Noteworthy Cases

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The Massachusetts Appellate Tax Board recently upheld the Commissioner of Revenue’s denial of deductions for interest expense on intercompany loans. Sysco Corp. v. Comm’r of Revenue, Docket Nos. C282656 & C283182 (Mass. App. Tax Bd., Oct. 20, 2011).

In Sysco, the taxpayer employed a common cash management arrangement in which cash was swept…

Most multistate taxpayers are audited, assessed, or challenged on their tax positions and are faced with a decision whether to challenge or settle. In this edition of A Pinch of SALT, Sutherland SALT’s Michele Borens and David Pope discuss techniques and considerations for deciding whether to settle; determining the scope of a settlement; developing a settlement strategy; and finalizing…

The Louisiana Court of Appeal recently ruled that a corporation’s passive ownership interest in a limited partnership doing business in Louisiana is not sufficient to create Louisiana corporate franchise tax nexus. Utelcom, Inc. v. Bridges, Dkt. No. 535,407 (Division “D”, Ct. App., First Dist., Sept. 12, 2011). The court held that because capital contributed to…

The New York State Department of Taxation and Finance (Department) provided another example of its longstanding eagerness to force taxpayer combination—at least in cases where it results in increased tax revenue. In the Matter of Kellwood Co., No. 820915 (N.Y. Tax App. Trib. Sept. 22, 2011).

The Department (or taxpayer) must prove three elements to require a combined report: 

  1. Sufficient ownership 
  2. Existence of a unitary business 
  3. Distortion

Continue Reading New York Attempts to Take Taxpayer Out Behind the (Kell)Woodshed

In shocking similarity to the once-popular Amy Winehouse song “Rehab,” the U.S. Supreme Court denied certiorari in two nexus cases: KFC Corp. v. Iowa, 792 N.W.2d 308 (Iowa Dec. 30, 2010) and Lamtec Corp. v. Wash. Dep’t of Revenue, Docket No. 83579-9, en banc (Wash. Jan. 20, 2011) but left open the possibility to hear DIRECTV, Inc. v. Levin, 128 Ohio St.3d 68 (Ohio Dec. 27, 2010).

KFC is an economic nexus case involving the license of intangibles. KFC did not have any employees or property within Iowa; KFC licensed the use of trademarks and other intangibles to independent franchisees in the state in exchange for royalties. The Iowa Supreme Court held that KFC’s license of the intangibles was the “functional equivalent” of physical presence under Quill and that, in the alternative, physical presence was not required to find substantial nexus for corporate income tax purposes.

The Court also denied certiorari in Lamtec, where the taxpayer’s sole presence in the state was irregular employee visits to customers. The Washington Supreme Court determined that Lamtec had nexus with Washington for Business and Occupation (B&O) tax purposes and raised additional questions regarding how Washington views the physical presence test relating to the B&O tax, stating: “We conclude that to the extent there is a physical presence requirement, it can be satisfied by the presence of activities within the state.” (emphasis added).Continue Reading These Cases Tried to Go to the U.S. Supreme Court, But the Court said “No…No…Oh?”

Taxpayers frequently challenge tax laws based on equal protection grounds, but states generally prevail on the rather easily met rational basis test. In a noteworthy Iowa decision, Qwest, an incumbent local exchange telecommunications company (ILEC), successfully argued that the application of two property tax exemptions resulted in unconstitutional discrimination against it in favor of competitive long distance companies (CLDCs) and wireless companies. Qwest Corp. v. Iowa State Bd. of Taxation and Revenue, Docket No. CV008413 (Iowa Dist. Ct. Aug. 17, 2011).

The first subject of Qwest’s challenge was an exemption for personal property acquired by CLDCs after 1995 that was available to “long distance telephone companies,” the definition of which specifically excluded ILECs like Qwest. The second aspect of Qwest’s challenge involved the state’s central assessment property tax scheme. Iowa law exempts all personal property from tax, but for centrally assessed telephone companies like Qwest, the state treats all property as “real property.” All “telephone companies” operating a telecommunications line in the state are subject to central assessment. The state did not classify wireless companies as telephone companies, because the wireless companies use radio wave technology and not a network of cable and wires. Therefore, Qwest paid tax on the value of all of its property, while wireless companies did not pay tax on personal property.Continue Reading Iowa Court Upholds Equal Protection Challenge

Alabama ALJ Bill Thompson voided a local sales tax assessment asserted against an electronics retailer because the retailer did not have a physical presence in the taxing jurisdictions. Although the retailer sent repairmen into the local taxing jurisdictions, the retailer did not have a physical store or sales representatives in the localities, and therefore lacked…

While the power to issue a jeopardy assessment has been referred to as part of a state’s “power of the purse, not its power of the sword,” state and local taxing authorities have shown a propensity to impose jeopardy assessments. Indiana Dep’t of State Revenue v. Adams, 762 N.E.2d 728, 732-33 (Ind. 2002). Luckily, state courts increasingly are willing to look behind jeopardy assessments to determine whether the statutory requirements for their issuance have been met. In Garwood v. Indiana Dep’t of State Revenue, No. 82T10-0906-TA-29 (Ind. Tax Ct. Aug.19, 2011), the Indiana Tax Court invalidated 16 jeopardy assessments issued by the Indiana Department of Revenue as a result of the Department’s abuse of its jeopardy assessment authority.

The Garwoods supplemented their dairy farm income by breeding and selling dogs.  Prompted by a series of consumer complaints, the Indiana Attorney General investigated the Garwoods. Undercover Attorney General agents purchased dogs and found that the Garwoods had failed to pay Indiana income tax and to collect and remit sales tax. In addition, the Garwoods did not register as retail merchants or file sales tax returns. The Department served jeopardy assessments on the Garwoods at their home and demanded immediate payment of the tax, interest, and penalties alleged to be owed. When the Garwoods informed a Department official that they could not pay immediately, the Department served them with jeopardy tax warrants and, on that same morning, state officials, police, and 60 volunteers from various humane societies raided the farm and seized all 240 of the Garwoods’ dogs, including their house pets and farm dogs. Later that day, the seizures were made public in a television press conference and newspaper interview (which the court described as a “media circus”). A day later, state officials sold all of the Garwoods’ dogs for a total of $300.Continue Reading Indiana Jeopardy Assessments (and Taxpayer) Turn Out to be a Dog