Tag: New York

New York Becomes First State Raise Minimum Wage to $15 . . . For Fast Food Workers

A panel appointed by New York Governor Andrew Cuomo recommended a minimum hourly wage increase to $15 for fast food service workers on Wednesday.  The recommendation comes just three months after Governor Cuomo tasked the state’s acting Labor Commissioner to empanel a Wage Board to investigate and make recommendations on increasing the minimum wage in the fast food industry.

The Labor Commissioner now has to adopt the recommended changes, but it is largely expected that he will, even if he first makes minor changes.  The minimum wage hike would be phased in over time, with the first increase to $10.50 for City fast food workers and to $9.75 for State fast food workers coming at the end of the year.  The minimum wage rate for City workers would then rise by $1.50 each year for the next three years until it tops out at $15 in 2018.  For the rest of the State, the wage rate would rise incrementally each year until it tops out at $15 in 2021.

The wage order covers Fast Food Employees working in Fast Food Establishments.  Fast Food Establishments mean any establishment in the state of New York serving food or drink items:

  1. where patrons order or select items and pay before eating and such items may be consumed on the premises, taken out, or delivered to the customer’s location;

  2. which offers limited service;

  3. which is part of a chain; and

  4. which is one of thirty (30) or more establishments nationally, including: (i) an integrated enterprise which owns or operates thirty (30) or more such establishments in the aggregate nationally; or (ii) an establishment operated pursuant to a Franchise where the Franchisor and the Franchisee(s) of such Franchisor owns or operate thirty (30) or more such establishments in the aggregate nationally.

Fast Food Employee covers anyone whose job duties include at least one of the following: customer service, cooking, food or drink preparation, delivery, security, stocking supplies or equipment, cleaning, or routine maintenance.

San Francisco, the City of Los Angeles and Seattle each have raised their minimum wage rates to $15 for all employees.  But New York becomes the first state to do so, even though it is limited to the fast food industry.  Many believe this hike will serve as a precursor to wage hikes in other low wage industries and possibly state-wide.  Similar efforts are being made on the left coast, where on the same day that the New York Wage Board released its recommendations, the County of Los Angeles Board of Supervisors voted for a $15 minimum wage.  Moments later, the University of California, which employs nearly 200,000 workers statewide, announced that it will pay its workers at least $15/hr.  We will continue to track these developments.

ARTICLE BY Michael S. Arnold of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
©1994-2015 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.

U.S. Supreme Court’s Wynne Decision Calls New York’s Statutory Resident Scheme into Question

On May 18, the U.S. Supreme Court issued its decision inComptroller of the Treasury of Maryland v. Wynne. In short, the Court, in a five-to-four decision written by Justice Alito, handed the taxpayer a victory by holding that the county income tax portion of Maryland’s personal income tax scheme violated the dormant U.S. Constitution’s Commerce Clause.

Specifically, the Court concluded that the county income tax imposed under Maryland law failed the internal consistency test under the dormant Commerce Clause, because it is imposed on both residents and non-residents with Maryland residents not getting a credit against that Maryland local tax for income taxes paid to other jurisdictions (residents are given a credit against the Maryland state income tax for taxes paid to other jurisdictions).

The Supreme Court emphatically held (as emphatically as the Court can be in a five-to-four decision) that the dormant Commerce Clause’s internal consistency test applies to individual income taxes. The Court’s holding does create a perilous situation for any state or local income taxes that either do not provide a credit for taxes paid to other jurisdictions or limit the scope of such a credit in some way.

The internal consistency test—one of the methods used by the Supreme Court to examine whether a state tax imposition discriminates against interstate commerce in violation of the dormant Commerce Clause—starts by assuming that every state has the same tax structure as the state with the tax at issue. If that hypothetical scenario places interstate commerce at a disadvantage compared to intrastate commerce by imposing a risk of multiple taxation, then the tax fails the internal consistency test and is unconstitutional.

Although the Wynne decision does not address the validity of other taxes beyond the Maryland county personal income tax, the decision does create significant doubt as to the validity of certain other state and local taxes such as the New York State personal income tax in the way it defines “resident.” New York State imposes its income tax on residents on all of their income and on non-residents on their income earned in the state; this is similar to the Maryland county income tax at issue in Wynne.

“Resident” is defined as either a domiciliary of New York or a person who is not a domiciliary of New York but has a permanent place of abode in New York and spends more than 183 days in New York during the tax year. N.Y. Tax Law § 605. (New York City has a comparable definition of resident.) N.Y.C. Administrative Code § 11-1705. Thus a person may be taxed as a statutory resident solely because they maintain living quarters in the state and spend more than 183 days in the state, even if those days have absolutely nothing to do with the living quarters; this category of non-domiciliary resident is commonly referred to a “statutory resident.” As such, under New York’s tax scheme, a person can be a resident of two states—where domiciled and where a statutory resident—and thus be subject to taxation on all of their income in both states.

Although New York State grants a credit to residents for taxes paid to another jurisdiction, that credit is only for taxes paid “upon income derived” from those other jurisdictions. N.Y. Tax Law § 620. As such, New York State does not grant a credit for taxes paid to another jurisdiction on income earned from intangible property, such as stocks, because income earned from intangible property is not ‘derived from’ any specific  jurisdiction.

