State & Local Tax

Overview

Today’s businesses are being assailed on every front, as state and local tax authorities attempt to increase revenues and reduce budget cuts. Third-party attacks are also on the rise, with the plaintiffs’ bar increasing its use of class actions and whistleblower cases to reap potential windfalls in the tax arena.

The firm has one of the largest and most diversified state and local tax (SALT) legal practices in the United States. Our lawyers possess in-depth knowledge of the constantly changing tax laws and have the experience and judgment necessary to provide advice and advocacy of the highest caliber. We identify and develop coordinated, cross-jurisdictional solutions for businesses wherever they are subject to existing or potential taxes and work closely with our many state and local contacts in various departments of revenue and with legislators to resolve tax issues.

In the area of tax controversy and litigation, our SALT group is one of the few firms that has argued—and won—state tax cases before the US Supreme Court. These cases include two Supreme Court taxpayer victories in the “unitary” area as well as the landmark Quill sales tax case. We efficiently develop the critical facts, construct the most effective arguments and help clients chart the best course for resolving any matter, whether at the audit or administrative review level or in trial and appellate courts.

Our tax team has repeatedly earned top rankings by leading industry and legal publications. We have been named “Law Firm of the Year” in Tax Law and Tax Litigation by US News-Best Lawyers, “North American Tax Firm of the Year” by International Tax Review and “Tax Practice Group of the Year” by Law360. Chambers USA and The Legal 500 also have singled out our practice and individual lawyers for recognition. We are consistently sought as speakers at conferences throughout the country, and are regularly quoted in publications such as The Wall Street Journal, Bloomberg BNA, Tax Notes/State Tax Today, CFO.com and CBS MoneyWatch.

Administrative & judicial proceedings

Our state and local tax lawyers have handled as many, if not more, state tax cases across the country than any other law firm over the past 30 years. We understand that clients have different appetites for litigating state tax issues. Whether at the compliance, audit or informal conference stages or in litigation, we offer advice and advocacy, always seeking alternative and creative solutions to resolve tax disputes. When necessary and appropriate, our state tax attorneys litigate aggressively, but with respect, to resolve client tax problems. Regardless of a taxpayer’s litigation profile, favorable results are more likely each step of the way when a taxing authority believes the taxpayer has hired an attorney with an extensive litigation portfolio, a history of success, and a strong presence in the state tax controversy community. Our SALT attorneys meet this criteria.

Audit defense

Clients look to the firm to develop audit strategies that address issues raised by state and local tax auditors, and to preemptively identify and resolve potential issues. We understand the goals and methods of the lawyers and professionals who represent the taxing authorities, from drafting document requests to interviewing key corporate employees. Our team frequently takes the lead in audit matters, assisting clients in developing responses to requests for information and to specific proposed audit adjustments, and in negotiations with state and local revenue authorities. When necessary, we can also play a “behind the scenes” role. Either way, with decades of experience, we can recommend “best audit practices” for establishing credibility with agents and officials.

Digital/cloud taxation

As state revenue departments attempt to impose taxes on cloud-based models and digital content using antiquated legal regimes, cloud-service providers and users alike face a host of tax-related questions and risk. Our lawyers have been involved in the national debate and work with providers and consumers of cloud-based services and digital content to understand, react to and comply with the sales and income tax issues that they face in the new economy. We help businesses identify and adjust for risk early in the process. We also work with vendors to understand tax incentives available to foster high-tech build out of facilities and employment. Our lawyers have worked with the Streamlined Sales Tax Governing Board to develop definitions and relevant sourcing rules and have worked extensively with the National Conference of State Legislatures concerning how to address taxation of the cloud.

False Claims Act

In addition to managing normal audit risk, our clients increasingly face the risk of tax-related claims brought by third parties. Such risks include whistleblower claims brought by qui tam plaintiffs alleging an under collection of tax and proposed class action claims alleging an over collection of tax or a violation of consumer fraud statutes. The firm’s SALT Group is well versed in the defense of such claims. We have been at the forefront of defending against whistleblower claims filed under the Illinois False Claims Act over the past decade, including the leading appellate court decisions. We also regularly advise clients about how to avoid such claims. In addition, we routinely represent clients faced with the threat of tax-related class action litigation, and have achieved favorable results for clients in several such matters.

Incentives

State and local governments offer a range of incentives to encourage private investment, business expansion and job creation within their jurisdictions. When companies consider relocating, expanding existing facilities or adding jobs, we can help them offset costs and realize significant value by identifying and claiming the right mix of incentives packages. We understand that the key to obtaining incentives is timing, and that early involvement of experienced legal counsel can improve a company’s leverage when negotiating incentives with state and local officials before a planned investment is initiated. Our incentives practice includes lawyers and project-management professionals operating throughout the United States.

