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Article Abstracts
Jurisdictional Limitations on State Claims to Abandoned Property
John A. Biek*
*Partner, McDermott, Will & Emery, Chicago, Illinois; Yale
University, B.S., 1984; Georgetown University Law Center, J.D., 1987. The author would
like to thank John E. Gaggini and Stanley R. Kaminski of McDermott, Will & Emery for
their helpful comments on this article.
INTRODUCTION
All fifty states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands
have enacted abandoned property statutes1 that draw their inspiration
from the English common law doctrine of bona vacantia. Under that doctrine, the
sovereign was allowed to claim certain kinds of personal property as custodian for the
rightful owner under the principle that the sovereign had a more equitable claim to the
property than the holder of that property did.2 Similarly, under abandoned
property statutes in the United States, businesses (hereinafter referred to as
"holders") are required annually to report and deliver to the appropriate state
intangible personal property constituting a debt or obligation owed, in the ordinary
course of its business, by the holder to the owner for more than the period of time
(typically five years) prescribed in the state abandoned property statute (as well as
abandoned tangible personal property).
In recent years, greater attention has been paid to state abandoned property laws due
to the multistate audits conducted by third-party contractors for periods typically going
back to the early or mid 1980s. Noncompliance by holders with state abandoned property
laws can be attributed to a number of factors, including the broad range of property types
and statutory dormancy periods covered by the various state abandoned property statutes.
If holders have been complying with state abandoned property laws, it generally has been
only for certain commonly understood types of unclaimed property such as payroll and
dividend checks. Other types of unclaimed property such as promotional and gift
certificates, customer overpayments, and unidentified remittances may not have been
reported at all.
This increased focus on abandoned property laws is bringing jurisdictional issues to
the fore. In Texas v. New Jersey,3 the United States Supreme
Court established priority rules in an effort to ensure orderly reporting of abandoned
property and to prevent the "race of diligence" among competing states that was
criticized by the dissenting opinion in Standard Oil Co. v. New Jersey.4
Nevertheless, some state abandoned property administrators and auditors have made the
remarkable assertion that any state with due process jurisdiction over the holder may take
custody of any property that is presumed abandoned and not yet reported to a state
with a higher priority under the rules of Texas v. New Jersey. Just as remarkably,
many states contend that holders are obligated to file annual abandoned property reports
in any state where the owner of unclaimed property is located, regardless of
whether the holder does business or otherwise maintains a physical presence in that state.
This article reviews the general requirements of state abandoned property laws and the
United States Supreme Court decisions addressing some of these jurisdictional issues. The
article concludes that notwithstanding the broadly expressed annual reporting requirements
of state abandoned property statutes, those compliance obligations must also satisfy the
Due Process Clause and Commerce Clause of the United States Constitution. State abandoned
property reporting obligations are arguably no less burdensome on multistate businesses
than state sales or use tax collection obligations. Accordingly, under the Supreme
Court’s analysis in Quill Corp. v. North Dakota,5 a holder should only be
required to file annual abandoned property reports in states where the holder maintains
substantial nexus (i.e., physical presence), typically through a place of business,
real or tangible personal property or employees, agents or representatives. To the extent
that the holder owes payment of unclaimed property to a resident of a state where the
holder does not have sufficient nexus to be required to file reports, the holder may be
required to report and deliver that property to its state of corporate domicile (generally
its state of incorporation) under the priority rules of Texas v. New Jersey.
The second jurisdictional issue addressed by this article is the right of a state to
claim abandoned property in the absence of claims by other states to that property. This
article concludes that the holding of Texas v. New Jersey places distinct
jurisdictional limits on state claims to abandoned property, even where only one state
currently is claiming custody of the property. Otherwise, the first state to audit the
holder would prevail. As long as the holder’s records indicate the last known address
of the owner of the abandoned property, no other state except possibly the holder’s
state of corporate domicile should be able to claim custody of the property.6
Further evidence of jurisdictional overreaching by the states is the so-called
"transactional rule" which the states assert authorizes the state where the
transaction occurred that gave rise to the abandoned property to claim abandoned property
if neither the owner state nor the holder’s state of corporate domicile can claim
that property. However, even if the transactional rule is valid, it should not allow
premature state claims to abandoned property by states contending that states with a
higher priority have not yet claimed the property in question.