To illustrate using an example, suppose an investment banker is unquestionably a domiciliary of New Jersey and has an apartment, i.e., permanent place of abode, in New York that he uses only occasionally. Further, suppose that the investment banker spends more than 183 days in New York during a tax year by going to his office in New York on most workdays. In such a case, the investment banker is a resident of both New Jersey and New York and subject to tax as a resident in both states on his entire worldwide income. New York does not give a credit for taxes paid to New Jersey on income derived from intangible property, and thus the investment banker pays tax on this income twice, once to New Jersey and once to New York, clearly disadvantaging interstate commerce and resulting in double taxation.

This is not some hypothetical example. This is actually the fact pattern in In the Matter of John Tamagni v. Tax Appeals Tribunal of the State of New York, 91 N.Y.2d 530 (1998). In that case, the New York Court of Appeals (New York State’s highest court) held that New York State’s taxing scheme did not violate the dormant Commerce Clause and did not fail the internal consistency test. The validity of the Court of Appeals’ decision is seriously called into question under the Wynne case.

The Court of Appeals, relying upon Goldberg v. Sweet, held that the dormant Commerce Clause did not apply to residency-based taxes because those taxes were not taxing commerce, but rather a person’s status as a resident. However, the U.S. Supreme Court’s decision in Wynne not only repudiates the very dicta from Goldberg v. Sweet cited by the New York Court of Appeals in Tamagni, but the U.S. Supreme Court also determined that even if a state has the power to impose tax on the full amount of a resident’s income, “the fact that a State has the jurisdictional power to impose a tax [under the Due Process clause of the Constitution] says nothing about whether that tax violates the Commerce Clause.” After Wynne, it is clear that the dormant Commerce Clause applies to residency-based personal income taxes.

The second reason that the vitality of the Tamagni decision is in question is its application of the internal consistency test. The Court of Appeals held that even if the dormant Commerce Clause applied, the internal consistency test was not violated because the tax at issue was imposed upon a purely local activity and thus could not violate the Complete Auto tests. However, as discussed above, New York State’s lack of a credit for taxes paid to other jurisdictions mirrors the lack of a credit under Maryland’s county income tax scheme.

New York State taxpayers should be cognizant of the Wynnedecision and should consider filing refund claims if they have paid— or will pay—tax to New York State as a statutory resident (i.e., not as a New York domiciliary). One would expect the New York State Department of Taxation and Finance to be quite resistant to granting such refunds and likely to vigorously defend the existing taxing scheme.

It may be worthwhile to note that this problem of double taxation was acknowledged and addressed in an agreement executed in October 1996 by the heads of the revenue agencies of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont. Under that agreement, the “statutory resident” state would provide a credit for the taxes paid by the individual on his or her investment income to his/her state of domicile. Unfortunately, that agreement was never implemented through legislation— maybe now is the time for that to be done.

Finally, a word about New York City: New York City imposes a personal income tax on residents, allowing no credit for taxes paid to other jurisdictions. However, New York City does not impose a tax on non-residents, making its personal income tax different than the Maryland county income tax. Thus, the constitutionality of the New York City personal income tax is not specifically addressed by the U.S. Supreme Court’s decision. However, similar to the New York State definition of resident, a person can be a resident in two different jurisdictions under the New York City definition of resident. As such, New York City’s personal income tax could be imposed twice on a person if the person is a domiciliary of one state and a statutory resident in another. Thus, the tax potentially fails the internal consistency test.

ARTICLE BY

Arthur R. Rosen & Mark Yopp of McDermott Will & Emery
© 2015 McDermott Will & Emery

New York Implements Medical Marijuana Rules

The New York State Department of Health has issued regulations implementing the State’s medical marijuana law, enacted last July.

Published April 15 in the State Register, the regulations allow the use of marijuana for patients with cancer, AIDS, Lou Gehrig’s disease, Parkinson’s disease, multiple sclerosis, certain spinal cord injuries, epilepsy, inflammatory bowel disease, neuropathies, and Huntington’s Disease, and symptoms including severe or chronic pain, surgeries, severe nausea, persistent muscle spasms and wasting syndrome, who comply with the rules. The Commissioner of Health may add other conditions, symptoms or complications, under the regulations.

In accordance with the law, those patients will be able to use only non-smokable forms or marijuana, to be ingested or vaporized. “Smoking is not an approved route of administration.” However, even vaporization is banned in public places, and in no case may approved medical marijuana be consumed through vaporization in locations where smoking would be prohibited by the State’s Public Health Law, including places of employment. Products authorized by the regulations are restricted to liquids, oils or capsules. Unless the Commissioner approves, approved marijuana products may not be incorporated into edible food products by a registered organization.

Only five businesses or non-profits in the State may be licensed to grow, process of distribute approved marijuana. Each such enterprise may have four dispensing facilities. The Commissioner can consider permitting more dispensing facilities.

While implementation will not be immediate, employers should prepare for responding to employees taking marijuana under the law and regulations.

Authored by:  Roger S. Kaplan of Jackson Lewis P.C.

New York Lawmakers Agree on Brownfield Law Extension With Less Drastic Changes to Tax Credits

Greenberg Traurig

In a departure from his budget proposal, the Legislature negotiated changes with the Governor to extend the tax credits for New York’s Brownfield Cleanup Program (BCP) with relatively modest changes to BCP eligibility requirements.  The Governor’s budget proposal would have limited the lucrative “tangible property” tax credit, which is the credit based on a percentage of the cost of constructing a new development on a Brownfield site, to (i) properties located in an environmental zone, (ii) properties to be utilized for affordable housing, or (iii) “upside down” properties – where the remediation of the property is projected to cost more than the value of the remediated property.  Under the bill agreed to with the Legislature, however, those limits (with modifications) will apply only to properties located in New York City.  In other words, outside of New York City, eligibility for the tangible property tax credit will remain available to all developers that otherwise qualify under the BCP, as per existing law.