Planning

Our SALT practice provides planning services related to existing business relationships and practices (e.g., structural planning including addressing nexus and apportionment issues), as well as to specific pending transactions (transactional planning). Working with the client’s staff, our lawyers determine where proactive changes can be made to improve the client’s state and local tax situation. One set of tax costs that are often overlooked when planning transactions is the imposition of state and local taxes (such as sales and real estate transfer taxes) on the transaction. Our lawyers not only assist clients in avoiding these hidden pitfalls, but also help them achieve greater tax efficiency in their post-transaction operations.

State & federal legislation

Although traditional legal avenues such as planning, settlement and litigation are often the best courses of action to achieve the desired results for our clients, in some instances these are either unavailable or foreclosed under existing laws or regulations. In those instances, we offer legislative and lobbying initiatives to help achieve the desired results. Our services include monitoring specific issues and legislative initiatives, building consensus with other interested parties, preparing legislative proposals, drafting legislation and communicating proposals to the legislative decision makers.

Unclaimed property

Unclaimed property, including uncashed vendor payment checks, unused balances on gift cards and un-refunded customer overpayments, is a target by many states as a source of revenue. States are adopting enforcement provisions that overreach what often constitutes unclaimed property, conflict with federal precedent, create data privacy issues, and expose businesses to unanticipated liabilities and significant penalties for noncompliance. We represent clients across a broad range of industries—including health care, manufacturing and retail—on unclaimed property issues, particularly those clients embroiled in multi-year, multi-state unclaimed property audits. Our counsel includes advising on the onerous document production process and offering efficient methods to limit both the scope of the responses and potential liability. In addition, we work with non-compliant companies—often following an acquisition—on state voluntary disclosure agreements to become current on state unclaimed property obligations.

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COVID-19 STATE AND LOCAL TAX UPDATES

Categorized by state, we give a brief overview of guidance issued in response to COVID-19

Inside SALT

In-Depth Coverage of Issues Surrounding State and Local Tax

McDermott Will & Emery’s tax group is “extremely effective through its combination of technical knowledge, practical application, and responsiveness.”

The Legal 500 US

Clients note that the team’s “technical ability is outstanding” and they “understand what matters to us and can tailor responses to how the law will apply to us.”

Chambers USA

“…extremely impressed with the state and local tax expertise of the tax partners…. They are very knowledgeable, professional and always responsive to our requests for assistance.”

Best Law Firms, Client Reference

Results

Administrative & judicial proceedings

Exxon Mobil Corporation v District of Columbia Office of Tax and Revenue, District of Columbia Office of Administrative Hearings, Case No.: 201-OTR-00049; Hess Corporation v District of Columbia Office of Tax and Revenue, District of Columbia Office of Administrative Hearings, Case No.: 201-OTR-00049; Shell Oil Company v District of Columbia Office of Tax and Revenue, District of Columbia Office of Administrative Hearings, Case No.: 201-OTR-00049. Three unaffiliated oil companies were involved in separate but similar cases. In a case of first impression, the administrative law judge ruled in favor of all taxpayers that non-mutual collateral estoppel precluded the government from litigating a matter that had already been decided against the government in another case involving another taxpayer. This case involved the use of a third-party IRC section 482 audit methodology that had previously been ruled invalid. The case is currently on appeal to the US Court of Appeals for the DC Circuit.
In the Matter of TD Holdings II, Inc., N.Y. Div. of Tax App, DTA No. 825329. The administrative law judge determined that the taxpayer, a bank subject to a state tax base different from its federal base, was not required to hypothetically use its NOL carryover in years when its New York tax was based on its assets rather than on its income.
In the Matter of the Petition of Gordon R. and Jennifer L. Cooke, N.Y. Div. of Tax App, DTA No. 823591. This determination captures the notion that appears to be at the essence of determining an individual’s “domicile”—that an individual’s domicile is the place to which one returns when he or she does not have a specific reason to be anywhere else. The determination also represents a continued recognition that the maintenance of a dwelling in New York City alone is insufficient. Simply because an individual can afford to maintain several residences does not change the fact that someone can have only one domicile “as his grounding place among many possibilities.”

