On June 26, 2019, the New York Court of Appeals held that a price comparison service was taxable as an information service because the information was not personal or individual in nature, which would exclude the service from sales tax.

The taxpayer operated a chain of grocery stores. As part of its pricing strategy, the taxpayer engaged a company to monitor competitors’ prices. The taxpayer selected the products and specific competitors’ locations to be investigated. The provider would then create a confidential report based on the pricing data collected. Under New York law, information services are subject to sales tax unless the information is personal or individual in nature. Here, the Court held that the pricing information and reports could not be personal or individual in nature because such information was derived from a non-confidential and widely-accessible source – the shelves of the taxpayer’s competitors. As such, the pricing service was a taxable information service.

Significantly, the Court confirmed its single rule for construing exemptions, deductions and exclusions, “each of which operates to negate the taxpayer’s obligation to pay the otherwise applicable tax.” Under this rule, exclusions are interpreted the same as exemptions and deductions and trigger a presumption in favor of taxation. In a concurrence, one justice commented on the practical impact of this rule: “in New York, the taxpayer always loses.” Wegmans Food Markets, Inc. v. Tax App. Trib., No. 56 (N.Y. June 26, 2019).

The South Carolina Administrative Law Court (ALC) held that it could not enforce a Department of Revenue (Department) summons for delivery records issued to a North Carolina freight carrier that regularly transported out-of-state furniture into South Carolina. The Department’s summons requested records of all deliveries the company made into South Carolina, including each purchaser’s name, address, delivery date, and a description of products delivered, for the period of May of 2016 through December of 2017. South Carolina law vested the Department with the power to issue summons for records “relating to any matters which the department has the authority to investigate or determine,” but the ALC concluded that it lacked the authority to enforce the statutory remedy for failure to comply against a “registered North Carolina business [that] was served in North Carolina.”

Dep’t of Revenue v. SunBelt Furniture Xpress, Inc., No. 19-ALJ-17-0110-IJ (S.C. Admin. Law Ct. June 11, 2019)

While group exercise classes led by instructors are especially popular these days, a recent decision subjects such classes to a special New York City sales tax. In a May 23, 2019, decision, a New York Administrative Law Judge (ALJ) determined that SoulCycle, Inc. indoor cycling classes were subject to a special New York City 4.5% sales tax.

In their article for Bloomberg Tax, Eversheds Sutherland attorneys Open Weaver Banks and Chelsea Marmor discuss how the company failed to convince the ALJ that the state sales tax exemption for “participatory sports” should extend to the city’s sales tax.

Read full article here.

A taxpayer’s spent carbon reactivation process did not qualify as “manufacturing” for the purposes of Texas’ manufacturing sales tax exemption, according to recently released guidance from the Texas Comptroller of Public Accounts. In a private letter ruling, the Comptroller holds that a taxpayer who operates a carbon reactivation plant is ineligible for the exemption because it did not obtain title to the carbon until after the completion of the reactivation process.

Refiners and industrial facilities use carbon as a filter for organic contaminants. The taxpayer reactivates or “repairs” spent carbon by burning the contaminants off in a high-temperature furnace so the carbon can function again as a filter. Due to liability issues, this taxpayer does not acquire title to spent carbon as waste material; the taxpayer only acquires the carbon post-reactivation when it is not waste but rather an item in commerce.

For the purposes of the sales tax exemption, manufacturing includes “the repair or rebuilding of tangible personal property that the manufacturer owns for the purpose of being sold, but does not include the repair or rebuilding of property that belongs to another.” In this case, the taxpayer is not engaged in manufacturing because it repairs carbon while the customer still owns title to the carbon.

Texas Private Letter Ruling No. 201905003L (May 9, 2019).

Eversheds Sutherland’s newest SALT associate, Lexi Louderback, is bringing more than just her deep knowledge and experience in handling multistate taxation issues to our Sacramento office. Joining Lexi is the other newest member of our SALT family, her adorable pup, Mufasa, named for the large scraggly mane he had sported when first adopted from a shelter in College Station, Texas.

Because there are such few details known about his birth and backstory, Lexi affectionately refers to Mufasa as a “dumpster dog.” Despite his cryptic lineage, Mufasa was always destined to be King of House Louderback. After Lexi watched another family adopt the German shepherd puppy she had her eye on, Mufasa, the true heir to the throne, stepped up to make his claim. Since that day, the two have been best friends.

Lexi and Mufasa are inseparable, regularly exercising together, hanging out on patios, or partaking in Mufasa’s favorite activity – binge-watching Game of Thrones. Mufasa credits the show for influencing his leadership style.

Next time you are in Sacramento, be sure to be on the lookout for Lexi and Mufasa.

We are thrilled to feature Mufasa as our June Pet of the Month!

 

New York’s highest court dismissed taxpayers’ appeal of an Appellate Division ruling that the payment of tax on intangible income to New York as statutory residents, without a credit for tax paid to Connecticut as domiciliaries, determining that the appeal did not raise a “substantial constitutional question.” Edelman v. New York State Dep’t of Taxation and Fin., 2019 NY Slip Op 66249 (N.Y. 2019). The intermediate court relied on the New York Court of Appeals decision in Tamagni v. Tax Appeals Tribunal, 91 N.Y.2d 530 (1998), which similarly determined that taxing statutory residents on intangible income without provided a credit for tax paid to the taxpayer’s state of domicile did not violate the Commerce Clause. As the Tamagni court held, the tax was imposed based only on the taxpayer’s status as a New York resident, without regard to any economic or interstate activity, and thus did not implicate the Commerce Clause.