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Convergence and Bundling: The Impact on State and Local
Telecommunications Taxes
Bruce Nelson*
Dee Tagliavia**
*Senior Tax Manager, State and Local Tax Group, Ernst & Young,
LLP, Denver, Colorado; member of the Colorado Society of Certified Public Accountants and
the American Institute of Certified Public Accountants; University of Nebraska, B.A.,
1976; Colorado State University, M.A., 1992.
**State and Local Tax Manager, EchoStar Communications Corporation,
Littleton, Colorado; member of the District of Columbia and Texas bars; University of
Denver, B.A., cum laude, 1971; George Washington University, J.D. 1977; Georgetown
University Law Center, LL.M., 1981. The views expressed in this article are those of the
authors and do not necessarily reflect the views of either Ernst & Young LLP or
EchoStar Communications Corporation.
INTRODUCTION
It is not an exaggeration to say that the single most important recent development in
telecommunications is "convergence." Put simply, convergence is the bundling of
voice, video, and data into one communications technology. Traditionally separate
industries, telecommunications, Internet, cable, and satellite television providers are
quickly evolving into a single communications industry. For example, according to the Wall
Street Journal, AT&T is planning "a discounted package of local and
long-distance phone service, Internet hookups, high-speed data access, and…cable TV
service."1
Qwest Communications has begun selling unlimited dial-up Internet access bundled with long
distance, online conferencing, and "a whole suite of Web-enabled services" for
$24.95 a month.2
Convergence should not be mistaken for the mere "stapling" of various
communication services into one billing; rather, convergence is the integration of these
services customized and priced to meet a specific customer’s needs. It is
customer-specific integration that creates added value,3 not the simple aggregation
of the services provided. In fact, the way a communications company tailors convergent
services to a customer’s needs may be what gives it a distinct advantage over its
competitors. According to a recent article in Telephony,4 price and reliability of
service no longer afford a competitive advantage because they have become fairly
consistent across providers. To distinguish themselves from their competitors in the
marketplace, communications companies are offering convergent services and bundled billing
with concomitant benefits to their customers.
Convergence is a direct consequence of the Telecommunications Act of 1996,5
which removed the regulatory barriers to competition among communication providers. While
the long-term social, cultural, and commercial impact remains speculative, there are
immediate consequences for state and local taxation. Because convergence is inherently a
bundling of services, it creates problems by (1) juxtaposing services typically offered by
traditionally monopolistic, regulated industries with those offered by unregulated
competitive companies, and (2) conjoining services offered by electronic transmission
providers with those of content providers. The resulting composite is difficult if not
impossible to tear asunder, and yet, current taxing regimes seem to require that the
bundled services be separately stated. The requirement of separation may have a
metamorphic effect, not only on nascent technologies such as the Internet that are bundled
with traditional products and services, but also upon the act of integration itself.
The bundling of telecommunication services with new untaxed services from emerging
technologies presents serious challenges to traditional tax models. In this article, we
will provide a summary and criticism of only a few of the questions prompted by these
challenges. Specifically, we will address (1) whether and when a state may impose a tax on
either the taxpayer or the service provided, (2) the difficulties confronting billing and
compliance, (3) the inadequacy of traditional "true object" tests in segregating
"mixed transactions" in bundled sales, and (4) the problems created in sourcing
sales, not only for sales tax, but also for income tax allocation and apportionment. In
sum, bundling not only raises questions regarding the very definition of
telecommunications and its traditional division between content and transmission, but also
challenges the very typology of traditional sales and use tax.
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Limited Liability Companies and Check the Box—How They Affect
State Tax Planning
John O. Michaelson*
*Senior Manager, Deloitte and Touche, San Jose, CA; California State
University, B.A., 1974; Golden Gate University, M.B.A., 1978; University of Santa Clara,
J.D., 1982.
The use of a Limited Liability Company ("LLC") as a tax planning vehicle is
becoming more widespread. An LLC provides limited liability to the owners while subjecting
the owners to only one level of tax. Additionally, the layering of the federal and state
tax alternatives that are available through the use of a "check-the-box"
election can make a limited liability company an ideal tax planning vehicle. However, care
must be taken to fully explore the state and local tax ramifications before using an LLC.
This article is intended to outline, in broad form, the multitude of state and local tax
issues that lurk before the unwary tax practitioner.
