In a letter of finding, the Indiana Department of Revenue concluded that a pharmacy benefit management provider was required to include in its sales factor receipts from prescription drugs sold to Indiana customers. The taxpayer contracted with insurance companies, retail pharmacies and drug manufacturers to provide health benefit plans and beneficiaries access to discounted prescription medicine. The taxpayer argued that it did not sell drugs to customers, since it had no ownership interest in the drugs but instead, provided services which, under Indiana’s “costs of performance” rule, must be sourced outside the state. Rejecting this argument, the Department concluded that the taxpayer failed to meet its burden to show it was a service provider. Instead, the Department affirmed the auditor’s findings that the taxpayer’s receipts were derived from the sale of tangible personal property.

Ind. Dep’t of Revenue, Letter of Finding No. 02-20160351 (Feb. 27, 2019).

The Texas Court of Appeals held that a hotel owner was not entitled to a resale exemption for the hotel consumables it offered to its guests during their stay. Alamo National Building Management (“Alamo”) purchased items such as soap, lotion, cups and coffee, among other things, using a resale certificate. The items were not separately invoiced to customers and the hotel’s website indicated that the items were “free” and included in the hotel rate. In addition, guests paid a single rental price and were not informed they were paying for the consumables even though Alamo asserted that 35% of the room rental price was for these consumables. Based on the lack of a separate charge, the description on the website and other evidence presented at trial, the Court of Appeals found that the trial court had sufficient grounds to conclude that Alamo did not purchase the items for resale and upheld the assessment.

Alamo Nat’l Bldg. Mgmt. LP v. Hegar, 13-17-00040-CV (Tx. Ct. App. 2019)

The Supreme Court of Arizona held that local surcharges imposed on car rental companies did not violate the US Commerce Clause or the state constitution’s anti-diversion clause. The surcharges, enacted by local initiative to fund sports facilities, were levied on car rental companies based on their income derived from renting vehicles. Representing a class of car rental companies, the taxpayer argued that the surcharges were enacted with discriminatory intent — to impose the tax on out-of-state visitors who rent most vehicles while effectively shielding residents — as evidenced by the publicity pamphlet for the local initiative. In rejecting this argument, the Court determined that the initiative did “not evidence an intent that out-of-state visitors be treated any differently from residents,” and the “fact that visitors, as a group, pay most of the surcharges collected by car rental agencies is not ‘discriminatory.’” Moreover, the Court found that the surcharge did not violate Arizona’s anti-diversion clause, which prohibits revenues derived from taxes or fees related to the operation of motor vehicles be expended for other than highway and street purposes, because the surcharge was not “imposed as a prerequisite to, or triggered by, the legal operation or use of a vehicle on a public road,” as contemplated by the clause.

Saban Rent-a-Car LLC v. Ariz. Dep’t of Revenue, No. CV-18-0080-PR 905192 (Ariz. Feb. 25, 2019)

The Virginia Supreme Court held that the use of the cost-of-performance method to apportion nearly 100% of the taxpayer’s sales of services to Virginia did not violate the U.S. Constitution, even though over 95% of the taxpayer’s customers were located outside of the state – perhaps an expected result for a services company based in a cost-of-performance state and doing business in other states, approximately two-thirds of which have market-sourcing rules. The taxpayer requested apportionment relief Va. Code § 58.1-421, which provides such relief if the statutory method of apportionment is inapplicable (unconstitutional) or inequitable (double taxation attributable to Virginia law). While the Court acknowledged that the taxpayer was subject to double taxation of its income, the Court found that the tax satisfied the Complete Auto four-prong test and stated that neither the Commerce Clause nor the Due Process Clause required one of two states to “recede simply because both have lawful tax regimes reaching the same income”. The Court rejected the taxpayer’s request for apportionment relief under Va. Code § 58.1-421 because the taxpayer failed to demonstrate, as required under Virginia law, that the double taxation was “attributable to Virginia” and not attributable “to the fact that some other states have a unique method of allocation and apportionment.” The Court reasoned that Virginia adhered to its cost-of-performance formula for nearly 60 years, and any double taxation was “attributable” to changes adopted more recently by other states. The Court also stated that each of the other taxing states adopted its own distinctive market-sourcing method, even if those methods share some conceptual similarities, and the record failed to establish whether those sourcing methods were “unique.” Corp. Exec. Bd. Co. v. Virginia Dep’t of Taxation, 822 S.E.2d 918 (Va. 2019).

The Arizona Department of Revenue ruled that custom video production, marketing and graphic design services are not subject to Transaction Privilege Tax (TPT). The retail classification of the TPT is imposed on the gross receipts from the business of selling tangible personal property at retail, and there is an exemption for gross receipts of “[p]rofessional or personal service occupations or businesses which involve sales or transfers of tangible personal property only as inconsequential elements.” A.R.S. § 42-5061(A)(1). Under Arizona regulations, sales of tangible personal property are inconsequential elements of a sale if: (1) the purchase price of the property to the person rendering the service is less than 15% of the total charge, (2) the property transferred is not in a form which is subject to retail sale, and (3) the charge for the property is not separately stated. A.A.C. R15-5-104(C). The Department ruled that videography is an exempt professional service and the video is an inconsequential element because “[t]he service of creating or developing the customized video (rather than the video itself) is the dominant purpose of the transaction” although sales of stock images are taxable because they do not involve a professional service and are stated separately on the invoice. Similarly, the Department ruled that marketing and graphic design services are not taxable. However, the Department ruled that custom-printing is taxable under the job printing classification of the TPT.

