The Georgia Legislature has introduced its annual Internal Revenue Code (IRC) conformity bill—HB 821. Georgia conformity is typically updated annually to apply for the most recent tax year. In light of the recently enacted federal tax reform, this year’s conformity bill will receive particular attention because of what tax reform provisions Georgia chooses to adopt and not to adopt.
On December 8, 2017, the Alabama Supreme Court issued an order without opinion in Thomas v. Elbow River Marketing Ltd. Partnership, affirming a lower court’s decision that a Canada-based seller of hydrocarbon products did not engage in or carry on a business in the City of Birmingham and thus was not subject to the city’s business license tax. The taxpayer had no physical operations, place of business, employees, agents or representatives in the city. Further, the taxpayer did not solicit sales or otherwise conduct sales or advertising activities in the city. Its only contact with the city consisted of sales of hydrocarbon products to two Alabama-based customers. The products were delivered into the city by third-party rail or trucking carriers, and the taxpayer retained title to some of the products while in the possession of the carriers. The lower court concluded, and the Alabama Supreme Court agreed, that under Alabama law, a product seller cannot be subjected to the city’s business license tax if it does nothing more than deliver its goods into the city by common carrier. Thomas v. Elbow River Marketing Ltd. Partnership, No. 1160678 (Ala. Dec. 8, 2017).
The North Carolina Supreme Court affirmed the North Carolina Business Court’s decision that Fidelity Bank was precluded from deducting “market discount income” from US bonds for North Carolina corporate income tax purposes. Fidelity Bank acquired US government bonds at a discount, held these bonds until maturity, and earned “market discount income.” Market discount income is the difference between (1) the amount a corporation initially paid for discounted bonds and (2) the amount it received from those discounted bonds at maturity. To determine its taxable corporate income, Fidelity Bank treated the market discount income as taxable income and then deducted this income as interest earned on US government obligations. Fidelity Bank argued that this income should be treated as interest because it is treated that way for federal income tax purposes.
However, the court determined that, while North Carolina law does not define the term “interest,” it should be interpreted in accordance with its plain meaning as involving “periodic payments received by the holder of a bond.” The fact that market discount income is treated as interest for purposes of determining federal taxable income did not mean that it should be treated as “interest” for all purposes under North Carolina tax law. The court also noted that the state legislature has selectively incorporated certain definitions from the Internal Revenue Code into the North Carolina Revenue Act and that if the legislature intended for “interest” to take on the same meaning it would require “specific support in relevant statutory language.” The Fidelity Bank v. North Carolina Department of Revenue, No. 392A16, 393PA16 (N.C. Aug. 18, 2017).
The Alabama Tax Tribunal (Tribunal) affirmed the Alabama Department of Revenue’s (DOR) assessment that denied Credit Suisse Boston USA Inc.’s (Credit Suisse) deduction for interest expense paid to a related member. Credit Suisse argued that the interest expense payments were exempt from Alabama’s addback requirement because the expense to its foreign affiliate generated income for the foreign affiliate subject to tax in a foreign jurisdiction, and that the payments had a business purpose. The DOR argued that Credit Suisse failed to submit any documentation showing that the interest expenses it paid to the related companies were subject to tax in a foreign jurisdiction which has an income tax treaty with the United States. The Tribunal found for the DOR because likewise, Credit Suisse failed to provide any documentation to the Tribunal in support of its position, and therefore, the “transactions are presumed to have tax avoidance as their principal purpose.” Credit Suisse First Boston USA Inc. v. Ala. Dept. Rev., Ala. Tax Tribunal, Dkt. No. BIT. 15-1666, 9/07/2017.
The Texas Supreme Court held that a non-discriminatory tax on stored gas held for future resale does not violate the Commerce Clause of the US Constitution. Harris County imposed an ad valorem tax on natural gas stored in the county on January 1 of the tax year. Applying the four-prong Complete Auto test after first finding that the gas was in interstate commerce, the court reasoned that: (1) the gas had substantial nexus with the county because it was not merely in transit through the county; (2) the tax was fairly apportioned because it was limited only to the amount of gas in the county on a certain day and therefore was internally consistent; (3) the tax did not discriminate against interstate commerce because it applied equally to gas that will be sold in the state and gas that will be sold outside the state; and (4) the tax was fairly related to services provided by the state because the stored gas benefited from services (specifically, fire department services). The ruling is consistent with similar cases in Oklahoma and Kansas. ETC Marketing Ltd. v. Harris County Appraisal District, No. 15-0687 (Tex. Dec. 6, 2016).
The Georgia Senate Special Tax Exemption Study Committee held its initial meeting to plan evaluation of Georgia income and sales tax exemptions by December 1, 2017.
- The special study committee was created by a Georgia Senate Resolution during the 2017 Legislative Session.
- The Committee will prioritize exemptions to evaluate, and then recommend whether to continue, expand, reduce, or sunset each exemption.
- The Committee scheduled dates for its next four meetings, which will take place throughout the state.