One benefit of the LLC/"check-the-box" strategy is to legally minimize a
commonly owned group’s state income/franchise tax liability by grouping various legal
entities in a single state return. For example, this state tax reduction may be
accomplished by converting corporations into disregarded entities for federal and state
income tax purposes by using the "check-the-box" regulations, thereby
effectively combining entities with unused tax benefits (e.g., operating losses)
with entities generating taxable income.
This article will provide an overview of these subjects and discuss various tax
planning opportunities that are available through the use of LLCs in conjunction with the
"check-the-box" regulations. This is a general discussion, and both federal and
relevant state statutes should be examined carefully before any tax plan is implemented.
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Recovery of Sales Tax on Bad Debts After Puget Sound
William J. McConnell*
*Manager – Sales, Use & Excise Taxes, General Electric
Company, Fort Myers, Florida; University of Utah, B.S., 1978; George Washington
University, M.B.A., 1981; George Mason University School of Law, J.D., 1984. The views
expressed in this Article are personal to the writer and do not necessarily represent the
views of General Electric Company and its affiliates.
INTRODUCTION
The states have generally permitted retail sellers to recover sales taxes paid in
connection with credit sales that become uncollectible. Since sales taxes are generally
imposed on the gross proceeds of sales at retail, a "bad debt" provision
eliminates the taxation of proceeds never actually received by the seller, and prevents
the burden of a tax generally borne by consumers from being shifted to the retailer.
However, it is not always clear how these bad debt rules are to be applied, particularly
with respect to third parties, which acquire credit obligations that ultimately become
uncollectible.
The Washington Supreme Court decision in Puget Sound National Bank v. State of
Washington Department of Revenue, focused on the recovery of sales tax on bad
debts which had been written off for federal income tax purposes by a subsequent purchaser
of the credit obligations.1
The controversy in Puget Sound centered on whether a bank, which had purchased
installment contracts on a nonrecourse basis from automobile dealers and suffered a bad
debt, could recover the sales tax that had been originally remitted by the car dealers.
This Article will examine the Puget Sound decision and review other related
developments in the sales and use tax law concerning the treatment of bad debts.
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State Taxation of Accumulated Trust Income: Statutory
Approaches and Constitutional Considerations
Warren R. Calvert*
Sylvia Z. Gaspar**
*Senior Assistant Attorney General and Tax Section Leader, Georgia
Attorney General’s Office, Atlanta, Georgia; Georgia Institute of Technology, B.S.
with highest honor 1974; University of Georgia Law School, J.D. cum laude 1977. The views
expressed herein are solely those of the authors and should not be considered official
positions of the Georgia Attorney General’s Office.
**Senior Associate, State and Local Tax Practice,
PricewaterhouseCoopers LLP, Atlanta, Georgia; University of North Carolina-Chapel Hill,
B.S. 1992; Georgia State University, J.D. cum laude 1997.
Among the myriad of topics in the field of state and local taxation there may be few
that are the subject of greater confusion than the state income tax treatment of
accumulated trust income. Although there has been an explosion of litigation in recent
years involving state and local tax matters, only a small number of court decisions
address the income taxation of trusts, and those cases are split in their outcomes. This
article examines typical statutory approaches to the income taxation of accumulated trust
income and discusses some of the constitutional considerations that govern the validity of
the more common schemes. Rather than address each and every statutory pattern a taxpayer
or practitioner might confront, or attempt to resolve the constitutional issues that have
bedeviled the courts so far, this overview is intended to provide a helpful background for
approaching and analyzing such questions.
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Be Careful What You Wish For, You Just Might Get It:
The Constitutionality of Tax Incentives in Light of Recent Pennsylvania Cases
Stewart M. Weintraub*
John M. Randolph, III**
*Stewart M. Weintraub (B.S., Drexel University, 1968; J.D., Temple
University School of Law, 1971) is a partner in the Philadelphia office of Schnader
Harrison Segal & Lewis, LLP. Mr. Weintraub also is an Adjunct Professor at the Temple
University School of Law LL.M. Tax program where he teaches a course in State and Local
Taxation.
**John M. Randolph, III (B.S., King’s College, 1986; J.D., Thomas
Cooley Law School, 1995; LL.M in Taxation, Villanova University, 1996) is an attorney in
the Philadelphia office of Schnader Harrison Segal & Lewis, LLP.
