Law & The Border: More tax amnesty in the U.S.

by Daniel Joyce

The downturn in the U.S. economy has had an impact on government budgets at the federal, state and local levels. States that had budget surpluses just a few years ago, are now facing budget deficits.

One way to solve the problem is to impose tax increases, but governments often try to find other ways to raise revenues before adopting measures that are unfavorable to the public. As a first approach, states often try to increase enforcement and collection efforts to bring in tax revenues from existing sources. That approach can bring in a mixed bag of good and bad.

On the good side, states may offer tax amnesty of one form or another.

Tax amnesty can be effective in several important ways. The voluntary nature of amnesty generally means that the state can achieve compliance with a minimum of expense on the enforcement personnel side. Amnesty often can be used to resolve existing disputes between the state and the taxpayer, but its broader benefit is that it may bring taxpayers into the picture that were previously unknown or unidentified. (This has been the case for many Canadian carriers who are subject to taxation in certain states, but have never filed returns or paid taxes in those states.)

Finally, amnesty adds a new taxpayer to the tax rolls, presumably increasing revenues from year to year in the future.

Recent reports indicate that N.Y. will receive US$175 million in payments under the recent amnesty program that ended January 31. Ohio and Michigan have also adopted amnesty programs, referred to as “voluntary disclosure programs.”

The Ohio and Michigan programs are similar in that they allow the taxpayer to pay tax and interest for delinquent years, without any penalties. Taxpayers with long delinquencies can benefit, because the maximum ‘look back’ period is four years; a taxpayer who complies with the voluntary disclosure program will be relieved from responsibility for tax liabilities prior to that time.

In order to be subject to taxation in Ohio and Michigan, the carrier has to have sufficient contacts or business activity within the state in order to trigger tax liability.

In Ohio, a carrier is subject to state taxation if it makes more than 12 trips through the state in any tax year. In Michigan, the carrier is subject to tax if the percentage of business attributed to pickups and deliveries in Michigan is greater than US$250,000.

Michigan, like virtually all other states, uses an allocation formula based on miles driven in the state, compared to miles everywhere. If five per cent of your miles are in Michigan, than five per cent of your gross income is allocable to Michigan.

In contrast to taxpayer-friendly approaches like amnesty, however, we have seen other less- welcome tactics used by tax auditors to exaggerate the amount of income subject to tax.

One such tactic involves the inclusion of brokerage income in the calculation of transportation income.

Canadian motor carriers by their nature do not conduct business in the United States, other than with respect to their pickups and deliveries. The states therefore have taxing jurisdiction only over motor carrier activities. In our view, that means any activities within the scope of their operating authority as a motor carrier. A carrier may have revenues from other lines of business including brokerage, sale or lease of equipment, and the like. We believe that revenues and net income from these activities should be excluded when calculating tax liability for any particular state in the U.S.

Some tax auditors have overreached, in our opinion, taking transportation brokerage activities into the calculation of taxable income. While we consider this to be improper, regardless of the amount involved, the issue is particularly problematic when the carrier is subject to a tax on its gross receipts or revenues.

The broker often serves as a conduit from the customer to the subcontracted carrier, with most of the payment going to the carrier and the “net” amount remaining with the broker for its services.

We believe it is wrong for a state to include brokerage income in the calculation of taxable income.

The actual carrier making the movement has operating authority and has already paid fuel taxes, highway use taxes and state franchise taxes relating to the brokered loads. In our opinion, it is improper to tax two companies for the same transaction under these circumstances.

Nevertheless, some state auditors have been more aggressive by including brokerage receipts in the calculation of taxable income, particularly when the company’s books do not adequately reflect the separation of the two lines of business (brokerage and motor carrier).

Many Canadian carriers do not realize that brokering loads in or from the U.S. requires licensing in the U.S., similar to operating authority for a motor carrier.

Carriers with significant brokerage divisions should make sure that they can survive the state tax audit by providing evidence of proper licensing authority and proper bookkeeping techniques that separate the various lines of business.

– Daniel Joyce can be reached at Hirsch and Joyce, Attorneys at Law, at 716-564-2727.

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