Washington, DC Update – July 2016

Another move in the Marketplace Fairness chess game

An Internet retailer has filed suit against Alabama, claiming its new rule requiring all retailers who sell more than $250,000 in goods annually to collect sales tax – regardless of whether the retailer has a physical presence in the state – is unconstitutional. This lawsuit is the second of its kind. Earlier this spring a lawsuit was filed against South Dakota challenging its law, which is similar to Alabama’s rule.

Last March, US Supreme Court Justice Anthony Kennedy wrote a concurring opinion stating that the “legal system should find an appropriate case for this court to re-examine Quill.”

In Quill Corp. v. North Dakotadecided in 1992, the Supreme Court held that states cannot require retailers with no in-state physical presence to collect sales tax. Kennedy criticized Quill in Direct Marketing Association v. Brohl for many of the same reasons the GFOA, along with member of the State and Local Legal Center, stated in its amicus brief.

Internet sales have vastly increased in comparison to sales from brick-and-mortar stores since 1992, yet States are unable to collect most taxes due on sales from out-of-state retailers. Congress could overturn the Quill decision, but has repeatedly refused to do so.

Alabama’s rule, which became effective on January 1, 2016, was intended to contradict Quill and unsurprisingly generated a lawsuit.  

The Alabama lawsuit was filed in the Alabama Tax Tribunal while the South Dakota lawsuit was filed in state court. Until either of these cases reaches the U.S. Supreme Court, the states will face an uphill battle. To rule in favor of the states the administrative agencies or lower courts would have to nullify Quill v. North Dakota, a step that lower courts are often reluctant to take. But because all administrative agencies and lower courts are required to follow rulings of the U.S. Supreme Court, the strategy of the GFOA, along with the State and Local Legal Center, is clear: encourage these states to pursue the case so that it may reach the U.S. Supreme Court.

Advisory Committee on Tax Exempt and Government Entities (ACT) Presents its Report of Recommendations on June 8, 2016

On June 8, 2016, the 21 members of the ACT presented its 15th report of recommendations to the IRS in a public meeting in Washington, DC.

The ACT report addresses five issues:

  • Employee Plans: Analysis and Recommendations Regarding Changes to the Determination Letter Program
  • Exempt Organizations: Stewards of the Public Trust: Long-Range Planning for the Future of the IRS and the Exempt Community
  • Federal, State and Local Governments: Revised FSLG Trainings and Communicating with Small Local Governments
  • Indian Tribal Governments: Survey of Tribes Regarding IRS Effectiveness with Current Topics of Concerns and Recommendations
  • Tax Exempt Bonds: Recommendations for Continuous Improvement and Enhancing Resources in the Tax Exempt Bond Market

ACT members provide observations about current or proposed IRS policies, programs and procedures, and suggest improvements. The members are selected by the Commissioner of the IRS and then appointed by the Department of the Treasury. The IRS seeks a diverse group of members representing a broad spectrum of people experienced in employee plans; exempt organizations; tax-exempt bonds; and federal, state, local and Indian tribal governments.

House Introduces Blueprint for Tax Reform

On Friday, June 24, House Republicans released a Blueprint for Tax Reform that is intended to act as a guide for future comprehensive tax reform. The Blueprint includes several significant, reforms to the current tax code:

  1. It reduces the corporate income tax rate to 20%
  2. It reduces the current seven-bracket individual income tax rate to three brackets with a top rate of 33%
  3. It repeals the Alternative Minimum Tax for both corporations and individuals

The Blueprint does not mention the tax exemption of municipal bonds directly but does mention repealing so-called “special interest” provisions. The plan does not include a discussion draft with legislative language and it will not likely be put on the House floor for a vote this year; however, GFOA will continue to communicate and educate members of Congress about the importance of maintaining the federal tax exemption on municipal bonds to promote job creation and improve the nation’s infrastructure.

GFOA public policy statements emphasize the long-standing partnership between the federal government and state and local governments through the federal tax exemption on municipal bond interest.  This long-standing federal tax policy, promulgated in 1913, is neither a loophole nor a special interest tagalong provision, but rather a fundamental component of our intergovernmental partnership and a safe and reliable investment.  The exemption needs to be maintained in order to provide much-needed and irreplaceable resources to finance the nation’s infrastructure needs.  Through this critical financing tool, state and local governments are able to save approximately two-percentage points on their borrowing costs to finance the vast majority of all public infrastructure in our nation, which translates into a substantial savings to local taxpayers.

