The Streamlined Sales Tax Governing Board, as well as its State and Local Advisory Council and Business Advisory Council, assembled in Minneapolis this week to discuss a number of policy matters related to Streamlined Sales and Use Tax Agreement. The overarching theme, however, was the continued viability of the Agreement in light of the Marketplace Fairness Act as it moves through Congress. This Legal Alert summarizes the more notable issues addressed in Minneapolis, particularly how the SSTGB plans to hit “refresh” on the Agreement if the Marketplace Fairness Act is signed into law.
California Court of Appeal Lends Judicial Support for Declining Term of Possessory Interests and for Authoritativeness of Assessors' Handbooks
By Douglas Mo
The California Court of Appeal ruled that the County of Los Angeles illegally assessed the possessory interest of the lessee of a building owned by the California State Teachers’ Retirement System. The possessory interest was valued pursuant to a special statute that only applied to property owned by a state public retirement system, which allowed the inclusion of the value of the tax-exempt reversion in the value of the possessory interest. In reversing the trial court’s decision, the Court of Appeal stated that the Los Angeles County Assessor should have declined the value of the possessory interest with each successive assessment to recognize the declining remaining term of the possessory interest. This is a significant and beneficial point to taxpayers owning possessory interests in California, because a declining term causes the value of the possessory interest to decrease as a function of time. Further, the Court of Appeal cited language in the California State Board of Equalization Handbook (AH 510) to support its decision. This decision is the second in the last four months (the other being Sky River LLC v. Kern County, 214 Cal.App. 4th 720 (2013)) to give judicial credence to the Assessors’ Handbooks. When there is helpful language in Assessors’ Handbooks to support taxpayer positions, Assessors can be inclined to ignore the guidance contained in these Handbooks. California State Teachers’ Retirement System v. County of Los Angeles, B225245, Court of Appeal, Second Appellate District (May 7, 2013).
"Tut-Tut," Long Beach: California Supreme Court Permits Taxpayers to File Class Action Suit to Recover Telephone User Taxes
The California Supreme Court held that taxpayers may file a class action lawsuit to claim a refund of local telephone user taxes (TUT) paid to the City of Long Beach. The taxpayer class alleged that the City unlawfully collected the TUT on services that were determined to be nontaxable under the Federal Excise Tax (and therefore were not subject to the TUT), and that the City had not properly obtained voter approval to amend its TUT ordinance as required by Proposition 218. The City filed a demurrer to dismiss the taxpayers’ complaint, arguing primarily that Long Beach’s municipal code expressly disallows class claims for refund. The City appealed the Court of Appeals’ denial of the demurrer, arguing that this case was distinguishable from the California Supreme Court’s recent decision in Ardon v. City of Los Angeles, 52 Cal.4th 241 (2011). Ardon held that the Government Claims Act permits class action claims for refund against a local government entity “in the absence of a specific tax refund procedure set forth in an applicable governing claims statute.” The City argued that the Long Beach municipal code constituted a “statute” for this purpose. The California Supreme Court rejected this argument, ruling the taxpayers could file a class action suit against the City, even though the local ordinance directly prohibits such claims. McWilliams v. City of Long Beach, Case No. S202037 (Ca. 2013).
Sutherland SALT was proud to be a sponsor of the City Year Greater Philadelphia's 2013 Idealist of the Year Tribute Dinner. As tutors and mentors, City Year Greater Philadelphia corps members provide critically needed services to some of Philadelphia’s most underserved children and youth.
Sutherland client Comcast is a National Partner to City Year. Sutherland SALT attorney Scott Booth (2nd from right) was joined at the event by (from left to right) Denise Dauchess, Jen Galbreath, Kristin Norman, Jane Lee, Jason Ruschak and Sarah Wellings from Comcast, as well as a current City Year corps member.
