TWIST - This Week in State Tax

Missouri: Membership Dues Subject to Sales Tax

The Missouri Supreme Court recently affirmed an Administrative Hearing Commission decision that a sporting club’s monthly membership dues were subject to sales tax. The taxpayer, a Kansas non-profit corporation, owned and operated a social club as a federal-tax-exempt entity in Missouri. Members enjoyed access to a variety of recreational activities and services, including equestrian facilities, a clubhouse, and a dining room. The club offered several levels of membership at various price points. Some levels granted members the right to vote on operational matters, such as selling real property or determining what happens to the Club’s assets on dissolution. No membership level granted an ownership interest in the club, a property interest in the club’s assets, or the ability to receive a distribution from the club upon resignation of a membership. 

The taxpayer filed two refund claims for the tax periods from December 2003 to November 2006 and September 2009 through August 2012 for the full sales tax amounts that it remitted for monthly dues and food and beverage sales. The Commission concluded that the club was entitled to a refund of sales taxes charged to club members for food and beverage purchases, but not for those related to the monthly membership dues. The club subsequently appealed. In the club’s view, the membership dues were not taxable because they also granted members the right to exercise control over the operations of the club and increased the value of each member’s equitable interest.

On review before the Missouri Supreme Court, the Commission’s decision was affirmed. The court determined that monthly membership dues were subject to sales tax because the dues represented fees paid solely for access to recreational activities, and the taxpayer was engaged in the taxable sale of retail goods or services. The court distinguished the taxpayer’s monthly membership dues from fees that are paid to improve the value of a members’ ownership interest or in exchange for the right to participate in the operation and control of an organization. Further, the taxpayer offered no evidence that a members’ right to participate in operations decisions was secured by the monthly membership dues and not related to their initiation fees. Similarly, the taxpayer failed to show that the dues provided a member with any equitable ownership interest. No member had a guaranteed right to any of the proceeds arising from the sale of assets or the club itself. Merely voting to determine what happens to the assets on dissolution was not an equitable ownership interest. Also, the taxpayer failed to present any evidence to help differentiate between the amount of the monthly dues that were paid for something other than the recreational services. As a result, the court upheld the Commission’s determination that the monthly membership dues were subject to Missouri sales tax and. Please contact John Griesedieck with questions on Saddle and Sirloin Club of Kansas City v. Director of Revenue.

Oregon: Portland Area Localities Adopt Market-Based Sourcing

The City of Portland, Oregon recently amended its Business License Tax law (City Code Chapter 7.02) to adopt market-based sourcing effective for tax years beginning on or after January 1, 2023. Currently, receipts from sales of other than tangible personal property are sourced to the City if the income producing activity is performed in the City. The change aligns the City tax with the rules for apportioning income under Oregon’s state corporate excise tax law. The Portland ordinance included language that it would not actually become effective until substantially similar provisions were adopted by the governing bodies of Multnomah County and Metro, the business income taxes of which are also administered by the City of Portland Revenue Division. Both other localities have recently approved ordinances adopting market-based sourcing; the Multnomah County Board of Commissioners revised County Code Chapter 12 on October 13, 2022, and Metro revised Metro Code Chapter 7.07 on October 27, 2022. The changes will take effect for the 2023 tax year.  Please contact Rob Passmore with questions.

Wisconsin: Credit Claimed on Post-Field Audit Return Denied

The Wisconsin Tax Appeals Commission recently addressed whether a taxpayer was entitled to a refund of corporate income tax related to a credit claimed on an amended return. The taxpayer filed its original 2013 Wisconsin corporate income tax return and did not claim a manufacturing credit. The taxpayer was subsequently audited, and the manufacturing credit (or lack thereof) was not adjusted or claimed. The taxpayer paid the resulting audit assessment without protest. Subsequently, and within the normal four-year statute of limitations, the taxpayer filed an amended return claiming the manufacturing credit, which entitled it to a refund if approved. The Department denied the refund request.

