Weekly Round-Up: The Battle Rages On Over Contingent-Fee Transfer Pricing Audits

Chainbridge Software LLC, a Fairfax, Va., contractor that conducts state transfer pricing studies with a patented method of analysis, is at the center of a multistate controversy in which taxpayers have been pushing back hard-not only against massive assessments arising from the contractor's work, but also against the very practice of hiring third parties to conduct such studies.

The company is central to challenges filed by two major multinational corporations, Microsoft Corp. and BP Products North America Inc., in the District of Columbia tax appeals system-the first appeals arising from any Chainbridge audit to make it into a public forum.

Should Microsoft prevail as a matter of law, its victory could severely curtail states' enthusiasm for contract transfer pricing audits generally. But should the taxpayer lose, according to one practitioner, “I would not be surprised if the floodgates opened up.”

Since 2003, Chainbridge reports to have generated more than $250 million in state income tax assessments, resulting in more than $100 million in collections in Alabama, the District of Columbia, Louisiana, and New Jersey. Much of its work has been as a subcontractor for ACS State & Local Solutions Inc., a subsidiary of Xerox Corp., and much of the revenue-according to practitioners-represents settlements paid by taxpayers who calculate it is cheaper to pay some fraction of the assessment than to fight it through protracted appeals.

“It is very frustrating for the taxpayer when you tell them that even though we think you have an airtight case, it will cost you X dollars to litigate it and win. Why don't we pay a third of that to make the issue go away?” said Bruce Ely of Bradley Arant Boult Cummings LLP in Birmingham, Ala. In some cases, practitioners say, settlements have been for far lesser sums-equal to “pennies on the dollar” in New Jersey and Washington. The purpose of the audits, some practitioners assert, is to generate assessments so onerous that taxpayers are pressured into settlements.

For an in-depth analysis of this issue, check out the article by Bloomberg BNA Reporter Dolores W. Gregory, found in this week’s issue of the Bloomberg BNA Weekly State Tax Report.

In other developments…

The most and least taxing states in 2012, as compiled by Bloomberg BNA.

Judge strikes down Colorado’s ‘Amazon Law’ reporting rule on constitutional grounds. Bloomberg BNA’s Christine Boeckel and Tripp Baltz cover the development here.

West Virginia outlaws zapping by enacting S.B. 411, which makes the use or possession of electronic cash register automated sales suppression devices unlawful.

Georgia lawmakers pass legislation to significantly change sales and use tax laws, await Governor’s signature, Kate Thurber of PwC reports.

Taxing Amazon: good for Virginia and good for me, Roberton Williams, of the Tax Policy Center, explains.

New York State reinstates its sales-tax exemption on clothing and footwear items costing less than $110, the New York Times reports.

Gov. Christie leaning on tax subsidies in hunt for jobs, the New York Times reports.

Compiled by Priya D. Nair
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