Recently, the Pennsylvania Supreme Court declared that two Pennsylvania taxes facially
discriminated against interstate commerce1 in violation of the Commerce
Clause.2
In each case, the facial unconstitutionality was the product of state tax incentives. What
remains to be seen, however, is whether the remedies ultimately selected by the
Pennsylvania Supreme Court will make the "victorious" taxpayers feel like
victims.
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The Tennessee Tax Revision and Reform Act of 1999
G. Michael Yopp*
*Member, Yopp & Sweeney, PLC; University of Kentucky and Murray
State University (B.S. 1968); Emory University (J.D., 1975); New York University (LL.M. in
Taxation, 1979).
INTRODUCTION
The 101st Tennessee General Assembly enacted "The Tax Revision and Reform Act of
1999" (the "Act") on the last day of the legislative session.1
It was passed in reaction to a projected budgetary shortfall of $350 million for the
upcoming fiscal year. Like many legislative enactments, there are inconsistencies and
oversights; however, the Act is also marred by the failure to properly integrate some of
its provisions with the Internal Revenue Code and the imposition of Generally Accepted
Accounting Principles ("GAAP") upon entities that do not usually keep books and
records in accordance with GAAP.
The Act completely repealed the existing Franchise and Excise Tax Law and replaced it
with a new set of provisions. Although many of the provisions of the Act are identical to
former provisions, the Act makes substantial changes in the law. The purpose of this
article is to highlight the changes from the prior law and to discuss the problems, issues
and, sometimes, answers to the issues.
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The Supreme Court and State Taxation: 1998–1999, On the
Straight and Narrow
Carter G. Phillips*
Nathan C. Sheers**
*Managing Partner, Sidley & Austin, Washington, D.C.; Ohio State
University (B.A., summa cum laude, 1973); Northwestern University (M.A., 1975; J.D., magna
cum laude, 1977). [The author was co-counsel for the State of Arizona in Arizona
Department of Revenue v. Blaze Construction Co., 119 S. Ct. 957 (1999).]
**Associate, Sidley & Austin, Washington, D.C.; West Virginia
University (B.A., 1989); Columbia University (J.D., 1992). The authors wish to thank Mark
Juba for his assistance in the preparation of this article.
INTRODUCTION
In the October 1998 Term, the United States Supreme Court continued its recent trend of
deciding relatively few cases. Only 80 oral argument slots—representing 90
cases—were filled, and those cases resulted in only 75 signed opinions.1 While
the Supreme Court had not granted any writs of certiorari in cases involving state or
local taxation issues at the conclusion of the 1997 Term, the Court eventually picked up
three such cases for the 1998 Term, a slight improvement over the prior Term when the
Court only gave plenary consideration to one state tax case.2 The
Court, however, continues to deny certiorari in large numbers of cases involving state and
local tax issues. During the time frame in which the Court was granting review in cases
heard during the 1998 Term,3 the Court rejected 28 petitions raising state or local
tax issues.4
The paucity of cases now heard before the Supreme Court led some members of the Supreme
Court bar quietly to ask Chief Justice Rehnquist to modify the Court’s argument
calendar to reflect its waning docket.5 The Chief Justice, however, has always maintained that
the Court’s current docket is not the result of a deliberate attempt to reduce the
number of cases heard, and the Chief Justice politely rejected the suggestion, stating
that "there [are] at least equally cogent reasons supporting the present
arrangements."6 The exchange of correspondence, however, did result in
one significant change. The Solicitor General, asked to comment on the practitioner
proposal by the Chief Justice, declined to endorse the practitioners’ proposal but
did suggest that the Court begin granting certiorari petitions during the course of the
summer. The Court did just that, issuing several grants in its order list of September 10,
1999.7
Unfortunately, as of the end of the 1998 Term, the Supreme Court had yet to grant review
of any cases raising state or local tax issues.
During the 1998 Term the Court did consider three state and local tax cases,8 one
of which was quite significant to the state and local tax bar, as Alabama offered the
Court a chance to abandon its prior negative Commerce Clause jurisprudence.9 In
the two other cases, of less moment to private taxpayers, the Court considered the scope
of the intergovernmental tax immunity doctrine. In so doing, the Court also defined the
scope of the Tax Injunction Act.
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