The Massachusetts Appellate Tax Board (ATB) granted summary judgement for taxpayer U.S. Auto Parts Network, Inc. (U.S. Auto Parts), abating the Department of Revenue’s sales and use tax assessment based on a finding that the online auto parts seller had acquired “cookie nexus” with the state. The Department’s economic nexus regulation, the “Internet Vendor Rule,” was adopted nine months before the South Dakota v. Wayfair decision. The Department determined that with this regulation,  the pre-Wayfair physical presence nexus requirement is satisfied if sellers place “cookies” on the browsers of in-state customers or if they make apps available for in-state customers to download.  The Department continued to enforce this “cookie nexus” rule post-Wayfair.

The ATB’s one-page ruling did not provide its legal analysis or findings of fact – and indicated a more detailed decision is forthcoming.  U.S. Auto Parts had argued that “cookies” do not qualify as physical presence. It also argued that the assessment violated the Internet Tax Freedom Act and the Due Process clause. The ATB’s decision in this case is significant because previous litigation had failed to overturn the Department’s “cookie nexus” rule and its attempt to enforce an economic nexus rule pre-Wayfair.

U.S. Auto Parts Network, Inc. v. Commissioner of Revenue, Dkt. No. C339523 (Mass. App. Tax Bd. Jan. 28, 2021)

On December 2, 2020, a three-judge panel of California’s Office of Tax Appeals (“OTA”) issued a non-precedential decision ruling that a husband and wife remained domiciled in and residents of California for the 2013 tax year despite the husband leaving the state for an alleged “permanent” job in Alaska that lasted from April to July of that year. The taxpayers filed a joint 2013 California Resident Income Tax Return but subtracted wages earned by the husband when he was living and working in Alaska.  At audit, the California Franchise Tax Board found that the taxpayers were California residents during the entire year. On appeal the taxpayers argued they were no longer domiciled in California as of April 2013, when the husband “moved” to Alaska.

Basing its decision on the written record, the OTA concluded that the taxpayers did not provide any evidence demonstrating their intent to remain in Alaska permanently or indefinitely such that they did not surrender their California domicile. For example, the taxpayers did not provide any documents or other evidence showing that the husband’s job in Alaska was anything other than a temporary position or that the taxpayers searched for a permanent home during the four months the husband worked in the state. Further, despite the wife’s claims that she returned to California after traveling to Alaska “only to sell the family home, quit her job, and sever ties with her community for good,” the taxpayers did not produce any evidence that the taxpayers owned – as opposed to rented – a California home in 2013 or that the wife quit – or gave notice of an intent to quit – her California job in 2013. Instead, the evidence showed the wife continued to live in the taxpayers’ rented California home while the husband was working in Alaska and that both taxpayers lived in the home when the husband returned to California in July.

The OTA also explained that other than their unsupported assertions, the taxpayers did not provide any evidence demonstrating that their absences from California during 2013 were “for other than temporary or transitory purposes.” In addition to the lack of evidence regarding the husband being offered a permanent job and the taxpayers searching for a permanent home in Alaska, the taxpayers did not provide evidence showing that they established any significant connections in Alaska.  Accordingly, the OTA concluded that the taxpayers’ closest connections were with California, that their visits to Alaska were for temporary or transitory purposes, and that the taxpayers remained California residents during the entire year.

For an overview of California law regarding domicile and residency, see our prior post on “What Makes a California Resident?”

Appeal of W. Smoot and K. Smoot, 2021-OTA-041 (Dec. 2, 2020) (non-precedential)

On December 21, 2020, a three-judge panel of California’s Office of Tax Appeals (“OTA”) ruled in a non-precedential opinion that an ophthalmologist successfully abandoned his California domicile and became a California nonresident from May 25, 2013 through December 31, 2013 after moving to Saudi Arabia. For a brief overview of the various legal concepts involved in and tests applied during California’s residency analysis, see our prior post on “What Makes a California Resident?”

Here, the OTA found that the taxpayer moved to Saudi Arabia in May 2013 with the intention of staying indefinitely, despite the fact the taxpayer ultimately returned to California to reside in 2015. The panel based its ruling on a number of uncontroverted facts, including: the taxpayer’s marriage to his former spouse was irreparably broken when he moved, as the two had separated 20 months prior; the taxpayer sold his property in California, including his cars, and closed his California bank accounts; and the taxpayer rented an apartment in Saudi Arabia under a two-year lease, joined a mosque, found a job as an ophthalmologist, bought a new car, obtained a local driver’s license (valid for 10 years), and became engaged to a Saudi woman. The taxpayer supported his position with testimony from a number of individuals, including family members and work colleagues, which the OTA found to be credible and consistent.

The OTA rejected the Franchise Tax Board’s (“FTB”) argument that the taxpayer continued to be a California domiciliary and was in Saudi Arabia for a temporary and transitory purpose. The FTB’s principal contention was that the taxpayer remained a California domiciliary because his minor children continued to reside in the state during his absence. The OTA concluded that the taxpayer had no choice but to leave the children with their mother because she had commenced a dissolution action against him and would not allow the children to go to Saudi Arabia.  The FTB also noted that the taxpayer did not cancel his California voter registration, driver’s license, or license to practice medicine.  However, during the period the taxpayer resided in Saudi Arabia, “he did not vote in California, and neither his California driver’s license nor his California license to practice medicine came up for renewal.” Additionally, while the taxpayer passively maintained a medical license, he did not practice medicine in California from May 2013 through the end of the year. Lastly, the OTA found that the taxpayer’s use of his parents’ mailing address in California did not show an intention to return to California, but instead reflected the difficulty of forwarding mail to Saudi Arabia.

