- Mississippi's Sales Tax Regulatory Smorgasbord Continues—Internet Sellers and Commercial Contractors on the Menu!
- August 7, 2017 | Author: John F. Fletcher
- Law Firm: Jones Walker LLP - Jackson Office
The Mississippi Department of Revenue’s recent flurry of regulatory activity continues unabated with a number of proposals and developments, primarily in the sales and use tax arena. With its most recent filings, the Department appears to take aim at remote internet sellers who have not voluntarily registered with the Department under its widely publicized “economic nexus” use tax proposals. Commercial construction contractors also have numerous substantive changes to consider, including a new 10 percent penalty regime that could apply even if all taxes are timely paid and even in some tax overpayment situations.
- Sales Tax Penalties / 50 percent Remote (Internet) Seller Penalty. On June 21, 2017, the Department issued a notice that it intended to amend Reg. 35.IV.1.02 concerning application of sales tax penalties. A public hearing will be held on Wednesday, July 26, 2017, at 2:30 p.m.
Through this proposed amendment, the Department attempts to clarify when the 50 percent and 300 percent sales tax penalties will be levied. The Department “will” levy the 50 percent penalty when an underpayment of tax by 100 percent or more is discovered during an audit or when an audit of taxpayer records reveals an attempt to disguise or hide taxable transactions. The proposal provides that this penalty will not be assessed if the taxpayer can prove reasonable cause for failure to comply. While ordinarily the Department must demonstrate that there has been an intentional disregard of the law or a deficiency resulted from an intent to defraud, and the 100 percent deficiency standard is not found in the statute, the language of this proposed regulation suggests the Department may intend to apply the 50 percent penalty to all non-filers because even $1 of sales tax liability will by definition constitute a 100 percent underpayment.
This provision should be especially concerning to any remote or internet sellers who have not voluntarily registered with the Department to remit use taxes even in the absence of a physical in-state presence. One need not be a conspiracy theorist to wonder if this language is intended specifically to address that particular situation and to increase pressure on sellers to voluntarily comply with the Department’s continued and well-documented efforts to overturn Quill. Given the Department’s transparency in publicly declaring its goal of reversing that decision, remote sellers should not expect the Department to consider such a constitutional defense to constitute “reasonable cause” to abate this 50 percent penalty if the Supreme Court were eventually to overturn the physical presence nexus standard.
The proposed amendment also makes significant changes to the 300 percent “trust fund monies” penalty. Under the new regulation, that penalty “will” be assessed if it is proved by preponderance of the evidence from the taxpayer’s records that tax was collected and then knowingly and intentionally not remitted. Proof of such intent is critical, as the taxpayer cannot be presumed to have collected the tax. Importantly, this penalty may be levied in addition to the 10 percent and 50 percent penalties. Previously, the regulation provided that the 300 percent penalty “may” be levied, so the new language would appear to make it mandatory. It is believed this amendment is being made in response to recent litigation challenging the Department’s application of that penalty based on an abuse of discretion defense.
Interestingly, these amendments purport to be effective May 1, 2016, not 2017. It is unclear whether this was a typographical error or an intentional effort to enact retroactive legislation.
- Contractor’s Tax Rules and Penalties. On June 21, 2017, the Department issued a notice that it intended to amend Reg. 35.IV.10.01 concerning application of the contractor’s tax and penalties for failing to prequalify a taxable contract. A public hearing will be held on Wednesday, July 26, 2017, at 2:30 p.m.
Under this proposed amendment, the Department formally proposes to levy a 10 percent penalty upon any contractor who, prior to beginning construction, fails to apply for a material purchase certificate (an “MPC”) and either prepay or bond the anticipated 3.5 percent contractor’s and applicable use tax on that job. That 10 percent penalty is due on all deficiencies, which include failure to post a bond or prepay the tax in full before work has begun. This penalty is based on the total amount of tax due on the total contract price, and apparently applies even if the contractor timely paid all taxes upon receipt of payments from the customer—even if the contractor is in a net tax overpayment situation. A penalty is also due on the tax applicable to monthly compensation not reported timely on subsequent returns.
