The Indiana Supreme Court recently held that a company properly classified a driver as an independent contractor, not an employee, for unemployment insurance tax purposes. The company connected drivers with vehicle manufacturers that needed large vehicles driven to their customers or dealerships. When a former driver filed a claim for state UI benefits, the Indiana Department of Workforce Development (DWD) classified the driver as an “employee” and an ALJ agreed. The Court of Appeals reversed and the DWD appealed.

Indiana employers pay UI tax on employee wages, but not independent contractor payments. Applying Indiana’s three-part worker classification test, the court found the company rebutted the statutory presumption that all workers are “employees” because the driver: (1) was free from the direction and control of the company, both under contract and in fact; (2) performed a “drive-away” service outside the usual course of the company’s business; and (3) independently engaged in an established trade or business of the same nature as the drive-away service performed for the company. Notably, under the “usual course of business” prong, the court rejected arguments by the DWD that placed undue reliance on the company’s advertising or regulatory licensing. Instead, the court analyzed the company’s actual business activity of “match[ing] drivers with customers who need large vehicles driven to them.” Q.D.-A., Inc. v. Ind. Dep’t of Workforce Dev., 114 N.E. 3d 840 (Ind. 2019).

On February 26, 2019, the Oregon Tax Court held that an out-of-state cigarette manufacturer’s in-state activities violated Public Law 86-272, resulting in the manufacturer being subject to Oregon’s corporation excise tax. P.L. 86-272 prohibits any state from imposing a net income tax on out-of-state taxpayers that generally limit their in-state business activities to solicitation. The manufacturer sold cigarettes to Oregon wholesalers, which then sold them to in-state retailers. The manufacturer had a program by which it paid wholesalers to accept returns of non-saleable cigarettes from retailers for replacement or refund. The court held that this practice exceeded mere solicitation and, thus, violated Public Law 86-272, subjecting the manufacturer to the Oregon corporation excise tax. Santa Fe Natural Tobacco Co. v. Dep’t of Revenue, Dkt. No. TC-MD 170251G (Or. Tax Ct. Feb. 26, 2019).

Meet Ellie, the best friend of Hanish Patel, SALT associate in Eversheds Sutherland’s Atlanta office, and his fiancée, Paru.

Ellie and Paru met in St. Louis (Ellie is a 2012 cum laude graduate of the Puppy Obedience School of St. Louis). When Paru accepted a job in Atlanta, Ellie moved in with Paru’s parents in Memphis.

“Ellie claims she’s a free spirit,” says Hanish, “but really she just doesn’t want to get a job.”

Ellie was initially hesitant about moving in with Hanish and Paru in Atlanta, concerned about being a small dog in the big city. At the same time, Hanish wasn’t too thrilled either, reportedly telling friends that he did not want an “animal loose in his house.” Things quickly changed once they got to know each other, and they realized they had much in common. Ellie and Hanish both like to go for evening strolls, listen to podcasts, and catch up on the week’s episodes of Jeopardy! 

 

According to Ellie, the move hasn’t always been so fun. “One time, [Hanish] told me we were going to the park, but he took me to the groomer instead,” Ellie recalls. “I wasn’t mad he lied to me, just disappointed.”

“Ellie’s a good girl, such a good girl,” Hanish now admits, even though she can still be stubborn at times. “She loves her Cheez-its, and she won’t share them, so don’t even ask.”

When Hanish was told Ellie would be featured as our Pet of the Month, he said, “This is probably the coolest thing that’s ever happened to me.” 

 

 

To submit YOUR pet to be featured, visit the Eversheds Sutherland SALT Shaker App, click the Pet of the Month in the drop-down, then click “Submit A Pet.”

On March 8, 2019, the New York Department of Taxation and Finance released an Advisory Opinion ruling that an online marketplace operator that facilitates taxable software sales is a “vendor” liable to collect sales tax. The Department relied on a rarely-used portion of the definition of “vendor,” which states that “when in the opinion of the commissioner it is necessary for the efficient administration of [the sales tax law] to treat any salesman, representative, peddler or canvasser as the agent of the vendor . . . the commissioner may, in his discretion, treat such agent as the vendor jointly responsible . . . for the collection and payment of the tax.” According to the Department, treating a software marketplace operator as a vendor will improve the efficiency of sales tax administration because the software marketplace operator “is in a better position” than a seller of software on the marketplace to collect the tax. The Department further stated in a footnote that a 1999 Advisory Opinion — which ruled that an online marketplace operator facilitating sales of tangible goods was not a “vendor” for New York sales tax purposes — was inconsistent with the new Advisory Opinion and therefore should no longer be followed.

Advisory Opinion, TSB A 19(1)S (N.Y.S. Dep’t of Taxation & Fin., Mar. 7, 2019, released March 8, 2019

On January 31, 2019, the New Jersey Tax Court issued its ruling on whether a taxpayer must add-back intercompany payments to its parent, estimated payments based on tax sharing agreements, as tax payments made to other states. The payments were to reimburse the parent corporation for taxes it paid on behalf of the combined group in non-separate reporting states. On its separate New Jersey return, the taxpayer did not add-back the intercompany payments and treated the payments as deductible business expenses. However, the New Jersey Division of Taxation denied this deduction and argued it was an “indirect payment of tax.” Although the court agreed with the taxpayer that the intercompany payments were not “taxes paid or accrued” to a state, but contractual obligations, the court concluded that the taxpayer must add-back the pro rata share of its tax liability paid by the parent in combined reporting jurisdictions. The court further found that the taxpayer would be entitled to a reduction in CBT related to any overpayment of CBT made by the parent on the taxpayer’s behalf. Daimler Investments US Corporation v. Director, Division of Taxation, No. 008165-2016, 2019 WL 409433 (NJ Tax Ct. Jan. 31, 2019).

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).