The New York State Department of Taxation and Finance has determined that a financial services firm is not subject to the New York State sales and use tax because the product being sold by the taxpayer constitutes a single, integrated, nontaxable service. The taxpayer provides its clients with investment management and risk management services and sells a product that consists of a comprehensive enterprise portfolio management support service for financial institutions and investment managers. The product includes numerous components, including a customized platform to manage information, customized investment analysis services, data control and operations services, customized trade management workflow services, compliance evaluation and reporting services, daily support, and a desktop analytical calculator. In determining the taxability of the product, the Department considered whether it represents a transaction that bundles taxable and nontaxable components for a single price or a “single integrated product.” The Department noted that, when considered separately, some components of the taxpayer’s product seem to qualify as taxable (e.g., the web interface for the product is built on taxable prewritten software). Ultimately, however, the Department determined that the product was a single integrated product—specifically a nontaxable operations and management contract service for portfolio investment managers—because: (i) the product does not come in multiple variants; (ii) customers may use different components of the product in different proportions without incurring extra charges; and (iii) the different components of the product are highly synergistic. Although nuanced, the Department’s opinion follows prior guidance and case law that distinguishes between bundled transactions and single integrated products. The opinion also provides a good analysis of the factors that taxpayers may want to consider in determining whether a particular transaction is subject to sales and use tax. N.Y. Advisory Opinion TSB-A-13(12)S (Apr. 23, 2013).
- California Court of Appeal: No Man May Profit From His Own Wrongdoing in a Court of Justice
- The (True) Object of My Affection: A Nontaxable Stock Screening Service
- Alternate Universe in Colorado: Financial Institution Allowed to Use Alternative Apportionment
- SALT Pet(s) of the Month: Max and Elphie
- Double-Dipping in Delaware: Delaware Assesses Unclaimed Property Liability for Years Covered by Voluntary Disclosure Agreement
- Truckin' It in Florida: Delivery in Company-Owned Vehicles Creates Sales Tax Nexus in Florida
- Class Dismissed! Georgia Court of Appeals Dismisses Sales Tax Refund Action Against Utility Company
- Throw It Back: Indiana Uses P.L. 86-272 to Throwback Foreign Sales
- Corporate Partner Loses Gamble on Indiana Deduction for Partnership Income
- In State Equal Protection Jurisprudence, the Hits Just Keep on Coming
- Bay State Snafu: Trust Me, I'm a Wicked Smaht Financial Institution
- Brr! Bundle Up to Collect Sales Tax on Entire Transaction in Massachusetts
- Tried and "True Object" Test: Michigan Court of Appeals Finds Mass Document Printing Not a Service
- To Be or Not to Be Investment Income? New York Division of Tax Appeals Rules on Nature of Dividend Income Used to Fund Equity Compensation Plan
- "Inspirational Shopping" Does Not Create Income Tax Nexus in New York
- Case Foreclosed: Tax Injunction Act Bars Federal Court Challenge to Tax Foreclosure Proceeding
The Massachusetts Appellate Tax Board ruled that an out-of-state corporation’s subsidiary qualified as a financial institution by virtue of the lending activities undertaken by the trusts in which it held beneficial ownership and from which the subsidiary derived more than 50% of its gross income. Under Massachusetts’ statutory “catchall” provision (Mass. G.L. c. 63, § 1(e)), a corporation “in substantial competition with financial institutions. . .[that] derives more than 50 per cent of its gross income. . .from lending activities” qualifies as a financial institution. To support the subsidiary’s claim that it was properly characterized as a financial institution, it established to the Board’s satisfaction that the trusts owned student loan portfolios that had been securitized by its parent and affiliates, and the trusts also engaged in a number of “lending activities” regularly performed by other banks securitizing student loans, within the meaning of the catchall. Further, because the trusts were correctly characterized as partnerships for federal and state purposes, the trusts’ activities were properly attributed to the subsidiary. Therefore, the Board ruled that the subsidiary should be separately taxed as a financial institution because it derived substantially all of its income from the trusts’ lending activities, which were in substantial competition with financial institutions and were attributable to the subsidiary. Based on its ruling, the Board also concluded that the subsidiary was entitled to apportion its income as a financial institution but that all of its property (i.e., the loans) was to be assigned to the subsidiary’s commercial domicile in Massachusetts in the absence of a regular place of business outside of the state. Marblehead Corp. v. Comm’r of Revenue, Dkt. No. C293487 (Mass. App. Tax Bd. Apr. 17, 2013).
