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States enamored with deceptively attractive "Geoffrey nexus" position.



Although some state tax officials expressed glee over the Supreme Court's decision denying certiorari certiorari

In law, a writ issued by a superior court for the reexamination of an action of a lower court. The writ of certiorari was originally a writ from England's Court of Queen's (King's) Bench to the judges of an inferior court; it was later expanded to include writs
 in Geoffrey, Inc. v. South Carolina South Carolina, state of the SE United States. It is bordered by North Carolina (N), the Atlantic Ocean (SE), and Georgia (SW). Facts and Figures


Area, 31,055 sq mi (80,432 sq km). Pop. (2000) 4,012,012, a 15.
 Tax Comm'n, 437 S.E.2d 13 (S. Car. Sup. Ct., 1993), state actions in the immediate aftermath of Geoffrey did not mirror the officials' excitement. While a few states quickly embraced the rationale underlying Geoffrey, most states took a "wait and see" approach to formally adopting economic presence nexus positions. (The absence of an intellectually honest nexus analysis in the Geoffrey decision may have impeded states from moving quickly to adopt their own nexus positions based on the decision.) However, the failures of other means to challenge similar corporate structures may have convinced many states that Geoffrey is their best weapon.

Precursors to Geoffrey

Economic presence nexus is not a new concept. Beginning in the late 1980s, a number of states began applying the economic presence theory of nexus to financial services businesses. Indiana, Minnesota, Tennessee and West Virginia all enacted statutes subjecting out-of-state financial services businesses to income tax based simply on an economic presence, including making loans, having credit card customers or depositors, or soliciting or rendering financial services to customers in the state. Reports now indicate that these states are targeting multistate credit card companies and lenders for audit.

More recently, Kentucky (networth franchise tax imposed on banks), Pennsylvania (bank shares tax) and Massachusetts have passed laws applying the economic presence theory of nexus to financial services businesses. Further, New Mexico regulations provide that franchisors are subject to gross receipts tax A gross receipts tax, sometimes referred to as a gross excise tax, is a tax on the total gross revenues of a company, regardless of their source. It is similar to a sales tax, but it is levied on the seller of goods or services rather than the consumer. , despite the absence of a physical presence in the state. In fact, the South Carolina Supreme Court The South Carolina Supreme Court is the highest court in the state of South Carolina. The court is composed of a Chief Justice and four Associate Justices. Selection of Justices
Judges are selected by the legislature of South Carolina to serve terms of ten years.
 relied on two New Mexico gross receipts tax decisions involving franchisors to support its decision in Geoffrey. Hawaii has also asserted nexus on the basis of licensing intangible rights for use in Hawaii. Now that the dust has settled on Geoffrey, states are now moving to impose "Geoffrey nexus" on taxpayers outside of financial services. One common theme among these states is that, other than Iowa, they have not adopted Geoffrey by statute; rather, they apply it pursuant to (1) formal administrative rule or policy statement or (2) informal audit position. Although these rules or audit positions remain subject to challenge constitutionally, they may also be subject to procedural challenges, since these actions may exceed a state department of revenue's rule-making authority.

Administrative Geoffrey Developments

Arkansas, Florida, North Carolina North Carolina, state in the SE United States. It is bordered by the Atlantic Ocean (E), South Carolina and Georgia (S), Tennessee (W), and Virginia (N). Facts and Figures


Area, 52,586 sq mi (136,198 sq km). Pop.
 and Wisconsin have formally promulgated prom·ul·gate  
tr.v. prom·ul·gat·ed, prom·ul·gat·ing, prom·ul·gates
1. To make known (a decree, for example) by public declaration; announce officially. See Synonyms at announce.

2.
 Geoffrey rules or statements of policy. These rules limit their Geoffrey nexus positions to licensing of intellectual property (such as trademarks, tradenames, patents and copyrights) and sales or licensing of other intangible property intangible property n. items such as stock in a company which represent value but are not actual, tangible objects.  (such as computer software, franchises, and other intangible rights). They do not extend their Geoffrey positions to encompass all types of activities that constitute economic exploitation of a market when the economic presence theory of nexus is taken to its logical (or illogical) extreme.

