Noteworthy Cases

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The New Mexico Court of Appeals held that for purposes of imposing the state’s gross receipts tax, Barnes & Noble Booksellers, Inc.’s (Booksellers) in-state activities may be imputed to an out-of-state retailer (Taxpayer) based on the use of common Barnes & Noble trademarks. New Mexico Tax. & Revenue Dep’t v. Barnesandnoble.com LLC, No. 31, 231 (N.M. Ct. App. Apr. 18, 2012). Notably, Booksellers undertook no physical activities on behalf of the Taxpayer that would independently satisfy the physical presence standard established in Quill. However, according to the court, the goodwill generated by Booksellers’ use of the same Barnes & Noble trademarks helped the Taxpayer establish and maintain a market in the state, thereby creating substantial nexus that is the “functional equivalent” of physical presence under Quill.Continue Reading “Functional Equivalent” Nexus: When Goodwill Goes Bad in New Mexico

The Louisiana Supreme Court declined to review the Court of Appeal’s holding that an out-of-state corporation’s passive ownership of an interest in a limited partnership is not a sufficient basis, by itself, to subject the foreign limited partner to Louisiana franchise tax. UTELCOM, Inc. v. Bridges, No. 2010-0654, 77 So.3d 39 (La. App. 1st Cir. Sept. 12, 2011), reh’g denied (Nov. 1, 2011), writ denied, No. 2011-C-2632 (La. Mar. 2, 2012). The court’s decision to not accept the case should prompt the Department of Revenue to reverse course on its current position.

In UTELCOM, the Department issued franchise tax assessments against two out-of-state corporations whose only connection with Louisiana was their ownership interests in a limited partnership engaged in the long-distance telecommunications business in Louisiana. The primary basis for the Department’s position was a regulation that provided that owning property in Louisiana through a partnership is sufficient to create franchise tax nexus. The trial court upheld the assessments based on the Department’s regulation.Continue Reading No Louisiana Nexus Over Out-of-State Corporate Partners

Fees masquerading as taxes have become increasingly common. And, as illustrated by the Iowa Supreme Court’s recent decision in Kragnes v. City of Des Moines, Docket No. 09-1473 (Mar. 2, 2012), in some cases all or part of a fee may constitute an illegal exaction to the extent it is deemed to be a tax. In Kragnes, the Iowa Supreme Court affirmed the district court’s holding that municipal franchise fees imposed on gas and electric services for almost 10 years exceeded the city’s reasonable costs of regulating the gas and electric franchises and, thus, the difference between the tax collected by the city and the city’s reasonable costs constituted an illegal tax.Continue Reading City of Des Moines and Residents in ROW over Franchise Fees

False claims act (FCA) statutes allow private persons to bring civil actions against alleged wrongdoers on behalf of the government. FCAs and qui tam actions vary, but generally impose significant penalties for “knowingly” failing to comply with a state law. In this edition of A Pinch of SALT, Sutherland SALT’s Jack Trachtenberg, Jeff Friedman and…

The controversial methodology relied upon by several states to assess corporate taxpayers for transfer pricing violations has been ruled invalid by a D.C. Administrative Law Judge. Several revenue authorities, including New Jersey, Alabama, Louisiana, Kentucky and the District of Columbia, have relied on this now invalidated transfer pricing audit methodology to assess corporate franchise and…

The Michigan Court of Appeals recently affirmed a Court of Claims summary judgment finding that sales to a related party are sourced to the location of the related party’s customers. Uniloy Milacron USA, Inc. v. Dep’t of Treasury, No. 300749 (Mich. Ct. App. Jan. 26, 2012).

Uniloy Milacron USA, Inc. (Uniloy), a manufacturer of molds used in blow-molding machines, entered into a distributor agreement with an affiliated corporation to purchase for resale and market Uniloy’s products. The affiliate did not obtain physical possession of the products. Instead, Uniloy packaged, loaded, and shipped the products directly to the affiliate’s customers.

The Michigan Department of Treasury (Department) argued that all of Uniloy’s sales should be sourced to Michigan for purposes of the Single Business Tax (SBT) sales apportionment factor because Uniloy’s products were “delivered” to the affiliate in Michigan before ultimately being sold/shipped to the affiliate’s customers.Continue Reading Michigan Court of Appeals Finds Drop-Shipped Sales Are Sourced for SBT Purposes Based on Delivery Location

The Massachusetts Department of Revenue ruled that a California lubricant and cleaning products manufacturer was a manufacturing corporation, even though 70% of its production activities were outsourced to third parties. As a result, the Department permitted the company to use a single sales factor to apportion its taxable net income to Massachusetts. Mass. Ltr. Rul. 11-8: Qualification as a Manufacturing Corporation under G.L. c. 63, s. 38(I) (Dec. 16, 2011).

Under Massachusetts Law, a “manufacturing corporation” that has income from business activity that is taxable both in Massachusetts and outside the state is required to apportion its net income to Massachusetts using a single sales factor. There are two requirements to be a “manufacturing corporation.” First, the corporation must be engaged in manufacturing during the year, and second, the manufacturing activity must be substantial. A corporation’s manufacturing activities are substantial if the corporation meets one of the five statutorily enumerated tests. The first test is that the corporation derives 25% or more of its receipts for the taxable year from the sale of manufactured goods that it manufactures.Continue Reading Massachusetts Greases the Skids for Lubricant Manufacturer to Use Single Sales Factor