Florida Tax Attorney Blog

For federal tax purposes, a foreign-based company must have a U.S. "permanent establishment" in order to be subject to federal taxation. In this respect, the concept of a U.S. permanent establishment essentially means a fixed place of business in the United States. Significantly, however, the permanent establishment concept, which drives federal taxation of foreign-based businesses, is generally irrelevant in the state tax context.

For state tax purposes, an in-state presence does not have to be fixed or permanent. To the contrary, the requisite level of presence for state taxing jurisdiction can be created by the transitory presence of an employee, non-employee representatives, or even non-physical presence. In other words, the level of contact required to establish state taxing nexus is substantially less than the level of contact required to establish federal taxing nexus. As a result, the absence of a permanent establishment for federal tax purposes does not necessarily mean that a foreign-based company is not subject to state taxation in the United States.

It is important for foreign-based companies to be aware of this for several reasons. From a compliance perspective, the compliance costs can be substantial even if the state tax liability itself is nominal - i.e. bookkeeping, tax calculation, return preparation. In addition, from a liability perspective, many state laws, including Florida, often allow for collection of unpaid state taxes from individuals associated with a business who should have been aware of the business's state tax obligations and of the business's failure to comply with those obligations - e.g., partners, officers, managers.

Most states take the position that corporations owned by Native Americans are subject to generally applicable corporate income taxes on the ground that a corporation is a legal entity separate and apart from its Native American shareholders. Indians cannot enjoy the benefits of corporate limited liability while simultaneously rejecting the burden of taxation that comes along with it ... they have their cake and eat it too, right? Actually, maybe they can if all of the corporation's income is earned from activities on the reservation.

Central Machinery Company v. Arizona State Tax Commission involved an isolated sale of tractors to Indians on a reservation by a non-Indian corporation with no permanent establishment on the reservation. There, the Supreme Court invalidated Arizona's gross receipts tax, holding that the transaction was "plainly subject to federal regulation" (emphasis added). To be clear, a gross receipts tax is in the nature of a sales tax, not an income tax. But if the gross receipts tax in Central Machinery was so plainly preempted by federal regulation of Native Americans, it is hard to imagine that income derived from regular sales to Indians on a reservation by an Indian-owned corporation deriving all of its income from activities on the reservation would not be similarly exempt from state taxation.

The Indian Reorganization Act of 1934 encouraged Indians to self-govern and manage their own affairs. One contemplated way of doing this was through the "creation of chartered corporations." See Mescalero Apache Tribe v. New Mexico. Moreover, the Act sought to put control of Indian affairs "in the hands of an Indian council or . . . a corporation organized by the Indians." Id. Given Congress' specific contemplation of Native American owned corporations as mechanisms to facilitate Indian sovereignty and self-governance, this comprehensive federal regulatory scheme arguably preempts a state corporate income tax with respect to a corporation that is wholly owned by Native Americans and that derives all of its income from activities on the reservation.

The Digital Goods and Services Tax Fairness Act (H.R. 1860) was introduced May 12, 2011 and would prohibit state and local governments from imposing taxes on certain sales of digital goods and services that are taxable under current law. The stated intention of H.R. 1860 is to promote neutrality, simplicity, and fairness in the taxation of electronic goods and services. But good intentions are not enough.

As a threshold matter, the proposed legislation arguably exceeds Congress' enumerated powers.

Commerce Clause. The Supreme Court has substantially narrowed its interpretation of the scope of the commerce power in recent years. In this regard, the Court has emphasized the importance of distinguishing between national matters and matters that are truly local. State and local taxation is a local matter insofar as revenue needs and tax issues vary among jurisdictions. The states are in the better position to identify issues with their tax systems and implement remedial measures.

14th Amendment. State action is a necessary prerequisite to the exercise of Congress' Section 5 power. It does not appear that Congress has made any factual findings of actual incidences of discriminatory taxation. To be sure, preventative rules are sometimes necessary, but even then, they must be appropriately tailored to reach the perceived threat in order to pass constitutional muster. The restrictions imposed on states' taxing rights by this legislation are too great in comparison to the threat of discriminatory taxation.