Arizona Private Taxpayer Rul. LR 18-008 (Dec. 10, 2018).

The quarterly Eversheds Sutherland SALT Scoreboard tallies significant state and local tax litigation wins and losses. In this Bottom Line webcast, Charles Capouet and Chelsea Marmor share 2018 year-end observations, including:

  • the overall results for 2018, including a breakdown of corporate income tax and sales and use tax case results
  • comparative results from 2016-2018
  • significant Q4 2018 cases, including Canon Financial Services, Inc. v. Director, Division of Taxation

The New Jersey Tax Court denied a holding company’s motion for partial summary judgment seeking a determination that the taxpayer lacked nexus with New Jersey and would not be required to file corporation business tax returns. The taxpayer’s only connection to the state of New Jersey was the receipt of royalties from an affiliate doing business in New Jersey. The taxpayer argued that its facts were distinguishable from those in Lanco, Inc. v. Dir., Div. of Taxation, 188 N.J. 380 (2006), in which the New Jersey Supreme Court held that an out-of-state company lacking a physical presence in New Jersey was deemed to be doing business in the state by receiving state-sourced royalty income. The court acknowledged that the taxpayer’s facts appeared to be distinguishable from the facts in Lanco, but noted that the facts regarding the taxpayer’s activities in the state were not sufficiently developed in the motion and that discovery was still incomplete and pending. As a result, the court denied the taxpayer’s motion but left open the question of whether the taxpayer had sufficient contact with the state to satisfy the Due Process and Commerce Clauses of the U.S. Constitution. Crown Packaging Technology, Inc. v. Dir., Div. of Taxation, Dkt. No. 003249-2012 (N.J. Tax Ct. Feb. 26, 2019).

The Eversheds Sutherland SALT team spent time together last week collaborating on strategies to better serve our clients and celebrating the return of Tim Gustafson.

 

Partners: Dan Schlueter, Jeff Friedman, Michele Borens, Tim Gustafson, Jonathan Feldman, Maria Todorova, Scott Wright, Todd Lard, Charlie Kearns (Missing: Eric Tresh)

Welcome back Tim!

 

 

On February 15, 2019, the United States Court of Appeals for the Fourth Circuit held that the Roanoke, Virginia stormwater management charge was not subject to the discriminatory tax prohibition in the Railroad Revitalization and Regulatory Reform Act of 1976 (“4-R Act”) because the charge was a fee. In 2013, Roanoke enacted a stormwater management charge to comply with state and federal stormwater regulations and based the charge on a parcel’s impervious surface cover that contributes to stormwater runoff. Invoking the 4-R Act, the railroad argued that Roanoke’s stormwater charge applied to its property differently than non-railroad property, and hence discriminated under the 4-R Act, even though both property types were equally pervious to stormwater. However, the court determined that the 4-R Act’s discriminatory tax prohibition did not apply because the charge was a regulatory fee, not a tax. The court explained that, among other things, the charge formed part of a comprehensive regulatory scheme to remedy the environmental harm associated with stormwater runoff. Norfolk S. Ry. Co. v. City of Roanoke, No. 18-1060 (4th Cir. Feb. 15, 2019).

The New York City Tax Tribunal held that an out-of-state corporate taxpayer, with an indirect interest in a limited liability company investment fund engaged in business in New York City, had nexus with the City and was subject to tax on capital gain from its sale of the fund. The taxpayer had no property, employees, or otherwise conducted business in the City and the parties stipulated that the fund was not unitary with the taxpayer. The taxpayer sold its interest in the fund through an intermediate partnership and realized capital gain. The taxpayer claimed that its capital gain was not subject to the City General Corporation Tax because it had no nexus with the City and its passive investment in the nonunitary fund did not create nexus for the taxpayer. The Tax Appeals Tribunal disagreed and reasoned that the ownership of a flow-through interest in an entity conducting business in the City, created nexus for the corporate owner and the gain was mainly attributable to the protection, opportunities and other benefits upon the fund by the City. The Tribunal apportioned the gain to the City based on the City’s business allocation percentage of the investment fund. The Tribunal held that the assessment satisfied the four-prong test in Complete Auto and was supported by the ruling in Wayfair and that physical presence is not required to subject an out-of-state corporation to tax in certain circumstances. The Tribunal further found that the imposition of tax did not violate the Due Process Clause or Commerce Clause. (Petition of Goldman Sachs Petershill Fund Offshore Holdings, TAT (H)16-9(GC), (N.Y.C. Tax Trib. Dec 6, 2018))