Nexus rules based on Geoffrey have also been proposed in New Jersey. Other states are also asserting Geoffrey nexus positions on audit, including Maine, Maryland, Massachusetts, Missour), New Hampshire New Hampshire, one of the New England states of the NE United States. It is bordered by Massachusetts (S), Vermont, with the Connecticut R. forming the boundary (W), the Canadian province of Quebec (NW), and Maine and a short strip of the Atlantic Ocean (E).  and Tennessee, which have announced (or have recently taken) Geoffrey audit positions with respect to passive investment companies.

The Outlook

Despite the troubling point that an increasing number of states are willing to place reliance on an (constitutionally suspect at best) opinion from a sister state's supreme court, it may be necessary to "educate" the states on the precedential prec·e·den·tial  
adj.
1. Of, relating to, or constituting a precedent.

2. Having precedence.

Adj. 1. precedential
 value of the Geoffrey decision outside of its specious spe·cious  
adj.
1. Having the ring of truth or plausibility but actually fallacious: a specious argument.

2. Deceptively attractive.
 constitutional parameters. It has legal, precedential value only in South Carolina. That the U.S Supreme Court denied certiorari is not critical, although states may read something into the Court's refusal to exercise its discretionary jurisdiction. For instance, according to Arkansas policy statement, "The United States Supreme Court United States Supreme Court: see Supreme Court, United States.  denied Geoffrey's request for the Court to review the case, which means that the South Carolina decision now applies in all states with tax laws similar to the South Carolina tax law." (Emphasis added.) This is not true. When the Supreme Court denies certiorari, this does not signify the Court's agreement with or judgment on the merits Noun 1. judgment on the merits - judgment rendered through analysis and adjudication of the factual issues presented
judgement on the merits

judicial decision, judgment, judgement - (law) the determination by a court of competent jurisdiction on matters
 of the lower court's decision (as opposed to the Court's dismissal for want of a substantial Federal question).

Recent events also indicate that taxpayers should take comfort in knowing that Geoffrey is being questioned by impartial arbiters. For example, the Geoffrey decision was recently rejected by Alabama's chief administrative law judge administrative law judge n. a professional hearing officer who works for the government to preside over hearings and appeals involving governmental agencies. They are generally experienced in the particular subject matter of the agency involved or of several agencies.  for purposes of Alabama's foreign franchise tax in Cerro Copper Products, Inc. v. Alabama Dep't of Revenue, No. F9 1 111 (12/11/95).

Conclusion

Although the Geoffrey decision is constitutionally suspect at best, states appear unable to resist the temptation held out by the South Carolina court's decision. Unless (and until) the U.S Supreme Court (or a series of state courts) rejects Geoffrey, taxpayers are left with many practical dilemmas presented for their current corporate structures. Taxpayers must carefully consider their tax return filing obligations, as well as available measures to enhance or re-engineer their corporate structures in light of the increasing momentum the Geoffrey decision is receiving in a number of states.

FROM MICHAEL H. LIPPMAN, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , KPMG KPMG Klynveld Peat Marwick Goerdeler (accounting firm)
KPMG Kaiser Permanente Medical Group
KPMG Keiner Prüft Mehr Genau (German)
KPMG Kommen Prüfen Meckern Gehen
 PEAT MARWICK LLP LLP - Lower Layer Protocol , WASHINGTON, D.C.

Committee Projects and Activities

Committee Objective

In 1995, the objective for the State and Local Taxation Committee was revised and approved as the following: To promote administrative uniformity and fairness in state tax laws. To identify leading judicial, legislative and administrative state tax issues and formulate the AICPA AICPA

See American Institute of Certified Public Accountants (AICPA).
 position for approval by the Tax Executive Committee, and advocate as appropriate.

Committee Comments to the MTC mtc - A Modula-2 to C translator.

ftp://rusmv1.rus.uni-stuttgart.de/soft/Unixtools/compilerbau/mtc.tar.Z.
 

