapter), Senior Vice President Lester D. Ezrati of Hewlett-Packard Company (Santa Clara Valley Chapter), Member, Executive Committee Christopher W. Baldwin of Gannett Co. (Baltimore-Washington Chapter), Chair, State and Local Tax Committee Fred H. Montgomery of Sara Lee Corporation (Chicago Chapter), Vice Chair, State and Local Tax Committee Michael J. Murphy, TEI Executive Director Timothy J. McCormally, TEI General Counsel and Director of Tax Affairs

MTC Delegation

John J. Chavez, New Mexico Taxation and Revenue Department Bob Hanson, North Dakota Office of State Tax Commissioner Billy Hamilton, Texas Office of Controller of Public Accounts Timothy J. Leathers, Arkansas Department of Finance and Administration Patricia Lien, Minnesota Department of Revenue David Metzler, Missouri Department of Revenue Ben Miller, California Franchise Tax Board W. Val Oveson, Utah State Tax Commission Mick Robinson, Montana Department of Revenue Robert Smith, Colorado Department of Revenue R. Michael Southcombe, Idaho State Tax Commission Les Sorenson, California Board of Equalization Sandi Swarthout, Washington Department of Revenue Jesse Weaver, Michigan Bureau of Revenue

Dan R. Bucks, MTC Executive Director Alan Friedman, MTC Special Counsel Michael Mazerov, MTC Director, Policy Research Les Koenig, MTC Director, Joint Audit Program Paull Mines, MTC General Counsel Bill Six, MTC Administrative Officer June Summers, MTC Director, National Nexus Program

RELATED ARTICLE: State and Local Tax Course

TEI Education Fund's 1996 State and Local Tax Course was held in Houston, Texas, the week of July 14. The course attracted a group of 114 women and men (divided almost exactly half and half), and an equally diverse faculty of 20 of the country's top tax practitioners. Students attended lectures and panel discussions, participated in two days of workshops (on sales/use and income/franchise tax issues), and witnessed a mock appellate hearing.

Among the TEI members participating as faculty members were Barbara Barton of Electronic Data Systems Corp., Lynn Kopnik of Praxair, Inc., Ray Rossi of Intel Corporation, and Jerry Steltenkamp of Sherwin-Williams Company. Chris Baldwin of Gannett Co., chair of the Institute's State and Local

Tax Committee, was in attendance throughout the course, served as moderator throughout, and also participated in the breakout sessions and as a judge at the course's mock hearing.