The quarterly Eversheds Sutherland SALT Scoreboard tallies significant state and local tax litigation wins and losses. In this videocast, Charles C. Capouet and Jessica N. Allen share 2017 year-end observations, including taxpayers’ performances in corporate income tax and sales and use tax cases and the Pennsylvania Supreme Court’s decision in Nextel. Stay tuned for upcoming 2018 editions of the Eversheds Sutherland SALT Scoreboard!
The American Catalog Manufacturers Association (ACMA) filed an action for a declaratory judgment in Ohio state court asserting that the new Ohio statutory definition of substantial nexus, which was expanded to include remote sellers by adopting “software” and “network” nexus provisions, violates the Commerce Clause, the Due Process Clause and the Internet Tax Freedom Act (ITFA).
Under Ohio’s expanded nexus provision, a seller located outside of Ohio is presumed to have substantial nexus with Ohio for its sales and use tax laws if a seller uses in-state software (e.g., apps or cookies) or enters into a contract with an in-state content distribution network to facilitate website delivery, provided that the seller has annual gross receipts in excess of $500,000 from transactions with Ohio customers in the current or preceding calendar year. ACMA alleges that the expanded nexus provision violates the physical presence requirement in Quill v. North Dakota because some of ACMA’s members would be required to register, collect and remit Ohio sales and use tax despite lacking a physical presence in Ohio. ACMA also alleges that the software and network nexus provisions discriminate against electronic commerce in contravention of ITFA. Complaint, American Catalog Mailers Association v. Testa, Case No. 17 CV 011440 (Ohio C.P. Dec. 29, 2017).
The Michigan Court of Appeals held that sales of a Detroit attorney’s services can be included in the sales factor numerator for the Detroit income tax only if the client received the services in Detroit. The Detroit income tax apportions income by a three-factor, property, payroll and sales formula. Gross revenue is included in the sales factor numerator if derived from sales made and services rendered in the city. The law firm contended that its services are “rendered” where the client receives the services, rather than where the work is performed. The court of appeals compared the sales factor term “services rendered” to the payroll factor term “services performed” and concluded that the terms must have different meanings. The court also considered the term in the context of how the Legislature treated the sale of tangible goods. The court concluded that only services provided to a client in the city of Detroit are considered to be “in-city” services includible in the sales factor numerator. Honigman Miller Schwartz & Cohn LLP v. City of Detroit, No. 336175 (Mich. Ct. App. Jan. 18, 2018).
The Indiana Department of State Revenue issued a Letter of Finding denying a taxpayer’s protest of throwback sales because the taxpayer failed to substantiate being subject to tax in multiple jurisdictions. For income tax purposes, Indiana requires the throwback of sales when tangible personal property is shipped from Indiana to a jurisdiction where a taxpayer is not subject to tax. The taxpayer argued that it was subject to tax in multiple jurisdictions because it was either included in its parent’s combined/unitary returns, employed employees who solicited sales in various states, or conducted business in foreign countries. The Department, however, concluded that the taxpayer failed to carry its burden and did not provide sufficient evidence to prove that it was subject to taxation in those jurisdictions. In particular, the Department determined that since the taxpayer filed a separate Indiana return, its Indiana-origin sales to states in which it was included in combined/unitary returns with its affiliates must be thrown back to Indiana. The Department also denied the taxpayer’s request for abatement of the negligence penalty, finding that the taxpayer failed to demonstrate that its actions were reasonable. Ind. Dep’t of State Rev., Ltr. Of Findings No. 02-20170298 (January 31, 2018).
Eversheds Sutherland SALT releases the eighth edition of its SALT Scoreboard, a quarterly publication that tracks significant state tax litigation and controversy developments. This edition of the SALT Scoreboard includes our year-end observations for 2017, a discussion of the Pennsylvania Supreme Court’s decision in Nextel, and a spotlight on apportionment cases. For 2018, we will reset our tallies and track the latest developments as they are issued in the new year.
View our Eversheds Sutherland SALT Scoreboard results from the fourth quarter of 2017!
