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By Samantha Trencs and Andrew Appleby

A South Carolina administrative law judge (ALJ) determined that cell phone insurance is not subject to South Carolina sales tax even though the wireless provider sells it with taxable communication services.

Alltel provided its wireless customers with an option to purchase insurance for the loss, theft or damage to their cell phones (cell phones have a way of accidently finding their way into toilets). Alltel remitted the monthly premiums its customers paid for insurance coverage to Alltel’s insurance agent, who then remitted the premiums to an insurance company.

The ALJ concluded that this cell phone insurance arrangement constituted insurance under South Carolina law, which is not subject to sales tax. Even though Alltel offered the insurance with its taxable communication service, the ALJ reasoned that the insurance was not inextricably intertwined with the communication service because the insurance was optional. Additionally, Alltel did not provide the insurance. Rather, a licensed insurance agent and insurance company provided the coverage. Therefore, the insurance charges were not subject to South Carolina sales tax. Alltel Commc’ns, Inc. v. South Carolina Dep’t of Rev., Dkt. No. 11-ALJ-17-0603-CC (S.C. Admin. Law Ct. Nov. 13, 2015). 

By Liz Cha and Timothy Gustafson

In its first decision on combined unitary reporting since Vermont adopted combined reporting in 2006, the Vermont Supreme Court held that the AIG insurance group was not unitary with its wholly owned ski resort subsidiary, Stowe Mountain Resort. Applying the U.S. Supreme Court’s test for unity articulated in Mobil Oil Corp. v. Comm’r of Taxes, 445 U.S. 425 (1980), the Vermont Supreme Court determined that Stowe was a distinct business operation from AIG, and there was not enough evidence to support a “linkage of economic realities” between Stowe’s operations in Vermont and AIG’s operations outside the state. First, the court determined there were no economies of scale between AIG’s insurance and financial services business and Stowe’s dissimilar ski resort business. Second, despite AIG being Stowe’s sole shareholder with the power to appoint AIG board members to Stowe’s board, the court held there was no centralization of management because Stowe did not have common purchasing, advertising or marketing with AIG. The evidence also failed to show that AIG’s control over appointments to Stowe’s board resulted in actual control over Stowe’s operations, because Stowe made its own operating decisions. Third, the court determined that AIG and Stowe were not functionally integrated because AIG and Stowe operated in different lines of business, were not part of a vertically integrated enterprise, and did not engage in joint purchasing or other common activities. The court also concluded that the financing Stowe received from AIG—Stowe’s sole lender—served an investment function rather than an operational function for AIG and noted that such intercompany financing alone, absent other indicia of unity, was not sufficient to warrant combination. While acknowledging AIG filed on a combined basis in 15 other jurisdictions, the court nevertheless found that such representations to other states “cannot create a unitary operation where it does not otherwise exist.” AIG Ins. Mgt. Serv. Inc. v. Department of Taxes, No. 2014-312 (Vt., November 20, 2015).

By Zachary Atkins & Prentiss Willson

The Massachusetts Supreme Judicial Court (SJC) refused to allow a taxpayer, a financial institution, to assign its loan portfolios based on the location of third-party loan servicing activities for purposes of calculating its financial institution excise tax property factor. The taxpayer earned flow-through interest income through its residual beneficial interests in trusts that owned securitized student loans. The taxpayer was a holding company and did not have employees, payroll, tangible property or office space but, as indicated on its tax returns, it had a principal office in Massachusetts. Under Massachusetts law, a loan is located in Massachusetts if it is properly assigned, based on a preponderance of substantive contacts, to the taxpayer’s regular place of business in the state. Second, when the taxpayer assigns a loan to a place outside Massachusetts that is not a regular place of business, there is a rebuttable presumption that the preponderance of substantive contacts with respect to the loan occur in the Commonwealth if the taxpayer’s commercial domicile was in the Commonwealth at the time the loan was made. The taxpayer, which did not have a regular place of business in Massachusetts, assigned the loans to locations of third-party loan servicers outside Massachusetts and reported a zero property factor for each of the tax years at issue. The SJC determined that the loans in question did not have any substantive contacts in Massachusetts because the taxpayer did not have a regular place of business in Massachusetts. Consequently, the SJC upheld the Appellate Tax Board’s determination that, according to the default rule, the loans were assignable to Massachusetts because the taxpayer’s commercial domicile was in Massachusetts. First Marblehead Corp. v. Comm’r of Revenue, No. SJC-11609 (Mass. Jan. 28, 2015)

