Reversing a judgment of the circuit court, the Alabama Court of Civil Appeals held that sales of prepaid authorization numbers that allow purchasers to access wireless services on cellular telephones are subject to the state’s sales tax. The court reasoned that during the 2008 through 2011 tax years at issue, the relevant sales tax statute treated a sale of a prepaid telephone calling card or prepaid authorization number as a taxable sale of tangible personal property.

Alabama Dep’t of Revenue v. Downing, No. 2170129, 2018 WL 3489917, at *6 (Ala. Civ. App. July 20, 2018).

On July 17, 2018, the Wisconsin Court of Appeals held that a taxpayer’s services qualified as taxable “laundry services” and were subject to Wisconsin sales tax.  The taxpayer entered into service agreements with clients and provided them contract cleaning services.  The taxpayer would hire its clients’ existing laundry department workforces as employees, who would then use the clients’ equipment to clean their laundry.  The procedures used to process the laundry would typically not change, and the employees would usually perform their duties in the same manner as they did when employed by the clients.  The court held that the taxpayer provided taxable “laundry services,” finding that the relevant statute was “about as clear and unambiguous as it gets.”  The court rejected the argument that the taxpayer instead engaged in nontaxable managerial and supervisory functions, concluding that these activities were for ensuring that the taxable laundry services were accomplished.  Interestingly, the clients did not have sales tax liabilities before contracting with the taxpayer, despite their laundry being cleaned by the same people using the same equipment.

Healthcare Servs. Group, Inc. v. Wisconsin Dep’t of Revenue, App. No. 2017AP567 (Wis. Ct. App. Jul. 17, 2018).

An Indiana taxpayer claimed net operation loss deductions (“NOLs”) on its adjusted gross income.  The NOLs were acquired by the taxpayer as part of a corporate acquisition.  The Indiana Department of Revenue did not dispute that the taxpayer was entitled to the NOLs, but limited the NOLs by an “asset ratio” based on the assets of the member of the acquired group that was doing business in the state.  The Department, in reviewing the audit adjustment, held that the application of the asset ratio was without any authority.  Therefore, the Department failed to meet its burden to support the additional limitation to the taxpayer’s NOLs and the audit adjustment was reversed.

Ind. Dep’t of State Rev., Ltr. Of Findings No. 02-20180708 (Ind. Dep’t of State Rev. May 26, 2018).

The California Court of Appeals affirmed a trial court’s holding that the California Franchise Tax Board can require interstate unitary businesses to use combined reporting, even though combined reporting is optional for intrastate unitary businesses. The taxpayer, a motorcycle retailer, argued that the differential treatment of interstate and intrastate business gave a direct commercial advantage to intrastate unitary companies and therefore discriminated against interstate commerce in violation of the Commerce Clause of the United States Constitution. The appellate court rejected the taxpayer’s argument and held that the legitimate state interest to accurately measure and tax all income attributable to California outweighed any possible discriminatory effect.

Harley-Davidson, Inc. v. California Franchise Tax Bd., Dkt. No. D071669 (Cal. Ct. App. Aug. 22, 2018).

The Alaska Superior Court denied the Alaska Department of Revenue’s (“DOR”) petition to enforce an administrative subpoena against Turo, Inc. (an out-of-state car sharing company), which sought all of the company’s business records from its inception in 2009 to 2017 in connection with an ongoing investigation regarding vehicle rental taxes. The court held that the subpoena was overly broad, lacked detail and encompassed too long a time period. Further, the court concluded, “the scope of the Tax Division’s authority to issue a subpoena is broader than the court’s ability to enforce the very same subpoena.” Although the court determined that Turo’s activities in Alaska – such as, allowing access to its website and mobile app in Alaska but not some other states, earning a percentage on each transaction, having users sign terms of agreement, and otherwise regulating transactions using its app in Alaska – were sufficient for personal jurisdiction, the court nevertheless lacked the authority to enforce the subpoena as enforcement under Alaska Stat. § 43.05.040 is only proper when the party that received the subpoena is an Alaska resident or was served the subpoena in Alaska. The court noted that the DOR might need to seek assistance from the courts in Delaware or California, where Turo is a resident. The court, however, reserved judgment on the issue of whether Turo is subject to Alaska’s Vehicle Rental Tax.

