The North Carolina Supreme Court affirmed a lower court decision that held that a manufacturer of brake pads used by railroads did not qualify for an exception to the state’s standard three-factor apportionment formula that allows “public utilities” to instead apportion their income using a single-sales factor formula.

In February 2019, the North Carolina Superior Court reasoned that the taxpayer did not meet either of the two statutory requirements for qualifying as a “public utility.” First, the statute requires that a public utility be subject to the control of certain specified entities, including the North Carolina Utilities Commission and the Interstate Commerce Commission. The taxpayer conceded that it was not regulated by any of the specified entities, but argued that it was regulated by a successor to the Interstate Commerce Commission and thus qualified as a public utility. The court disagreed, explaining that the plain language of the statute included only specific, enumerated entities, and did not extend to successor agencies.

Second, the statute requires that a public utility own property used for the transmission of communications or the transportation of goods or persons. The court determined that the taxpayer failed to meet this requirement as well, because the taxpayer did not use the property to transport goods or persons. Rather, the taxpayer sold brake pads to railroads, like Amtrak, who then used the brake pads as part of their own transportation of goods or persons. The court reasoned that the taxpayer’s argument would extend the public-utility exception to every manufacturer or retailer who supplies parts and equipment to public utilities.

Eversheds Observation: Notwithstanding the NC Supreme Court’s decision, the issue of whether companies that are subject to some forms of regulations, e.g., federal versus state regulation, is a recurring issue and can have significant impacts on how taxpayers apportion their income.

Railroad Friction Prods. Corp. v. North Carolina Dep’t Revenue, No. 18 CVS 3868 (N.C. Super. Ct. Feb. 21, 2019), aff’d, No. 278A19 (N.C. Apr. 3, 2020)

On May 22, 2020, the Idaho Supreme Court held that the gain realized by a corporate holding company on the sale of its 78.54 percent ownership interest in an LLC was nonbusiness income and therefore not subject to apportionment in Idaho. The LLC was formed in 2003 and manufactured and sold tangible personal property. The LLC had operations in most states, including a factory located in Idaho. The LLC and the corporate holding company shared the same founder, who also served as president and CEO of the LLC, but the LLC maintained its own human resource department and the shared President and CEO did not manage the day-to-day operations, marketing decisions, and other ordinary business and sales decisions of the LLC. After 2003, when the manufacturing business was transferred to the LLC, the corporate holding company’s activities were limited to ownership of the LLC as well as another business that leased real property to the LLC in Virginia. Almost all of the corporate holding company’s income came directly from the LLC. The corporate holding company did not have any employees, did not share any expenses or assets with the LLC, and did not provide financing or other services to the LLC. The two entities did use the same professional firms for legal and accounting services.

The Idaho Supreme Court held that the gain did not constitute business income under the transactional test or functional test, which includes the unitary business test. The court held that the transactional test was not satisfied because the holding company was not in the business of buying and selling such interests. The court noted that the sale of its interest in the LLC was the only such sale the company had made in the seven-year period from 2003 to 2010. As to the functional test, the court held this test was not satisfied because the taxpayer’s sale of its interest in the LLC did not serve an operational function but was instead a passive investment. The court further held that the functional test was not satisfied because the LLC was not unitary with the holding company. Specifically, the court held that the three hallmarks of a unitary relationship, functional integration, centralized management, and economies of scale, were not present. The court found that the fact that the same individual had founded both companies and served as president and CEO of the LLC was not sufficient to support a finding of unity, as he was a “high level executive” who did not manage the LLC’s day-to-day operations.

Noell Indus., Inc. v. Idaho State Tax Comm’n, Dkt. No. 46941 (Idaho May 22, 2020).

On June 22, the US Supreme Court denied Altera Corp.’s petition for certiorari seeking review of the US Court of Appeals for the Ninth Circuit’s decision upholding the US Department of the Treasury’s transfer pricing regulation requiring related participants in cost-sharing agreements to include stock-based compensation costs in the joint cost pool to comply with the arm’s-length standard.

The split Ninth Circuit court had previously reversed a unanimous, en banc decision of the Tax Court invalidating those regulations on the grounds that they violated the Administrative Procedure Act.

In finding that the cost-sharing regulations adequately comported with the arm’s-length standard, the Ninth Circuit endorsed a more fluid definition of the standard — one that permits the use of flexible methodology and does not necessarily require specific arm’s-length comparability.

The federal tax and administrative law implications of the Ninth Circuit’s holding are important and have been widely discussed in the legal press. However, the Altera decision may also have potentially broad significance for the states’ application of transfer pricing principles in separate-return states. In this article for Law360, Eversheds Sutherland attorneys Eric Tresh, Maria Todorova and Justin Brown discuss the potential state tax impacts of the decision and strategies for state transfer pricing audits in the wake of Altera.

