The November 26, 2018, release by the Internal Revenue Service of proposed regulations (REG-106089-18) related to IRC § 163(j) has provided some clarity for federal income taxpayers. But the regulations’ treatment of federal consolidated groups gives rise to complexities and questions as to how the limitation will operate at the state level.
This Bottom Line videocast includes:

  • an overview of IRC § 163(j)
  • key elements of the proposed regulations
  • important SALT considerations

 

The New Jersey Tax Court rejected the taxpayer’s argument that the partnership filing fee, which requires a partnership with New Jersey source income to pay a per-partner fee of $150 (capped at $250,000), violated the Commerce Clause. The Tax Court held that the filing fee is not facially discriminatory because all partnerships must pay the fee regardless of the location of the partnership or partner, or the nature of the partnership’s business, provided the partnership earns New Jersey source income. The Tax Court also held that the plaintiff failed to prove that the filing fee, in practical effect, discriminates against interstate commerce. The Tax Court ruled that the filing fee did not “implicate or violate” the Commerce Clause because the fee is imposed to cover the government’s cost of processing and reviewing the New Jersey returns of partnerships and their partners, which, according to the Tax Court, is a purely intrastate activity.


Targa Resources Partners, L.P. v. Director, Division of Taxation, 010749-2015 (N.J. Tax 2018)

Ferrellgas Partners, L.P. v. Director, Division of Taxation, 007051-2014 (N.J. Tax 2018)

The November 26, 2018, release by the Internal Revenue Service of proposed regulations (REG-106089-18) related to IRC § 163(j) has provided some clarity for federal income taxpayers. But the regulations’ treatment of federal consolidated groups gives rise to complexities and questions as to how the limitation will operate at the state level. In this Bottom Line videocast Eversheds Sutherland attorneys Todd Betor and Elizabeth Cha discuss:

  • an overview of IRC § 163(j)
  • key elements of the proposed regulations
  • important SALT considerations

The Texas Comptroller ruled that the purchase of a battery system did not qualify for the manufacturing exemption from Texas sales and use taxes because it was used to store electricity, not manufacture it. The taxpayer operated a wind farm and began a project to participate in the Electric Reliability Council of Texas’ Fast-Responding Regulation Service (FRRS). Each participant in the FRRS was required to make energy available on demand. To do this, the taxpayer needed a battery system, which could store and maintain the electricity so it would be available and ready for distribution.

The taxpayer argued that its purchase of the battery system qualified for the manufacturing exemption – which is available for items directly used or consumed during manufacturing of tangible personal property (such as electricity) if the use or consumption is necessary for the manufacturing operation and makes or causes a chemical or physical change to the property being manufactured. The taxpayer argued that the exemption applied because the energy underwent a chemical change when the battery converted the direct current energy from the wind farm from electrical energy to chemical energy and, upon discharge, converted the chemical energy to direct current electrical energy. However, the Comptroller disagreed and ruled that the chemical change was done for storing manufactured electricity, not to manufacture electricity, and the manufacturing exemption specifically excludes property used to maintain or store tangible personal property.


Texas Private Letter Ruling No. 20180110142309 (Aug. 14, 2018).

On September 26, 2018, the Illinois Department of Revenue issued a Private Letter Ruling confirming that certain electronic signatures satisfied the first prong of the software license sales tax exemption test. In Illinois, a license of software is not a taxable retail sale if a five-part test is satisfied. The first prong asks whether the license is evidenced by a written agreement signed by the licensor and the customer. The Department had previously concluded that a license agreement in which the customer electronically accepts the terms by clicking “I agree” does not comply with the requirement. Here, the Department concluded that four methods of executing the Order Form satisfied the written agreement prong: (1) physically signing the Order Form; (2) physically signing the Order Form and then digitizing the Order Form into a PDF file; (3) using DocuSign to sign the Order Form; and (4) digitally signing the Order Form by pasting a digital image of a signature onto the PDF Order Form file and then saving the file with the signature image embedded into the Order Form. However, the Department did not have sufficient information to determine whether the use of a competing software product satisfied the prong. Additionally, the Department concluded that it would incorporate the Terms and Conditions Agreement into the Order Form in order to constitute a written agreement.


Illinois Private Letter Ruling ST 18-0010-PLR, Illinois Department of Revenue (Sept. 26, 2018).

Meet Stella, the athletic yet snuggly cat that entertains the family of Open Weaver Banks, tax counsel (SALT) in Eversheds Sutherland’s New York office. Her name was written in the stars, or rather the cement, as one day the Banks spied the name scratched in a freshly poured sidewalk while discussing what to name the newly adopted 6-month-old kitten. Stella quickly settled in to family life and, ever since, this gray tuxedo has skillfully divided her time between sleeping on her humans and playing.

If given a piece of dry pasta (preferably rotini), Stella will practice soccer with it on the kitchen floor, demonstrating dexterous footwork. Using both paws, she will dribble the pasta across the room until inevitably scoring a goal (losing it under the refrigerator). Not just a soccer fan, Stella also enjoys watching basketball and football on television, preferring to sit very close to the screen to better “catch” any ball she sees. Stella expects to chase the Banks family through the house daily as they drag a bird on a string. In addition to her athletic pursuits, Stella is a champion cuddler and makes it difficult for Open to login from home.

As a reward for her efforts, Stella likes the extra water from a tuna fish can to be left in her dish. As Open says, “She rolls and fetches toys. Really, who needs a dog?”*

 

*Eversheds Sutherland has no preference on pet species.

 

Pacific Northwest Regional State Tax Seminar
Seattle, Washington
December 6, 2018

Eversheds Sutherland is pleased to be a co-sponsor of the Council On State Taxation’s Pacific Northwest Regional State Tax Seminar in Seattle, Washington, on December 6, 2018. For more information and to register, please visit https://cost.org/events/COST-Events/seattle-wa—pacific-northwest-regional-state-tax-seminar/.

Eversheds Sutherland SALT lawyers are presenting on several topics including:

The Texas Comptroller of Public Accounts recently ruled that the physical presence nexus standard continues to apply for the Texas Franchise Tax, even after South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018). As a result, a California company whose only contacts with Texas were sales of digital products, software and e-commerce transaction processing and subscription management services to third parties did not have franchise tax nexus with the state. In the Comptroller’s view, retaining ongoing rights in software used in Texas, by itself, is not sufficient to create physical presence in the state. The Comptroller observed that although Texas has not yet moved away from the physical presence requirement, the agency will give “ample notice through various means” of any change to the current requirement.


Texas Private Letter Ruling No. No. 201809005L (09/07/2018).

On November 7, 2018, the Multistate Tax Commission’s Uniformity Committee held its fall meeting in Orlando, Florida, where it considered several important topics. Key developments from the Uniformity Committee meeting, include:

• The Committee’s plan to explore updating P.L. 86-272 guidance;
• The progress of the Finnigan Combined Filing Work Group;
• A white paper addressing marketplace facilitator legislation; and
• The legal limitations on states’ abilities to collect tax debts from non-US sellers.

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