This installment of A Pinch of SALT examines the comptroller of Maryland’s practice of attributing in-state operating companies’ apportionment factors to affiliated out-of-state holding companies. This article posits that this type of attribution violates the internal consistency test reflected in the US Supreme Court’s dormant commerce clause doctrine.
Superior Court of Washington Strikes Down New Income Tax on High Income Residents
By Liz Cha and Eric Coffill
The Superior Court of Washington for King County held that Seattle’s new income tax on “high income residents” violates a provision of Washington state law which prohibits a city from levying a tax on net income.
On July 14, 2017, Seattle Mayor Ed Murray signed Seattle Ordinance No. 125339, which would impose an income tax on “high-income residents.” This tax would impose an additional tax of 2.25% on the amount of total income in excess of $250,000 for individuals and the amount of total income in excess of $500,000 for married taxpayers filing jointly.
Plaintiffs raised multiple arguments against the tax regarding Seattle’s authority to levy the tax such as whether the tax was an income tax or an excise tax, whether state law prohibited cities from enacting income taxes, and whether the tax violates the Washington Constitution. The court considered each argument but ultimately decided the case on the issue of whether the tax violated state law prohibiting cities from levying a tax on net income.
Wash. Rev. Code Sec. 36.65.030 provides that a “county, city, or city-county shall not levy a tax on net income.” The court rejected the city’s challenge that Wash. Rev. Code Sec. 36.65.030 was invalid because it violated the Single Title Rule and Subject in Title Rule provisions of the Washington State Constitution. Instead, to determine whether this statute applied to the tax, the court analyzed the meaning of the term “net income.” Notwithstanding the dictionary definitions cited by the city, the court determined that there could only be one conclusion—that the city’s income tax is tax on net income. Thus, the court concluded that the city did not have the authority to impose the new income tax because it applied to the net income of high income residents. Kunath v. City of Seattle, No. 17-2-18848-4 (Wa. Sup. Ct. Nov. 22, 2017).
California Office of Tax Appeals Releases Final Draft Emergency Regulations on Rules for Tax Appeals
Under notice dated December 26, 2017, the California Office of Tax Appeals (OTA) released its Final Draft Emergency Regulations on the Rules for Tax Appeals (Emergency Regulations), which will be submitted to the Office of Administrative Law for review in the coming days.
- The Emergency Regulations are largely based on the Board of Equalization’s prior Rules for Tax Appeals but contain some notable differences.
- For example, the OTA is authorized to remove the precedential status of BOE opinions and designate its own opinions as precedential if the opinion establishes a new interpretation of law, resolves an apparent conflict in the law, or makes a significant contribution to the law, among other reasons.
- The Emergency Regulations also outline procedures for requesting a closed hearing and/or sealed records in appeals from both the California Department of Tax and Fee Administration and the California Franchise Tax Board.
View the full Legal Alert.
The Most Important State And Local Tax Cases Of 2017
There has been no shortage of state tax controversies this year. States and taxpayers looked to state courts seeking guidance on some of the most contentious state tax issues.
In their article for Law360, Eversheds Sutherland attorneys Jeffrey Friedman and Stephanie Do look back at some of the most interesting decisions of 2017, which highlight critical developments all taxpayers should watch out for, especially attacks on the physical presence nexus requirement, aggressive application of economic nexus principles and continued uncertainty around the applicability of related party addback exceptions and retroactive tax legislation.
View the full article.
Surrender: Minnesota Department of Revenue Gives Away NOL Limitation Case
By Charles Capouet and Charlie Kearns
On November 6, 2017, the Minnesota Department of Revenue issued a Revenue Notice advising taxpayers that it acquiesces to the Minnesota Tax Court’s decision in Sinclair Broadcast Group, Inc. v. Commissioner of Revenue. As a result, the Department now takes the position that Minnesota’s version of the I.R.C. § 382 net operating loss limitation is “calculated in the same manner as the federal section 382 limitation, and is not apportioned for franchise tax purposes.” For the years at issue in Sinclair, I.R.C. § 382 imposed an annual limitation on an acquiring corporation’s use of the net operating losses of an acquired corporation in the amount of approximately 5% of the acquired corporation’s stock value. The Minnesota Tax Court rejected the Commissioner’s position that Minnesota’s version of the limitation must be applied twice, both on a pre-apportioned and, subsequently, a post-apportioned, basis. Revenue Notice No. 17-09: Corporate Franchise Tax – Net Operating Loss Carryforwards – Sinclair Broad. Grp., Inc. v. Comm’r of Revenue, No. 8919-R, 2017 (Minn. Tax Ct. Aug. 11, 2017), Minn. Dep’t of Revenue (Nov. 6, 2017).
