The California Office of Tax Appeals (OTA) found that a foreign single-member LLC domiciled in Georgia was “doing business” in California by reason of its 50 percent interest in a pass-through LLC operating in California (LLC) and thus, was subject to the state’s annual LLC tax. The OTA focused on California’s definition of “doing business” in Cal. Rev. & Tax Code § 23101(a), which provides that a person is doing business in the state if it “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” In ruling against the taxpayer, the OTA distinguished the taxpayer’s facts from Swart Enterprises, Inc. v. Franchise Tax Bd., 7 Cal. App. 5th 497 (Ct. App. 2017), which held that an out-of-state taxpayer was not “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit” – i.e., not “doing business” – in California by reason of its small (0.2%), non-managing member interest in a manager-managed LLC investment fund. The OTA reasoned that unlike in Swart (and because the taxpayer failed to provide requested supplemental briefing on the relevant issue), the doing business status of the LLC was attributable to the taxpayer because: (1) the taxpayer failed to show it was not a managing member of the LLC doing business in California; (2) the taxpayer would have significant authority over the activities of the LLC by virtue of its 50 percent interest; (3) although the taxpayer did not have a controlling interest, no other member of the LLC had a larger interest; and (4) the taxpayer presumably could have used its 50 percent interest to block the LLC from taking actions it disagreed with, if it was so inclined.

Appeal of Wright Capital Holdings LLC, Dkt. No. 2019-OTA-219P (Ca. Office of Tax App. Aug. 21, 2019).

A Virginia statute gives circuit courts original jurisdiction to hear declaratory judgment actions brought by businesses to challenge another state’s assertion of sales or use tax nexus. Va. Code Ann. § 8.01-184.1. In a case of first impression, on October 9, 2019, a Virginia circuit court granted the Massachusetts Department of Revenue’s motion to dismiss such a suit challenging the Department’s “cookie nexus” standard for sales tax collection. The Department notified the plaintiff, a Virginia-based company, of the cookie nexus standard in three separate letters. The plaintiff did not allege that the Department had any other contacts with the plaintiff in Virginia. The court dismissed the litigation, finding that the Department’s three letters sent to plaintiff were insufficient to establish jurisdiction under the Due Process Clause of the 14th Amendment of the United States Constitution.

Crutchfield v. Commonwealth of Massachusetts, No. No. CL17001145-00 (Va. Commw. Ct. Oct. 9, 2019).

The Utah Supreme Court upheld the constitutionality of Utah’s taxing scheme, which provides a credit against taxes paid to other states, but not against taxes paid to foreign governments.

The taxpayers – Utah residents who owned interests in a Subchapter S corporation doing business throughout the world – argued that this scheme taxed a disproportionate share of their income compared to the share actually earned from Utah sources. The court determined that this analysis was irrelevant, holding that the US Supreme Court’s decisions only require a credit for taxes paid to other states, not to other nations.

The court noted that the Utah taxing scheme must pass the fair apportionment internal consistency test, which requires a theoretical replication of the Utah tax system by every other state to determine whether it would result in multiple taxation. Shockingly, the court rejected the taxpayer’s position that the taxing scheme must also pass the fair apportionment external consistency test, which instead considers whether the taxing scheme includes extraterritorial value.

The court determined that the US Supreme Court implicitly rejected the external consistency requirement in Comptroller of the Treasury of Maryland v. Wynne, 135 S. Ct. 1787 (2015). In Wynne, the court struck down Maryland’s internally inconsistent taxing scheme, but in doing so, suggested that Maryland’s scheme would not need to satisfy external consistency. The Utah Supreme Court relied on this language to determine that external consistency – at least in the context of residence-based taxation – is dead.

The court also rejected the taxpayer’s claim that the lack of a credit for foreign taxes violated the dormant Foreign Commerce Clause. Because the US Supreme Court has not rendered a decision regarding the application of the Foreign Commerce Clause to a resident’s tax, the Utah Supreme Court declined to do so here. Nevertheless, the court reasoned that the tax did not violate the Foreign Commerce Clause (if it did apply) because the taxpayers received a credit for foreign taxes paid on their federal tax returns. This decision is also noteworthy for its harsh criticism of the Dormant Commerce Clause.