The news for New York City-based developments is also not all bad. The final bill adds a fourth category of properties eligible for the tangible property tax credit for “underutilized” properties – to be defined by regulation, and the criteria for upside down properties were loosened so that a property can qualify if the remediation is projected to cost over 75 percent – rather than 100 percent – of the value of the remediated property. Despite these revisions, the New York BCP will continue to provide significant tax incentives to developers seeking to clean up and redevelop contaminated sites and the extension will resolve the uncertainty over the future of the program that existed for several years.

Other changes include:

  • “Grandfathering” of Existing Tax Credits: Amendments to the law as they relate to all eligible tax credits are tied to the dates by which a Brownfield site is accepted into the BCP and obtains a Certificate of Completion (COC) from the Department of Environmental Conservation (DEC).

    • Existing provisions related to the tax credits would remain applicable to those sites that either (i) were admitted into BCP prior to June 23, 2008 and obtained their COC by December 31, 2017, or (ii) were admitted into the BCP between June 23, 2008 and July 1, 2015 (or the date by which DEC proposes regulations defining “underutilized,” whichever is later) and obtained a COC by December 31, 2019.

    • Amendments related to the tax credits are applicable to those sites that are accepted into the BCP between July 1, 2015 (or the date by which DEC proposes regulations defining “underutilized,” whichever is later) and December 31, 2022, so long as they obtain a COC on or before March 31, 2026.

  • Definition of “Brownfield Site”: The amendments redefine “Brownfield Site” to mean “any real property where a contaminant is present at levels exceeding the soil cleanup objectives or other health-based or environmental standards, criteria or guidance adopted by [DEC] that are applicable based on the reasonably anticipated use of the property.” This is a welcome change which ties eligibility to cleanup objectives and moves away from the prior vague definition that required the presence of contamination that “complicates” redevelopment.

  • Creation of a New EZ Program: The amendments empower DEC to adopt regulations to implement a program for “the expedited investigation and/or remediation” of brownfield sites (BCP-EZ program) provided the developer agrees to take no tax credits associated with the program. The EZ Program, however, appears to provide a minimal departure from existing remediation and public notice requirements, and thus may not actually provide for an expedited investigation as advertised. One area where a more expedited process may work is for Track 4 – restricted use – cleanups where the applicant the applicant would be allowed to use site-specific data to demonstrate that the concentration of the contaminant in the soils reflects background conditions and, in that case, a contaminant-specific action objective for such contaminant equal to such background concentration may be established.

  • Inclusion of Class 2 Sites: The amendments allow in class 2 Superfund sites that are being remediated by non-culpable volunteers.  Previously, such sites were deemed ineligible even if the party seeking to remediate the site had no role in the contamination.

  • Change In DEC Oversight Costs: The amendments eliminates the payment of DEC oversight costs for volunteers, and permits a flat fee charge to participants.

  • Related Service Fee: The amendments address a perceived problem related to the computation of service fees charged to the Brownfield applicant by a related party and the calculation of tax credits. The concern was that these service fees could be inflated as a way to increase the remediation or site preparation costs, and result in associated increases in the ceiling of eligible tangible property credits.  The amendments provide that such service fees cannot be claimed as eligible site preparation or remediation costs until they are earned and actually paid, and the portion of the tax credits related to such fees cannot be claimed until the taxable year when the subject property is placed into service. This limits the use of such fees as a way to inflate costs that are used to calculate the ceiling for tangible property credits. That ceiling is deemed to be the lesser of $35 million for residential/commercial projects ($45 million for industrial projects) or three times the amount of eligible site preparation and onsite groundwater remediation costs.

  • Definition of Eligible Site Preparation Costs and Groundwater Remediation Costs: The definition of eligible “site preparation” and “onsite groundwater remediation” costs is critical because these costs are eligible for tax credits that range from 28 to 50 percent of such actual costs, and, as noted, those costs are often used as the basis for calculating the ceiling for a project’s tangible property tax credits. The amendments provide a more specific and detailed description of eligible costs, requiring such costs to be necessary to implement a site investigation or remediation, or to qualify for a COC.  Eligible costs include those related to excavation, demolition, engineering and environmental consulting costs, legal costs, transportation and disposal of contaminated soil, physical support of excavation, and dewatering.

  • Increased Tangible Property Tax Credit Percentage and Changed Definition: The amendments limits the tangible property credit to only costs for tangible property with a useful life of at least fifteen years. Certain projects, however, will be eligible for a higher percentage tangible property credit, which in a general sense is a tax credit calculated based on a percentage of the cost of constructing the building on the Brownfield site.  Under existing law, that percentage is either 10 or 12 percent.  Under the amendments, that percentage can be increased in five percent increments, and total as much as 24 percent of the development costs, with five percent bonuses for sites that are cleaned up to Track 1 standards (highest level of cleanup), located in En-zones or a Brownfield Opportunity Area (BOA), or developed for manufacturing or affordable housing.