State of Illinois ex rel. Schad, Diamond & Shedden, P.C. v. QVC, Inc., 2015 IL App (1st) 132999. Affirming dismissal of Illinois False Claims Act litigation brought by a class action law firm alleging fraudulent failure to collect and remit tax on shipping charges.
SCSI, LLC v. Illinois Department of Revenue (No 10-CH-116) (Circuit Court for the 10th Judicial Circuit, Peoria County, IL). Achieved victory for a taxpayer following a bench trial regarding eligibility for a manufacturing exemption from sales tax (August 2014).
Beeler, Schad & Diamond v. Burlington Coat Factory Warehouse Corp., 369 Ill. App. 3d 507. This case established a very favorable standard for evaluating a state’s motion to dismiss a whistleblower case filed under the Illinois False Claims Act over the objection of the whistleblower.
In the Matter of the Illinois Department of Revenue v. Motor Werks of Hoffman Estates, Inc., Docket 11-ST-0097 (Illinois Department of Revenue Administrative Hearings Division) Ruling for Taxpayer in Administrative. These proceedings challenge a denial of a use tax refund for tax paid on automobiles used in a loaner car program.
Equifax, Inc. and Equifax Credit Information Services, Inc. v. Mississippi Department of Revenue, Case No. 2010-CT-01857-SCT. Filed an amicus curiae brief on behalf of the Institute for Professionals in Taxation in support of a petition for writ of certiorari.

False Claims Act

State of Illinois, ex rel. Schad, Diamond & Shedden, P.C. v. QVC, Inc., 2015 IL App (1st) 13299. In this Illinois False Claims Act lawsuit alleging a failure to collect use tax on Illinois destination shipping and handling charges, the decision affirmed the dismissal of the lawsuit by the trial court, and reaffirmed a favorable standard of dismissal (glaring bad faith) for cases in which the Illinois Attorney General has filed a motion to dismiss. It also held that a whistleblower plaintiff is not a “prevailing party” entitled to attorneys’ fees in such a circumstance.
Numerous clients named as defendants in Illinois False Claims Act litigation with obtaining orders of dismissal, and worked with several dozen other clients in the defense of such claims. See, e.g., State of Illinois ex rel. Stephen B. Diamond, P.C. v. 1-800-Flowers.com, Inc., et al., No. 13 L 13193 (Circuit Court of Cook County, IL) (9-3-15 order granting motion to dismiss Illinois False Claims Act litigation).
Two retailers in class action lawsuits filed against them in federal court, alleging failure to deduct coupons from the tax base on which Illinois sales tax was calculated and collected from customers. The firm obtained a favorable general information letter from the Illinois Department of Revenue indicating that the retailers’ practice of collecting tax from consumers on the value of the coupons for which it is reimbursed is proper. The cases settled favorable shortly thereafter.

Incentives

Massachusetts: Successfully negotiated a $9.5 million award of Economic Development Incentive Program Tax Credits that will substantially reduce a client’s state corporate income tax liabilities for a 10-year period, and structured $25 million of funding to public infrastructure improvements that will benefit a headquarters relocation
Georgia: Obtained $8.75 million of Jobs Tax Credits that are refundable in cash over a five-year period
Texas: Secured $5.7 million of direct cash subsidies from state and local officials through the Enterprise Fund
Nevada: Negotiated the settlement of an incentives clawback
California: Structured an agreement that would guarantee the receipt of sales and use tax revenue by a municipality in exchange for streamlined permitting for a real estate development project
Structured $10 million of funding to public infrastructure improvements that will benefit a headquarters relocation
Implemented TIF arrangements that significantly reduced state income and local property taxes in exchange for capital investment and job creation

Planning

Advised a large transportation company about state tax aspects of an IRC section 338(h) transaction
Performed a multistate apportionment study for an international investment management company and made recommendations that will result in significant tax savings

Unclaimed property

The National Retail Federation, Retail Industry Leaders Association and Entertainment Software Association before the Uniform Law Commission on the Revised Uniform Unclaimed Property Act
Represented one of the nation’s largest retailers in a multistate audit involving a review of accounts receivable, accounts payable, payroll and gift cards
A large manufacturer in quickly resolving a contested audit in Delaware.
Complex health care provider in a multistate audit involving accounts receivable, accounts payable and payroll
Major health care provider in exemption and exclusion analysis for unique property types

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Key contacts

Timothy S. Shuman

Partner

Washington, DC

Catherine A. Battin

Partner

Chicago

Stephen P. Kranz

Partner

Washington, DC

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Acquisitions & Restructurings

In today’s tax environment, there are no run-of-the-mill merger and acquisition transactions. From exploring a potential transaction, to obtaining IRS and regulatory approvals, to closing and post-closing transitions, we provide tailored guidance that helps minimize potential tax burdens and maximize the value of the deal.

