Tax Compliance Bureau Discovery & Tax Enforcement Division

Projects Discussed: Unclaimed Property Individual Income Tax Fraud Detection Internet Tobacco Voluntary Disclosure

Unclaimed Property Project

General Overview Any asset, tangible or intangible, belonging to a third party, that remains unclaimed for a specified period of time is considered unclaimed property. Unclaimed property is not a tax. The most commonly used term for unclaimed or abandoned property is “escheat”.   All fifty states have escheat laws that require state administrators to hold abandoned property indefinitely for the missing owner or heirs.

The entity holding the property (the “holder”) must use due diligence to locate a missing payee. If the owner cannot be located, the unclaimed funds, along with the owners’ name, last known address, and date of last contact must be reported to the appropriate state administrator. Under the Supreme Court rules of jurisdiction decided in Texas v. New Jersey (1965) the property must be remitted to the state of the owners’ last known address. If there is no last known address, the property goes to the state in which the holder is incorporated.   Generally, all intangible personal property is presumed abandoned after the dormancy period has expired unless the state legislature has explicitly exempted a category of property, such as state lottery winnings.

Sample of Michigan Property Types and Dormancy Period Dormancy is measured from the date the liability became due and payable. Account Balances Due Dormancy Period Checking Accounts 5 Savings Accounts Matured CD or Savings Certificate Safe Deposit Boxes Dormancy Period Safe Deposit Box Contents 5 Insurance Dormancy Period Individual Policy Benefits 5 Claim Payments Un-cashed Checks Dormancy Period Cashier’s Checks 5 Certified Checks Registered Checks Treasurer’s Checks Utilities Dormancy Period Utility Deposits 1 Membership Fees 5 Misc Checks & Intangible Personal Prop Dormancy Period Wages, Payroll, Salary 1 Commissions Gift Certificates 5 Court Deposits Dormancy Period Escrow Funds 1

Michigan Unclaimed Property Initiative Of the over 200,000 registered Michigan businesses, approximately 5,000 currently file unclaimed property reports. Decision made to launch an initiative to educate businesses about their legal responsibilities as holders of unclaimed property.

Roundtable discussions held with business associations such as: Michigan Bankers Association Michigan Municipal League Michigan Chamber of Commerce Roundtable discussions with media Presentation at MACPA Annual Conference Little to no negative reaction from business Strong positive reaction from practitioners Request from CPA firm for Discovery letter and enclosures to present at additional MACPA conferences

Discovery Letter Letter of inquiry Enclosures Offered four year look-back period and no penalty or interest if company responded within 90 days. Did not require due diligence Enclosures Property types and dormancy period list Unclaimed property brochure Attestation of Compliance Michigan and the majority of states do not require yearly “negative” reports if the company has no unclaimed property for the year. For this campaign, an “Attestation of Compliance” signed by an officer of the company was required if the company claimed no unclaimed property for the look-back period.

Letter to Property Holders

Contract Auditors Michigan’s Uniform Unclaimed Property Act gives the State Treasurer the authority to conduct unclaimed property examinations if there is reason to believe that an entity is a holder that has failed to report or has under-reported unclaimed property. Three outside auditing firms were chosen to conduct audits. The three firms are Abandoned Property Experts LLC, Tichenor & Associates, and Kelmar Associates. From the first two letter populations mailed, audits were chosen by Unclaimed Property Division. Unclaimed Property Division sends an initial letter, indicating that an auditor has been appointed to conduct the audit. To date, approximately 20 companies have been contacted.

Response As of July 31, 2006, over $3.5 million has been turned over in unclaimed property as a result of the Letters of Inquiry. Statistics: 18,000 letters sent beginning October 2005 10,800 letters with past due dates 46% have not responded 43% responded with an attestation, claiming no unclaimed property to report 5% remitted some unclaimed property Approximately 300 companies have requested a chance to voluntarily comply without receiving a letter.

Individual Income Tax Fraud Detection Process

History Manual process – beginning 1987 Visual review of returns, one by one Individual letters sent to taxpayers Automated process – beginning 2000 Use of daily queries to select returns Both E-filed and Paper Automated process for sending letters to taxpayers.

