The state and local tax (SALT) impact of the recently enacted federal tax reform is still being assessed. Because of states’ broad conformity to the federal income tax laws, many of these changes will have an impact on taxpayers’ SALT liabilities.

In their article for Bloomberg Tax, Eversheds Sutherland attorneys Jeff Friedman, Todd Betor and Michael Spencer focus on the SALT consequences stemming from the following international provisions of the Tax Cuts and Jobs Act:

• a one-time “transition tax” on untaxed accumulated earnings and profits of controlled foreign corporations and certain other foreign corporations.

• 100% dividends received deduction for certain foreign source dividends.

• current taxation of certain US taxpayer’s global intangible low-taxed income.

• deduction allowed to certain US taxpayers for foreign derived intangible income.

• a base erosion and anti-abuse tax imposed on certain US taxpayers.

View the full article.

WASHINGTONEversheds Sutherland is pleased to announce that Associate DeAndre R. Morrow has been selected as one of The National Black Lawyers Top 40 Under 40. He joins an elite group of attorneys from Washington DC and across the country as members of the organization composed of outstanding black attorneys under the age of 40 who exemplify superior leadership and achievements in the legal industry and within their communities.

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SACRAMENTO—Eversheds Sutherland (US) LLP is pleased to announce that state and local tax (SALT) attorneys Carley A. Roberts and Eric J. Coffill were selected as top Northern California attorneys by Super Lawyers. The designations are the result of an annual survey conducted by the publication, which focuses on professional achievement and peer recognition.

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By Charles Capouet and Andrew Appleby

The Florida Department of Revenue determined that a reinsurer did not have nexus with Florida for corporate income tax purposes.  The Department first asserted that an insurer or reinsurer would have nexus with Florida if it was authorized to transact business in the state.  The Department also stated that nexus would exist if an approved reinsurer reinsured policies from an insurer domiciled in Florida.  In this case, the reinsurer did not have nexus with Florida because: (1) it was not an approved reinsurer and was not registered with the Florida Office of Insurance Regulation; and (2) the ceding companies were not domiciled in Florida.  The Department also addressed an insurance company’s apportionment factor, which depends on whether the ceding insurance companies are resident, or have a regional home office, in Florida.  Fla. Technical Assistance Advisement No. 17C1-001, Fla. Dep’t of Rev., Jan. 13, 2017.

We are pleased to announce that Sutherland has been named Tax Practice Group of the Year for the third consecutive year by Law360, a nationwide legal news service. The award is given annually to firms that had the biggest wins and worked on the most important deals over a one-year period.

Sutherland’s Tax Practice Group has received numerous awards for client service, most recently being named Tax Advisory Firm of the Year for the fourth consecutive year by Captive Review, the leading trade publication focused on risk management and captive insurance. The group’s attorneys are also regularly featured in a range of “best of” and “who’s who” lists, including The Best Lawyers in America, Chambers USA: Guide to Leading Business Lawyers, The Legal 500: United States and Super Lawyers.

A group of Law360 editors reviewed 619 submissions, of which 80 firms covering 34 practice areas were recognized. Sutherland was one of just five firms selected by Law360 for recognition in the Tax category.

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By Zack Atkins and Tim Gustafson

The Washington State Department of Revenue ruled that an out-of-state baker whose only in-state “presence” was its use of in-state independent commissioned sales representatives to solicit orders had substantial nexus with Washington and therefore was subject to the state’s business and occupation (B&O) tax. The taxpayer contracted with the in-state representatives to solicit orders in a territory that included Washington. All orders were sent to the taxpayer outside of Washington for approval. Relying on the state statute and administrative rules in effect at the time and case law standing for the proposition that substantial nexus for B&O tax purposes can be established through the use of independent agents contracted to perform in-state activities, the Department concluded that the independent commissioned sales representatives provided significant services that enabled the taxpayer to establish and maintain a market in Washington. The Department also found that, even though shipment was made by common carrier and title passed to the customers outside of Washington, the taxpayer’s sales to Washington customers occurred in Washington because the baked goods were received there. Commercial law and UCC “delivery” terms, the Department said, are not dispositive for B&O tax purposes. Det. No. 16-0149, 35 WTD 613 (2016).

By Zack Atkins and Marc Simonetti

A federal district court denied a taxpayer’s motion to dismiss a lawsuit brought under the New York False Claims Act (FCA) for lack of subject matter jurisdiction and remanded the action to state court. The relator, an Indiana University professor, alleges that Citigroup violated the FCA by deducting net operating losses on its New York franchise tax returns while knowing that it was not entitled to such deductions under the New York Tax Law. The federal government acquired a substantial interest in Citigroup under its Troubled Asset Relief Program. While IRC § 382 generally limits net operating loss carryforwards that can be deducted after an “ownership change,” the IRS issued multiple notices indicating that it would not treat such acquisitions as ownership changes. The relator claims that Citigroup underpaid its tax liability because the IRS’s notices are invalid and therefore cannot be relied upon or, alternatively, that the notices were never incorporated into the New York Tax Law. The federal district court observed that while Citigroup’s arguments for dismissal—all of which were grounded in state law—were “potentially meritorious,” the lawsuit “does not truly present a federal question.” The lawsuit calls into question the validity of the IRS’s notices but the court held that the relator lacks standing to challenge the validity of the notices. Because it could conceivably resolve the relator’s FCA claim without deciding whether the IRS’s interpretation of IRC § 382 was arbitrary and capricious, the court concluded that the relator’s complaint did not necessarily raise a federal issue and therefore remanded the case to state court. State ex rel. Rasmusen v. Citigroup, Inc.

