Minutes of TEI-MTC liaison meeting - Tax Executives Institute, Multistate Tax Commission - Panel Discussion

Tax Executive, The, July-August, 1996

Mr. Bucks responded that the purpose of Bulletin 95-1 was to bring some clarity to the area. He said that the States had adopted a facts-and-circumstances approach to the nexus implications of repair services and that the approach had been applied through enforcement activity during the previous five years. He suggested that there had been a widespread misunderstanding of the case law as applied to various fact patterns, and that the bulletin was intended to correct that misunderstanding. Mr. Bucks explained that Panel Publishers had previously developed a survey related to third-party maintenance contracts, and that information advisories and similar documents had been issued during the previous decade (including proposed guidelines under Public Law No. 86-272). Notwithstanding the States' outreach, there was a significant tax gap in respect of the nexus established by instate repair services.

According to Mr. Bucks, the question was whether the States should continue to act primarily through enforcement activity -- which could be characterized as part of a "gotcha" approach to tax administration -- or whether a taxpayer-education effort would be more efficacious. Stated differently, the MTC concluded that it would be inefficient to proceed with an enforcement-only approach and decided to proceed with an "instruction booklet" approach that would secure compliance more efficiently.

Mr. Bucks emphasized that Bulletin 95-1 did not constitute an MTC recommendation to the States. He added that the MTC and signatory States intended to provide industry with an opportunity to comment on the bulletin and that, pending the outcome, the States would likely restrain their enforcement activity. Mr. Bucks continued that the computer industry had proven to be quite dynamic and, further, that its high level of noncompliance was evidence that the "playing field" was not level (between those companies that comply and those that do not). By identifying the applicable standards (for both the States and taxpayers), the MTC intended to mitigate the unfair competition enjoyed by (noncomplying) companies. Mr. Bucks added that, even if Bulletin 95-1 prompted enforcement action, the affected taxpayers would raise the ordinary defenses to such activity (i.e., they could dispute the application of the law to their fact situations). Mr. Bucks concluded that the public policy underlying the bulletin -- bringing certainty to an area plagued by uncertainty--was laudable, and that he was baffled by the level of controversy surrounding the bulletin.

Mr. Anderson stated that in Texas the department had undertaken to clarify the law without regard to Bulletin 95-1. The purpose of the exercise, he explained, was to inform taxpayers of the risk they were running if they ignored the applicable rules and regulations.

Mr. Ezrati thanked Messrs. Bucks and Anderson for their comments. He added that there were really two issues: First, whether the legal conclusions expressed in Bulletin 95-1 were supportable; and secondly, whether the reaction to Bulletin 95-1 suggested that the MTC should modify the process for developing such guidance. In this regard, Mr. Ezrati noted that in California in particular Bulletin 95-1 had been criticized as a "midnight regulation"; although characterized as a discussion draft, many people (both in and out of government) had interpreted the bulletin as a regulation.