Category: Blue Sky, Compliance

The Dilemma (or, where to register the sale of funds for blue sky reporting purposes)


At the 2017 Blue Sky Roundtable, hosted April 25, 2017, we heard differing schools of thought about where a fund sale should be registered for blue sky reporting purposes.

One speaker suggested the rule should apply to blue sky sales. The concept is that online sales are not subject to state tax since the business MUST have a physical presence in the state in order to be taxed.* What this would mean is that funds should provide notice filings for sales in the place where the sale is received; in this case at the transfer agent or sub-transfer agent where the sale is recorded.

Is blue sky really like Or should different rules apply?

Let’s follow that thread. The premise is that many states, like my home state of Massachusetts, charge sales tax. So, when I order something¬†online my “state of residence” is Massachusetts, but my transaction is received somewhere in the Amazon cloud, ostensibly located in Seattle, Washington.

Apply this logic to blue sky sales. When I place my mutual fund order through my online broker my “state of residence” is Massachusetts, but, my transaction is received by my transfer agent in Kansas City, MO. Should this be recorded as a sale in Massachusetts or Missouri?

See any potential problems?

I do.

Is the transfer agent responsible for collecting revenue based on tax code? Or, is the transfer agent merely charged with maintaining a record of the mutual fund account? If provided mutual fund recordkeeping services, they could not defend the argument that someone in Massachusetts did NOT purchase an item, they could only state that Amazon is not based in Massachusetts and do not need to comply with sales tax provisions.

Blue sky vendors like us are one step further removed in their role managing the notice filing process and remittance of filing fees based on sales volumes in some states. They are not collecting “revenue” based on tax code. Instead, their obligation is to accurately complete the Form NF with the sales data provided to them by the transfer agents and intermediaries.

State law has been slow to adapt to the ever changing mutual fund industry and there is little guidance available to funds around sales reporting. This is why our preferred practice, to help maximize our clients’ regulatory compliance and increase transparency, is to report sales in the shareholders state of residence.

Our annual Blue Sky Roundtable is intended to start dialogue among participants about the complexity of the regulatory environment. In this case, we hit the mark with a provocative discussion about whether or not blue sky and mutual fund recordkeeping have implications for tax reporting. Clearly this is regulatory compliance that feels a lot like taxation or revenue generation – but as the laws are written, we will guide our clients to comply and utilize available exemptions to reduce the expenses.

* originally collected sales tax only from five states as of 2011, but as of April 2017 collects sales taxes from customers in all 45 states that have a state sales tax and in Washington, D.C.

Kevin Caravella

Kevin Caravella

As Vice President, Kevin is responsible for all aspects of Blue Sky Administration including service delivery excellence, relationship management and business development. He has over 26 years of Blue Sky administration experience, including systems and infrastructure development, operations and product distribution. Prior to joining Boston Financial, Kevin served as Vice President in the Asset Servicing Division at Bank of New York. Kevin led the Information Technology and Special Project teams as well as created information technology strategies for numerous product lines associated with state compliance and securities laws. He was also a founding partner at Automated Business Development (ABD) and instrumental in developing the company into a premier software and consulting firm. Kevin holds a Bachelor of Science in Business Administration from Boston University with a concentration in Management Information Systems.

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