Even if Congress has authority to enact this legislation, the focus on tangible versus intangible is misplaced. A sales tax is best summarized as a tax on consumption. In this respect, there are two basic precepts to the sales tax: (1) all personal consumption should be taxed; and (2) all business inputs should be exempt. Yet, the inquiry as to whether the thing being conveyed is tangible or intangible says nothing about personal consumption or business inputs. Not only does this legislation focus on the wrong issue, but it also explicitly contravenes the established principle that business inputs should not be taxed. See Sec. 5(2)(B) (specifying business location as tax address for sourcing purposes when item is delivered to a business); Sec. 5(2)(F) (indicating that advertising services are sales taxable).

Moreover, although the proposed legislation apparently seeks to "promote neutrality, simplicity, and fairness in the taxation of digital goods and services," it will actually do the opposite. A "digital good" includes a variety of downloadable content - e.g., software, music albums, films, e-books, photography. Significantly, the downloaded content is no different than the content acquired through off-the-shelf software, CDs, DVDs, traditional books, or traditional photos. Yet, these items would be subject to a special federal tax regime under the proposed legislation. Such disparity is not neutral, simple, or fair. The substance of the transaction rather than the form of delivery should govern tax consequences. In this respect, the focus should be on consumption.

To be sure, risks of multiple taxation remain even when the focus is on consumption. However, States are competent to deal with these issues, and the drafters of this bill would agree according to Section 8 (expressing States' competency to deal with multiple taxation in international context). In the e-commerce environment, the issues of multiple taxation are similar domestically and internationally. So if Congress has faith in the States' ability to handle the issue on an international level, then the States are certainly competent to handle the issue domestically.

In a recent case, the Florida Supreme Court held a residence requirement set forth in Florida's homestead exemption statute to be invalid and unenforceable because the residence requirement was not required by the provision of the Florida Constitution which authorizes the homestead exemption. Garcia v. Andonie, Florida Supreme Court, No. SC11-554, October 4, 2012. Specifically, the statute required the taxpayer seeking the exemption to be a permanent resident in order to qualify for the exemption. However, the Court held that the Florida Constitution does not require a taxpayer to be a permanent resident to claim the exemption. Significantly, the Court emphasized that the constitutional requirement is an either/or proposition. In other words, a taxpayer either has to use the property as their permanent residence or the property has to be used as a permanent residence by individuals who are legally or naturally dependent on the taxpayer. A brief synopsis of the case is included below.

Facts: The taxpayers were citizens of Honduras who lived with their children at the property in question. The taxpayers were allowed to the stay in the United States pursuant to a temporary visa. The taxpayers' children were born in the United States and accordingly were citizens of the United States and the State of Florida.

Holding: Although the taxpayers could not claim permanent residence due to their temporary visas, they were nevertheless entitled to the homestead exemption because their children could claim the property as their permanent residence.

Following the writing of last week's article discussing the effect of an employee's in-state presence on the state tax nexus determination, I received the following question from a reader:

I am moving to Florida from New Jersey and want to telecommute and continue working for my job in New Jersey. Do Florida laws put my employer at risk?

The state tax nexus determination is a facts and circumstances analysis. Therefore, each case will vary depending on the unique facts and circumstances of that particular case, so it is not possible to definitively conclude one way or the other. Nevertheless, a review of the case law from various states suggests that a single employee's presence in a state will most likely put an employer at risk.

In my opinion, this is the wrong result. As I have previously discussed, United States Supreme Court case law indicates that an employee's mere presence in a taxing state is insufficient to support a finding of nexus by itself. Instead, the nexus determination must be made by reference to the nature and extent of the employee's activities in the taxing states. Eventually, the right case will come along, and the state of the law on this point will be clarified. Until then, however, most state courts will continue to assume that employee presence equals nexus. This is especially true in the current market conditions where states are looking for revenue sources wherever they can find them.