The committee has prepared and submitted comments to the Multistate Tax Commission (MTC) on the Nexus Guideline for Application of a Taxing State's Sales and Use Tax Sales and use tax refers to:
  • Sales tax
  • Use tax
 to a Remote Seller (MTC staff draft) and on the proposed amendment to MTC Regulation IV.18.(c). Special Rules: Sales Factor. In addition, the committee is developing comments on the proposed amendment to MTC Regulation IV.1.(a) Business and Nonbusiness non·busi·ness  
adj.
1. Unrelated to business or industry.

2. Unrelated to one's own business or employment.
 Income Defined.

Nexus guideline comments: Specifically, on Oct. 25, 1994, the MTC issued a Nexus Guideline for Application of a Taxing State's Sales and Use Tax to a Remote Seller. As the committee mentioned in its comments submitted to the MTC on Apr. 12, 1995, the AICPA supports the MTC's efforts to develop uniform standards for determining when an out-of-state taxpayer has nexus with a state for purposes of sales and use tax collection duties. Fair and uniform nexus standards would relieve the administrative and compliance burdens imposed on businesses by the piecemeal, state-by-state development of nexus standards. However, the committee believes that, in several crucial respects, the approach taken in the guidelines is fundamentally deficient; these issues must be resolved if the guidelines are to achieve their stated goals.

[] Various aspects of the guidelines extended states' taxing powers beyond those allowed by the U.S. Constitution.

[] The guidelines fail to recognize that the higher jurisdictional nexus standards of substantial connection (i.e., physical presence) required by the Commerce Clause of the U.S. Constitution control, not the nexus standard of minimum contacts (i.e., purposefully directing activities toward a state) under the Due Process Clause of the U.S. Constitution.

[] The concept of "deemed" physical presence should not be used.

The guidelines should not treat an interest in intangible property as creating physical presence or deemed physical presence.

[] The guidelines should contain a duration standard based on the sales tax sales tax, levy on the sale of goods or services, generally calculated as a percentage of the selling price, and sometimes called a purchase tax. It is usually collected in the form of an extra charge by the retailer, who remits the tax to the government.  reporting period (i.e., monthly or quarterly, rather than 12 months).

The guidelines should have a reasonable, quantitative de minimis An abbreviated form of the Latin Maxim de minimis non curat lex, "the law cares not for small things." A legal doctrine by which a court refuses to consider trifling matters.  rule. After meeting with the Executive Director of the MTC on Dec. 6, 1995, the committee requested the formation of a working group with the MTC on the nexus guidelines.

Sales factor comments: On Apr. 21, 1995, the MTC held a hearing on the proposed amendment to MTC Regulation IV.18.(c). Special Rules: Sales Factor. The committee sent a representative to the hearing, and developed comments that were submitted to the MTC on dune 27, 1995. The comments focus on:

[] The proposed change should be made by statute rather than by regulation.

[] The lack of consistency in applying rules relating to the apportionment The process by which legislative seats are distributed among units entitled to representation; determination of the number of representatives that a state, county, or other subdivision may send to a legislative body. The U.S.  of receipts from the sale of intangibles.

[] Ambiguity in the definition of business versus nonbusiness income covered by the regulation.

[] Potential distortion in the sales factor on the sale of an intangible derived from a significant operational function of the taxpayer.

[] Technical compliance issues involving the computation of net gains at the transactional level.

On Dec. 28, 1995, the MTC issued an Interim Report of Hearing Officers on the proposed amendment. The report said that, in light of concerns raised, the MTC Executive Committee should consider the adoption of one of two alternatives to the original proposal and approve an additional hearing session for consideration of the alternative proposals. The first alternative makes several changes in the language to the original proposal and reflects the suggestions of various respondents. The second alternative, a draft proposal submitted by the California Franchise Tax Board The California Franchise Tax Board (FTB) collects state personal income tax and corporate income tax of California.[1] History
In 1879 California adopted its state constitution which among many other programs created the State Board of Equalization and the
 staff, departs significantly from the language of the original proposal, but addresses many of the issues and concerns raised during the hearing process. The committee is currently reviewing these alternatives. An MTC hearing on the alternatives was held on May 3,1996.