ARTICLE BY

Steven C. Russo
Robert M. Rosenthal
Greenberg Traurig, LLP

Currency Conversion Concerns: New York Issues Guidance on Virtual Currencies

Mcdermott Will Emery Law Firm

On December 5, 2014, the New York Department of Taxation and Finance (Department) released TSB-M-14(5)C, (7)I, (17)S.  This (relatively short) bulletin sets forth the treatment of convertible virtual currency for sales, corporation and personal income tax purposes.  The bulletin follows on a notice released by the Internal Revenue Service (IRS) in March of this year, Notice 2014-21.

The IRS Notice indicates that, for federal tax purposes, the IRS will treat virtual currency as property, and will not treat it as currency for purposes of foreign currency gains or losses.  Taxpayers must convert virtual currency into U.S. dollars when determining whether there has been a gain or loss on transactions involving the currency.  When receiving virtual currency as payment, either for goods and services or as compensation, the virtual currency is converted into U.S. dollars (based on the fair market value of the virtual currency at the time of receipt) to determine the value of the payment.

The IRS Notice only relates to “convertible virtual currency.”  Virtual currency is defined as a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”  Convertible virtual currency is virtual currency that “has an equivalent value in real currency, or that acts as a substitute for real currency.”

The Department’s bulletin also addresses only convertible virtual currency, and uses a definition identical to the IRS definition.  The Department indicates that it will follow the federal treatment of virtual currency for purposes of the corporation tax and personal income tax.

For sales and use tax purposes, the bulletin states that convertible virtual currency is intangible property and therefore not subject to tax.  Thus, the transfer of virtual currency itself is not subject to tax.  However, the exchange of virtual currency for products and services will be treated as a barter transaction, and the amount of tax due is calculated based on the fair market value of the virtual currency at the time of the exchange.

The Department should be applauded for issuing guidance on virtual currency.  It appears that these types of currencies will be used more and more in the future, and may present difficult tax issues.

However, the Department’s guidance is incomplete.  There are a couple of unanswered questions that taxpayers will still need to ponder.

First, the definition of convertible virtual currency is somewhat broad and unclear.  The Department and the IRS define “convertible” virtual currency as currency that has an “equivalent” value in real currency, but equivalent is not defined in either the IRS Notice or the bulletin.  Many digital products and services use virtual currency or points that cannot be legally exchanged for currency to reward users, and the IRS and the Department should be clearer about the tax treatment of those currencies.

Second, although the Department will follow the federal treatment for characterization and income recognition purposes, the bulletin does not discuss apportionment.  This is likely a very small issue at this point in time, but the Department will, some day, need to address how receipts from gains in the exchange of virtual convertible currencies are apportioned.

Virtual currencies will create issues not only in the tax world, but also in the unclaimed property world.  The Uniform Law Commission has begun its efforts to rewrite the Uniform Unclaimed Property Act, and the treatment of virtual currency will be an issue discussed during the rewrite.  Companies that use virtual currencies, convertible or not, should follow the rewriting process to make sure the drafters are informed of all of the issues these companies will face.

ARTICLE BY

Mark Yopp
OF
McDermott Will & Emery

United Nations: A Renewed Focus on Climate Change This Week in New York

Covington BUrling Law Firm

Regardless of your perspective on the subject, expect significantly increasing media and public attention around climate change and greenhouse gas emissions this week.

The Secretary General of the United Nations, Ban Ki-moon, is convening a Climate Summit on Tuesday in conjunction with the meeting of the UN General Assembly in New York.  More than 120 world leaders are expected to attend this gathering, making it significant and historic to have so much focus on this issue.  The Climate Summit prompted activists to put together a People’s Climate March on Sunday calling for action by the assembled world leaders.  Hundreds of thousands of people reportedly joined the march in New York — creating media and popular momentum– and demonstrations also occurred in cities around the world.

This focus on climate change has come to be known as Climate Week in New York City.  One of the most notable features of it is the role that businesses are playing in promoting private sector innovation for clean energy solutions, accounting for their climate-related activities, and even advocating for clearer governmental climate emissions policies.  The week is filled with dozens of meetings and forums featuring such business approaches.  Today, for example, Apple’s CEO Tim Cook will be joining Climate Week opening day events to discuss his company’s approach, and dozens of CEOs will be attending a Private Sector Forum tomorrow at the UN.  These meetings include financial firms and investors, as well as greenhouse gas emitters.  The Carbon Disclosure Project (CDP) will be at the New York Stock Exchange on Tuesday to release its annual survey of company reporting on carbon emissions, showing that some 70% of the S&P 500 companies voluntarily report on their carbon emissions.  Several major companies are expected to announce commitments to power 100% of their operations from renewable energy.

The business discussions in New York will increasingly center on a call for companies to put an internal price on carbon, as a complement to efforts to have governments establish regulatory mechanisms — such as emissions limits or trading schemes — that likewise impose such a price.  A carbon price is believed to sharpen the business focus on climate change risks, costs and opportunities.  The UN Global Compact and the World Bank are promoting leadership criteria for companies based on such reporting.  Indeed, a just released report  from the Carbon Disclosure Project (CDP) shows that some 150 companies have developed internal carbon pricing schemes.  It would not be surprising for calls for company pricing policies to increasingly appear in future shareholder resolutions.

