Tax Analysts Blog

Maintaining a Business-Friendly Reputation

Posted on Feb 12, 2014

To states, being labeled business friendly matters. So it should be no surprise that the Mississippi Legislature is advancing legislation (HB 799) to undo the effect of a court opinion that may have damaged the state’s business-friendly reputation.

The opinion in Equifax Inc. et al. v. Department of Revenue was widely discussed among state and local tax practitioners. Equifax Inc. is a Georgia-based company that provides consumer credit reporting services. Equifax provided those services electronically to Mississippi businesses. In apportioning its income to Mississippi, it used the state’s statutory cost of performance sourcing method. The Mississippi Department of Revenue didn’t believe the statutory method fairly reflected Equifax’s business activity in the state, and it required the company to source its income using a market approach.

The Mississippi Supreme Court issued an opinion that drew the consternation of many in the state and local tax community. First, the court held that although the DOR was the party that required alternative apportionment, it did not have the burden of proving that the statutory formula did not fairly represent Equifax’s business activities in Mississippi.

That is contrary to the holding of most courts across the country. It is generally thought that the party that requested the switch from the standard apportionment formula to an alternative apportionment formula must establish the existence of distortion and the reasonableness of the proposed alternative apportionment formula. If the state is the party requiring the use of an alternative apportionment formula, the burden of proof applies to the state. That requirement applies even though tax assessments are typically presumed to be correct.

Second, the court upheld the imposition of penalties against Equifax after the switch to market-based sourcing resulted in a greater tax liability. Even though Equifax followed Mississippi’s statutory method of apportionment, the court held that Equifax had not shown that it wasn’t guilty of neglect. In other words a taxpayer followed the state’s tax code and got hit with a 10 percent penalty for doing so.

It’s not surprising that the opinion was widely criticized by the business community and that the state legislature took notice. Legislation passed the Mississippi House that would limit the imposition of alternative apportionment methods only when the DOR can present “clear and convincing evidence” that the standard apportionment method does not fairly represent the taxpayer’s activities in the state.

Establishing a clear burden of proof (and ensuring that the DOR bears the burden if it is the party requesting alternative apportionment) is a positive step. The bill also prohibits the DOR from assessing penalties unless it can establish by clear and convincing evidence that the taxpayer’s method was “without reasonable basis.”

That implies that taxpayers could still be assessed a penalty for using the statutory apportionment method as long as the department can assert that the taxpayer’s position was frivolous. Does this really mean taxpayers are required to choose the method that brings in the most revenue for Mississippi?

Overall, the legislation is a step in the right direction. Although I question whether it will solve the problems that arose in Equifax, the bill acknowledges the need for Mississippi to both reform the administration of its tax laws and improve its business climate.

The bill is still being debated, and negotiations over its language are continuing. Taxpayers that do business in Mississippi should closely watch this bill as it proceeds.

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