Queries Currently ~ 30 daily queries, using both a nightly mainframe process and a daily database process. Queries are used for two primary purposes: taxpayer education and to stop fraud schemes by both individuals and tax preparers. Queries are added throughout the year as additional fraud schemes or educational areas are identified. Queries are modified throughout the year to reflect changes in fraud schemes and educational areas.

Letters ~ 90% of letters are return specific 2 returns may stop on same error but letters will be different based on individual tax return. ~ 10% of letters are error specific 2 returns stop on same error letters will be exactly the same whether or not there are differences on individual tax return.

Statistics ~ 43,000 returns stopped in 2005 ~ 33,000 taxpayers contacted via letter ~ 15,000 taxpayers are non-responders ~ 83% of the returns we challenge are reduced or disallowed ~ $22.3 million in revenue for fiscal year 2005

Data Sharing Data is shared in both directions with Department of Corrections Unemployment Insurance Agency Department of Health and Human Services Michigan State Housing Development Authority Data is used from the above agencies to assist in detecting fraudulent returns. In return, information is provided to agencies to assist with their fraud detection. Data is used without sharing Social Security Death Master File IRS

Future Continue to improve processes to identify additional fraud schemes while avoiding the stopping of innocent returns. Continue to educate taxpayers on proper filing of tax returns. Obtain more sources to share data that will benefit all participants. Specifically interested in sharing with other states and the IRS.

Tobacco Tax Compliance Project

Project Timeline August 2002 GAO report cites a 2001 study conducted by Forrester Research Inc., that Internet Tobacco Sales in the United States will exceed $5 billion in 2005 and that States will lose about $1.4 billion in tax revenue from these sales. July 1, 2004  Michigan raises Tobacco Tax rate by .75 cents per pack, to $2.00 per pack - $20.00 per carton. Michigan’s Tobacco Tax Rate is the 4th highest in the nation.

September and October 2004 Tax Compliance Bureau issues 14 subpoenas to U.S. Internet vendors including 9 of the top 10 vendors identified as selling 40% of the total Internet tobacco sales. E-mail messages were sent to 587 Internet sites about selling tobacco products into Michigan and the requirement to comply with Jenkins Act. Notices sent to approximately 450 in-state newspapers – daily papers, community news, campus papers about not running advertisements for Internet tobacco. Tobacco Tax forms are made available on the department’s website for individuals to self-disclose cigarette purchases from unlicensed sources.

Subpoena to Vendors

Notice Concerning Cigarette Sales into the State of Michigan     Notice Concerning Cigarette Sales into the State of Michigan This notice is to inform you of state and federal reporting requirements related to the advertisement of cigarettes via the Internet, direct mail, or other media, or the sale or transfer for profit of cigarettes into Michigan. Federal Law (15 U.S.C. §§ 375-377), commonly referred to as the Jenkins Act, requires that any person (including Native Americans) selling or transferring for profit cigarettes in interstate commerce into a state that taxes the sale of such cigarettes, to other than a distributor authorized by the state to distribute cigarettes at wholesale or retail, or who advertises the sale of such cigarettes, must register and file a monthly report of all cigarette shipments with the receiving state’s Tobacco Tax Administrator. Michigan Law (MCL 205.14) prohibits a person from selling, distributing, or importing a tobacco product into this state that violates any federal law or regulation. Further, Michigan’s Tobacco Products Tax Act (MCL 205.431) also prohibits a person, either as a principal or agent, from selling or soliciting orders for a tobacco product to be shipped, mailed, or otherwise sent or brought into the state to any person not licensed under the act. Violation of either of these Michigan provisions or the Jenkins Act may be punishable by a term of imprisonment, a fine, or both. If you made sales into Michigan for periods beginning on or after August 1, 2002, you must file a “Jenkins Act Report” within 45 days of this notice. If this is your initial report filed with Michigan, you must include your name and trade name (if any), your principal place of business, and any other place of business. The report must cover the period from August 1, 2002 through the end of the last full month. Thereafter, you must file reports by the tenth of each month for the prior month’s shipments. The report must detail (1) the first and last name and address of the person to whom cigarette shipments were made, (2) the brands of cigarettes shipped, (3) the quantities of cigarettes shipped, and (4) invoice date. File your reports in .txt format (other formats will be accepted) using the following methods: ·         Electronic (preferred). Send your report via e-mail to TreasDis@michigan.gov. Enter “Mail Order Tobacco Sales” in the subject line. ·         On disk or CD-ROM. Mail to: Russell Venaska Discovery and Tax Enforcement Division Michigan Department of Treasury P.O. Box 30140 Lansing, MI 48909-7640 Failure to file Jenkins Act Reports will result in enforcement action as provided by statute. If you have any questions or need additional information, please contact Russell Venaska, Discovery and Tax Enforcement Division, at the address above, or by calling (517) 636-4120. E-Mail to Potential Vendors