Double-Dipping in Delaware: Delaware Assesses Unclaimed Property Liability for Years Covered by Voluntary Disclosure Agreement
On April 17, 2013, Select Medical Corporation (Select Medical) filed suit in federal district court seeking to enjoin Delaware from enforcing an unclaimed property assessment issued for years that had been resolved already through the state’s voluntary disclosure program. In 2006, Select Medical entered into Delaware’s voluntary disclosure program for the years 1997-2001. As part of the voluntary disclosure process, Select Medical escheated approximately $17,000 to Delaware and paid approximately $300,000 in unclaimed property to states other than Delaware. On the same day that Delaware cashed Select Medical’s escheatment check, it notified the company that it was being placed under audit. Using a third-party auditor, Delaware demanded payment of $297,436 for the period 1997-2001 based on an estimate that looked to the amount of property owed to other states from 2002-2008. Unable to resolve the matter with the state, Select Medical commenced a lawsuit and sought injunctive relief against the demand for payment, alleging that Delaware exceeded its authority under state law by estimating an unclaimed property liability through extrapolation of amounts paid to other states for a different period, even though Select Medical had actual records from which any liability could be determined and the owners of any unclaimed property identified. Select Medical also alleged a variety of federal common law and constitutional violations. Given Delaware’s position as one of the most aggressive states in enforcing unclaimed property law, the trajectory of this litigation will be important, especially given the recent trend toward more aggressive unclaimed property enforcement in all states. Taxpayers who have previously entered into voluntary disclosure agreements or who are contemplating doing so should pay close attention to this case as it may frame new powers for the states with respect to escheatment. Select Medical Corp. v. Del. Sec’y of Finance, Del. Dir. Of Rev., & Del. State Escheator, Case No. 1:13-cv-00694-UNA (D. Del. Apr. 17, 2013).
In a Letter of Findings, the Indiana Department of Revenue disallowed a corporate partner’s attempt to deduct flow-through income from a limited liability company as “foreign source dividends and other adjustments” on its Indiana corporate income tax return. Indiana requires corporate partners to report their share of partnership income, whether distributed or undistributed, on their income tax returns, with certain adjustments for intercompany and related party transactions. If a corporate partner is unitary with a partnership, only nonbusiness income can be removed from a corporate partner’s apportionable base. The taxpayer, an Indiana corporation, held a majority interest in an Indiana limited liability company (LLC) that elected to be treated as a partnership for U.S. federal income tax purposes, and which owned an Indiana LLC that was a disregarded entity for U.S. federal income tax purposes and conducted a gaming business in Indiana. The taxpayer argued that it was not domiciled in Indiana and thus, under Riverboat Development, Inc. v. Department of State Revenue, 881 N.E.2d 107 (Ind. Tax Ct. 2008), the taxpayer did not have to report or pay tax on the flow-through income. The Department disagreed, not only finding the taxpayer to be incorporated in and operating in Indiana, but also that Riverboat Development was distinguishable because that case involved a non-resident shareholder’s receipts of “intangibles,” and no “intangibles” were at issue in this case. Finally, the Department found that the taxpayer and the LLCs were unitary because the taxpayer earned its income solely from business in Indiana as the majority member of the LLCs and from managing the gaming LLC’s daily business operations. Consequently, the Department determined that the taxpayer’s flow-through income from the LLCs was nondeductible business income that was attributable to Indiana and subject to Indiana corporate income tax. Ind. Dep’t of State Rev., Ltr. Of Findings No. 02-20100152 (Mar. 1, 2013).