Read the full article here

Vermont H. 954, a collection of miscellaneous tax proposals, includes several digital taxation proposals. Vermont currently charges a 2.4% “universal service charge” on the sale of prepaid wireless telecommunication services. H. 954 would require marketplace facilitators collecting the corresponding sales tax to also collect the universal service charge beginning July 1, 2021. Additionally, H. 954 would require the state Department of Taxes to prepare a report on the effect that remote seller and marketplace facilitator legislation have had on individual reporting and remittance of use tax and recommend options for amending the alternative methodology for use tax reporting.

The bill has been adopted by both bodies of the Vermont legislature and is at the governor’s desk.

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:
On September 2nd, 1965, the Congressional Special Subcommittee on State Taxation of Interstate Commerce released the final volume of its study concerning issues in state and local taxation, which was referred to as this report.

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

The prize for the first response to today’s question is a $20 UBER Eats gift card.

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

A California Court of Appeal held that San Francisco may not impose a documentary transfer tax on the value of an existing 41-year leasehold interest upon the sale of the underlying property because the leasehold interest does not constitute “realty sold”. The taxpayer owned a commercial building and agreed to lease the ground floor to a separate business for 45 years. Upon recording the lease with the city and county of San Francisco, the taxpayer paid a real property transfer tax based on the value of the stream of rental payments due over the life of the lease. Six years later when the taxpayer sold the building, including the lease, it again paid the transfer tax and sought a refund for the amount paid based on the value of the payments due from the lessee during the remaining 41 years of the lease on the grounds the existing leasehold interest did not constitute “realty sold”.

The appellate court agreed with the taxpayer, holding that San Francisco cannot impose a documentary transfer tax on an existing leasehold interest with a remaining term of more than 35 years. Applying previous California decisions interpreting “realty sold”, the court looked to definitions of “change in ownership” as used in property tax provisions and found that a leasehold interest will be considered “realty sold” where there is a “creation of a leasehold interest in taxable real property for a term of 35 years or more.” Because the 41-year leasehold interest at issue was transferred, not created, the court concluded that the interest did not constitute “realty sold” and was not subject to the tax.

731 Mkt. St. Owner, LLC v. City & Cty. of San Francisco, No. A154369 (Cal. Ct. App. June 18, 2020).

On June 30, 2020, a California Court of Appeal affirmed a trial court decision that held the California Constitution’s requirement that local taxes be approved by a supermajority vote does not apply to taxes imposed by voter initiative. For background on the case and coverage of the trial court’s decision, see our prior Legal Alert.

The Court first addressed the claim that Article XIIIA, section 4 of the Constitution, which provides that “Cities, Counties and special districts” may impose certain special taxes “by a two-thirds vote of the qualified electors of such district,” applies to voter initiated taxes. The Court concluded that this provision “does not repeal or otherwise abridge by implication the people’s power to raise taxes by initiative, and to do so by majority vote.” Next, the Court addressed the argument that Article XIIIC, section 2(d), which precludes a “local government” from imposing, extending or increase a special tax absent approval by a two-thirds vote, likewise applies to taxes proposed by voter initiative. The Court rejected this argument as well, applying the reasoning of the California Supreme Court in California Cannabis Coalition v. City of Upland (a case interpreting a similar provision of the state Constitution) and concluding that the text of Article XIII, section 2 applies only to actions taken by local government.

There are several “Upland” cases currently pending before various California courts challenging, or seeking validation of, voter initiatives passed by a simple majority. This is the first appellate decision, likely priming it to be appealed to the California Supreme Court and giving that court a chance to clarify its decision in Upland.

Meet the newest member of our Eversheds Sutherland SALT Team, Olive, a French bulldog adopted by Partner Michele Borens less than two weeks ago. This Quarantine Frenchie pup is still only about 10 weeks old, but she is already starting to make her presence felt amongst our SALT team.

There was a lot of initial debate between Michele and her daughters on what this adorable puppy’s name should be. Ultimately, her youngest daughter won that debate, and chose the name Olive.

Olive, or “Ollie” as she has affectionately come to be known, has become a regular on SALT team video calls. She is really enjoying her remote orientation to the team. She particularly enjoys nap time, a special perk reserved only for young puppies on the team (no sleeping for SALT members). Another activity that has quickly become one of her favorite times of the day is lunch time, where she enjoys snacking on toes, shoes, tree branches and many other non-edible items.

Michele and Olive have quickly developed a great working relationship. We are excited to welcome Olive to our SALT Team and thrilled to feature her as the June SALT Pet of the Month!

Friday, June 26, 2020 was “Sine Die” or the 40th and final legislative day of the 2019–2020 legislative session at the Georgia General Assembly.

  • The legislative session was suspended since March 13, 2020 but resumed earlier this month for the remaining 11 days of the legislative session.
  • In the last days of the legislative session, the Georgia General Assembly passed key legislation, including conformity to the federal tax law, a new rideshare fee, changes to interest payments on direct pay permit holder’s refund claims, and amendments to the film tax credit.
  • However, bills limiting tax credits and exemptions, eliminating or reducing administrative deference at the Tax Tribunal, legalizing online sports betting, and facilitating contingency fees failed to pass.

Read our full Legal Alert here.