Letter to Newspapers

December 2004 Michigan increases the penalty for possession of unstamped cigarettes by unlicensed persons from 100% of the tax to 500% of the tax. February 2005 Discovery and Tax Enforcement begins mailings to individuals identified as purchasing cigarettes. August 2005 Warning Posters distributed to retail establishments that sell tobacco through various Trade Associations: Michigan Grocers Association, Michigan Petroleum Association, Michigan Association of Convenience Stores, Service Station Dealers Association, Association of Food Dealers, Spartan Stores, Michigan Vendors and Distributors.

Warning Poster distributed to Tobacco Retailers

Taxpayer Letter

Additional Purchase Schedule

Project Statistics February 2005 to Date: Total Revenue $16,200,000 Letters First Request Letters to Individuals Second Request Letters Sent Additional Purchase Letter Sent* Total Letters Sent Revenue Paid in Full Payment Plan Requested Assessed Total Revenue 17,057 1,348 708 19,113 9,383 1,241 1,294 $550,000 $10,600,000 $906,000 $4,600,000 $16,200,000 *over 100 other vendors identified per additional purchase schedule.

Project Procedures Per Statute: The penalty imposed against an unlicensed person for possession of untaxed cigarettes is as follows: ·   100% of the tax for purchases on or before December 27, 2004. ·   500% of the tax for purchases on or after December 28, 2004. Penalty is applied by the division only when: There is no response and an assessment is issued Or Additional purchases are made AFTER the original letter and the individual had already received a penalty waiver from a prior contract The penalty imposed for failure to remit the applicable use tax is 25% of the tax amount due.

Project Advantages Reduces Internet Purchases Once Discovery begins contacting individuals, the number of subsequent purchases reported by the vendor reduces significantly. DataSourceDate DataSourceDesc Data#RecsRcvd 12/22/2005 Vendor 794 2/17/2006 Vendor Dec-2005 & Jan-2006 692 3/21/2006 Vendor Feb-2006 53 4/20/2006 Vendor Mar-2006 42 5/23/2006 Vendor Apr-2006 54 6/22/2006 Vendor May-2006 52 7/10/2006 Vendor June-2006 27

Project Advantages Increases State Revenue from legitimate purchases Current tobacco collections are up 1.6%, where they would normally be expected to be down 1.5%. Educates the Public “I didn’t know I couldn’t purchase.” Protects Michigan Tobacco Retailers

Vendor Invoice Legal Claim

Vendor Web Page Legal Claim

Voluntary Disclosure Program

Michigan’s Nexus Standards RAB 1998-1 SBT Nexus Standards Invalidated RAB 1989-46 Mere solicitation of sales creates nexus Issued February 1998 Applies to all open periods ending after January 1, 1989 RAB 1999-1 Use Tax Nexus Standard Issued May 1999 Applies to all open periods

