The Arkansas Department of Finance & Administration issued an opinion stating that the provision of certain “virtual services,” including bookkeeping, project management, business analysis, email management, research, and customer service, provided via the Internet, are not subject to Arkansas sales tax. Arkansas sales tax is imposed on the gross proceeds from all sales of tangible personal property, specified digital products, and certain enumerated services. The opinion states that the services at issue are not specifically enumerated services subject to sales tax, regardless of whether the services are performed virtually or in person.

On June 5th, the Maryland Court of Appeals held that a reduced interest rate on refunds paid to taxpayers as a result of the U.S. Supreme Court’s decision in Comptroller of Maryland v. Wynne did not violate the U.S. Constitution’s dormant Commerce Clause.

In 2018, the U.S. Supreme Court held that a Maryland statute that authorized a credit for taxes paid to other states was unconstitutional to the extent it applied only to the state portion of Maryland’s income tax, and not to the county “piggyback.” After the Court’s ruling, the Maryland General Assembly made two relevant amendments to the law. It amended the credit so that it would also apply to the county portion, and it also authorized interest on refunds related to the county portion of the credit at a prime rate of 3%, rather than the 13% interest rate paid on certain other tax refunds.

After their successful challenge to the constitutionality of the underlying credit provision, the Wynnes brought a new action challenging the reduced interest rate. The Wynnes again invoked the dormant Commerce Clause, arguing that the Comptroller must pay the same 13% interest rate that it uses for other income tax refunds.

The Maryland Court of Appeals disagreed. The court first determined that a tax refund is distinct from interest paid on a refund, and that the latter does not “implicate[] interstate commerce sufficiently to awaken the dormant Commerce Clause.” The court explained that the payment of interest on tax refunds is a matter of legislative grace, and that the legislature may periodically adjust the interest rate. The court noted that in many instances, the Comptroller pays no interest, and here, the 3% rate paid was tied to the prime rate used by banks, which ensured “fair compensation,” while maintaining the state’s “fiscal integrity.” By reducing the rate from 13% to 3% for Wynne refunds, the state saved an estimated $38 million.

Although the court determined that interest rates do not implicate the dormant Commerce Clause, it nevertheless analyzed the constitutional issue and determined that even if the dormant Commerce Clause were implicated, the reduced interest rate did not create interstate discrimination. Rather, the court reasoned that both the reduced 3% rate and the ordinary 13% rate would produce windfalls for the Wynnes, because both rates exceeded the rate of inflation. Thus, the court determined that even with the reduced interest rate, the Wynnes are better off than taxpayers who engaged solely in intrastate business, received full credit for income taxes they paid to other states, and never had to seek refunds.

Wynne v. Comptroller of Maryland, No. 12 (Md. June 5, 2020)

The D.C. Council is considering a new sales tax on advertising services, including digital advertising services, and personal information.

  • On July 6th, the D.C. Council released the Committee Print of the Fiscal Year 2021 Budget Support Act of 2020, which includes a sales tax expansion to those services beginning October 1, 2020 at the reduced rate of 3% instead of the general 6% sales tax rate.
  • Today, the Council will hold its first vote on, and possibly consider amendments to, the proposed Budget Support Act. A second and final vote will occur later this month.
  • The legislation would then need sign-off from the Mayor, who has publicly opposed new taxes this year in a letter to the Council on July 4th. The legislation also would be subject to congressional review under the District’s Home Rule Act of 1973.

Read our full Legal Alert here.

The U.S. Supreme Court recently denied cert in Altera Corp. v. Commissioner. This podcast addresses the Altera decision’s impact on transfer pricing and deference. This podcast also addresses prior state transfer pricing decisions and strategies to defend state transfer pricing audits.

For more information on this topic here is a link to a recent article by Eversheds Sutherland.

 

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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.

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