The reciprocity agreement between New Jersey and Pennsylvania allows the residents of each of those states to pay income tax to their home state only, even if they work in the reciprocal state.
As New York tax professionals know, people who work in New York pay tax to New York even if they live in New Jersey or Connecticut. They have to file a New York Non-resident Tax Return, pay tax on their wages and other earnings in New York, and also file a Resident Return in their home state and claim a credit on their home state resident return for taxes paid to the other state. New York does not have a reciprocity agreement with any state, unlike New Jersey and Pennsylvania.
However, New Jersey Governor Chris Christie gave notice of termination of the reciprocity agreement on September 2, 2016 (to take effect on January 1, 2017) in order to address a potential $250 billion state budget deficit. But, on November 21, 2016, Governor Christie signed legislation that streamlined and modified the state’s pharmacy benefits system, saving up to $200 million in health care benefits costs and allowing him to save the NJ/PA reciprocal agreement.
With the NJ/PA reciprocity agreement still in place, Pennsylvania residents working in New Jersey do not have to file a New Jersey tax return. The New Jersey employer will withhold tax in the employee’s home state of Pennsylvania. Therefore, the employee only needs to file a Pennsylvania Resident Tax Return. Pennsylvania also has reciprocity agreements with the states of Indiana, Maryland, Ohio, Virginia and West Virginia.
This past year, a determination was issued in a New York residency case in the Matter of Carl Ruderman for tax year 2007. The Administrative Law Judge for this case was Dennis M. Galliher. The issue was statutory residence.
A taxpayer can be determined to be a resident of New York by either being domiciled in New York (having your primary residence there) or being a statutory resident, meaning that you have a residence in New York and you spend more than 183 days there in any given year.
The New York State Tax Audit Division accepted that Mr. Ruderman was domiciled in Florida; however they determined that he was a statutory resident of New York State and City for 2007. The audit findings resulted in almost $1 million in additional State and City tax, plus interest and penalty. The case involved whether Mr. Ruderman could prove that he was not in New York for over 183 days. The Division’s review revealed credit card charges in a variety of places, including New York City, on days when petitioner claims to have been elsewhere.
According to the law, the taxpayer has the burden to establish by clear and convincing evidence that he was not present in New York City for more than 183 days during the year. This is a heavy burden that should not be taken lightly. The typical evidence examined in audits of this type would be a personal or business diary, backed up by a record of credit card charges and phone bills, including land line and cell phone. Additional records that can indicate your whereabouts are commonly requested and/or subpoenaed, such as EZ-Pass and utility bills.
In a well-known New York State Tax Tribunal case, Matter of Julian Robertson, the taxpayer had a secretary that maintained a diary to track his whereabouts every day of the year. He was prepared for his audit. He had a day count prepared with the filing of his return, which was supported by his diary and records. Since his recordkeeping was very detailed and accurate, the state auditors only had questions on a few days during the year. This case went to the Tax Tribunal with only two days in question. Due to the level of detail maintained, the taxpayer was found to be credible and Robertson was able to win his case resolving the final two questionable days with credible oral testimony.
The Ruderman case, however, is different. The Audit Division’s review revealed credit card charges in a variety of places, including New York City, on days when petitioner claims to have been elsewhere. Mr. Ruderman claimed that although he only had one credit card (one copy), sometimes his wife, children or even his housekeeper could be using the same card. He also did not try to discern which charges were made by which person. As you can see, this is not a very credible argument.
To try to help his case, Mr. Ruderman was able to get affidavits from business associates and acquaintances. One of which stated that Mr. Ruderman was present in Florida from May through the end of November 2007. This is a block of time of seven months, and the affidavit only mentioned one specific event that he recalled which took place during October. Furthermore, there were many credit card charges that took place in New York during this period, hurting the credibility of this affidavit. Not only is the credibility of the affidavit affected, but the entire case is called into question.
It is possible for affidavits to help your case and be accepted as proof that one was not present in New York, however it has to be more specific as to dates and situations that took place on those dates. And you certainly don’t want those affidavits contradicted by better evidence. According to the ALJ in this case:
“The foregoing review bears out that the evidence in this case fails to provide the degree of specificity necessary to establish petitioner’s whereabouts with certainty so as to conclude that he was present outside of New York State and City on the disputed days. Accordingly, petitioner has not met the burden of establishing by clear and convincing evidence that he was not present in New York City on more than 183 days in the year 2007 within the contemplation of Tax Law…”
In summary, when confronted with credit card charges in his name, Mr. Ruderman claimed that he had not made the charges with no evidence or explanation establishing any of the charges as those made by his children or others. When confronted with phone calls made from his New York residence, again he claimed that it wasn’t him. He submitted general affidavits stating he was in Florida for extended periods of time. This was not convincing. In order to be successful, one has to be consistently accurate with the records that are provided to build a level of confidence in their credibility.
