Congratulations to Alisa Margolis, Director of AWS Tax at Amazon for serving on the dinner host committee for a successful gala benefiting the Friendship Circle of Washington. The Seattle-based non-profit promotes disability inclusion and friendship through programs that offer much-needed respite and fun for children with special needs and their families. The organization’s 14th Annual Heroes Gala, held March 28, raised over $500,000 to support these activities in the community.  We applaud Alisa, pictured here with Eversheds Sutherland tax partner, Michele Borens, and the Friendship Circle of Washington!

 

The Court of Appeals of Ohio held that a Georgia-based wholesaler of lawn and garden products established nexus and its sales were properly included in the Commercial Activity Tax (CAT) base.

The taxpayer was a wholesaler of garden equipment that did not have property, employees or other presence in Ohio. The Taxpayer’s primary customers were “big-box” retailers that were headquartered outside of Ohio but maintained distribution centers in Ohio and other states. The Taxpayer was not responsible for shipping its sold goods as its customers arranged for shipping. However, the Taxpayer was provided with a bill of lading that indicated the destination of the goods.

The Ohio Department of Revenue assessed the CAT based on the bill of lading information received by the Taxpayer. Where there is the transportation of goods, “the place at which such property is ultimately received after all transportation has been completed shall be considered the place where the purchaser receives the property.” Ohio Rev. Stat. § 5751.033(E). This rule ignores where the title passes or other conditions of sale. The court went on to find that these sales exceeded Ohio’s $500,000 sales nexus threshold and that the Commerce and Due Process Clauses were not offended. Greenscapes Home & Garden Prod., Inc. v. Testa, 2019-Ohio-384 (Ohio Ct. App. 2019).

The North Carolina legislature has introduced S.B. 622, which would make significant changes to a wide range of North Carolina taxes.

Among those changes, the legislation would allow a deduction, to the extent included in federal taxable income, for amounts received from specified economic incentive programs in North Carolina—the Job Maintenance and Capital Development Fund, the Job Development Investment Grant, and the One North Carolina Fund. S.B. 622, § 5.1.(a)-(b). These state programs are discretionary incentives that offer cash grants to businesses to relocate or expand in the state, and are generally awarded through an incentive agreement with the state. The provision under S.B. 622 would apply to amounts received under agreements entered into on or after January 1, 2019, and would be effective for tax years beginning on or after that date.

Notably, the legislation does not appear to decouple from I.R.C. § 118 generally. Under I.R.C. § 118, as amended by the 2017 Tax Cuts and Jobs Act, contributions of money or property from governmental entities generally are now includible in a corporate taxpayer’s federal gross income. See Many State Tax Incentives Are Now Taxable Due to Federal Tax Reform (Jan. 8, 2018). In response, some states—e.g., Georgia and Tennessee—have expressly decoupled from I.R.C. § 118.

On March 26, 2019, the Washington Court of Appeals held that a pharmacy benefit management company’s payments from clients (e.g., health maintenance organizations, health insurers, etc.) for the value of prescription drugs, were subject to the Washington B&O tax. The taxpayer manages the clients’ prescription drug benefit programs and performs activities, including contracting with third-party retail pharmacies to provide prescription drugs to its clients’ members. The taxpayer asserted that the payments were not subject to the B&O tax because they were “pass-through” funds, which merely moved from the clients, through the taxpayer, to the pharmacies. The court concluded that the taxpayer is not a mere pass-through agent. Rather, the taxpayer is solely responsible for payment to the pharmacies for the drugs, assumes the credit risk of its clients’ ability to pay for the drugs and negotiates prices with its clients and the retail pharmacies. Thus, the compensation the taxpayer receives from its clients for the prescription drugs’ value is “an integral part” of its business model. Express Scripts, Inc. v. Washington Dep’t of Revenue, No. 50348-4-II (Wash. Ct. App. Mar. 26, 2019).

The Tennessee Court of Appeals held that a business that sold and installed automotive glass and also made repairs to automotive glass was properly classified as a seller of tangible personal property (glass), and not as a seller of services, for purposes of the Tennessee business tax. The Tennessee Department of Revenue audited the taxpayer’s business tax returns and issued an assessment based on the higher tax rate applicable to sellers of services. The taxpayer paid the assessment under protest and filed a refund claim, which was denied by the Department. The taxpayer then filed a complaint in chancery court, claiming that it should be classified as a seller of glass because most of its income comes from selling glass. Specifically, the taxpayer proffered uncontroverted documentary evidence, supported by the deposition of the taxpayer’s president that showed its gross revenue from glass sales comprised 58.7 percent and 59.4 percent of its sales for the tax years at issue, with the rest of its sales consisting of sales of glass-related products and services. The chancery court ruled in favor of the taxpayer, and the Tennessee Court of Appeals affirmed, noting that for purposes of the Tennessee business tax, a taxpayer’s dominant business activity is the activity that is the major and principal source of its taxable gross sales. Auto Glass Company of Memphis Inc. v. Gerregano, No. W2018-01472-COA-R3-CV (Tenn. Ct. App. Feb. 12, 2019).

