The Commonwealth Court of Pennsylvania affirmed a decision by the Board of Finance and Revenue that found American Electric Power Service Corporation (“Taxpayer”) was subject to Pennsylvania’s gross receipts tax as a wholesale seller of electricity. The Taxpayer presented two substantive arguments, both of which the Court found unconvincing. Taxpayer asserted that it was not subject to the gross receipts tax because it was not a “public utility.” Alternatively, Taxpayer asserted that its sales of electricity were exempt sales for resale because Taxpayer did not provide electricity to end-user customers. The Court found that the Taxpayer was subject to the gross receipts tax because the tax applied to all sales of electric energy, regardless of whether the Taxpayer was subject to the jurisdiction of the Pennsylvania Public Utility Commission. Additionally, the Court found that Taxpayer’s sales did not qualify as sales for resale because the customer to which Taxpayer sold electricity did not fall into one of the statute’s listed entities eligible for the resale exemption. See American Electric Power Service Corporation v. Commonwealth of Penn., Pa. Commw. Ct., Dkt. No. 861 F.R. 2013, (Mar. 15, 2018).
Eversheds Sutherland SALT releases the ninth edition of its SALT Scoreboard, and the first of 2018. Each quarter, we tally the results of what we deem to be significant taxpayer wins and losses and analyze those results. This edition of the SALT Scoreboard includes insights regarding New Jersey’s attempted taxation of foreign source income, Virginia’s corporate income tax addbacks, and Detroit’s sales factor numerator.
View our Eversheds Sutherland SALT Scoreboard results from the first quarter of 2018!
On April 17, the US Supreme Court heard arguments in South Dakota v. Wayfair, a case involving the states’ authority to tax online purchases. This is the first sales tax jurisdiction case heard by the US Supreme Court in 25 years and may have a significant impact on online sales across the country.
About the Case
- Title: South Dakota v. Wayfair, Inc., et al.
- Docket No. 17-494
- Decision Below: State v. Wayfair Inc., 901 N.W.2d 754 (2018) (PDF)
The Wayfair case re-examines the Supreme Court’s 1992 holding of Quill v. North Dakota, in which the court ruled that states could not require mail order retailers that lack a physical presence in the state to collect sales tax from their customers. The Quill decision protects Internet retailers that lack physical presence from being forced to collect tax on online sales.
On April 18, 2018, the Tax Executives Institute (TEI) and Thomson Reuters hosted a two-hour webcast entitled “South Dakota v. Wayfair – Insights on the Oral Argument.” Eversheds Sutherland Partner Jeff Friedman was among the panelists who addressed the issues raised by Wayfair and provided commentary on the oral arguments.
Wayfair Case Background
In 1967, the US Supreme Court held that the Commerce Clause prohibits a state from requiring catalog retailers to collect sales taxes on sales unless the retailer has a physical presence there. Nat’l Bellas Hess v. Dep’t of Rev. of Ill., 386 U.S. 753 (1967).
In 1992, the US Supreme Court declined to overrule the physical presence requirement of Bellas Hess in a state sales tax case involving a mail-order catalog seller. Quill Corp. v. North Dakota, 504 U.S. 298 (1992). In Wayfair, South Dakota has brought a similar case against three online sellers – Wayfair Inc., Overstock.com, Inc., and Newegg Inc.
More: See the Supreme Court docket for complete case filings.
Photos from Oral Arguments
- Politico, A taxing case on the Supreme Court’s docket“.” Bernie Becker. (April, 17, 2018)
- Tax Notes, “South Dakota Slams Physical Presence Rule as ‘Unworkable and Indefensible.” Jad Chamseddine. (April 10, 2018) (Subscription.)
- Bloomberg, “South Dakota Rebuffs E-retailer Concerns in Last High Court Brief.” Ryan Prete. (April 9, 2018)
- Reuters, “U.S. Supreme Court takes up state online sales tax dispute.” Lawrence Hurley. (Jan. 12, 2018)
About Eversheds Sutherland SALT:
As state and local jurisdictions in the US evolve their tax systems and engage in increasingly sophisticated enforcement and litigation strategies, businesses need sound state and local tax (SALT) advice more than ever before. Eversheds Sutherland’s SALT practice is committed to delivering innovative solutions that meet the needs of your business. Read more.
On April 17, 2018, the US Supreme Court is poised to hear oral arguments in the case of South Dakota v. Wayfair. The Wayfair case will re-examine the 1992 holding of Quill v. North Dakota, in which the US Supreme Court ruled that states could not compel mail order retailers that lack a physical presence in the state to collect sales tax from their customers. The Quill decision now protects Internet retailers that lack physical presence in states from collecting tax on online sales.
Please join the Tax Executives Institute (TEI) and Thomson Reuters for a two-hour complimentary webcast, on April 18, 2018, entitled “South Dakota v. Wayfair – Insights on the Oral Argument.” Eversheds Sutherland (US) Partner Jeff Friedman will be among the panelists who will address the issues raised by Wayfair, provide commentary on the oral arguments and predict the outcome of the case.
Many states require or permit affiliated businesses to report their income to the state in a combined group return. In their article for Bloomberg Tax, Eversheds Sutherland attorneys Maria Todorova, Justin Brown and Samantha Trencs discuss some of the complexities of combined reporting related to the inclusion of foreign entities in a combined group, including trends among states intended to expand the combined group to include additional foreign affiliates.
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!