The Mississippi Department of Revenue is continuing a strong push to force collection of state sales tax on internet purchases from companies without a physical presence in the state. John Fletcher, a tax attorney at the firm of Jones Walker writes that in a filing today DOR “appears to take aim at remote internet sellers who have not voluntarily registered with the Department under its widely publicized “economic nexus” use tax proposals.”
On Friday June 21, the Department issued a notice that it intended to amend Reg. 35.IV.1.02 concerning application of sales tax penalties. A public hearing will be held on Wednesday, July 26, 2017, at 2:30 p.m.
Fletcher writes that through this proposed amendment,
the Department attempts to clarify when the 50 percent and 300 percent sales tax penalties will be levied. The Department “will” levy the 50 percent penalty when an underpayment of tax by 100 percent or more is discovered during an audit or when an audit of taxpayer records reveals an attempt to disguise or hide taxable transactions. The proposal provides that this penalty will not be assessed if the taxpayer can prove reasonable cause for failure to comply. While ordinarily the Department must demonstrate that there has been an intentional disregard of the law or a deficiency resulted from an intent to defraud, and the 100 percent deficiency standard is not found in the statute, the language of this proposed regulation suggests the Department may intend to apply the 50 percent penalty to all non-filers because even $1 of sales tax liability will by definition constitute a 100 percent underpayment.
This provision should be especially concerning to any remote or internet sellers who have not voluntarily registered with the Department to remit use taxes even in the absence of a physical in-state presence. One need not be a conspiracy theorist to wonder if this language is intended specifically to address that particular situation and to increase pressure on sellers to voluntarily comply with the Department’s continued and well-documented efforts to overturn Quill. Given the Department’s transparency in publicly declaring its goal of reversing that decision, remote sellers should not expect the Department to consider such a constitutional defense to constitute “reasonable cause” to abate this 50 percent penalty if the Supreme Court were eventually to overturn the physical presence nexus standard.
The proposed amendment also makes significant changes to the 300 percent “trust fund monies” penalty. Under the new regulation, that penalty “will” be assessed if it is proved by preponderance of the evidence from the taxpayer’s records that tax was collected and then knowingly and intentionally not remitted. Proof of such intent is critical, as the taxpayer cannot be presumed to have collected the tax. Importantly, this penalty may be levied in addition to the 10 percent and 50 percent penalties. Previously, the regulation provided that the 300 percent penalty “may” be levied, so the new language would appear to make it mandatory. It is believed this amendment is being made in response to recent litigation challenging the Department’s application of that penalty based on an abuse of discretion defense.
Interestingly, these amendments purport to be effective May 1, 2016, not 2017. It is unclear whether this was a typographical error or an intentional effort to enact retroactive legislation.
The Mississippi Senate declined to pass legislation approved by the House in the 2017 session to implement the tax. However, The Dept. Of Revenue proceeded with regulatory rules changes to implement the tax anyway. Legislation that would strictly forbid the Dept. Of Revenue from proceeding with regulatory changes was allowed to die in a Senate committee.