The New Mexico Administrative Hearings Office affirmed the Taxation and Revenue Department’s assessment to Agman Louisiana Inc. based on the taxpayer’s gain from the sale of stock of a corporation in which the taxpayer owned less than a 50% interest. The Hearings Office ruled that such gain was apportionable business income subject to New Mexico corporate income tax. Agman argued that the gain was non-business income and must be allocated to its commercial domicile. The Hearings Office disagreed and determined that Agman met New Mexico’s three-prong business income test in NMSA 1978 § 7-4-2(A). Under the first prong of that statutory test, the Hearings Office summarily concluded that Agman met the threshold “transactional test” because the sale arose from “transactions and activity” in the “regular course of the taxpayer’s trade or business.” Agman met the second prong “disposition test” because the income from the stock sale arose from the disposition of a business. The company also met the third prong “functional test” because the income from the sale of the stock provided the taxpayer with an “operational benefit integral to [its] business.” Finally, the Hearings Office ruled that characterizing the gain as apportionable business income did not offend the US Constitution because the stock that generated the gain served an “operational rather than investment function,” as explained in the Supreme Court’s Allied Signal and MeadWestvaco decisions. In the Matter of the Protest of Agman Louisiana Inc. v. Taxation & Revenue Dep’t, N.M. Admin. Hearings Office, Decision and Order No. 17-47 (Dec. 5, 2017).
By Sam Trencs and Open Weaver Banks
The New Jersey Tax Court held that New Jersey could not impose corporation business tax on a foreign corporation’s foreign source income that was not included in the federal tax base because of a treaty benefit. Although New Jersey is permitted to adopt a legislative addback for exempt foreign source income, it did not, and therefore, it is presumed that federal taxable income is the starting point for computing New Jersey entire net income for purposes of the New Jersey corporation business tax. Infosys Limited of India, Inc. v. Director, Division of Taxation, Dkt No. 012060-2016 (N.J. Tax Nov. 28, 2017).
The Superior Court of Washington for King County held that Seattle’s new income tax on “high income residents” violates a provision of Washington state law which prohibits a city from levying a tax on net income.
On July 14, 2017, Seattle Mayor Ed Murray signed Seattle Ordinance No. 125339, which would impose an income tax on “high-income residents.” This tax would impose an additional tax of 2.25% on the amount of total income in excess of $250,000 for individuals and the amount of total income in excess of $500,000 for married taxpayers filing jointly.
Plaintiffs raised multiple arguments against the tax regarding Seattle’s authority to levy the tax such as whether the tax was an income tax or an excise tax, whether state law prohibited cities from enacting income taxes, and whether the tax violates the Washington Constitution. The court considered each argument but ultimately decided the case on the issue of whether the tax violated state law prohibiting cities from levying a tax on net income.
Wash. Rev. Code Sec. 36.65.030 provides that a “county, city, or city-county shall not levy a tax on net income.” The court rejected the city’s challenge that Wash. Rev. Code Sec. 36.65.030 was invalid because it violated the Single Title Rule and Subject in Title Rule provisions of the Washington State Constitution. Instead, to determine whether this statute applied to the tax, the court analyzed the meaning of the term “net income.” Notwithstanding the dictionary definitions cited by the city, the court determined that there could only be one conclusion—that the city’s income tax is tax on net income. Thus, the court concluded that the city did not have the authority to impose the new income tax because it applied to the net income of high income residents. Kunath v. City of Seattle, No. 17-2-18848-4 (Wa. Sup. Ct. Nov. 22, 2017).
By Charles Capouet and Charlie Kearns
On November 6, 2017, the Minnesota Department of Revenue issued a Revenue Notice advising taxpayers that it acquiesces to the Minnesota Tax Court’s decision in Sinclair Broadcast Group, Inc. v. Commissioner of Revenue. As a result, the Department now takes the position that Minnesota’s version of the I.R.C. § 382 net operating loss limitation is “calculated in the same manner as the federal section 382 limitation, and is not apportioned for franchise tax purposes.” For the years at issue in Sinclair, I.R.C. § 382 imposed an annual limitation on an acquiring corporation’s use of the net operating losses of an acquired corporation in the amount of approximately 5% of the acquired corporation’s stock value. The Minnesota Tax Court rejected the Commissioner’s position that Minnesota’s version of the limitation must be applied twice, both on a pre-apportioned and, subsequently, a post-apportioned, basis. Revenue Notice No. 17-09: Corporate Franchise Tax – Net Operating Loss Carryforwards – Sinclair Broad. Grp., Inc. v. Comm’r of Revenue, No. 8919-R, 2017 (Minn. Tax Ct. Aug. 11, 2017), Minn. Dep’t of Revenue (Nov. 6, 2017).