Steiner v. Utah State Tax Comm’n, No. 20180223 (Utah Aug. 14, 2019)

The Supreme Judicial Court of Massachusetts held that pipes and appurtenant equipment used by a taxpayer to produce, store and distribute steam for heating and power generation were exempt from local personal property tax as manufacturing property. Affirming the Appellate Tax Board, the court applied the “great integral machine” doctrine to find that the pipes and appurtenant equipment comprised an integral part of the taxpayer’s steam production and distribution system, thereby qualifying for the manufacturing exemption. Notwithstanding the local board of assessors’ argument that the manufacturing exemption statute specifically excludes “underground conduits, wires and pipes,” the court reasoned that the statutory exclusion does not abrogate the doctrine, which “has endured without legislative interference for well over one hundred years” and “enjoys continued vitality.” In reaching its decision, the court noted that it accorded the Appellate Tax Board’s decision “great deference” and will not disturb the board’s decision if it is based on “substantial evidence and correct application of the law,” as the board is an agency charged with administering the tax law and it has expertise in tax matters.

Veolia Energy Boston, Inc. v. Board of Assessors of Boston, 130 N.E.3d 767 (Ma. 2019)

The New Jersey Appellate Division held that New Jersey’s insurance premium tax (IPT) for self-procured insurance coverage is based only on the risks insured in the state, and not based on risk insured throughout the United States. In reversing the New Jersey Tax Court, the appellate court noted the differences between self-procured insurance and surplus lines insurance noting that the plain language of the IPT statute applies a “home state rule” imposing the IPT on the premiums paid on all risks in the United States, while self-procured insurance is only subject to tax on risks within New Jersey. Because the taxpayer self-procured the insurance from a subsidiary captive insurance company, the court concluded that the insurance was not a surplus lines policy and not subject to IPT on all of its risks in the United States. Although the four relied on the plain language of the statute to resolve the case, the court noted that even if the IPT statute’s reference to surplus lines policies was ambiguous, any ambiguity would need to be resolved in the taxpayer’s favor.

Johnson & Johnson v. Dir., Div. of Taxation, & Comm’r, No. A-5423-17T3 (N.J. Super. Ct. App. Div. Sept. 25, 2019)

The Minnesota Supreme Court held that a taxpayer that sold data technology services was not eligible for Minnesota’s sales tax exemption for computer equipment used in online data retrieval systems because the underlying information was “not equally accessible to all of its customers.”

Minnesota provides a sales tax exemption for, among other things, “machinery and equipment used primarily to electronically transmit results retrieved by a customer of an online computerized data retrieval system.” Minn. Stat. Ann. § 297A.68, Subd. 5(a). In turn, the statute defines an “online data retrieval system” as a “system whose cumulation of information is equally available and accessible to all its customers.” Id., Subd. 5(d)(8) (emphasis added).

Because the taxpayer’s customers obtained access only to their own collection of documents, and could not access or view other customers’ documents, the Supreme Court ruled that the taxpayer’s service did not meet the qualifying definition of an “online data retrieval system,” which requires that the information on the computer system be available to all customers. In reaching this conclusion, the Supreme Court examined the intent of the sales tax exemption and the plain meaning of the term “data retrieval” and concluded that the taxpayer’s proposed interpretation was untenable and would have made the exemption too broad.

Kroll Ontrack, LLC v. Comm’r of Revenue, 931 N.W.2d 371 (Minn. 2019)

 

SALT Marketplace Mondays

Since its annual meeting in Boise, Idaho, in early August, the MTC has held a series of teleconference calls to discuss the priority marketplace issue list that was developed based on state input. The purpose of these calls is to solicit additional feedback from the states and business community on the issue list for purposes of drafting a white paper with recommendations on each of the issues. During the calls, the MTC has discussed a variety of issues, including:

• Fifteen states have a broad definition of marketplace facilitator, and 19 states plus the District have a narrow definition. Several of the states also have common exclusions from the definition of marketplace facilitator including, advertising, payment processors, food delivery services and online travel companies. The most common exclusion is for payment processors.
• whether marketplace facilitators should have the same rights as retailers. For example, should they qualify for bad deductions, vendor compensation and other price adjustments. The MTC noted that approximately 23 states currently treat marketplace facilitators as retailers.
• liability protections for marketplace facilitators. This discussion centered around which entities were subject to audit and whether states provide protections for marketplace facilitators that rely on information from marketplace sellers. There was also some discussion regarding whether marketplace sellers should be subject to audit.
• information reporting requirements between marketplace facilitators and marketplace sellers. For example, should marketplace sellers be required to provide marketplace facilitators certain information to determine taxability.
• simplified state/local tax rates for remote sellers. For example, some states allow remote sellers to collect at a single combined state and local tax rate. This type of system eases compliance for remote sellers and simplifies the determination of tax rates and taxability issues for every locality.
• registration and compliance for foreign sellers. It was noted that some state systems make it complicated for foreign sellers that are registering. For example, Arizona requires a US-recognized email domain. However, it was also noted that the Streamlined Sales Tax Board permits foreign companies to register through its process.
• locally administered taxes. For example, Colorado has 72 home rule cities that have independent taxing authority. Some of the changes that have been made in Louisiana and Alabama to simplify local tax discussions have also been discussed. For example, Alabama enacted a Simplified Sellers Use tax program that allows sellers to levy a flat eight percent rate statewide, half of which gets distributed to localities.

