News from the MA Department Of Revenue

2014 Filing Season Update-  Learn about the important changes for the 2014 Tax Season. For example, the income tax rate was reduced from 5.25% to 5.20% for most taxable income effective January 1, 2014.  Something new this tax season in the health care area - taxpayers who don't meet the Massachusetts Minimum Creditable Coverage standards mandate may offset any penalty owed to Massachusetts by the amount of their Federal penalty. To learn about more changes and earn a CPE credit, visit the 2014 Filing Season Update online course.

Note: If requesting direct deposit for a tax refund, be sure to insert the bank routing number and the individual bank account number for the deposit - and double check the numbers for accuracy.  If recorded incorrectly, it may delay the refund and will result in a paper check.

Identity Quiz to Reach More Taxpayers-  With tax season now open, the new fraud protection filter that we told you about back in October will affect many more taxpayers.  If a taxpayer is notified by mail that their return was flagged for further review, they will be directed to take an online identity confirmation quiz that can be completed in two minutes.  Only the taxpayer should complete the quiz, it is fairly impossible for a practitioner to do that on behalf of the client.  The quiz is made up of a series of personal questions only the primary filer would know and once the quiz is successfully completed the refund will be issued. For more information visit the Identity Confirmation Quiz page.

Tax Refunds Receive Closer Scrutiny on News from Turbo Tax - As you probably heard, Intuit (Turbo Tax) held up the release of client returns to state revenue agencies on news that there may have been a breach at the company.  Intuit subsequently released many of the returns.  In an effort to be abundantly cautious, MA DOR stopped refunds for a short time to take a closer look at the returns.  Processing of returns requesting refunds has now been resumed with additional scrutiny.  Returns set aside for a closer look may result in a taxpayer receiving a notice asking for information to confirm their identity.

Penalty Abatement Available Tied to Repayment of Premium Tax Credit

Some taxpayers have received advance credits on their health insurance purchased through the Marketplace.  Some of these taxpayers may not be fully aware of the requirement to calculate the actual Premium Tax Credit based on their actual 2014 income tax return.  Some of these calculations will result in taxpayers receiving an additional credit when they file their income tax returns, resulting in higher refunds.  Other taxpayers will find their advance credit is higher than the actual credit which means they will receive lower refunds or higher balances due.  A taxpayer who has a balance due could be liable for the penalty for underpaying estimated taxes.  A taxpayer who does not pay the balance due by April 15, 2015, would also be subject to the failure-to-pay penalty.

This is the first year of this Premium Tax Credit and many taxpayers may not have been aware of the calculation and possibility of having to repay some or all of the credit.  Thus some taxpayers may not have taken this into account when making their estimated tax payments.  Other taxpayers may not have the funds available to pay their balance due by April 15, 2015.

Notice 2015-09 provides taxpayers an abatement of penalties for underpayment of estimated taxes under Section 6654(a) and for the failure-to-pay penalty under Section 6651(a)(2) for any taxes due as a result of the requirement to repay part of the advance credit.  Interest will still be charged on any taxes not paid by April 15, 2015.  This relief is available only for 2014 returns.  This relief does NOT apply to taxes due to the shared responsibility penalty under Section 5000A since these are not subject to underpayment or failure to pay penalties.

To obtain the abatement relief taxpayers must file their 2014 returns by the due date (including valid extensions) showing the excess advance credit amount and be current with all tax filing and payment obligations.  If an amount of tax for another tax matter is unpaid, the taxpayer must have entered into an installment arrangement, offer in compromise, or both to satisfy the federal tax liability.  In addition the failure-to-pay penalty relief only applies if the taxpayer pays the entire balance by April 15, 2016 – in essence giving these taxpayers one extra year to pay the excess credit amount without incurring the penalty.  Interest will still be charged beginning April 15, 2015.

To obtain the relief for the underpayment of estimate tax penalty a taxpayer should check box A in Part II of Form 2210, complete page 1 of the form, and include the form with their income tax return, along with the statement “Received excess advance payment of the premium tax credit.”

To obtain the relief for the failure-to-pay penalty a taxpayer who receives the penalty notice from IRS should submit a letter to the address on the notice that contains the statement “I am eligible for the relief granted under Notice 2015-9 because I received excess advance payment of the premium tax credit.”

This text has been shared with you courtesy of:  David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065 (920-496-9111).

Minister Housing Allowance Challenge Thrown Out of Court

Ministers have the opportunity to receive employer provided housing benefits.  If the restrictions under IRC Section 107 are met, these benefits can be nontaxable for income tax purposes.  (They are subject to self-employment taxes.)  Nonclergy must generally pay income tax on the value of their employer-provided housing unless they meet certain requirements including that the housing be provided “for the convenience of the employer.”

The co-presidents of Freedom From Religion Foundation Inc. received part of their pay in the form of a housing allowance.  Because they were not ministers, they paid income tax on this portion of their salaries.  Neither of the co-presidents sought to exclude this income on their federal income tax returns.  Neither has filed a claim for refund.  Freedom From Religion Foundation Inc. and its two co-presidents filed suit stating Section 107 violated the First Amendment because it conditions a tax benefit on religious affiliation.

District Court held the plaintiffs had standing to challenge this and therefore heard the case.  The District Court then determined Section 107 was unconstitutional.  The case was appealed.