With that being said, it pays to be conservative right now. Although I believe the current trend of equating mere employee presence with automatic taxing nexus to be legally incorrect, I would still not advise any client that they can put a telecommuting employee in a state without becoming subject to the taxing jurisdiction of that state. The reality is that there is a very real possibility that a state would try to assert taxing jurisdiction over the employer as a result of the presence of a telecommuting employee.

In closing, consider a recent case out of New Jersey. In Telebright v. Director, Division of Taxation, the New Jersey Division of Taxation effectively used a single employee's act of telecommuting as the jurisdictional hook to tax the income of a Delaware corporation. Significantly, the corporation maintained no offices in the State of New Jersey. The corporation's only contact with New Kersey came in the form of this one employee who telecommuted to work in Delaware from her home in New Jersey. Based on this indirect contact, the Delaware corporation was held to be "doing business" in New Jersey. As a result, its income was subject to taxation in New Jersey.

Bottom Line: Employers must be mindful of their telecommuting policies in this modern age of technology. Your employer may already be aware of this and may have already considered this if it is willing to allow you to telecommute. There is also the possibility that your employer already has contacts with the State of Florida so that your telecommuting will not create any additional exposure to taxation.

It is often assumed by courts and commentators that an employee's presence within a state creates nexus for the employer within that state, regardless of the nature and extent of the employee's activities in that state. But the proposition that an employee creates nexus regardless of that employee's activities might be far too encompassing.

To the contrary, Supreme Court jurisprudence indicates that it is the nature and extent of the employee's activities in the taxing state and not the employee's mere presence which supports nexus. In this respect, the Court has called the distinction between an employee and an independent contractor a distinction "without constitutional significance." Scripto. Indeed, if such a "fine distinction" were of a constitutional significance, employers could simply fire "employees" and rehire them as "independent contractors." Id. To be sure, independent contractors may still be nexus creating as illustrated by the Scripto case, but there is also the possibility that their activities do not rise to that level. This possibility is incentive enough for employers to fire "employees" and rehire them as "independent contractors." Constitutional lines cannot be so arbitrary.

Given the established constitutional irrelevance of the employee/independent contractor dichotomy, the nexus analysis is one of the nature and extent of the in-state activities. To this end, the focus is on solicitation and exploitation of the taxing state's market. See Scripto (emphasizing independent contractors' "exploitation of the consumer market"); Tyler Piping (emphasizing independent contractor's relationship to the corporation's "ability to establish and maintain a market in [the taxing] state for sales"); National Geographic (emphasizing the "continuous presence" and solicitation activities).

Moreover, even cases that appear to be subscribe to the traditional view actually have more narrow holdings that are more consistent with Scripto, Tyler Piping, and National Geographic. For instance, Standard Pressed Steel, cited by the National Geographic Court, held that a single employee created nexus. However, in reaching this conclusion, the Supreme Court emphasized that this single employee "made possible the realization and continuance of valuable contractual relations" with customers of that state.

Finally, other nexus cases not involving this employee/independent contractor dichotomy similarly make clear that the focus of the nexus analysis is on the nature and extent of activities in the taxing state and not on formalistic concepts like the employee/independent contractor dichotomy. For instance, the emphasis in Miller Brothers was on the fact that the Delaware seller did not go into Maryland to make the sales. Rather, the Marylanders went into Delaware to make the purchases. In other words, the requisite exploitation of the Maryland consumer market was not present in Miller Brothers. Likewise, the Bellas Hess Court drew a sharp distinction between truly remote vendors like Bellas Hess and vendors exploiting the taxing state's market through solicitors and property within the taxing state.

In light of the foregoing, I would argue that the nature and extent of the employees' activities within the taxing state should be considered prior to making a nexus determination.

It's that time of year again. Florida commercial property owners can expect to receive their property tax assessments in the next few weeks.

The Bad News

Your commercial property may be overvalued for property tax purposes. In Florida, real property is assessed through a mass appraisal process. In this respect, property appraisers use computer models and sometimes even aerial photographs to determine square footage and other material aspects of the property. After gathering this information about the property, property assessors use comparable sales and other general market indicators to value the property for assessment purposes.