More recently, however, the U.S. Supreme Court determined in Comptroller of Treasury of Maryland v. Wynne, 135 S. Ct. 1787 (2015), that a state’s “raw jurisdictional power” to tax its residents “says nothing about whether that tax violates the Commerce Clause.” Nevertheless, in Edelman, the Appellate Division distinguished Wynne on two grounds: Wynne did not involve a situation where double taxation arose from the taxpayer’s status as a domiciliary of one state and a statutory resident of another; and Wynne did not involve a tax on intangible income. Edelman v. New York State Dep’t of Taxation and Fin., 162 A.D.3d 574 (2018). The Court of Appeals’ dismissal of the case leaves the Appellate Division’s decision intact.

The taxpayers petitioned for certiorari to the U.S. Supreme Court on June 24, 2019. Docket Nos. 18-1569, 18-1570.

Congratulations to Diane L. Hardt, Administrator of the Income, Sales and Excise Tax Division for the Wisconsin Department of Revenue, on receiving the Harley T. Duncan Award for Leadership and Service in State Tax Administration from the Federation of Tax Administrators. Diane was recognized for her sustained and significant service in the administration of state taxes. In her role as division administrator for the Income, Sales and Excise Tax Division, Diane oversees approximately 825 permanent employees and carries out the Division’s mission to “promote voluntary tax compliance, identify and address noncompliance, provide excellent service, and promote fairness and equity in tax administration.” Congratulations, Diane!

 

The Washington Court of Appeals upheld the Washington Department of Revenue’s denial of a sales tax exclusion for trade-ins of software and hardware. GameStop provides customers with a trade-in credit for software and hardware and allows customers to apply these credits towards future purchases of software and hardware. The Department denied GameStop’s exclusion for two reasons: the Department relied on its interpretation of its regulation to conclude that software and hardware are “not of a like kind,” and GameStop violated the separate statement requirement on trade-in credits used for subsequent purchases. In reaching its decision, the court agreed with the Department’s interpretation of its regulation that “property of like kind” is based on the “nature of the property and its function or use,” because software and hardware do not perform the same function or use. The court also noted that “[w]e give great deference to the Department’s interpretations of its own regulations, especially where the legislature has silently acquiesced over a long period to the Department’s construction.” Wash. Dep’t of Revenue v. GameStop, Inc., 428 P. 3d 1269 (Oct. 30, 2018), withdrawn upon motion for reconsideration, No. 50409-0-II, 2019 WL 1247107 (Wash. Ct. App. Mar. 19, 2019).

The Alabama Supreme Court ruled that all software, including custom software, is tangible personal property subject to Alabama sales tax. The taxpayer filed refund claims for sales tax paid on computer software and accompanying equipment, claiming that an Alabama Department of Revenue regulation exempted these purchases from the sales tax as “custom software programming.” The Alabama Supreme Court affirmed the denial of the refund claim, reasoning that the purchases at issues were software and that “there is no distinction for Alabama sales-tax purposes between canned or custom software.” In the majority’s view, “[a]ll software is tangible personal property and thus subject to sales tax.” The court clarified, however, that the act of customizing the software for a particular user is a nontaxable service when separately invoiced by the vendor. One concurring opinion urged the legislature “to clarify how a transaction involving software and services is to be documented and invoiced.” However, the dissenting opinion noted that the majority had ignored the Department’s regulation because the taxpayer’s software fit within the stated definition of “custom software programming,” which includes “separately stated charges for modifications to a canned computer software program when such modifications are prepared to the special order of the customer.” Russell Cty. Cmty. Hosp., LLC v. State Dep’t of Revenue, No. 1180204, 2019 WL 2150922 (Ala. May 17, 2019).

On May 22, 2019, the Illinois Appellate Court held that the late filing of a boat tour business’ Amusement Tax protest was excusable. The Cook County Department of Revenue had violated the taxpayer’s procedural due process rights by “affirmatively misleading” it on the proper filing deadline. Cook County law requires that taxpayers protest assessments within 20 days from the mailing of the assessment. The auditor erroneously informed the taxpayer, by e-mail, that the protest was due on October 1, 2014, 20 days after the taxpayer’s receipt of the assessment. Relying on the auditor’s advice, the taxpayer filed its protest on that date, two days after the actual deadline. On review, the court held that the unambiguous ordinance began the 20-day window for the taxpayer to protest its assessment on the date the Department mailed the assessment. However, the court determined that the auditor’s incorrect advice, along with confusing documents from the Department, misled the taxpayer that the date of the assessment’s receipt was the trigger for the 20-day deadline. Thus, the court concluded that: (1) the Department violated the taxpayer’s procedural due process rights, and (2) the proper remedy was to deem the protest timely filed and address the merits. Mercury Sightseeing Boats, Inc. v. County of Cook, Nos. 16 CH 10775, 16 L 50566 (Ill. App. Ct. May 22, 2019).