There will not be a 10 percent penalty on the same deficiency more than once. Any portion of tax related to compensation that was penalized as a failure to post a bond or prepay the tax in full on contracts before the work was begun will not also be subject to the ordinary 10 percent penalty on the late remittance of monthly returns. Any portion of tax related to the late remittance of monthly returns that was penalized will not also be subject to a 10 percent penalty for failure to post a bond or prepay the tax of a contract. This exception does not, however, appear to mean the 10 percent pre-qualification penalty is inapplicable if there is no ultimate deficiency upon which to assess the normal 10 percent negligence penalty. This proposed regulation appears to remove the risk of double penalties but leaves significant risks for contractors on jobs that may not become subject to the contractor’s tax until well into the job (e.g., a small contract is expanded mid-project to exceed the $10,000 contractor’s tax threshold), as well as those that do not clearly fall within the 3.5 percent or 7 percent categories (e.g., it is unclear whether the work was on tangible personal property or real property).
Effectively, the Department intends to levy a 10 percent penalty even if all payments under a contract are timely made as payments are received, in which case there will have been no ultimate tax deficiency. In many instances, taxpayers will have paid the regular 7 percent sales tax on a contract only to be audited and assessed the 3.5 percent tax, meaning the state will have collected twice the tax actually due. To its credit, the proposed amendment does provide that taxpayers with projects subject to the contractor’s tax who have paid retail sales tax on purchases of materials and services that become a component part of the structure may take a credit against their sales tax liabilities for the sales tax paid on these purchases after obtaining the MPC for the related project. This credit, however, does not appear to ameliorate the threat of the 10 percent non-qualification penalty even though the contractor could be in an excess payment situation. Also, because the credit may be taken against the contractor’s sales tax liability, it is questionable whether that credit may be taken against his or her contractor’s tax liability, in which case he or she may be double taxed.
An additional change within this proposed amendment concerns items that are considered to be non-component materials subject to the normal 7 percent sales tax, and apparently this list is intended to be non-rebuttable even though it contains several items that historically could have been either component or non-component materials depending upon how they were installed and the extent to which they were physically integrated into the real property structure. The list of items in this new subsection 505 that apparently will always be considered non-component materials appears to directly contradict the specific criteria in the previously existing subsection 503 of that same regulation that govern that determination.
Expect this regulation to face significant challenges if it is enacted in the current proposed form, as the legality of the proposed amendment is highly questionable under existing statutes, and the amendments may be intended to stack the deck in the Department’s favor under the new appeals deference rules enacted by House Bill 799 (2014). These amendments also purport to be effective May 1, 2016, not 2017. It is unclear whether this was a typographical error or an intentional effort to enact retroactive legislation.
The Department has come under sharp public criticism recently over the fact that it has never issued an economic impact statement for any of its proposed regulations or amendments, in spite of the fact that such statements are explicitly required under Mississippi’s Administrative Procedures Act. In response to this criticism, the Department has begun issuing those statements, but, as seen below, so far it has concluded none of its amendments and new regulations pose any additional economic burden on taxpayers.
- Airbnb, VRBO, etc. – Economic Impact Statement. On March 24, 2017, the Department proposed to amend Reg. 35.IV.5.01 addressing the short-term rental of homes and other dwelling facilities for purposes of levying the state’s sales tax on “hotels.” A public hearing was held on that regulation on April 26, 2017. Under that proposed amendment, offering a room or home for rent on a short-term basis renders it taxable if the facility is “known to the trade” as a hotel or motel. The regulation now provides that advertising the room or home by the owner or through a third party would render it “known to the trade” for purposes of rendering that rental taxable.
On July 7, 2017, the Department issued an economic impact statement concluding the new regulation will impose no additional costs or other economic impact on the public or small businesses, purportedly because the new guidance does not impose any requirements on any business not already subject to tax under the Code. The amended rule is expected to become final on August 28, 2017.
