Earlier this week the Mississippi Legislature approved the conference committee report on tax reform legislation (House Bill 799) that significantly changes Mississippi’s tax assessment and appeals procedures. Both the House and the Senate approved the report on House Bill 799 by wide margins, and the bill now goes to Governor Phil Bryant for signature. Governor Bryant is expected to sign the landmark legislation in short order.
The legislation is a direct response to the Mississippi Supreme Court’s recent decision in Equifax, Inc. v. Miss. Dep’t of Revenue (see our June 2013 State & Local Tax Alert: Mississippi Edition on the Court’s Equifax decision), upholding the Mississippi Department of Revenue’s use of market-based sourcing, as well as interest and penalties against Equifax, despite the company having filed in compliance with the statute. The Equifax decision led the Council On State Taxation (COST) to lower Mississippi’s grade on its 2013 COST Scorecard on Tax Appeals & Procedural Requirements from B+ to C+. Assuming the Governor signs it, the legislation:
- Codifies the ability of a taxpayer or the Department to utilize an alternative apportionment method, but expressly places the burden of proof on the party invoking the method to prove by a “preponderance of the evidence” that the statutory or regulatory methods do not fairly represent the extent of the taxpayer’s business activity in Mississippi and that the proposed method more fairly represents that activity than any other reasonable method available.
- Explains that alternative apportionment is intended to be invoked only in “limited and unique, nonrecurring circumstances” where the standard apportionment provisions produce “unanticipated results that do not fairly represent the extent of the taxpayer’s business activity” in Mississippi.
- Prohibits the Department from assessing any penalties related to a deficiency arising from requiring the use of an alternative apportionment method unless the Department establishes by a preponderance of the evidence that the taxpayer’s method was without reasonable basis or was not in accordance with existing statutes or regulations.
- Prohibits the Department’s use of forced combination until regulations are issued which specify the criteria and circumstances that form the basis for meeting the preponderance-of-evidence standard required to support a conclusion that intercompany transactions have resulted in the improper shifting of income.
- Prohibits the Department from assessing any penalties related to a deficiency arising from forced combination unless the Department establishes by a preponderance of the evidence that the taxpayer’s filing method was without reasonable basis or the intercompany transactions at issue lacked any material nontax business purpose.
- Clarifies that any appeal to the state Board of Tax Appeals or to a chancery court must include a full evidentiary judicial hearing on all factual and legal issues raised by the taxpayer which address the substantive or procedural propriety of the Department’s action being appealed.
- Changes the trigger date for the 60-day appeal period from the date of the action to the date that the notice is mailed or delivered to the taxpayer.
- Establishes that appeals or other filings with the state Board of Review or Board of Tax Appeals are considered timely if mailed by the due date.
- Reduces over a six-year period the interest rate on deficiencies and refunds from the current annual rate of 12% to an annual rate of 6%, which is more reflective of current market rates.
- Eliminates the mandatory “pay-to-play” judicial appeal requirements, but does preserve the Department’s ability to file a motion requesting that a court require a taxpayer to post a bond or other adequate security if the Department believes that the appeal is being brought to delay payment of the disputed assessment.
The legislation will take effect January 1, 2015.
The passage of House Bill 799 is a significant change for Mississippi taxpayers, and is attributable to the hard work of many individuals, especially Scott Waller at the Mississippi Economic Council. The Mississippi Manufacturers Association, COST, and many others also deserve thanks for their efforts.