By Nick Kump and Amy Nogid

The Colorado Department of Revenue (Department) released a non-binding general information letter,  concluding that a marketplace provider’s payment of sales tax on transactions involving “jointly responsible” third-party retailers discharges the obligations of the third-party retailers to collect and remit sales tax. By statute, the Department has discretionary authority to treat an agent for a retailer as “jointly responsible” for the collection and remittance of sales tax, and can pursue the retailer’s agent when it is “necessary for the efficient administration” of the sales tax. Here, the marketplace provider, which operates a marketplace for third-party digital products such as games, apps, movies and books, and collects and remits sales tax on purchases of the third-party products, stated that it did so as a “jointly responsible” retailer. Relying on the principles of contract law, the Department determined that while both parties were liable for the full amount of sales tax, the marketplace provider’s payment of the correct amount of sales tax discharged the third-party retailers’ sales tax obligations. However, even though the third-party retailers were relieved of their immediate sales tax obligations, the Department could still collect the tax from either the marketplace provider or the third-party retailers, if a deficiency were to occur in the future. The Department added that if the marketplace provider exercises reasonable diligence when accepting an exemption certificate or sales tax license, then both of the jointly responsible retailers would be relieved of liability for collecting tax if the Department later determines that the exemption did not apply. Colo. Gen. Info. Letter No. GIL-16-020 (Colo. Dep’t Revenue Oct. 4, 2016, released Dec. 7, 2016). Colo. Gen. Info. Letter No. GIL-16-020 (Colo. Dep’t Revenue Oct. 4, 2016, released Dec. 7, 2016).

By Charles Capouet and Andrew Appleby

The Washington Supreme Court held that drop shipments and sales from out-of-state are subject to the Washington business and occupation (B&O) tax even when an in-state office was not involved in placing or completing the sales. A wholesaler of electronic components and computer technology worldwide sold products through its Arizona headquarters and its many regional sales offices, including one in Washington, but excluded its national and drop-shipped sales from its B&O tax liabilities. The taxpayer shipped goods into Washington from an out-of-state warehouse. The products were delivered to the customers at its Washington branch, but the goods were billed to the out-of-state office.

The taxpayer argued that the substantial nexus prong of the dormant Commerce Clause was not met because the Washington office was not involved with the sales. The court held that “merely showing that an in-state office was not involved in the placing or completion of a national or drop-shipped sale is insufficient to dissociate from the bundle of in-state activities that are essential to establishing and holding the market for its products.” The Washington employees provided the corporate office with market intelligence regarding Washington markets, met with the taxpayer’s sales teams and suppliers to strategize on how to create a greater demand for the products and services, and worked with customers to improve products and design new prototypes. The in-state activities created nexus and satisfied the dormant Commerce Clause for the taxpayer because they were “at least minimally associated with [the taxpayer’s] ability to establish and maintain a market in Washington for the sale of its products.”

The taxpayer also argued that a Washington regulation barred the imposition of the B&O tax on both categories of sales. The rule stated that “Washington does not assert B&O tax on sales of goods which originate outside this state unless the goods are received by the purchaser in this state and the seller has nexus.” The court held that the imposition of the B&O tax to the taxpayer’s sales was proper because the rule defined “received” as including the purchaser’s agent receiving the goods. Thus, the taxpayer’s buyer would qualify as either the purchaser or as the purchaser’s agent. Avnet, Inc. v. Washington Department of Revenue, No. 92080-0 (Wash. Nov. 23, 2016) (en banc).

By Stephen Burroughs and Maria Todorova

The Commonwealth Court of Pennsylvania recently reaffirmed its decision that Level 3’s network infrastructure services (including local dial networks, telephone numbers and modems, i.e., Internet “backbone”) sold to retail Internet service providers (ISPs) constitute non-taxable Internet access services. The Commonwealth Court previously held that the taxpayer’s facility was an access point (point of presence or PoP) that enabled ISP end users to access the Internet, and its services were, therefore, Internet access services exempt from sales and use tax (see previous coverage of the court’s holding here). The Commonwealth sought reconsideration of the court’s holding, primarily arguing that: (1) the taxpayer’s services constituted a mere technological advancement to otherwise taxable telecommunications services (such as port modem management (PMM) services—see America Online, Inc. v. Commonwealth, 932 A.2d 332 (Pa. Cmwlth. 2007) here); and (2) the taxpayer merely directed end users to an ISP homepage and it was the ISP and its PoP—and not the taxpayer—that enabled end users to initiate a connection to the Internet. The court disagreed with the Commonwealth and reaffirmed its prior reasoning that: (1) the “fundamental technological differences” between taxable PMM services and the taxpayer’s Internet backbone services related to what services were provided and not how the services were provided; and (2) it was the taxpayer’s PoP that provided the access point for ISP end users to establish an Internet connection. The Commonwealth has filed a Notice of Appeal to the Pennsylvania Supreme Court. Level 3 Communications, LLC v. Commonwealth, 166 F.R. 2007 (Pa. Cmwlth. Dec. 8, 2016) (en banc).