The Missouri Legislature passed S.B. 18 recently. This Bill requires the Missouri Department of Revenue to notify taxpayers when the Department’s taxation position of property or service changes as a result of a certain events. The bill states that if the taxation of items of property or of services is modified by a decision or order of: (1) the director of revenue, (2) the administrative hearing commission; or (3) a court of competent jurisdiction and a reasonable person would not have expected the decision or order based solely on prior law, all affected sellers shall be notified by the department of revenue before such modification shall take effect for such sellers.
The failure of the DOR to notify a seller shall relieve such seller of liability from taxes that would be due under the modification until the seller is notified. The relief only applies to sellers actively selling the type of property or service affected by the decision on the date the decision or order is made. The Bill requires that the DOR send letters to all affected taxpayers and also that the DOR update its website for the changes. However, this website change is not deemed to be a formal notice to affected taxpayers.
Upon reading SB 18 I’m struck by several things. First off, the bill is poorly written. The sentence structure is confusing and is fraught with noun and verb conflict. That aside, the bill also provides a loophole so large that I’m not sure the DOR will ever be required to issue any notices. The bill requires notices when a “reasonable person” would not have expected such a decision. Missouri law already provides taxpayer relief from what are deemed to be “unexpected” decisions. That provision was imposed in the late 80s when the Missouri Supreme Court said that newspapers were taxable sales of property and not nontaxable sales of services. I remember this vividly because I was the Director of Audits for the Missouri DOR at the time. What is the “reasonable man” theory when it comes to sales tax and who will make that determination? This will surely open a new avenue for tax litigation as taxpayers are issued assessments and will argue that they were not notified of the policy change.
As written, the bill appears to only apply to situations when an item or service had been deemed “nontaxable” before the policy change was made to now make the item “taxable”. At that point, the DOR needs to send letters to all the sellers of a particular item of property or to the providers of a particular service, otherwise the seller has no obligation to begin collecting tax on the item. My real concern is how will the DOR even know who the sellers of this particular item of property or seller of service are? The DOR’s database of company information is not robust enough to identify which sellers are selling which items of property. Further, what if the seller is not registered with the DOR but is currently selling this “nontaxable” item. If the item was nontaxable prior to the change of policy, the company may have decided that there was no need to even register with the DOR. Without registering, the DOR has no opportunity to notify them. Further, even if the seller finds out in some other way that the product or service they sell is now taxable, there is no obligation on their part to begin collecting tax. Not until they receive a letter from the DOR are they required to begin collecting tax. The same argument could apply to out-of-state sellers that may have nexus in Missouri but are not registered.
In the case where the Administrative Hearing Commission or a Court modifies the law to now make an item or service taxable, how does this bill impact the taxpayer subject to the litigation. Are they the only ones affected by the change of law? I suppose they could plead that their case provided an “unexpected” decision and that they are not liable for the tax. This may now become a standard item in the pleadings before the Courts and AHC.
I know the frustration of taxpayers being surprised by policy changes by state departments of revenue and often times it does not seem fair. However, the burden placed on the Missouri DOR under SB 18 seems impossible to meet. The Bill also seems to open up an entirely new set of litigation issues for attorneys! A similar bill was vetoed last year, so we will see what Governor Nixon does this time.
Ned Lenhart, CPA