• What’s Next? The MTC is working toward finalizing a draft of its white paper on the marketplace issues before its next meeting in November.

The Maryland Tax Court reversed the Comptroller’s disallowance of NOLs and essentially struck down a regulation that limited the usage of pre-nexus NOLs. The Comptroller disallowed the taxpayer’s use of NOLs accumulates by entities with no nexus in Maryland that subsequently merged into the taxpayer. The Comptroller relied on a regulation enacted in 2007 that did not permit the use of NOLs of an acquired company that was not subject to Maryland income tax when the NOL was generated. COMAR 03.04.03.07(5). The Tax Court ruled that no statutory authority existed for this regulation, and the only permissible subtraction or addition to federal taxable income are prescribed in Maryland statutes. In this case, the Taxpayer’s NOLs were allowed for federal income tax purposes, and the Maryland Tax Court noted that no statute contemplates the modification the Comptroller made.

Sunbelt Rentals, Inc. v. Comptroller of Maryland, No. 18-IN-00-0241 (Md. Tax Ct. Sept. 9, 2019)

Massachusetts Court of Appeals held that a taxpayer could not rely on timely applications for refund of deficiency assessments to also seek refund resulting from alleged overstatement of sales factor in corresponding years’ returns, where the initial application for abatement did not include the sales factor argument and statute of limitations had since lapsed.

The Court of Appeals concluded that the taxpayer’s deficiency assessments only encompassed the stated amounts in the notices of deficiency assessment, not any differences between the amounts the taxpayer self-reported on its returns for the appealed years and the amounts “properly due.” The taxpayer sought to broaden the scope of its deficiency assessments appeals to also seek a refund for taxes paid because of an overstated sales factor. The Court of Appeals concluded that because the taxpayer had never applied for an abatement of the tax originally reported on the return, any challenge to the original self-assessment was time-barred.

Raytheon Co. v. Commissioner of Revenue, Case Nos. 18-P-790 and 18-P-1468, Mass. Court of Appeal (September 12, 2019)

On October 4, 2019, the California Department of Tax and Fee Administration (CDTFA) released its Initial Discussion Paper in anticipation of an Interested Parties Meeting (IPM) set for October 15, 2019 in Sacramento. The subject of both the IPM and the Discussion Paper is how to interpret, clarify and make specific the Marketplace Facilitator Act.

Assembly Bill (AB) No. 147 (Stats. 2019, ch. 5) was signed into law in April 2019 and, broadly speaking, has two components. First, as a result of Wayfair, AB 147 added California Revenue and Taxation Code section 6203(c)(4) which provides that a retailer engaged in business in California includes “Any retailer that, in the preceding calendar year or the current calendar year, has total combined sales of tangible personal property for delivery in this state by the retailer and all persons related to the retailer that exceed five hundred thousand dollars ($500,000). That new provision was operative as of April 1, 2019, and was the subject of a CDTFA Initial Discussion Paper released on May 10, 2019, and the subject of a CDTFA IPM held on May 23, 2019, regarding needed amendments to existing CDTFA regulations 1684 and 1827 to conform them to this statutory change.

Second, AB 147 expanded the definition of “retailer” to include marketplace facilitators, as defined, and those new provisions – known as The Marketplace Facilitator Act – were operative as of October 1, 2019. The IPM held on May 23, 2019 did not address the marketplace facilitator provisions of the bill, which CDTFA chose to address at a separate IPM, and which is now set for October 15th. The Initial Discussion Paper just released for that IPM includes a copy of Proposed Regulation 1684.5, “Marketplace Sales” and staff “looks forward to hearing the interested parties’ thoughts regarding the proposed regulation as well as any additional issues that may warrant further consideration.”