This type of mass appraisal is necessary as a practical matter given the number of properties that must be valued. However, mass valuation techniques often fail to account for meaningful details, resulting in assessments that inaccurately value the property. Moreover, property tax assessments are performed a year in arrears. This means that your 2012 assessment is based on 2011 market indicators.

The Good News

You can fight back! As a Florida property owner, you have the right to appeal the County's assessment of your commercial property. If you believe that your assessment does not fairly reflect the value of your property, you may want to consider appealing the assessment. But the window for appeal is small, so you have to act fast!

In Florida, taxpayers only have 25 days to appeal the assessment. With assessments delivered in early August, the deadline for appeal typically falls around September 10. If you think the County has overvalued your commercial property, contact me today.

At the most fundamental level, there are two precepts to the ideal sales tax: (1) that all personal consumption should be taxed; and (2) that all business inputs should be exempt.

That the underlying focus is on consumption is clear in the drafting of most state sales tax statutes which tend to define a "retail sale" as involving a purchase for use or consumption. For instance, the Florida taxing statute defines a "retailer" as any person "engaged in the business of making sales at retail or for distribution, or use, or consumption, or storage to be used or consumed in this state." Fla. Stat. § 212.02(13).

Despite the overriding purpose of the sales tax as a tax on personal consumption, the inquiry as to whether a transaction is sales taxable often turns on whether the thing conveyed in the transaction constitutes tangible personal property. See e.g., Robert Smith d/b/a FlipFlopFoto v. Ala. Dep't of Revenue, No. S. 05-1240, 2006 WL 3587184 (Ala. Admin. Law Div. Nov. 17, 2006) (holding that professional photos conveyed digitally by photographer were taxable as tangible personal property).

Of course, the form in which something is purchased should not determine the tax consequences. To the contrary, good tax policy militates in favor of parody in terms of tax consequences. For instance, the tax consequences of purchasing an e-book should be the same as the tax consequences of purchasing a traditional book; the tax consequences of purchasing a digital album on iTunes should be the same as the tax consequences of purchasing a traditional CD. Presumably, this is why the Alabama court shoehorned the digital photos involved in FlipFlopFoto into Alabama's definition of tangible personal property.

In order to achieve this desired parody in terms of sales tax consequences, some states have redrafted their statutes to provide for a more encompassing definition of tangible property which captures things like e-books and other digital files. In states where statutes have not been redrafted, courts are being forced to shoehorn these modern forms of retail into old statutes like the Alabama court did in FlipFlopFoto.

But perhaps this dichotomy between tangible property and intangible property is much ado about nothing. Perhaps we are asking the wrong question. The sales tax concept developed essentially as a mechanism to tax consumption. Yet, classification as tangible versus intangible says nothing about consumption. We are litigating the wrong issues because the state sales tax statutes require us to. So perhaps states should consider redrafting their sales tax statutes to adopt a different dichotomy: personal consumption versus business input.

Effective 2008, Florida residents voted to amend the Florida Constitution to protect commercial property owners against substantial increases in annual property assessment values. Specifically, the constitutional amendment operates to preclude increases in the assessed value in excess of ten percent from one year to the next.

All Commercial Properties Are Not Created Equal

While the protection of the ten percent cap extends to most types of commercial property, certain types of properties are unprotected. Among these unprotected properties are agricultural and conservation properties. The theory is that these types of properties already receive favorable tax treatment under Florida law and do not require additional protection in the form of the ten percent cap.

10% Cap Is Not Absolute

The protection against increases in assessed value in excess of ten percent is forfeited by a change in ownership or control. This means that sale or other disposition of the property will result in loss of the protection. To be clear, the new owner of the property is entitled to the protection going forward. However, the assessed value for the new owner's first year of ownership may be more than ten percent of the prior owner's assessment for the year preceding the property transfer.

Key Takeaway

If your Florida commercial property assessment has increased by more than ten percent this year, your commercial property may be overassessed for Florida property tax purposes. If your property is of a type entitled to protection under the ten percent cap, and there has been no transfer of ownership or control that would trigger loss of that protection, you can and should appeal the assessment.

