Sometimes taxpayers find themselves in a dilemma. They discover they are delinquent in tax reporting, perhaps for several years, and don't know what to do. An admission could result in significant tax...
Sometimes taxpayers find themselves in a dilemma. They discover they are delinquent in tax reporting, perhaps for several years, and don’t know what to do. An admission could result in significant tax liability, while the failure to address the issue poses the risk of even higher costs in the future.
To help address those situations, many states offer a limited period of tax amnesty from time to time to bring people back into the fold and to soften the blow of the tax liability. New York offered a tax amnesty in 1996, and has introduced another amnesty period through Mar.15, 2003.
The amnesty applies to many types of taxes, including corporate franchise taxes applicable to Canadian motor carriers, for tax periods through Dec. 31, 2000. The State of New York is required to waive applicable penalties, and reduce the applicable interest rate by two per cent, if the taxpayer submits the applicable amnesty application, including all required returns, with payment of tax plus interest, prior to Mar. 15.
Many Canadian carriers are unaware that they are subject to state taxation. Although the U.S.-Canada Tax Treaty exempts Canadian carriers from federal income tax on transportation activities in the U.S., the same does not apply to the individual states. The individual states have separate taxing authority and are not covered under the U.S.-Canada Tax Treaty. As a general rule, a state cannot tax the activities of a motor carrier engaged in interstate commerce.
However, certain activities, despite having the appearance of interstate commerce, can be deemed to be sufficiently local in nature and they can trigger state corporation tax liability.
The legal term “nexus” is used to characterize the relationship between the carrier and the state that exposes the carrier to tax liability. The word “nexus” means “connection,” and the legal principle is that a certain level of business activity within a state removes it from the protection of interstate commerce, and creates a sufficient connection with the state to expose it to tax liability. Most states look at the issue in terms of the number of pickups and/or deliveries within the tax year, the number of miles driven within the state (even if they are pass-through miles), or both.
New York State has traditionally had one of the lowest nexus thresholds to trigger state taxation. A Canadian or other out-of-state carrier is subject to New York State tax if it makes more than two pickups or deliveries within the state in any tax year.
Once this nexus is created, the state can impose its franchise tax on net income attributable to New York as a percentage of miles driven in New York. At one time, compliance among Canadian carriers was quite low, primarily due to the lack of communication from New York.
Many carriers had faithfully paid New York fuel taxes and highway use taxes, filing monthly reports, without knowing that they were also liable for filing franchise tax reports.
For some reason, the state did not do a good job of matching up those carriers with delinquencies in franchise tax reporting, and often did not notify the carrier of a franchise tax delinquency until many years of delinquency existed.
With penalties and interest, tax liabilities often ran into the tens, and even the hundreds, of thousands of dollars.
A lawsuit filed by the Ontario Trucking Association (OTA) and some Ontario carriers in the mid-1990’s brought much publicity to this issue, and helped achieve a settlement for a large class of motor carriers that were adversely affected.
However, the lawsuit was not successful in obtaining a court ruling that the tax was unconstitutional.
As a result, the New York franchise tax remains intact, and Canadian carriers remain subject to it once they reach the nexus threshold of three or more pickups or deliveries in the state.
The amnesty program is not available to everyone. It is generally available to small corporate taxpayers, who haven’t filed the required returns and haven’t used a New York State amnesty program in the past. (Keep in mind that participants in the OTA settlement were not beneficiaries of tax amnesty, and would appear to be eligible.)
Amnesty is not available to taxpayers with over 500 employees, or to taxpayers who are already the focus of a tax investigation or proceeding.
Tax amnesty can be a very helpful method of correcting and reducing the size of past problems, and we recommend you review your activities in New York to determine if this is appropriate for you.
If you are unsure of whether you are subject to New York franchise taxes, this is the time to find out. n
Daniel Joyce can be reached at Hirsch and Joyce, Attorneys at Law, at 716-564-2727.