When Holding On Is Letting Go: Alabama Supreme Court Agrees Holding Title to Goods Delivered into City Insufficient for Purposes of Imposing Municipal Business License Tax
By Mike Le and Tim Gustafson
On December 8, 2017, the Alabama Supreme Court issued an order without opinion in Thomas v. Elbow River Marketing Ltd. Partnership, affirming a lower court’s decision that a Canada-based seller of hydrocarbon products did not engage in or carry on a business in the City of Birmingham and thus was not subject to the city’s business license tax. The taxpayer had no physical operations, place of business, employees, agents or representatives in the city. Further, the taxpayer did not solicit sales or otherwise conduct sales or advertising activities in the city. Its only contact with the city consisted of sales of hydrocarbon products to two Alabama-based customers. The products were delivered into the city by third-party rail or trucking carriers, and the taxpayer retained title to some of the products while in the possession of the carriers. The lower court concluded, and the Alabama Supreme Court agreed, that under Alabama law, a product seller cannot be subjected to the city’s business license tax if it does nothing more than deliver its goods into the city by common carrier. Thomas v. Elbow River Marketing Ltd. Partnership, No. 1160678 (Ala. Dec. 8, 2017).
Happy Holidays from the Eversheds Sutherland SALT Team!
Atlanta Office
Pictured from the left to right: Scott Wright, Alla Raykin, Suzanne Palms, Rether White, Chris Beaudro, Hanish Patel, Melissa Bragg, Maria Todorova, Jonathan Feldman, Justin Brown
New York Office
Pictured from left to right: Chelsea Marmor, Aruna Chittiappa, Marc Simonetti, Sue Ann Charles, Dmitrii Gabrielov, Andrew Appleby, Nicole Boutros and Evan Hamme
Sacramento Office
Pictured from left to right: Carley Roberts, Nick Kump, Eric Coffill, Robert Merten, Mike Le, Tim Gustafson, Jessica Allen and Stefanie Fulps
Washington DC Office
Pictured from left to right, front row to back row: Todd Lard, Dominique Wharton, Michele Borens, DeAndre Morrow, Liz Cha, Jessie Eisenmenger, Stephanie Do, Sam Trencs, Debbie Manders, Mike Kerman, Charlie Kearns, Candice Alba, Jeff Friedman, Todd Betor and Michael Spencer
Tennessee DOR Subjects Cloud-Based Employee Scheduling Services to Sales and Use Tax
The Tennessee Department of Revenue issued a letter ruling finding that a taxpayer’s annual subscription charge for its cloud-based employee scheduling services is subject to Tennessee sales and use tax.
In Tennessee, the use of computer software is subject to tax, even if it remains in the possession of the dealer or a third party. If a transaction involves taxable and non-taxable components, the entire transaction is subject to sales tax if the true object of the transaction is a crucial, essential, necessary, consequential or integral element of the transaction.
The taxpayer provides software and services that allows its customers to manage employee schedules remotely over the Internet through personal computers and handheld devices on a website or application. The taxpayer retains the scheduling software, and users in Tennessee access it remotely.
The Department determined that the true object of the transaction is the remotely accessed software, not the non-taxable services provided by the taxpayer, because without the software, the taxpayer’s services would be of no value to the subscribers. Thus, the cloud-based employee scheduling services are subject to Tennessee sales tax. Tenn. Dept. of Rev., Letter Ruling No. 17-15 (10/11/17).
Eversheds Sutherland SALT Shaker: November 2017 Digest
Read our November 2017 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.