This increasing private sector focus complements the accelerating pace of the official UN negotiations.  Interestingly, the Climate Summit is merely an effort by the Secretary General to enhance the focus on the climate treaty negotiations, which are happening elsewhere.  The next step is the annual meeting of the parties of the UN Framework Convention on Climate Change in Lima, Peru in early December to continue with drafting a framework.  Countries will then submit emissions reduction commitments in the Spring, with an effort  to reach a global agreement at the Paris meeting of the parties in December 2015.  Yesterday, the Major Economies Forum of the largest nations met to tackle these issues and discuss next steps to accomplish such an agreement.  Several observers see this meeting as a demonstration of the increasing importance of this issue, as for the first time that meeting consisted of country Foreign Ministers (Secretary of State Kerry attended) rather than simply energy or environmental officials.  Issues around addressing the growing emissions from rapidly developing economies, such as China and India — which currently sit outside of the existing UN framework — remain central to the ultimate success of this endeavor.

Key to the United States’ position are the significant emissions reductions that would be derived from the Environmental Protection Agency’s recently proposed rules for existing power plants. They are a central piece in fulfilling the President’s international pledge in 2009 that the United States would reduce its carbon emissions by 17% by the year 2020.  The President’s speech this week will be important in setting a trajectory for how much further the United States may be willing to go after 2020.

The UN’s chief climate change official, Christian Figueres, speaking at a small gathering yesterday, regards the week’s activities as an indication that the climate issue may be reaching a tipping point.  She characterizes the public demonstrations as a statement that the nations of the world “must” address climate change, the business actions as a demonstration that governments “can” address climate change, and believes that governmental leaders are now poised to assert that they “will” address it.  While the outcomes may not be fully settled for some time, companies can expect to see a renewed public focus on these issues and will likely find that they present a range of increasing risks and opportunities.

ARTICLE BY

Gary S. Guzy
OF
Covington & Burling LLP
© 2014 Covington & Burling LLP

Kickback-Tainted Medicare/Medicaid Claims for Reimbursement Actionable Under FCA, New York Federal Judge Holds

tz logo 2

The U.S. District Court for the Southern District of New York (“SDNY”) recently issued an opinion making clear that liability now arises under theFalse Claims Act (“FCA”) whenever claims for reimbursement of prescription drugs are submitted under Medicare Part B, Medicare Part D, or state Medicaid programs in connection with which a provider has received a kickback (referred to herein as a kickback-tainted claim).  The SDNY’s decision was based on an interpretation of an amendment to the Anti-Kickback Statute made by the Patient Protection and Affordable Care Act (“PPACA”) in 2010, which implicates claims arising under the False Claims Act (“FCA”).

The FCA allows a private citizen whistleblower (referred to as a relator) with knowledge of fraud against the federal government to file a qui tam lawsuit on behalf of himself and the United States.  Because the FCA provides for treble damages and significant civil penalties, as well as attorneys’ fees and costs, recoveries are often in the multi millions of dollars, providing a strong deterrent to companies and individuals against committing fraud on the government.  In addition, whistleblowers are entitled to an award of between 15% and 30% of any amount recovered, providing an equally strong incentive for those with knowledge of such fraud to come forward.  Health care fraud is particularly rampant, having given rise to over 70 percent of all FCA recoveries over the past decade.

U.S. ex rel. Kester v. Novartis, involved a common form of health care fraud involving kickbacks, where monetary payments or other financial incentives are unlawfully provided to doctors, hospitals, or pharmacies in exchange for referrals or for the prescription of pharmaceutical drugs or supplies.  Specifically, in this case, the government alleged that Novartis had paid kickbacks to certain pharmacies for promoting two Novartis pharmaceuticals (Myfortic and Exjade) in violation of the Anti-Kickback Statute (“AKS”), which prohibits pharmacies from accepting kickbacks in exchange for purchasing or recommending a drug covered by a federal health care program, such as Medicare and Medicaid.

In 2010, the PPACA amended the AKS with the intention of assigning liability under the FCA for violations of the kickback statute.  The FCA prohibits making a fraudulent claim for payment to the Government or submitting false information material to such a claim.  The AKS amendment expressly provided that a “claim that includes items or services resulting from a violation of [the AKS] constitutes a false or fraudulent claim for purposes of [the FCA].”  42 U.S.C. § 1320a-7b(g).  Novartis argued, however, that the “resulting from” language in the amendment limited, rather than expanded, the reach of the FCA, asserting that liability could not be established without showing that the claims for reimbursement were actually caused by the receipt of a kickback―”i.e. where a pharmacy convinced a physician . . . to prescribe a drug that he would not have otherwise prescribed, or convinced a patient . . . to order a refill that he would not otherwise have ordered.”  Such a strict “but-for” causation requirement not only would have made it difficult to show liability, it would have significantly reduced any recovery to only those situations where “the decision to provide medical treatment is caused by a kickback scheme.”

The SDNY rejected this unduly narrow interpretation, relying on the legislative history of the PPACA, which it reasoned was aimed at expanding the reach of the FCA, and the Second Circuit’s framework for analyzing false claims set forth in Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001).  In Mikes, the Second Circuit held that a party violates the FCA when it falsely certifies compliance with a statute, regulation, or contract that is a precondition to payment.  Mikes also held that false certifications did not need to take the form of express statements certifying compliance, but rather could be implied when the underlying statute or regulation expressly requires a party to comply in order to be paid.  Under such circumstances, knowingly submitting a noncompliant claim for payment will constitute a violation of the FCA.  To this end, the SDNY held in Novartis that the PPACA expressly made compliance with the AKS a precondition to payment under Federal health care programs.  Consequently, any kickback-tainted claim for reimbursement submitted to the government is a violation of the FCA under this reasoning.  Thus, whereas previously, a whistleblower had to have evidence of an express certification of compliance with the law, now, in order to establish an FCA violation involving kickbacks, a whistleblower need only show that a claim for reimbursement was submitted to the Government in connection with which kickbacks were received.