The Texas Comptroller of Public Accounts has issued a private letter ruling finding that a Texas company’s revenue from sales of real-time payment risk and fraud prevention services should be sourced to the location of Taxpayer’s customers. In Texas, receipts from a service are sourced to the location where the service is performed, and in determining where a service is performed, the Ruling notes, “the focus is on the specific, end-product act for which the customer contracts and pays to receive, not on non-receipt producing, albeit essential, support activities” (citing previous Comptroller Decisions). Taxpayer’s customers access Taxpayer’s services by submitting certain information on Taxpayer’s website and then receiving a response within seconds of the submission after Taxpayer’s servers access the databases of third-party vendors. The Comptroller explained that “while the processing of information is essential to the performance of Taxpayer’s service, it is nonetheless a support activity and not the service for which the customers contract.” Instead, Taxpayer’s customers pay to receive Taxpayer’s response at the customers’ location. Therefore, for purposes of the Texas franchise tax, gross receipts from providing that response should be sourced based on the customers’ location. (Tex. Private Letter Ruling No. 201703005L (Mar. 15, 2017) (released May 2017).)
The United States District Court for the Middle District of Tennessee held that Tennessee’s sales tax on railroad carriers for the purchase or use of diesel fuel was not discriminatory under the Railroad Revitalization and Regulatory Reform Act of 1976 (4-R Act) even though it did not similarly apply to motor carriers because motor carriers are subject to a comparable excise tax on motor carrier fuel. This case was on remand from the Sixth Circuit Court of Appeals following the U.S. Supreme Court’s decision in Alabama Dept. of Revenue v. CSX Transportation, Inc., 135 S.Ct. 1136, 1143 (2015), holding that a rail carrier can show discrimination under the 4-R Act by demonstrating that it is subject to differential tax treatment compared to its competitors; although, tax disparity may be nondiscriminatory if competitors are subject to an alternate, comparable tax.
Railroad carriers are subject to a sales or use tax on their purchase, consumption or use of diesel fuel in Tennessee while competing motor carriers are exempt from such tax. However, in lieu of the sales tax, motor carriers pay a motor fuel tax. For the tax years at issue, the railroad carriers were subject to a 7% tax on diesel fuel and motor carriers paid a motor fuel tax of 18.4 cents per gallon. Despite the effect of varying fuel prices on the amount of taxes paid by railroad carriers and motor carriers in recent years, the court determined that the tax burden bore by motor carriers was historically higher than railroad carriers and that over the years the tax burden on both motor and railroad carriers was “roughly” equivalent. In addition, the court agreed with the Tennessee Department of Revenue that there was sufficient justification for a different tax imposed on railroad carriers because railroad carriers purposely choose to use dyed fuel instead of clear fuel, which is exempt from the sales and use tax. The railroad carriers could, like the motor carriers, use clear diesel fuel and be subject to the same tax scheme as motor carriers but choose not to do so to avoid a federal excise tax on the use of clear diesel fuel. Accordingly, the court determined that the Department provided sufficient justification for the sales tax on railroad carriers for their purchase or use of diesel fuel and that there was no violation of the 4-Act. Illinois Central Railroad Co. v. Tennessee Dep’t of Revenue, No. 3:10-cv-00197 (M.D. Tenn. April 12, 2017).
In Georgia Letter Ruling SUT-2016-24, the Georgia Department of Revenue ruled that sales of software equipment delivered to a Georgia assembly facility on an out-of-state customer’s behalf were subject to Georgia sales and use tax. In the ruling, the taxpayer sold technology solutions, which were comprised of licenses of software, sales of hardware and the performance of services. The sales agreement between the parties reflected that title did not pass to the customer until payment was received in full by the seller. Nonetheless, prior to the passage of title, the seller would send the equipment to an assembly facility located in Georgia. The Department concluded that the assembly facility was accepting the equipment on the purchaser’s behalf notwithstanding the fact that unencumbered title had not yet passed to the purchaser. Because O.C.G.A. § 48-8-77(b)(1) provides that sales should be sourced to Georgia for sales tax purposes when the purchaser receives the item in Georgia, the sales were Georgia sales even where the customer was located outside the state. Georgia LR SUT-2016-24.
By Madison Barnett and Stephanie Do
Many foreign companies are surprised to learn that US states are not generally bound by income tax treaties entered into by the US with foreign countries. Under these treaties, for US federal income tax purposes, certain non-US corporations and residents of foreign countries may be exempt from tax or taxed at a reduced rate. Most US states, however, also impose income taxes on corporations and individuals, and US tax treaties are generally not binding on states. As a result, the applicability of US tax treaties to state income taxes must be determined on a state-by-state and treaty-by-treaty basis. Some states expressly respect US tax treaties, such as Florida, Massachusetts, South Carolina and Virginia. Other states do not expressly respect treaties, but may implicitly do so by tying the state tax base to the US federal tax base in a manner that effectively conforms to federal treaty protections.
Some states will only apply a treaty to their state income taxes if the treaty specifically limits state taxation. Consequently, foreign taxpayers that are protected from US federal income tax by an income tax treaty may nevertheless have a state income tax filing obligation and potential state tax liability in the US states in which they do business.
On March 13, 2017, the State of Arkansas Department of Finance and Administration (the Department) issued Legal Opinion No. 20170217 addressing the applicability of the US-Canada Income Tax Treaty to Arkansas personal income tax. The Department determined that the treaty applies only to US federal income taxes, such that “income taxes levied by individual states, such as Arkansas, do not fall within the treaty’s jurisdiction.” As a result, “the treaty’s provisions are generally not recognized by this state.”
The Department also determined that the Arkansas credit for personal income taxes paid to another US state does not extend to taxes paid to the Canadian government or a Canadian province. Non-US taxes may be deducted from gross income for Arkansas personal income tax purposes, but not credited.