Interestingly, the economic impact statement contains additional details not included in the regulation itself as to what activities constitute advertising and, thus, render a short-term rental taxable. The regulation states that “advertising for rent, whether by the owner of the property or a third party, qualifies as being ‘known to the trade as such.’” The economic impact statement contains slightly different language, explaining that the Department considers “a room or home for rent to members of the general public through an advertisement on a website that in turn is widely advertised through television, print, and other media as a way to shop for short term rentals will qualify that rental as a hotel for sales tax purposes.” The language in the economic impact statement appears to be slightly narrower than the regulation, in that it purports to require the website to “in turn” be “widely advertised through television, print and other media.” It is unclear what prompted this distinction or whether it suggests that the Department may be leaning toward a narrower application of the regulation than originally contemplated. Taxpayers facing contesting whether they were engaged in such a trade or business might also be inclined to cite this official statement in arguing for a narrower application of that regulation under their specific facts.
foods – Economic
Impact Statement. On March 24, 2017, the Department proposed to amend Reg.
35.IV.9.02 attempting to define what constitutes “prepared foods” for purposes
of local sales taxes on those items, as that term was not previously
defined in the statutes or regulations. A public hearing was held on that
regulation on April 26, 2017. Under that proposed amendment, prepared
foods include (a) food made to order upon the customer’s request; (b) food
sold in a heated state or heated by the seller; (c) two or more food
ingredients mixed or combined by the seller for sale as a single item but
not including food that is only cut, repackaged, or pasteurized by the
seller, and eggs, fish, meat, poultry, and foods containing these raw
animal foods requiring cooking by the consumer as recommended by the Food
and Drug Administration in Chapter 3, part 401.11, of its Food Code so as
to prevent food-borne illnesses; or (d) food sold with eating utensils
“provided by the seller,” including plates, knives, forks, spoons,
glasses, cups, napkins, or straws.
On July 7, 2017, the Department issued an economic impact statement concluding the new regulation will impose no additional costs or other economic impact on the public or small businesses, purportedly because the new guidance does not impose any requirements on any business not already subject to tax under the Code. The amended rule is expected to become final on August 28, 2017. The economic impact statement contains no additional guidance or explanation of amended regulation.
industry – Economic
Impact Statement. On March 24, 2017, the Department proposed to amend Reg.
35.IV.4.05 addressing customer use of printing equipment and printed
products delivered out of state. A public hearing was held on that
regulation on April 26, 2017. Under that proposed amendment, the term
“Printer” includes publishers and other producers or reproducers of
lettering or images of any kind on paper, printing plates, or other
material. Providing copiers, printers, or other machinery in the owner’s
place of business for use by customers who make their own printed material
for a fee does not fall under the term “Printer.” The regulation also
clarified that printed products that are delivered outside of this state
are exempt from sales tax; specified that computers, digital equipment,
and software used in the printing process are subject to the reduced
1.5 percent tax rate; and that electric power and other fuels used
in the process are fully exempt in accordance with recent statutory
changes. New language in the regulation specified that other forms of
printing equipment, such as inserters or mail sorting equipment, as well
as purchases of copiers and other equipment provided for use by customers
who make their own printed material, are taxable at the regular retail
rate of tax.
On July 7, 2017, the Department issued an economic impact statement concluding the new regulation will impose no additional costs or other economic impact on the public or small businesses, purportedly because the new guidance does not impose any requirements on any business not already subject to tax under the Code. The amended rule is expected to become final on August 28, 2017. The economic impact statement contains no additional guidance or explanation for the amended regulation.
Other Pending Actions
Final action remains to be taken on numerous other previously issued regulatory amendments for which public hearings have already been held. Those proposals include the following:
- New economic nexus rules for remote / internet sellers (hearing held February 15, 2017);
- Expanded rules addressing both income and sales tax transferee and responsible persons liability (hearing was held June 7, 2017);
- Clarification on how the taxpayer discount applies to sales tax returns that have multiple permit locations included on the single return under the new online filing system (hearing was held June 7, 2017);
- Guidance on issues related to sales / leaseback transactions (hearing was held April 26, 2017);
- Changes related to purchases of pollution control equipment and the updated exemption for manufacturing utilities (hearing was held March 15, 2017);
- Amendments related to sales tax on installation charges (especially for services such as the installation of roofing, siding, tile, glass, floor coverings, and fences) and provisions related to the contractor’s tax on commercial construction (hearing held March 15, 2017);
- New restrictions and requirements for filing sales tax returns, subsequent amendments and resulting credits and refunds (hearing held March 15, 2017); and,
- Sales taxes on textbook sales and fundraising activities carried on at schools (hearing held March 15, 2017).