D.C. Government Challenges to Qualified High Technology Company Exemptions from Franchise Taxes
The District of Columbia Office of Tax and Revenue (“OTR”) has become aggressive in challenging Taxpayer’s self-determinations that they are Qualified High Technology Companies (“QHTCs”) and thus exempt from the District of Columbia’s corporate franchise tax. GKG Law recently represented a Taxpayer who received a Notice of Proposed Assessment of Tax Deficiency (“Proposed Assessment”) against it, pursuant to which the OTR was seeking approximately a million dollars in corporate franchise taxes over the life of the exemption. In our experience, a vigorous defense of such assessments is necessary to prevail in reversing such an assessment.
In 2001, the District of Columbia enacted the “New E-Conomy Transformation Act,” D.C. Law 13-256, D.C. Code §47-1818.01 et seq. (2001) (the “Act”). The Act, which is designed to make the District of Columbia an attractive location for high technology companies, grants certain high technology companies a five-year exemption from the District of Columbia’s corporate franchise tax. In order to qualify for the exemption, a company must, among other things, derive at least 51% of its gross revenues from specified high technology activities. These activities include internet-related marketing and promotion services, and the development of internet-related application and digital content.
GKG Law recently handled a case in which, as outlined in the Proposed Assessment, the OTR determined that the Taxpayer was not a QHTC because it had not established that its internet-related service and sales were performed with regard to the internet and not simply over the internet. The OTR also challenged whether the Taxpayer derived 51% of its income from specified high technology activities. GKG Law filed a Protest of the Proposed Assessment with the Office of Administrative Hearings (OAH) in which it asserted that the Taxpayer was a QHTC based upon the fact that the Taxpayer was not merely placing advertising on its website but instead was deriving revenue from its own high technology activities, which included designing, developing and operating internet-based services. GKG Law also argued that the Taxpayer’s revenue was primarily derived from the high technology specified activities.
Addressing these types of tax assessments requires not only tax expertise, but also a willingness to aggressively challenge OTR’s positions. Please contact us if you would like to discuss these or similar tax issues you may have. Brendan Collins may be reached by telephone at 202.342.6793 or by email at bcollins@gkglaw.com. Chris Younger may be reached by telephone at 202.342.5295 or by email at cyounger@gkglaw.com.