Business and nonbusiness income defined: In April 1995, the MTC released a proposed amendment to MTC Regulation IV.1. (a) Business and Nonbusiness Income Defined. The proposed amendment is designed to clarify confusion over the limits of business (i.e., apportionable Adj. 1. apportionable - capable of being distributed
allocable, allocatable

distributive - serving to distribute or allot or disperse
) income. In particular, the amendment attempts to reconcile the transactional and functional tests for distinguishing business income with the constitutional limitations on the scope of apportionable income. The committee is currently developing comments and plans to testify at the MTC hearing on this proposed amendment. The committee has requested a working group be set up with the MTC on this issue as well.

Report on Corporate State Tax Administrative Uniformity

In June 1995, the committee updated the AICPA Report on Corporate State Tax Administrative Uniformity to:

[] Illustrate the significant differences among the states in administrative matters related to corporate income taxation.

[] Describe the problems these differences cause taxpayers and state tax administrators.

[] Make recommendations as to administrative uniformity.

The report outlined the many state rules on filing dates, penalties, reporting of Federal adjustments and statutes Of limitations, and presented recommendations for uniformity. The committee sent copies of the report to all the state CPA societies and various state tax organizations. After receiving feedback from the Committee on State Taxation (COST), Tax Executives Institute (TEI 1. (communications) TEI - Terminal Endpoint Identifier.
2. (text, project) TEI - Text Encoding Initiative.
), the MTC, the Utah Tax Commission, the Montana Society of CPAs and the Florida Institute of CPAs The Florida Institute of CPAs (FICPA) is a professional membership organization representing over 19,000 CPAs and accounting professionals in Florida and beyond. The FICPA offers opportunities for professional development, knowledge-sharing, networking, community involvement, , the committee plans to summarize the comments and actively pursue the consideration of these recommendations by the various state legislative bodies, especially those states with the least uniform rules. All Tax Section members received a complimentary copy of the report last summer. (For additional copies, call the AICPA Order Department at 1-800-862-4272 and request product # 061044.)

Attribution of Expenses for Tax-Exempt Income Tax-exempt income

Dividends and interest not subject to federal and, in some cases, state and local income taxes.
 

The committee is developing a practice guide on the various methods used by states to attribute expenses for purposes of disallowance dis·al·low  
tr.v. dis·al·lowed, dis·al·low·ing, dis·al·lows
1. To refuse to allow: "[The government]
 as used to purchase or carry tax-exempt interest.

Checklist on Nexus Issues

The committee is developing a checklist/organizer on the different state tax treatments of nexus.

The Tax Adviser Column

The committee has started a quarterly column on state and local taxes in The Tax Adviser: An annual update was published in the April and May 1996 issues, and the column begun in this issue will appear quarterly.

Liaison Efforts

The committee is continuing and increasing its liaison efforts with various state tax organizations, including the MTC, COST, Federation of Tax Administrators, TEI and the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws.  (Simplified Tax and Wage Reporting System and Fed-State Relations Office). The committee will meet on June 5, 1996 in Washington, D.C., and encourages members to attend and share their thoughts with the committee.

FROM EILEEN R. SHERR, CPA, TECHNICAL MANAGER, AICPA TAX DIVISION, WASHINGTON, D.C., AND PHIL KREVITSKY, CPA, COOPERS & LYBRAND L.L.P., NEW YORK, N.Y.

Editor's note: Ms. Manos-McHenry chairs the AICPA Tax Division State and Local Taxation Committee, of which Mr. Lippman and Mr. Krevitsky are members. Ms. Sherr is the committee's technical manager.
COPYRIGHT 1996 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Author:Lippman, Michael H.
Publication:The Tax Adviser
Date:Jun 1, 1996
Words:2048
Previous Article:Sales management for tax practices.
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