If you have any questions regarding residency, or any other state and local issues, please call Brian Gordon at 516-938-5219.
As you scan the recent New York State Administrative Law Judge (ALJ) court determinations, it seems that there will always be cases involving sales tax audits of cash businesses. These include delis, salad bars or restaurants, and a common theme is that the business does not have complete records. A commonly omitted item is cash register tapes. It is very important to handle these audits properly, as it is very difficult for a taxpayer to win this type of case in court.
Over a period of many years, cases have gone to ALJ hearings and many of those have been advanced to the New York State Tax Tribunal. The decisions by the Tribunal set a precedence for future audit treatment. As such, it has been determined that, if your records are inadequate, the auditor is allowed to use indirect methods to estimate the amount that your actual taxable sales should have been and then calculate the sales tax due per audit. Indirect methods may include:
Conducting an observation of the business
Using published business ratios
The difficulty in fighting these cases in court is that in using these indirect methods, the auditor doesn’t have to prove that the result is accurate.
It has been established in past Tribunal Cases:
“…The Division’s method must be reasonably calculated – exactness is not required.”
“In addressing the method of audit, considerable latitude is given to an auditor’s method”.
You can see what we‘re up against. The auditor doesn’t even have to be correct. Considerable latitude is given and the method must only be reasonable. This seems harsh, but don’t forget that the business owner is required to keep records. When presented with incomplete records, the auditor has no other option than to use estimates.
The Tribunal has also established that: “The burden is then on the taxpayer to demonstrate, by clear and convincing evidence, that the audit method was unreasonable”. This is how you can win, but it is a steep climb.
In a recent case, affidavits were submitted in lieu of records. The taxpayer’s representative rebutted the auditor’s findings with alternative estimates. That strategy doesn’t work because the requirement of the taxpayer is to produce records that will show that the sales were correctly reported. If you don’t produce records, the auditor is allowed to estimate – you are not allowed to. The aforemention taxpayer lost their case and, what makes matters worse is, there were substantial penalties added to the tax.
If you have a Sales Tax problem, I’d be happy to help you. Please call 516-938-5219 to speak with me.
Also known as “The Amazon Law” (after internet trendsetter Amazon.com), click-through nexus laws clarify that the solicitation of business by placing a link on someone’s website in another state that connects a potential customer to your website may create a sales tax filing obligation for you in that “foreign” state. In order to eliminate forcing this requirement on smaller business, most states include a $10,000 threshold for sales in the preceding year resulting from these click-throughs. Be careful, though, if you are a multi-state business as the threshold for the following states are less: Rhode Island, Connecticut and Pennsylvania ($0). About half of all states have now either passed click-through laws or follow them as policy.
You might ask what happened to the requirement of physical presence in a state to create nexus as established in the Supreme Court decision in the Quill case. In response, some states might argue that a link already qualifies as physical presence. For example, New York State law always provided that nexus includes physical presence of employees, independent contractors, agents or other representatives soliciting business in New York State. Placing a link on a website that connects to your website is the modern equivalent of this example – an agent or representative soliciting business for you. New York’s law, as well as the law in many other states, includes a presumption that the agent or representative is soliciting for you. This is a rebuttable presumption, however, which means that if the only activity in New York is the link and the agent does not engage in any solicitation on behalf of the out of state seller, the nexus rule can be challenged. Most states with Amazon Laws have this rebuttable presumption. However, Connecticut’s law is irrefutable.
Additionally, the law in Illinois was challenged in the Illinois Supreme Court and it was found that the click-through law was not permitted as it was preempted by the Internet Tax Freedom Act and it discriminated against the use of internet. In response, Illinois amended their law to include both tangible and electronic means of referring sales. The click-through law is once again active in Illinois.
Do the click-through laws pertain to Corporation taxes? While you never know what a particular state will propose, the click-through nexus laws are specific to sales tax. Many states have also created new corporation nexus laws based on the amount of sales in that state with no physical presence required. States have become aggressive in writing new laws to attach new taxpayers to their state. If you have any questions regarding nexus or filing requirements in any state, please call me, Brian Gordon, at 516-938-5219 for information.