ARTICLE BY

Anna C. Haac
 
OF 
Tycko & Zavareei LLP

New York Proposes First State Bitcoin Regulations

Proskauer Law firm

One might have thought the biggest news in the digital currency world lately was Dell announcing that it was now accepting bitcoin. However, after a series of highly-publicized hearings in January, New York State rolled out its proposed regulations surrounding bitcoin and virtual currency – the first state in the nation to propose licensing requirements for virtual currency businesses.

 

The July 23rd New York State Register includes a Notice of Proposed Rule Making from the New York State Department of Financial Services (the “NYSDFS”) regarding the regulation of virtual currency (“Regulation of the Conduct of Virtual Currency Businesses,” No. DFS-29-14-00015-P). The proposed rule calls for the creation of the “bitlicense” which the NYSDFS has hinted at in the past. The state agency goals are two-fold: to protect New York consumers and users and ensure the safety and soundness of New York licensed providers of virtual currency products and services. Virtual currency is still a nascent industry that is generally unregulated outside of federal anti-money laundering regulations, and while anti-establishment bitcoin pioneers may revel in the “wild west” atmosphere of the digital currency, the NYSDFS feels that their proposed regulations will protect consumers from undue risk, encourage prudent practices for those engaged in virtual currency business activity and foster the growth of the New York financial sector.

 

The Notice, which refers to the full text of the proposed rule originally made available by NYSDFS on July 17th, marks the beginning of a 45-day window for public comment on the proposed rule. Interestingly, the NYSDFS concurrently released a copy of the proposed regulations on the social news site Reddit to elicit debate (note, Ben Lawsky, Superintendent of Financial Services at the NYSDFS, participated in a Reddit AMA (“Ask Me Anything”) session in February as the agency was developing the rules).

 

The proposed rule appears to be drafted to carefully exclude merchants and bitcoin miners from the scope of the licensing requirement, but include exchanges, digital wallet services, merchant service providers and others in the virtual currency ecosystem. It imposes many of the same types of requirements that we already have in the area of money transmission and clearing house services, including capital requirements, anti-money laundering safeguards, and “know your customer” type issues. It also includes requirements with respect to business continuity and cyber security issues.

 

This alert will outline some of the major elements of the “bitlicense” regulations.

 

Who’s Covered?

 

Under the proposed regulations, “Virtual Currency Business Activity” means any one of the following activities involving New York or a New York resident:

 

(1) receiving Virtual Currency for transmission or transmitting the same;

(2) securing, storing, holding, or maintaining custody or control of Virtual Currency on behalf of others;

(3) buying and selling Virtual Currency as a customer business;

(4) performing retail conversion services, including the conversion or exchange of Fiat Currency or other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency; or

(5) controlling, administering, or issuing a Virtual Currency.

 

Such “virtual currency businesses” would have to obtain a license from the agency before engaging in any such business activity, though persons chartered under the New York Banking Law to conduct exchange services and are approved by the NYSDFS to engage in virtual currency business activity would be exempt. As previously mentioned, the proposed rules seemingly excludes consumers who buy goods and services with digital currency, merchants who accept digital currency and bitcoin miners from the scope of the licensing requirement, but explicitly include digital currency exchanges, digital wallet apps and services, merchant service providers, virtual currency issuers,  and other similarly situated businesses.  Specially, the agency is not seeking to regulate virtual currency used solely on online gaming platforms or digital units used exclusively for customer affinity or rewards program, but cannot be converted into fiat currency.

 

Other Important Requirements

 

  • Application Details:  Applicants would have to submit financial, insurance and banking particulars; organization charts and background reports for the principal officers and stockholders (along with fingerprints for officers, principals and employees); and an explanation of the methods used to calculate the value of virtual currency in fiat currency, among other things. Upon filing of an application, the agency will investigate the financial condition and responsibility of the applicant before issuing the bitlicense, and may revoke the license on sufficient grounds. Moreover, if the licensee wants to make a “material change” to an existing product or service, it would need the NYSDFS’s prior approval; similar approval would be required in the event of any changes of control or mergers and acquisitions.
  • Compliance: Applicants would have to comply with all federal and state laws and regulations, appoint a compliance officer to monitor activity within the business, and maintain written compliance policies relating to anti-fraud, anti-money laundering, cybersecurity, and privacy and data security. In addition, virtual currency businesses would have to submit quarterly financial statements and audited annual financial statements to the NYSDFS.
  • Capital Requirements: The proposed regulations do not outline specific capital requirements. Rather, the text suggests that licensee shall maintain levels of capital as the NYSDFS determines is sufficient to ensure financial stability, taking into account basic financial barometers. The proposed regulations also would require licensees to only invest earnings in high-quality investments with maturities of up to one year, such as certificates of deposit regulated under U.S. law, money market funds, state or municipal bonds, or U.S. Gov’t securities.
  • Anti-Money Laundering: Each licensee would be expected to enforce an anti-money laundering program with adequate internal controls and training, as well as a written policy reviewed and approved by the licensee’s board. Under the regulations, virtual currency records would have to include records containing the identity and physical addresses of the parties involved, the amount of the transaction, the method of payment, the date(s) on which the transaction was initiated and completed, a description of the transaction, and special reports of any aggregate daily transactions that exceed $10,000 or otherwise involve suspicious activity. Covered businesses would also have to conduct adequate due diligence on new customers, with enhanced scrutiny for foreign entities. Such regulations are presumably similar to the March 2013 Financial Crimes Enforcement Network (“FinCEN”) Guidance (FIN-2013-G001), which clarified that federal anti-money laundering regulations covering  “money services businesses” also applied to virtual currency exchanges.
  • Examinations: Each licensee would have to permit the NYSDFS to examine the licensee’s accounting and operations at least once every two years to determine financial stability, business soundness and compliance.
  • Cybersecurity: Under the bitlicense regulations, each licensee would have to establish an effective cybersecurity program for their electronic systems and maintain a written cybersecurity policy that covers data and network security, data governance, access controls, business continuity and disaster recovery, customer privacy, vendor management, and incident response, among others. Licensees would also have to appoint a Chief Information Security Officer responsible for implementing the cybersecurity program and also submit an annual report assessing the cybersecurity program.
  • Protection of Customer Assets: The regulations would require each licensee to maintain a bond or trust account for the benefit of its customers in an amount acceptable to the NYSDFS, and hold virtual currency of the same type and amount the licensee is storing for a customer. The licensee would be prohibited from selling or encumbering virtual currency assets stored on behalf of a customer.
  • Consumer Protection: The proposed regulations require certain disclosures before a consumer may enter into a transaction, including disclosure of the material risks associated with digital currency (e.g., digital currency is not legal tender, transactions are generally irreversible, values may fluctuate, and cyberattacks are a real concern), the general terms and conditions of conducting business with the licensee, and a detailed receipt following the completion of any transaction.