In all merger and stock purchase transactions, buyers must be concerned about the tax history of the purchased entity and, in the case of an acquisition out of a consolidated group, the tax history of that consolidated group. Our lawyers regularly work with buyers in conducting tax due diligence with respect to a particular acquisition candidate. We help buyers analyze the target’s tax history and, where appropriate, secure additional representations, warranties and indemnities from the sellers.

In taxable asset sales (including many merger transactions), we help buyers formulate a purchase price allocation that results in the fastest write-off for tax purposes. We advise sellers on tools for maximizing the capital gain and minimizing the ordinary income that otherwise results from the transaction. In a taxable stock sale, we help buyers calculate the "tax cost" of purchasing stock, analyze the tax attributes of the purchased entity, and determine which form of entity represents the best vehicle for the acquisition.

We also work with buyers and sellers to ensure compliance with tax rules that apply to transactions that potentially qualify as tax-free under the US Internal Revenue Code, regularly seeking private letter rulings or issuing tax opinions to facilitate transactions. We draft tax representations and tax-sharing agreements, and structure tax-free spin-off and split-off transactions.

When multinational companies seek to form international joint ventures, we guide clients through the complex tax issues related to all stages of the international joint venture, including formation, operation and exit.

Mergers & acquisitions

We regularly advise on many of the largest public mergers and acquisitions along with intercompany restructurings involving Fortune 500 companies. We are frequently retained as special tax counsel to advise on transactions that are particularly tax sensitive or involve cutting-edge tax issues. We work closely with our corporate lawyers to help structure transactions in a manner that is most tax-efficient for all parties involved. Our team includes former IRS rulings officials whose backgrounds and insights have proven to be critical to procuring favorable, timely responses and private letter rulings from the IRS. We also represent clients before the US Department of Treasury with respect to legislative and regulatory matters, and have been instrumental in influencing pending legislative proposals and regulations projects.

Private equity

We advise private equity funds—and investors poised to deploy capital for investments and acquisition activities—on all aspects of US and cross-border taxation. We provide counsel at each stage of the private equity life cycle, from fund formation and management, to transaction and investments, optimizing fund and portfolio company operations, and exit planning. We also provide tailored US inbound services to international and offshore funds undertaking US fundraising, establishing US offices and making US investments. Our international team represents all types of investment funds, pooled investment vehicles, fund sponsors and fund investors, including LBO funds, hedge funds, private equity divisions of investment banks, venture capital funds, mezzanine funds, public permanent capital vehicles, public fund managers, fund-of-funds, general partners, fund managers, and US, international, tax-exempt and institutional investors.

Spin-offs & restructurings

Our corporate spin-off and restructurings tax practice is unsurpassed in depth of experience, sophistication and volume. We are engaged continuously in planning and implementing some of the largest and most complex corporate separation, reorganization and integration projects. Given the unusually wide range of tax issues that arise in such engagements, we work closely with experienced lawyers in many of the firm’s core practices, and help coordinate the work of top accounting firms, economists, valuation consultants and other third-party advisors. We counsel public and private US- and non-US-based corporations on tax-free and taxable spin-offs and structures, manage related tax processes to ensure proper sequencing of transaction steps, prepare legal opinions and SEC filings, and work with the IRS to obtain tax rulings.

Tax

Tax considerations shape how your business structures transactions, financings, and international investments. Our lawyers advise you on global tax compliance and design tax strategies that support growth, help mitigate financial exposure, and strengthen your business operations across jurisdictions.

Our tax lawyers represent financial institutions, investors, and businesses – including more than half of the Fortune 100. Working across the US, Europe, and other major markets, we align tax strategy with your global business strategy while helping you anticipate regulatory and controversy risk.

Tax strategy is most effective when integrated early into decision-making. Our tax lawyers advise you on federal, state, local, and international tax laws that affect your transactions, investments, financings, restructurings, and cross-border operations. We also help you evaluate the tax implications of evolving business models, supply chains, and operating structures as your business expands internationally.

Our tax law practice includes advising on transfer pricing planning, advance pricing agreements, and cross-border tax controversies. We handle sophisticated transfer pricing disputes worldwide and engage with taxing authorities and organizations involved in international tax policy and enforcement – including the Organisation for Economic Co-operation and Development (OECD), the Internal Revenue Service (IRS), and tax authorities throughout Europe and globally.

Tax disputes can affect enterprise value. Our team includes former IRS administrators, Department of Justice (DOJ) Tax Division lawyers, Tax Court clerks, and legislative advisors who understand how tax policy is developed, interpreted, and enforced. This experience strengthens our ability to advocate before taxing authorities and guide you through examinations, administrative appeals, and litigation before trial courts, appellate courts, and the US Supreme Court.