Alaska Dep’t of Revenue v. Turo, Inc., No. 1JU-18-580 CI (Alaska Sup. Ct., Jun 28, 2018).

The South Carolina Administrative Law Court ruled that the taxpayer was required to collect sales tax on its retail sales of prepaid cellular telephone service.  The taxpayer argued that its sales did not constitute “prepaid wireless calling arrangements,” which must be “sold in units or dollars which decline with use in a known amount.”  Because it sold unlimited plans, the taxpayer contended its sales did not meet this test.  The court disagreed, finding the statute to unambiguously subject prepaid plans to sales tax.  Although the taxpayer’s prepaid plans were unlimited, they were still subject to a known unit and known expiration date of 30 days.

Unlimited Phone Store, LLC v. S.C. Dep’t of Revenue, No. 16-ALJ-17-0399-CC

The Minnesota Tax Court held that  a tobacco distributor was entitled to a refund of Minnesota tobacco tax that it paid on federal excise tax (FET) that was passed through by the tobacco manufacturer, but only if the FET was separately stated on the manufacturer’s invoice. The court looked to the plain language of the statute, and decided that the FET is not included in the “wholesale sales price,” as statutorily defined, upon which the tobacco tax is imposed. However, if the FET is not separately stated on the invoice from the manufacturer to the wholesaler, then the entire amount is taxable.

Winner Tobacco Wholesale, Inc. v. Commissioner of Revenue, Dkt. No. 9049-R (Minn. Tax Ct., Aug. 6, 2018)

The Texas State Office of Administrative Hearings (“SOAH”) found that the receipts of a non-nexus member of a combined group (Company A) “should be deleted” from the computation of the group’s gross receipts for purposes of apportioning revenue to the state.  The group was in the business of franchising fast food restaurants.  On audit, the Texas Comptroller of Public Accounts determined that Company A had nexus with Texas because the group’s Texas franchisees were required to purchase their food products and supplies from an unrelated distributor that purchased the same items from Company A.  The Comptroller contended the distributor was acting as an agent for Company A in Texas and imputed the distributor’s nexus in Texas to Company A.  SOAH disagreed with the auditor’s determination and concluded that an agency relationship did not exist between the distributor and Company A.  An agency relationship only exists if: (1) one person acts for another, (2) both consent to the arrangement, and (3) the agent is under the principal’s control.  SOAH determined that there was insufficient evidence that Company A controlled the distributor.  In addition, Company A did not have nexus with Texas based on its own activities with Texas because it did not have physical assets or employees working in Texas.

Read our September 2018 posts on stateandlocaltax.com or read each article by clicking on the title. For the latest coverage and commentary on state and local tax developments delivered directly to your phone, download the latest version of the Eversheds Sutherland SALT Shaker app.

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The New Mexico Court of Appeals upheld the imposition of gross receipts tax on certain trademark-related royalty fees received by an out-of-state corporation pursuant to its franchise agreements with New Mexico businesses. The court examined whether, following statutory amendments in 2007, the royalty fees flowing from a limited trademark license provision contained within the franchise agreements “should be treated as being received from the grant of a franchise” and, thus, subject to the gross receipts tax, “or from the licensing of a trademark” and, therefore, not subject to the gross receipts tax. The court concluded that the trademark licensing provision was “central to the overall franchise and should be treated as part of the franchise,” and not as a standalone trademark licensing agreement, even though the provision was separately stated and itemized in the agreements.

A&W Rests., Inc. v. Taxation & Revenue Dep’t of New Mexico, No. A-1-CA-35999 (N.M. Ct. App. Aug. 22, 2018).