 

Looking Ahead

 

All entities involved in or planning on being involved in virtual currency-related businesses should study this proposed rule carefully. There is still an opportunity to voice concerns and have the final rule reflect any issues that the NYSDFS views as important (for example, some commentators have suggested that the regulations should contain exemptions for smaller digital currency start-ups that handle small transactions, while the Bitcoin Foundation suggests that the comment period should be open for a longer period of time to allow the industry to digest the proposal). It is likely that whatever is enacted in New York will be used as a model in other states that wish to enact a similar virtual currency licensing structure. Moreover, the regulations, as they stand today, require that any entity engaged in a “virtual currency business activity” would have to apply for a license within 45 days of the effective date of the regulations or risk being deemed to be conducting an unlicensed virtual currency business, further suggesting the importance in getting up to speed with the emerging digital currency regulatory environment in New York. It remains to be seen how onerous the final regulations and compliance obligations will be to both established digital currency service providers and start-ups alike.

Article By:

Robert. J Cleary
James P Gerkis
Martin T Hamilton
Arnold S Jacobs
Jeffrey D Neuburger
Dietrich L Snell
Of:
Proskauer Rose LLP

 

New York Nonprofit Revitalization Act Rollout Challenges

Proskauer

As the July 1, 2014 compliance date of the New York Nonprofit Revitalization Act of 2013 (the “Revitalization Act”) quickly approaches, many charities operating in New York are confronting some difficult rollout challenges. While parts of the Revitalization Act are clear and welcomed (such as new rules that broaden the use of electronic communications and eliminate the need for supermajority board approvals of routine property transactions), other new requirements are puzzling to many of these charities’ officers and directors. Indeed, as we counsel our clients, we are finding that certain new Revitalization Act rules that concern board operations are causing some charities, in particular family foundations and corporate foundations, to wonder whether operating through corporations formed in New York is desirable.

The charities that seem to be facing the hardest issues are foundations with small boards, and with directors that either directly and appropriately exert substantial influence over foundation operations (such as in a family foundation), or are employed by the businesses that have founded and fund these charities to do their good works.

We are finding that many, but not all, of the requirements causing concern are tied to vague drafting in the Revitalization Act. The good news is that we have also identified what we believe are reasonable interpretations of the law that align with workable solutions for many clients.

This client alert notes just a few of the more pressing Revitalization Act issues, as well as relevant potential solutions, as they appear to us today. We will be highlighting other aspects of the Revitalization Act rollout over the coming year. We stress that the New York State Attorney General’s Charities Bureau may issue clarifying Revitalization Act guidance, and it is also possible that follow-up legislation may address some of these issues. Importantly, it is possible that this guidance or future legislation will not support our interpretations, although we hope that it does. Stay tuned.

Three Independent Directors

The Revitalization Act will require many charities to identify at least three individuals that satisfy detailed requirements of “independence” to serve as directors and oversee specified audit and financial reporting activities. (Three are needed because that is the fewest number of directors required by New York law to perform delegated board-level functions.) For many family foundations, corporate foundations, and labor/management charities – with small boards that are typically composed of individuals tied in some way to the charity or related entities – this requirement has created concern. This concern may be heightened when membership on the board has been finely balanced to achieve acceptable approaches to shared governance.

Most important for these charities to keep in mind is that the requirement is limited to charities that raise or “solicit” funding from the general public. However, some of these charities, in their annual charities filing with the New York Attorney General, may have been filing as soliciting charities even though they do not actually solicit funding. We suggest that such charities consider amending their filing status and we urge that any change in filing status in response to the Revitalization Act be made in consultation with corporate and tax counsel, closely assessing individualized factors and risks. For example, part of the analysis may be to examine whether the charity has been filing its annual Form 990 with the Internal Revenue Service (“IRS”) as a “public charity” (based on “public support” concepts of the IRS that differ from the New York concepts of “solicitation”). While we do not believe that the New York charitable solicitation concepts match the IRS concepts, tailored assessments should be made with both New York charitable solicitation laws and U.S. federal tax laws in mind.