The New York Division of Tax Appeals denied a refund claim to a taxpayer that sought to apply the income sourcing rules for registered broker-dealers to accept receipts from its separate investment advisory business. The taxpayer structured its broker-dealer operations and investment advisory operations into two different single-member Limited Liability Companies (LLCs). The taxpayer claimed that it was entitled to apply the customer-based sourcing rules for registered broker-dealers under former N.Y. Tax Law § 210(3)(a)(9) to income from its investment advisory business because the LLCs were disregarded and deemed divisions under the federal check-the-box regulations. However, an Administrative Law Judge (ALJ) ruled that the taxpayer could not carry over one LLC’s status as a broker-dealer to the non-broker-dealer receipts earned by the other LLC. According to the ALJ, “a disregarded entity that is not a registered broker-dealer is not disregarded under the check-the-box regulations in determining where its receipts are sourced for New York State franchise tax purposes.” Matter of BTG Pactual NY Corp.; DTA No. 827577 (N.Y. Div. Tax App. March 7, 2019)

The Maryland Tax Court held that six nonresident Limited Liability Companies (LLCs) wholly-owned by another out-of-state limited liability company owed Maryland income tax despite the fact that the LLCs, as disregarded entities, had no federal income tax liability. Maryland law imposes an income tax “on each pass-through entity that has . . . any member who is a nonresident of the State or is a nonresident entity” and “any nonresident taxable income for the taxable year” under Md. Code Ann., Tax-Gen, Sec. 10-102.1(b). The Court reasoned that although Maryland income tax is calculated using federal taxable income as the starting point, the taxability of individuals and corporations in Maryland does not turn on whether a taxpayer actually completed a federal return. Accordingly, while the LLCs may not be obligated to complete a Form 1120 for the federal government, they “are clearly required to do so in order to complete the Maryland return.” This decision is pending review in circuit court. CNI Technical Services, LLC v. Comptroller of Maryland, Nos. 17-IN-00-0743; 17-IN-00-0748 (Md. Tax Ct. Jan. 17, 2019).

The Tennessee Department of Revenue issued a letter ruling finding that a taxpayer’s mobile and web data analytics services were not subject to sales and use tax. The taxpayer’s customers installed the taxpayer’s software code, which collected user data about the customers’ websites or mobile applications. The taxpayer then analyzed the data and granted the customers a limited, non-exclusive software license allowing them access to the taxpayer’s web-based dashboard to review reports and analysis of the data. The Department’s ruling noted that access to the web-based dashboard constituted taxable computer software while the taxpayer’s data analytics services were not subject to Tennessee sale and use tax. The Department explained, however, that the “true object” test determined the taxability of a bundled transaction involving both taxable and nontaxable components. The Department concluded that the true object of the taxpayer’s transaction was the sale of nontaxable data analytics service and the provision of computer software was merely incidental to the sale such that the entire transaction was not subject to sales and use tax.

Tenn. Letter Ruling No. 18-09 (Dec. 14, 2018)

The Kentucky Court of Appeals held in an unpublished opinion that an out-of-state parent company was not an “includible corporation” as defined by Kentucky law and could not file a consolidated return with its in-state subsidiary. The Department argued that the parent company taxpayer was not an includible corporation because it fell within two exceptions included in the statutory definition – one for companies that have net operating losses and de minimis apportionment factors and the other for companies with zero apportionment factors. The parent company argued that, regardless of those exceptions, it qualified as an “includible corporation” under a separate section in the statute that defines “affiliated group.” Based on statutory construction and legislative history, the Court of Appeals sided with the Department, reasoning that “includible corporation” and “affiliated group” are two different definitions and one cannot be read into the other. Even if it is a member of an “affiliated group,” a common parent must also meet the definition of an “includible corporation” to be included in the Kentucky consolidated return.
World Acceptance Corp. et al. v. Fin. & Admin. Cabinet, Kentucky Dep’t of Revenue, No. 2015-CA-001852-MR (Ky. Ct. App. Jan. 4, 2019).