Under Wisconsin law, a taxpayer may file a claim for refund of any tax assessed or to recover any part of a tax credit denied after a field audit if the assessment was not protested. The taxpayer did not protest the assessment. However, the law also provides that no claim for refund may be made with respect to items that were not adjusted in the notice of assessment or refund. The taxpayer argued that it did not claim the credit on the audited returns, meaning it could not have been adjusted. Therefore, the taxpayer argued, it should still be able to file a refund claim. The Commission disagreed with this position and held that the taxpayer’s refund claim was correctly denied because the manufacturing credit was not adjusted on audit. The Commission also rejected the taxpayer’s argument that the Department’s correspondence and publications indicated the taxpayer had a right to file an amended return. The taxpayer, by paying the audit assessment in full and not protesting, was not entitled to file a claim for refund related to an issue that was not the subject of an adjustment in the audit, despite the refund claim being within the normal statute of limitations. Please contact Brad Wilhelmson with questions on General Mills, Inc. v. Wisconsin Department of Revenue.

Multistate: Special Master in Unclaimed Property Dispute Revises Recommendation on Treatment of MoneyGram’s Checks

A special master in the multistate dispute involving escheatment of MoneyGram’s official checks has recently changed his recommendation to the U.S. Supreme Court. As background, the consolidated cases, Delaware v. Pennsylvania and Wisconsin and Delaware v. Arkansas, address which state is entitled to unclaimed MoneyGram official checks. The issue hinges on whether the official checks are “money orders, traveler’s checks, or similar written instruments.” If they are, then the checks are subject to the federal Disposition of Abandoned Money Orders and Traveler’s Checks Act (Disposition Act), which was enacted in 1974 to specifically change the reporting and escheatment priority rules for money orders, traveler’s checks, and similar written instruments, not including a third-party bank check. Under the Disposition Act, the checks would be escheated first to the state where the instrument was purchased and second to the holder’s state of incorporation. If the checks are not money orders, traveler’s checks, or similar written instruments, then they would be escheated to Delaware, MoneyGram’s state of incorporation, under the normal priority rules set forth in Texas v. New Jersey. There are two types of official checks at issue-agent’s checks and teller’s checks. Both types of instruments are sold only at financial institutions, and in all cases, MoneyGram holds the proceeds from the sales until the check is presented for payment or deemed abandoned. In the case of teller’s checks, the selling financial institution is designated as the “drawer” of the instrument. Nonetheless, MoneyGram’s agreements with its selling financial institution customers describe teller’s checks as “drawn by” both the financial institution and MoneyGram.

Not surprisingly, Delaware has taken the position that MoneyGram’s agent’s checks and teller’s checks are not akin to money orders covered by the federal Disposition Act. A number of states, including the named parties of Arkansas, Pennsylvania, and Wisconsin, argue that the MoneyGram checks are money orders that are escheated to the place of purchase under federal law. After Delaware refused to return checks escheated to it, certain states filed suit demanding the return of the checks. The cases were eventually consolidated before the U.S. Supreme Court, which has original jurisdiction in suits between states. A special master was appointed by the high court to provide a recommendation in the case. In a July 2021 report, the special master concluded that the official checks were covered by the 1974 Disposition Act and should be escheated to the state where the purchase occurred. On October 3, 2022, the U.S. Supreme Court heard oral arguments as to whether the special master’s recommendation should be adopted. Just weeks later, in a rather unusual move, the special master issued an order stating that as a result of reading transcripts of the oral arguments, he is revising his earlier recommendation. “It is my intention to advise the Court that I now believe, contrary to my earlier recommendation, that MoneyGram Teller's Checks are not subject to the Federal Disposition of Abandoned Money Orders and Traveler's Checks Act, while I continue to believe that Agent Checks should escheat pursuant to the directive of the Act.”

The special master’s reversal of his earlier recommendation after the oral arguments is unusual and creates additional uncertainty for all parties involved in this litigation. KPMG will continue to monitor this case. For more information, please contact Will King at (214) 840-6107 or Marion Acord at (404) 222-3053.