GFOA will continue to meet with Speaker Ryan as well as Chairman Brady of the House Ways and Means Committee in addition to all members of Ways and Means to communicate this message and ensure that the tax exemption of municipal debt remains intact.

Senate Introduces BQ Legislation

Last week, a group of Senate lawmakers introduced legislation (S 3257) that would permanently raise the issuer limit on bank-qualified bonds from $10 million to $30 million. The legislation, which breathes new life into the effort to restore the annual issuer limit to $30 million, is the culmination of work by GFOA’s Federal Liaison Center with the offices of Senator Cardin (D-MD) and Senator Menendez (D-NJ). This legislation is identical to legislation introduced in the House late last year (HR 2229).

To have bicameral identical legislation is a significant step in the right direction – it not only sends a message to both the House and Senate at the importance of raising the BQ limit, but it also serves to set the agenda for what may prove to be an exciting 115th Congress beginning in January 2017.

The Federal Liaison Center encourages members to reach out to your Senators and encourage co-sponsorship on this important legislation. Our BQ Resource Center has sample letters and other helpful information about the legislation and the history of bank-qualified bonds.

Bank-qualified bonds were created in 1986 to give smaller issuers more cost-effective access to credit by allowing them to bypass the traditional underwriting system and sell their tax-exempt bonds directly to local banks. In addition to the higher costs of issuance in the normal underwriting process, many small issuers have a difficult time selling their bonds because investors are not as familiar with their jurisdictions. As a result of these factors, many small issuers have been forced to pay higher interest rates on their bond issuances.

Recognizing the utility of bank-qualified bonds to overcome these cost barriers, Congress temporarily expanded their use by raising the issuer limit to $30 million annually in 2009, and as a result, the market for bank-qualified bonds increased in 2009 to approximately $32 billion. However, despite the effectiveness of bank-qualified bonds and bi-partisan support on Capitol Hill, Congress did not extend these provisions beyond their December 31, 2010, sunset date, and on January 1, 2011, the annual issuer limit for bank-qualified bonds reverted to $10 million.

Round Two Class Action Derivatives Settlement: Deadline Approaching

Jurisdictions that are potential class members in a municipal derivatives antitrust litigation receive claim forms this spring, and those forms are due July 28, 2016. This class action is about the sale of municipal derivatives from January 1, 1992, through August 18, 2011, in a lawsuit claiming bid-rigging in the sale of municipal derivative transactions by several companies, including UBS AG, Société Générale S.A., Natixis Funding Corp., Piper Jaffray & Co., National Westminster Bank Plc, George K. Baum & Co., the remaining six defendants in the case. The settlement was recently approved at a fairness hearing.

The first round of class action settlements, which have been settled, included Morgan Stanley, Wells Fargo/Wachovia, JP Morgan, Bank of America, and GE Capital.

Some defendants are not settling and others have excluded themselves from the class and are pursuing independent claims. Those that have filed suggest that the most difficult step is identifying the transactions believed to meet the class definition. 

For more information click here:

https://municipalderivativessettlement.com/frequentlyaskedquestions.aspx

SLLC Issues Supreme Court Review for Local Governments

Last term the Supreme Court decided seven “big” cases. Five of those big cases impacted local governments in some way. In some of these cases the absence of Justice Scalia made all the difference and in at least two cases his absence made no difference at all. Beyond the big cases, the Court decided a number of “bread and butter” issues such as qualified immunity, public employment, and Fourth Amendment searches affecting local governments.

As an associate member of the State and Local Legal Center, the GFOA engages with other Big Seven members to write amicus briefs in order to ensure the Court is aware of the impact of findings on state and local governments. This term, the GFOA signed an amicus brief regarding Friedrichs v. California Teachers Association.

In Friedrichs v. California Teachers Association,the Supreme Court issued a 4-4 opinion affirming the lower court’s decision to not overrule Abood v. Detroit Board of Education (1977).

In Abood, the Supreme Court held that the First Amendment does not prevent “agency shop” arrangements –  where public employees who do not join the union are still required to pay their “fair share” of union dues for collective-bargaining, contract administration, and grievance-adjustment.

In two recent cases in 5-4 opinions written by Justice Alito and joined by the other conservative Justices (including Justice Scalia and Justice Kennedy), the Court was very critical of Abood. The Court heard oral argument in Friedrichs in January before Justice Scalia died, and the five more conservative Justices seemed poised to overrule Abood. Justice Scalia, who ultimately didn’t participate in this case, likely would have voted to overrule Abood.

Other important cases of interest to state and local governments can be found in the SLLC’s Supreme Court Review Summary for State and Local Governments 2016.