Appeal of A. Kahn, 2021 – OTA – 064 (Dec. 21, 2020) (non-precedential).

A taxpayer’s services measuring the effectiveness of advertising campaigns constitute taxable information services, according to a Jan. 14 ruling by the New York Division of Tax Appeals.

The taxpayer measured its clients’ advertising effectiveness using end user surveys. The taxpayer provided the resulting data to its clients with corresponding analysis. While the taxpayer retained the rights to copy, distribute, resell, modify and otherwise use the data it collected from end users, its clients were authorized to furnish the survey data to third parties. The taxpayer also offered a subscription-based ad effectiveness benchmarking product, which was powered by anonymized and aggregated results from the surveys. The benchmarking product allowed subscribers to compare the effectiveness of their advertising campaigns to industry peers.

The New York Division of Taxation audited the taxpayer and took the position that the taxpayer’s services constituted taxable information services under Tax Law § 1105(c). The taxpayer took the position that it furnished nontaxable consulting services where the information provided was merely a component of the service.

In ruling against the taxpayer, an administrative law judge held that the taxpayer’s services fell “squarely within the realm of Tax Law § 1105(c),” explaining that the “process of collecting, compiling and analyzing information is the very essence of an information service.” Additionally, the judge noted that the relevant regulation provides that  “[t]he collecting, compiling or analyzing information of any kind or nature and the furnishing reports thereof to other persons is an information service,” including, “analysis reports and product and marketing surveys.” 20 NYCRR 527.3(a)(2), (3).  Further, the fact that the survey data could be shared by the taxpayer’s clients and was included in the benchmarking product rendered the statutory exclusion for “the furnishing of information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to other persons” inapplicable.

In the Matter of Dynamic Logic, Inc. (By Kantar LLC, as Successor-in-Interest), DTA No. 828619 (N.Y. Div. Tax App., ALJ Det’n Jan. 14, 2021).

New York Governor Andrew Cuomo released his Fiscal Year 2022 budget and accompanying legislation on January 19, 2021 (the Budget Bill). In this webcast, Eversheds Sutherland attorneys Ted Friedman, Michael Hilkin and Chelsea Marmor analyze the state tax implications of the Budget Bill, along with recent New York litigation developments and Department of Taxation and Finance guidance that could impact businesses in 2021.

View the presentation slides here.

How do you change your state of domicile? What makes you a resident of a particular state? While these questions appear simple on the surface, the answers are complex and can vary depending on the state. That’s why Eversheds Sutherland’s SALT team has honed our knowledge and expertise on these issues to provide answers. Our practitioners have deep experience in addressing residency issues across the country, including issues in high tax jurisdictions like California, New York and Illinois.

If you’re facing a state tax residency audit, we can help. Our team has successfully defended taxpayers at all stages of the administrative process in cases that are incredibly fact-intensive and invariably intrusive. We also routinely assist high-net-worth individuals with navigating both the objective factual thresholds and the critical subjective elements – such as demonstrating intent – involved in adequately severing ties with one jurisdiction and establishing new connections in another.

Our team will continue to cover the latest developments in state tax residency – administrative guidance, decisions, rules and regulations – as well as introductions to and overviews of some of the relevant authority in various states – i.e. What makes a California resident?

These resources merely scratch the surface, however. If you have questions regarding state tax residency, please contact a member of our SALT team to learn more.

In this episode of the SALT Shaker Podcast, host Chris Lee discusses four recent developments, which includes a New York State advisory opinion addressing the taxation of email services (TSB-A-20(30)S, July 14, 2020), an Iowa publication addressing the taxability of computer peripherals, a Rhode Island rule concerning the taxability of online hosted software related to advertising services (Ruling Request No. 2020-03, December 29, 2020) and an Alabama Tax Tribunal decision addressing the taxability of prepaid wireless services (Cellular Express, Inc. v. Department, Ala. Tax Trib. No. S.14-320-JP – January 21, 2021).

Questions or comments? Email SALTonline@eversheds-sutherland.com.

 

 

 

 

 

 

 

Listen now: 

For a transcript of the podcast, click here. 

Subscribe for more:

  

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: What state, which is home to a mega ranch owned by two musicians featured on The Voice, also has pending legislation to exempt master music recordings from sales tax?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card.

Answers will be posted on Saturdays in our SALT Weekly Digest. Be sure to check back then!

On January 6, 2021, the Court of Appeals of New Mexico held that a power purchase agreement (PPA), entered into by a wholesale electricity generator to secure compensation in exchange for providing electricity, constituted intangible property that is not subject to property taxation and cannot be included in the value of the wholesaler’s electric plant for property tax purposes. The Court also held that, for purposes of valuing the plant, it was appropriate to use the cost of acquisition, rather than the cost of construction, to determine the tangible property cost of the plant.  The Court reasoned that, under the applicable statute, “tangible property costs should first be based on the cost of acquisition, and then on the cost of construction only if the cost of acquisition is not known or available.” Finally, the Court concluded that it was appropriate to consider the PPA in determining whether the wholesaler was entitled to deductions from the plant’s value due to obsolescence, and that the wholesaler was not entitled to deductions because the PPA mitigated obsolescence.

Lea Power Partners, LLC v. New Mexico Taxation & Revenue Dep’t, Dkt. No. A-A-CA-37707 (N.M. Ct. App. Jan. 6, 2021).