On June 2, 2016, the Governor of Connecticut signed legislation adopting market-based sourcing for purposes of a corporation apportioning receipts from services. This is effective for years beginning on or after January 1, 2016. The effect of the change to market-based sourcing is that income from services will now be considered Connecticut source income if the customer receives the benefit of the service in Connecticut regardless of where the service was performed. However, this does not necessarily result in a nexus determination in Connecticut. If you have no physical presence in Connecticut, and no other nexus connection, you would need $500,000 (subject to annual adjustments) to be subject to Corporation Tax in Connecticut. Prior to this change, the method was called Cost of Performance Method, which means that income was sourced to the location that the service was performed. Market-based sourcing has been adopted by many states, and the list is growing. New York State adopted economic nexus and market based sourcing for all receipts beginning January 1, 2015.
Continue reading Connecticut Changes to Market-Based Sourcing
The state of Alabama passed new regulations that would require out-of-state sellers with no physical presence in Alabama to collect Alabama Use Tax if they have sales to Alabama customers exceeding $250,000. This took effect January 1, 2016.
There has been a longstanding precedent established by the Supreme Court in Quill v. North Dakota that the bright line test of physical presence was required for sales tax nexus. The states have protested that times have changed and we must recognize that they are losing sales tax revenue because their residents are purchasing from out-of-state businesses over the Internet rather than at local businesses where they would have to pay sales tax. Based on the Quill decision, these Internet businesses are not required to collect sales tax in states where they have no physical presence.
Continue reading Challenge to Alabama’s New Nexus Rule: Internet Sales
This article originally appeared in the April 2016 TaxStringer and is reprinted with permission from the New York State Society of Certified Public Accountants.
In 2010, Colorado enacted a law that imposes use tax reporting obligations on many remote sellers with no nexus to the state. This law does not require them to collectsales or use tax; it only requires them to report the sales information to both the purchaser and the state of Colorado, notifying them of a use tax liability. This can be equated to filing Form 1099 to ensure the reporting of income.
After an initial review in 2013, the U.S. Court of Appeals for the Tenth Circuit reviewed this case for the second time in February 2016 and ruled in Colorado’s favor again. This time, however, the court specified that the Colorado law does not discriminate against, nor does it unduly burden, interstate commerce.
This is an extremely significant decision: For the first time, a state will have a means to verify and enforce use tax filing by individuals. Use tax has been underreported for many years, and the amount of use tax on purchases by individuals has grown exponentially with the growth of Internet sales. Continue reading Colorado Wins Round Two on Use Tax Reporting Requirements for Remote Sellers
Residency Audit: Client Saved $2 million
This office has just completed a New York State Residency audit which was referred to us by another CPA. The issue was statutory residency. Statutory residency is where you have a primary residence (domicile) outside of New York, but also have a residence in New York, and spend more than 183 days in New York. These audits focus on a detailed review of documents to establish your whereabouts for every day of the year, and to determine if you exceeded 183 days in New York to be considered a New York resident. At the time of the referral there was an audit finding with a liability proposed for a little over $2 million. My many years as a District Audit Manager for NYS Taxation and Finance give me unique experience that enables me to see the finer points of statutory resident audits and to understand day counting rules and record keeping requirements. As a result, after reviewing the records with the audit staff, I was able to convince the auditors that my client did not exceed 183 days in New York, therefore was not a resident of New York, and the $2 million tax bill was cancelled. Continue reading Tax Audit Success
How can states increase revenue without raising taxes? The answer is to create new taxpayers. Many states have created new taxpayers by expanding the reach of their nexus laws. This means making laws that require companies physically located in other states to either pay their state’s taxes or collect their state’s sales tax. This is referred to as economic nexus as opposed to physical nexus. Continue reading Changing Nexus Rules: What you need to know
This article originally appeared in the January 2016 TaxStringer and is reprinted with permission from the New York State Society of Certified Public Accountants.
There are many different types of sales tax audits. Audits of cash businesses, which are often closely-held or family-owned businesses that lack internal controls, are very common. In these audits, records are sometimes incomplete or, as the state audit division would say, “inadequate.” An auditor may then employ an indirect method to determine if the reported sales are correct; this could be based on a physical observation of the business, counting actual sales for a full day, or calculating sales using ratio analysis. Continue reading New York Sales Tax Audits: Are Test Period Agreements Binding?