It is well-established that the Due Process and Commerce Clauses of the U.S. Constitution impose limits on the taxing powers of the several States. E.g., Bellas Hess v. Illinois, 386 U.S. 753 (1967); Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Under the Due Process Clause, there must be some minimum connection between a state and a corporation before such state may tax that corporation. E.g., Miller Bros. Co. v. Maryland, 347 U.S. 340, 344-45 (1954). Under the Commerce Clause, the corporation must have a "substantial nexus" with the taxing state. See Quill Corp. v. North Dakota, supra (citing Complete Auto v. Brady, 430 U.S. 274 (1977). In addition, the tax must be fairly apportioned, non-discriminatory, and fairly related to the services provided to the corporation by the taxing state. Id.

Of course, a corporation will typically know where its property and employees are located. Thus, to the extent a corporation has property or employees in a given state, it can be said to be on notice of its potential exposure to tax in that state, and the requirements of the Due Process Clause are, therefore, satisfied. In addition, the substantial nexus requirement of the Commerce Clause will likely be satisfied assuming that the tax is fairly apportioned, non-discriminatory, and fairly related to the state services provided to the corporation.

But what about corporations engaged in the leasing business (e.g., rental car businesses, equipment leasing businesses)? Can nexus be established with a state solely by virtue of a lessee's transportation of the leased property into that state?

The current trend suggests that the answer is yes.

Continue reading "STATES MAY BE DEPRIVING LEASING COMPANIES OF DUE PROCESS" »

In Telebright Corp. v. Director, Division of Taxation, the New Jersey Division of Taxation effectively used a single employee's act of telecommuting as the jurisdictional hook to tax the income of a Delaware corporation. Significantly, the corporation maintained no offices in the State of New Jersey. Rather, the corporation's only contact with the State of New Jersey was in the form of an employee who telecommuted to work from her home in New Jersey.

This employee received her work assignments in New Jersey and completed such assignments from New Jersey using a company-provided laptop. Based on these indirect contacts through its employee, the corporation was held to be "doing business" in New Jersey. As a result, its income was subject to taxation in New Jersey under New Jersey law.

More significantly, the court held that such taxation was consistent with the Due Process and Commerce Clauses of the U.S. Constitution. First, the court held that the corporation's tax liability did not violate the Due Process Clause because the corporation had sufficient minimum contacts with New Jersey to justify taxation. In this respect, the court emphasized that the corporation had "fair warning" that its employment relationship with a New Jersey resident could subject it to New Jersey's jurisdiction. Second, the court held that the employee's presence in New Jersey in an employee capacity satisfied the substantial nexus requirement of the Commerce Clause because the corporation enjoyed the benefits of New Jersey's labor markets.

Key Takeaway: In this modern age of technology, corporations must be mindful of their telecommuting policies. Indeed, having a single employee telecommute from a state with otherwise insufficient minimum contacts to justify income taxation could subject that corporation to taxation in that state.

As the South Florida real estate market continues to decline, home prices throughout the State continue to drop, and property taxes are increasing for many Florida homeowners.

If this seems counter-intuitive it's because it is. Logically, a homeowner's property tax burden should increase or decrease in direct proportion to increases and decreases in the fair market value of the home. This is especially true in Florida where property is assessed at "just," or market, value and reassessed on an annualized basis (as compared to other states where property is reassessed on a biennial or triennial basis). Still, county assessments typically trail market changes by a year or more in Florida. This is because Florida law mandates that assessments be performed a year in arrears, with January 1 designated as the statutory date for assessment.

This means that your current assessment is based on comparable sales and other market indicators for January 2- December 31 of LAST year. Thus, your 2011 property tax assessment is based on 2010 market data, and changes in the market value of your home that occur after January 1 are not reflected in your 2011 property tax bill. While this may be desirable in a rising market, it deprives homeowners of a tax benefit to which they are legally entitled in a falling market.

Moreover, although every piece of real estate is unique, county tax appraisers use a mass method of appraisal to assess home values.

Continue reading "YOUR HOME MAY BE OVERVALUED FOR FLORIDA PROPERTY TAX PURPOSES" »