The 7th Circuit Court of Appeals heard the case and ruled the plaintiffs did not have standing to challenge Section 107 since the plaintiffs were not ministers. Part of the Appeals discussion included a statement that neither the organization nor the co-presidents suffered any personal injury.  The Court stated there may be direct harm such as mandatory prayer in a public school classroom, or by being exposed to religious symbols.  But in this case there is no harm to either the organization or the co-presidents.  The case was remanded to the District Court with instructions to dismiss the complaint.

Freedom From Religion Foundation Inc, 7th Circuit Court of Appeals, November 18, 2014.


This text has been shared with you courtesy of: David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065 (fax 920-496-9111)

Pushing to the Edge of the Envelope - Economic Nexus

William Delaney, EA
Westwood, MA

The Quill case is a sales and use tax case.  It stands for the proposition that substantial nexus (as opposed to mere economic activity) is required in order to grant a state the power to impose a tax on an out-of-state (i.e. foreign) business entity.  Quill reaffirmed the physical presence requirement for nexus to be present as articulated in National Bellas Hess v. Dept. of Revenue of the State of Illinois, 386 U.S. 753 (5/8/1967).

“Unless a company has offices, employees, or other property in a state, it does not have nexus under Complete Auto and cannot be subject to use tax obligations.”  [See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (3/7/1977)]

Since these cases are sales and use tax cases, states argue that either the same concepts do not apply to income tax assessments or what they seek to assess is a franchise and/or permission to do business type of non-income based tax.  This is a convenient argument designed to rope you in so that more tax revenue may be collected.

A beyond the edge of the envelope concept was successfully argued by the West Virginia Tax Commissioner when the Supreme Court of Appeals of West Virginia decided that the Quill decision “applies only to state sales and use taxes and not to state business franchise and corporation net income taxes,  Rather than a physical presence standard, this Court believes that a significant economic presence test (emphasis added) is a better indicator of whether substantial nexus exists for Commerce Clause purposes.” [See Tax Comm. Of West Va. V. MBNA America Bank, N.A., S. Ct. of Appeals of W. VA. No. 33049, 11/21/2006]. This state decision stands for the proposition that a foreign company, with no presence in the state, is subject to taxation if all it has is some customers within the state (i.e. accounts receivable).

This is, essentially, an attempt at an end run around the Dormant Commerce Clause and the Commerce Clause in general.  Unfortunately, other states have followed suit.

So, we now have any number of states (35 at least), who do not apply the Quill
principle to taxation other than sales and use.  They walk on both side of the street at the same time, or try to, by applying all or most of the MBNA decision theory.  What is also consistent in their application, however, is the need for there to be an intangible property element in order to pull an otherwise entirely out-of-state business into a state for tax purposes.  Intangible property is generally defined as a copyright, trademark, patent, or the like (legal tangible property).  It is difficult, if not impossible, to argue that an income preparation service provided to an in-state resident by an out-of-state preparer (individual or entity) includes the transfer or existence of an intangible property.

Absent an intangible, most of these economic nexus statutes do not apply to the preparation of income tax returns.  And, even if one could successfully argue that the mailing or electronic filing of an income tax return meets the definition of the transfer of intangible property, there are large minimum amounts which the economic activity must exceed (either expressed in sales dollars or as a percentage of total sales dollars) in order for an income tax preparer to be subject to an economic nexus income or franchise tax assessment.

At this time, there is a very interesting case being appealed to the U.S. Supreme Court,
Direct Marketing Assn. v. Brohl, 10th Cir, No. 12-1175 (8/20/13).  It has to do with a Colorado statute which requires out-of-state vendors, even if they are not subject to any type of CO tax, to notify the state of all sales made to CO residents (transaction notices) and to send annually to all customers who purchase $500 or more a notification of their obligation to report the sale to CO and pay a use tax.  The state even specifies the minimum size of the type to be used.

The issue is whether or not this is an impermissible crossing of the line and a violation of the Dormant Commerce Clause doctrine.  The 10th Circuit Court of Appeals upheld a federal District Court injunction and the state appealed to the U.S. Supreme Court.

Extracts from oral arguments heard December 8, 2014:

May the state mandate on a vendor the obligation to notify the state of economic activity (transaction notice)?  May it also mandate on a vendor the obligation to  notify a customer of an obligation to declare and pay a state tax?

Quoting Justice Kagan:  “Essentially the State is saying we’re not going to be able to collect this tax…unless we tell people that they…owe the tax and unless we have a mechanism to make sure that people who don’t pay the tax are identified…That’s how we’re going to collect it.”

Justice Sotomayer:  “…but this injunction is not stopping you from collecting the tax.”

State Response:  “…it is stopping us from using the tool…”

Justice Breyer:  “…Henry Friendly (a prominent Judge of the Second Circuit Court of Appeals, now deceased) some years ago said of course you can use the term collection to refer to any method of helping to secure payment.”   “…once we start down your road,” continued Justice Breyer “there is no stopping place.”

State Response:  “The injunction makes it impossible for Colorado…to do any form of assessment, any form of collections on hundreds of thousands---“  Interrupted by Justice Breyer:  “Really, you can’t ask your citizens the same way that the Federal government asks us?  Pay, that’s their polite way of saying it.”

Stay tuned.  This decision may be very important indeed.