RAB 1998-1 NO NEXUS NEXUS More Than 10 Days 10 Days or Less U.S. Mail         RAB 1998-1 NO NEXUS NEXUS   More Than 10 Days 10 Days or Less De Minimis Zone De Minimis Zone   U.S. Mail Common Carrier Economic Presence Advertising   Meeting with in-state suppliers In-state meetings with governmental representatives in their official capacity Occasional meetings (board meetings, retreats, seminars, etc.) Recruiting or hiring events Advertising in the state Renting customer lists to or from an in-state entity Attending trade show at which no orders are taken and no sales are made   Resident employee conducting business activity Owning, renting, leasing, maintaining or using tangible personal property or real property Own, rent, lease, use, or maintain an office by employees or representatives Deliver goods into Michigan in own trucks Related party delivers goods into Michigan Employee, agent, representative, independent contractor, broker or other acting on its behalf conducts REGULAR AND SYSTEMATIC BUSINESS ACTIVITY: 10 days of business activity 2 days of: Soliciting sales Making repairs or providing maintenance service Collecting current or delinquent accounts Installing or supervising installation Conducting training Providing any technical assistance Investigating, handling or assisting with customer complaints Providing consulting services Soliciting, negotiating, or entering into franchising or licensing agreements  

Voluntary Disclosure Legislation enacted to address the difficulties that arose when appellate decisions applied a new jurisdictional standard retroactively and created filing responsibilities where none had previously existed. Gillette Co v Dep’t of Treasury Guardian Industries Corp v Dep’t of Treasury Magnetek Controls, Inc v Dep’t of Treasury

Public Act 221 of 1998 Added Section MCL 205.30c to Revenue Act Gave the Department authority to enter into voluntary disclosure agreements with non filers In effect since July 1, 1998

Qualification Requirements Non filer* for type of tax disclosing and filing responsibility under nexus standards issued by department after December 31, 1997 or Has a reasonable basis to contest liability for a tax or fee administered under the Revenue Act *Non filer – means a person who has not filed a return for the particular tax being disclosed for periods beginning after December 31, 1988. Non filer also includes a person whose only filing was a single business tax estimated tax return filed before January 1, 1999.

Additional Requirements No previous contact by department. (A letter of inquiry is not considered previous contact.) Not under audit or investigation by the department or its agents, state police, attorney general, or local law enforcement agency Not subject to civil action or criminal prosecution involving type of tax in agreement Agrees to register, file, and pay all taxes for the lookback period Agrees to respond within the time period and manner specified in agreement

Lookback Period For All Taxes Four most recent completed fiscal or calendar years over a 48 month period or the first date of business activity in Michigan if less than 48 months Another period that best represents interest of state and preserves fair administration of taxes

Lookback Period For the Single Business Tax Optional lookback period limited to three most recent completed fiscal or calendar years over a 36 month period provided: Tax returns filed in another state based on net income and Michigan sales in numerator of apportionment formula of other state Michigan sales increased tax liability to that state

Nexus Initiatives Discovery routinely contacts out-of-state companies regarding nexus standards for single business tax and use tax. Companies are invited to participate in voluntary disclosure. 98,000 companies contacted last 5 years. The majority of companies that request voluntary disclosure result from Discovery contact. In FY2005, 1,231 companies requested participation in voluntary disclosure – only 98 were self-requested.

Companies should have no expectation that they can wait to receive a letter from Discovery. The Audit Division actively pursues unregistered out-of-state companies, for audits up to 10 years. Sources of information: Out-of-state vendor data provided by Michigan based companies, universities, hospitals Use Tax audit results IRS Data – 1099 payments issued by out-of-state payers to Michigan payees State of Michigan contracts – DMB, Casino Vendors Internet subscription service

Voluntary Disclosure Program Nets over $520 million since 1998 5,037 companied have completed the voluntary disclosure process. Tax Type Requests Prior Year taxes paid Subsequent payments Total Paid SBT 4,579 244,841,194 184,517,794 429,358,987 Use 905 21,744,621 62,291,687 84,036,308 IIT 636 7,514,835 7,514,834 Total 6,120 271,100,650 246,809,481 520,910,131 Figures as of 06/30/2006.

Discovery & Tax Enforcement Division Contact Information Douglas Schafer Administrator Discovery & Tax Enforcement Division (517) 636-4120 TreasDis@michigan.gov