By Stephen Burroughs and Andrew Appleby 

A Vermont Superior Court held that the Commissioner of Taxes unconstitutionally applied the unitary business principle to AIG and its subsidiary, Stowe Mountain Resort. Stowe operates a ski resort, lodging and conference business in Vermont. None of AIG’s other 700 subsidiaries resemble a ski resort, and the Commissioner acknowledged that AIG was not actively involved in Stowe’s ski business. The Commissioner’s argument for unitary combination was based on AIG’s purported active management of Stowe’s financial operations, including the following administrative level findings: loans by AIG not made at arm’s length, management of expansion efforts at the resort by AIG, AIG’s assistance with financial and asset management expertise and various centralized corporate services, and AIG’s provision of marketing support through resort discounts offered to AIG employees. The Commissioner ultimately argued that Stowe was dependent upon AIG loans for its financial viability, and a separate accounting would not capture the true financial picture of AIG’s involvement with Stowe’s operations. But the Commissioner’s findings lacked one critical ingredient—adequate support from the record. The court held that the Commissioner’s findings “far outrun the evidence, which unambiguously shows that Stowe was a discrete business that did not send taxable value out of state in any appreciable way.” AIG offered uncontradicted testimony from several key AIG executives and independent Stowe consultants, whose testimony combined to describe a discrete business enterprise. Accordingly, the court held the Commissioner’s finding of unity at the administrative level was outside the constitutional boundaries of the unitary business principal. This decision represents an important taxpayer victory, as it is one of the first court decisions to apply the unitary business principle to Vermont’s combined reporting statutes. AIG Insurance Mgmt. Services, Inc. v. Vermont Dept. of Taxes, No. 589-9-13 (Vt. Sup. Ct., July 30, 2014).

The New York State Governor and Legislature recently enacted the 2014-2015 New York State Budget, Senate Bill 6359-D and Assembly Bill 8559-D (Budget), which results in the most significant overhaul of New York’s franchise tax on corporations in decades. In this edition of New York Tax Reform Made Easy, we will address the changes made to apportionment sourcing in computing a taxpayer’s apportionment factor.

Continue Reading New York Tax Reform Made Easy: Apportionment

The Sutherland SALT Team will release commentary on the revamped New York State corporate tax system that was reformed as part of the recently enacted Budget Legislation (“Budget”). By way of background, Governor Andrew Cuomo signed into law the tax provisions of the Budget on March 31. The changes will affect nearly every New York State corporate taxpayer and should be considered in preparing financial statements for the first quarter of 2014.     
 
In the coming days, Sutherland will release targeted, concise commentary on each of the most significant aspects of the Budget, including:

  • Mandatory Unitary Combined Filing
  • Economic Presence Nexus
  • Income Tax Base Changes
  • Sourcing/Apportionment (market-based approach)
  • Net Operating Losses (NOLs) and other Tax Attributes
  • Rate Changes
  • Capital Base Changes
  • Financial and Insurance Industry Impact

By Todd Betor and Andrew Appleby

The Chief Administrative Law Judge (ALJ) of the New York City Tax Appeals Tribunal ruled that The McGraw-Hill Companies, Inc., may source its receipts from Standard & Poor’s (S&P) public credit rating business using an audience-based method. The ALJ first determined that S&P’s ratings receipts are “other business receipts” because the receipts are not derived from a service or tangible personal property. Therefore, the ALJ determined that the receipts should be sourced as an “other business receipt” on a destination (market) basis. The ALJ next determined that S&P is functionally equivalent to a publisher, and thus the Constitution requires New York City to tax S&P similarly to publishers, absent a compelling government interest. Because New York City tax law requires publishers to source receipts based on the audience in the city, the ALJ held that S&P’s ratings receipts should be sourced similarly based on its New York City audience. In the Matter of the Petition of The McGraw-Hill Cos., Inc., Determination No. TAT(H)10-19(GC) et al., (N.Y.C. Tax Trib. Feb. 24, 2014).

Click here to read our January 2014 posts on stateandlocaltax.com or read each article by clicking on the title. A printable PDF is also available here. To read our commentary on the latest state and local tax developments as they are published, be sure to download the Sutherland SALT Shaker mobile app.

By Nicole Boutros and Timothy Gustafson

The New York State Department of Taxation and Finance issued an advisory opinion determining that a securities broker may source receipts from “matched principal transactions” based on the “production credit method” provided in New York tax law. The taxpayer was a U.S. entity operating in six states, including New York. Although the taxpayer was not a registered broker-dealer with the Securities and Exchange Commission, it indirectly owned single member limited liability companies (SMLLCs) that were registered broker-dealers. One SMLLC frequently engaged in voice-brokered and electronically traded matched principal transactions, whereby the SMLLC acted as principal, buying securities from a seller and selling those securities to a separate buyer. The Department determined that the taxpayer is allowed to source income derived from matched principal transactions—limited to the spread between the purchase and sale price of the securities, and excluding any related commission—based on production credits awarded to the trading desk associated with each transaction. In so doing, the Department concluded that the SMLLC’s broker-dealer status, like its income, flows through to the taxpayer as the single member. This position represents a broad application by the Department of the production credit sourcing methodology for broker-dealers. N.Y. Advisory Opinion TSB-A-13(11)C (Dec. 20, 2013).

By Scott Booth and Andrew Appleby

The Massachusetts Governor released his proposed fiscal year 2015 budget, which includes a tax provision that is targeted directly at the insurance industry. Currently, income earned by pass-through entities, such as partnerships, owned by licensed life or property and casualty insurers is excluded from Massachusetts income tax because the owners are subject to a premiums tax instead. The proposal would treat pass-through entities owned by insurance companies as corporate entities for Massachusetts tax purposes. A similar proposal had been discussed in the Multistate Tax Commission Financial Institutions Work Group but ultimately did not materialize. The provision would apply when an insurance company owns, directly or indirectly, at least 50% of an entity engaged in a non-insurance trade or business that would otherwise be treated as a partnership or disregarded entity. In that case, the net income that passes through to the insurance company with respect to the non-insurance trade or business would be taxed as if the partnership or disregarded entity were a corporation subject to the state’s corporate excise tax.