For those charities that do solicit within the meaning of New York law, and whose small boards are populated by individuals employed by related entities, it will be worthwhile to take a hard look, again guided by counsel, at the kind of control exerted by a charity’s affiliated corporate entities over the charity. Under the Revitalization Act, whether that employment disqualifies a director as “independent” will depend on whether the particular corporate or other entity that employs the director “controls” or is “under common control with” the charity. Notably, the Revitalization Act does not define “control.”

Conflicts Policy Quagmire

Although the Revitalization Act is clear that the requirement for independent-director oversight of auditing and financial matters is limited to “soliciting” charities, the law is less clear about whether independent director oversight also applies to the law’s requirements on conflicts policies.

Essentially, the Revitalization Act codifies the widespread practice already adopted by many charities – many motivated by the IRS Form 990 conflicts policy checkbox – to have a written conflicts policy. It also requires oversight of adoption, implementation, and compliance with the conflicts policy by the Board or the audit committee. Certain provisions of the Revitalization Act can be read as requiring these oversight functions to be handled by independent directors only. While our interpretation is not free from doubt, we believe that to the extent there is an obligation to have independent directors oversee conflicts policy administration, a close and reasonable reading of the Revitalization Act supports the interpretation that such requirement is also confined to soliciting charities. If not, many private foundations will be forced to make drastic board changes for conflicts policy oversight, while permitted to use directors that do not satisfy independence criteria for what is generally viewed as the critical audit oversight function – a seemingly absurd result.

Charities with conflicts policies based on the IRS form are probably already aware that they will need to amend those policies to satisfy Revitalization Act requirements, since the IRS form does not track all of the components of a conflicts policy required by the Revitalization Act. As these policies are drafted, special attention should be paid to the annual conflicts questionnaire required by the Revitalization Act. Many charities already distribute an IRS Form 990 annual questionnaire to directors, officers and key employees. Revitalization Act questionnaires will now be covering some, but not all, of the same territory. To avoid bombarding individuals with duplicative annual forms, consideration should be given as to whether to use a single questionnaire that reasonably covers both IRS and Revitalization Act requirements.

Approval of Director, Officer, and Key Employee Compensation

The Revitalization Act imposes significant new requirements concerning related-party transactions. Among other things, the Revitalization Act imposes a new requirement to “contemporaneously document in writing the basis for the board or authorized committee’s approval” of a related party transaction, “including its consideration of any alternative transactions.” The Revitalization Act also provides the Attorney General with enhanced enforcement authority to void, rescind, seek restitution, and remove directors in connection with a transaction that is not properly approved or that was not reasonable or in the best interests of the corporation at the time the transaction was approved.

Because the Revitalization Act broadly defines a “related party transaction” as “any transaction, agreement, or any other arrangement in which a related party [including a director, officer or key employee] of the corporation has a financial interest and in which the corporation or any affiliate of the corporation is a participant,” there is some question as to whether compensation arrangements with directors, officers, and key employees are related party transactions. While the matter is not free from doubt, we believe that there is a reasonable basis for considering these compensation arrangements to be regulated in a manner distinct from related party transactions under the Revitalization Act. Clarification on this issue, however, would be helpful.

In addition, the Revitalization Act appears to define all directors as “related parties,” and prohibit all related parties from participating in deliberations and voting pertaining to related party transactions, without specifically distinguishing between directors who have an interest in the particular transaction and those who do not. Guidance clarifying that the Revitalization Act will not be construed or enforced in such an impracticable manner would be helpful.

Also, certain ambiguous language in the Revitalization Act can be read as expressly prohibiting any director from being present at or participating in any board deliberations or vote concerning director compensation, while apparently requiring director approval of the compensation. While we believe that such a reading of the Revitalization Act would be unreasonable and contrary to principles of statutory construction, clarifying guidance would help avoid uncertainty on an important governance issue. In the interim, boards may wish to approve director compensation arrangements prior to July 1.

Extraterritorial Application of Revitalization Act

Finally, some commentators have raised concerns that certain provisions of the Revitalization Act relating to board composition and operation may be applicable to charitable organizations formed outside of New York, such as Delaware non-stock corporations. We have not found this to be a reasonable interpretation of the Revitalization Act. Again, however, clarifying guidance would be welcome.

Article By:

Jacob I. Friedman
Edward S. Kornreich
Amanda H Nussbaum
Richard J Zall
Herschel Goldfield
Ellen H Moskowitz
Of:
Proskauer Rose LLP

New York Federal Judge Finally Tosses Aside Limits on Contributions to New York Super PACs (Political Action Committees)

COV_cmyk_C

Super PACs in the Empire State and in the Big Apple are about to become more “super.”  On April 24th, a New York federal court finally (albeit begrudgingly) struck down a state law that effectively capped contributions to state Super PACs at no more than $150,000.  Prior to today’s ruling, New York had been one of a few holdout states refusing to recognize the application of Citizens United to state laws limiting contributions to independent political groups.  Indeed, the New York Attorney General defended the limit even after the Second Circuit concluded that it was likely unconstitutional as applied to the Super PAC that challenged it.  It is not clear whether the state will appeal the decision and face a near-certain loss.  If the decision stands—as we expect it will—donors may now contribute unlimited sums to independent political committees that run ads for or against New York state or city candidates.

Article By:

Zachary G. Parks
Of: 
Covington & Burling LLP