Tax Controversy & Litigation

Tax Structuring

One of the first and most critical steps in any tax-planning process is the creation of effective financial and tax structures that can withstand the scrutiny of taxing authorities and regulatory agencies. Our experienced tax lawyers work with closely held businesses, publicly traded corporations and multinational enterprises to develop, document and implement cutting-edge solutions that help achieve business objectives and minimize tax liabilities.

Our closely held business group focuses on the unique tax, corporate and other issues facing privately held businesses and their owners, with a focus on family-owned businesses. Our corporate taxation team offers a broad range of tax structuring counsel to tax clients and their affiliates organized as C corporations for US federal income tax purposes. The firm’s pass-through taxation lawyers advise on the use of partnerships, limited liability companies, S corporations, real estate investment trusts (REITs), and other pass-through entities in sophisticated tax planning.

We have highly experienced lawyers who practice in the area of structured investments and derivatives, offering a full range of legal counsel relating to financial products, funds (both registered and unregistered), derivatives, tax credit investments and insurance products. Finally, as one of the preeminent advisory firms in the area of international supply chain planning, we help establish the legal entity structures under which a multinational enterprise develops, produces, markets and sells its products around the world.

Together, we help clients with the formation, operation and unwind of all forms of domestic and international joint ventures, private equity funds in fund formation and acquisition transactions, operators and investors on structuring complex real estate transactions, and other pass-through entities on achieving tax-efficient operations.

Captives

Our lawyers are pioneers in the structuring of alternative risk transfer mechanisms, specializing in captive insurance companies of all types. We focus not only on the development and structuring of creative risk retention and transfer solutions, but also on the operation of efficient risk-management programs designed to enhance business performance by aligning economic incentives with loss minimization to lower the enterprise’s cost of risk. We regularly advise on high-deductible and self-insured retentions, trusts, retro programs, offshore and onshore captives, risk retention groups, risk purchasing groups and group captives. For those clients whose captive arrangements are being challenged by the IRS, we offer effective tax controversy services, drawing on the experience of lawyers who have successfully resolved disputes at Examination, Appeals and the United States Tax Court.

Closely held businesses

Our Closely Held Business group represents 28 of the top 100 (including seven of the top 10) largest privately held businesses in the United States. We focus on the unique tax, corporate and other issues facing closely held businesses and their owners, with an emphasis on family-owned businesses. We provide comprehensive guidance on tax matters arising in the context of daily operations, mergers, acquisitions and other transactions, liquidity events, succession planning transactions, inter/intra-family disagreements (including multi-generational issues), liquidity needs and access to capital. We regularly develop client-service teams to provide effective tax counsel in the context of related legal and business concerns; these teams often include lawyers from our employee benefits, intellectual property, corporate and securities groups.

Cooperatives

We are one of the only law firms in the United States that provides comprehensive legal services to cooperative organizations. We represent cooperatives engaged in a broad range of products and services, including the manufacturing, marketing and wholesale distribution of agricultural products, farm supplies, hardware, groceries, hospital supplies, transportation products, credit and other financial services, electricity, telephone services and housing. We represent clients in disputes with the IRS, before legislative and regulatory bodies, and—in conjunction with lawyers from throughout the firm—in handling a broad range of corporate transactions, financings, intellectual property and other issues. In addition, we have worked with many entities in the Farm Credit System and have advised numerous agriculture-related trade associations.

Partnerships & joint ventures

National and multinational companies are increasingly forming international joint ventures with related and third parties as an efficient means to enter the global marketplace. When these joint ventures take the form of a partnership for US federal income tax purposes, it is essential that the parties have a comprehensive understanding of the US partnership and the international tax opportunities and consequences of the structure. It is equally important to take account of the tax issues that arise in a contractual alliance that is not intended to constitute a tax partnership. Our industry-leading partnership and international taxation lawyers guide clients through the complex tax issues related to all stages of international joint ventures, including formation, operation and exit.

Pass-throughs

We advise clients on the use of partnerships, limited liability companies, S corporations, real estate investment trusts (REITs), and other pass-through entities to assist in sophisticated tax planning, including avoiding double taxation, obtaining the full benefit of tax losses or tax incentives, and minimizing the tax impact of asset acquisitions or dispositions. We help individuals, investor groups and owners with the formation, operation and unwind of domestic and international joint ventures, counsel private equity funds in fund formation and acquisition transactions, and represent operators and investors in structuring complex real estate transactions and other pass-through entities in order to achieve tax-efficient operations.

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