- SALT Pet of the Month: Leon
Meet Leon, the spunky little kitten belonging to Legal Secretary Samantha Duzniak. - California Declines to Extend Landing-Based Situs Property Tax Rule to All Aircraft
The California Court of Appeal held that the entire value of an air taxi company’s jets were subject to the County of Los Angeles 1% personal property tax, despite the fact that the jets spent 40% of their time outside of California. - Colorado Court of Appeals Held that Out-of-State Holding Company is Not Included in Combined Report
The Colorado Court of Appeals held that a corporate parent doing business in Colorado was not required to include its subsidiary holding company that held no property or payroll in Colorado or elsewhere in its Colorado unitary combined corporate income tax report. - Watch Your Step: New York City Real Property Transfer Tax Imposed Under Step Transaction Doctrine
The New York State Supreme Court, Appellate Division, affirmed the New York City Tax Appeals Tribunal’s (Tribunal) determination that certain real estate transactions were subject to the New York City Real Property Transfer Tax (RPTT) under the step transaction doctrine. - New York State Advisory Opinion: Non-US Unauthorized Life Insurance Companies’ Premiums Excluded from Apportionment Factor
The New York State Department of Taxation and Finance issued an advisory opinion determining that non-US unauthorized life insurance companies’ premiums were not includable in the New York State insurance franchise tax apportionment factor. - New York State Appellate Division Affirms that HMOs Were Subject to New York City General Corporation Tax
The New York State Supreme Court, Appellate Division, affirmed the New York City Tax Appeals Tribunal’s (Tribunal) decision that Aetna’s subsidiary health maintenance organizations (HMOs) were subject to the New York City General Corporation Tax (GCT) for 2005 and 2006. - Washington Strikes and Hits Again – Nonresident Jeweler Subject to Washington B&O Tax
The Washington Administrative Review and Hearings Division of the Department of Revenue found that an out-of-state diamond and gold wholesaler was subject to the business and occupation (B&O) tax based on in-state consigned property. - Tax Reform Executive Summary – A 2-Pager on the 7 Things You Need to Know
Tax reform efforts, if successful, will have a major impact on virtually every business. There has been a great deal of reporting on the tax reform process and the proposed changes to the US Internal Revenue Code (IRC). - The State and Local Tax Implications of Federal Tax Reform
On November 2, 2017, Republicans in the House of Representatives released their much-anticipated tax reform bill. The Tax Cuts and Jobs Act proposes numerous changes to the Internal Revenue Code, many of which will have an impact on taxpayers’ state and local tax liabilities.
ANNOUNCEMENTS
- 2017-2018 Maryland State Bar Association State Tax Study Group
The Maryland State Bar Association (MSBA) Taxation Section works to further the mutual interest of MSBA members concerned with the law relating to taxes through stimulating the interest of MSBA members and informing them in the law concerning Maryland and Federal taxation; studying proposed improvements and reforms in such laws through legislation and otherwise; and generally promoting the interests and welfare of Bar members and the public in the areas of taxation. Throughout 2017 and 2018, Eversheds Sutherland SALT will host a live videocast of the MSBA State Tax Study Group’s meetings on the third Tuesday of a month from 8:30 – 9:30 a.m. Eastern in our Washington, DC office (700 Sixth Street, NW, Suite 700, Washington, DC).
EVENTS – LEARN ABOUT OUR UPCOMING EVENTS
SALT Pet of the Month: Leon
Meet Leon, the spunky little kitten belonging to Legal Secretary Samantha Duzniak. For the longest time, Sam did not want pets, but things changed when Leon and his sister Daphne were found in the street at just three weeks old. Sam’s sister helped foster the two siblings and ended up adopting Daphne, leaving Leon in need of a home. Sam would receive multiple pictures of Leon with messages of “Adopt me!” from her sister each day over the next several weeks. Eventually, Leon’s cute little face grew too irresistible to deny, and it wasn’t long before he had a home with Sam.
This sweet boy is now four months old and full of energy! He loves galloping around the kitchen, playing hide and seek, and bird watching. His favorite toys include rubber bands and Mr. Mouse, who unfortunately lost his tail recently during playtime. When the rubber bands shoot across the floor, Leon runs right behind, often crashing into walls, tables and chairs to get to them. Strange as it seems, Leon also loves water. He climbs into the bathtub to watch the water flow from the faucet. Needless to say, the squirt bottle has not been the most effective discipline tool.
Leon has regular play dates with his sister Daphne, and they love wrestling and chasing each other around and around. They wipe each other out, and come back from their play dates exhausted. When this active boy is not galloping around or playing, he loves to snuggle and watch TV with Sam.
We are so excited to feature Leon as our November Pet of the Month!