By Ted Friedman and Eric Coffill

On August 30, 2017, the Indiana Department of Revenue determined that an out-of-state corporation doing business in Indiana and worldwide was entitled to a reduction of its Indiana sales factor because certain sales in foreign jurisdictions should not have been sourced to Indiana under the state’s “throwback rule.” In a prior audit, the Department had required the corporation to include in its income royalties received by subsidiaries for licensing intellectual property in order to “fairly reflect” the corporation’s income. The Department explained that “[b]y allocating the royalty income to [the corporation], the Department’s prior audit implicitly considered that [the corporation’s] subsidiaries’ nexus could be attributable to [the corporation],” and that, for the current years at issue, the Department will consider the subsidiaries’ nexus for purposes of the corporation’s apportionment computation “as a matter of equity under these particular set of facts.” The Department concluded that the corporation demonstrated that its subsidiaries’ activities in certain foreign countries exceeded the protection of P.L. 86-272 and that the corporation would be subject to a net income tax in those countries. Therefore, the Department determined that the throwback rule should not apply to the corporation’s receipts from sales in those countries. Mem. of Decision 02-20160336R (Ind. Dep’t of State Revenue Aug. 30, 2017).

On September 16, 2017, California Governor Jerry Brown signed Assembly Bill 131, a budget trailer bill clarifying a number of provisions related to the roles of California’s two new tax agencies, the California Department of Tax and Fee Administration (CDTFA) and the Office of Tax Appeals (OTA), which were created to perform many of the California State Board of Equalization’s (BOE) previous duties by the Taxpayer Transparency and Fairness Act of 2017. Key clarifications include:

  • The CDTFA will conduct appeals conferences related to sales and use taxes in the same manner as the BOE had prior to July 1, 2017, and will apply the BOE’s rules regarding appeals conferences.
  • The OTA is not to be construed as a tax court so non-lawyers will be allowed to appear on behalf of taxpayers at appeals hearings.
  • The standard of review for taxpayer appeals of OTA decisions is trial de novo in Superior Court.

View the full Legal Alert.

By Charles Capouet and Jonathan Feldman

The Massachusetts Supreme Judicial Court held that an in-state wholesaler was required to collect and remit sales tax on drop shipment sales made to Massachusetts customers. A drop shipment is a transaction in which an in-state customer purchases a product from an out-of-state retailer which then orders the product from an in-state wholesaler and directs it to deliver the product directly to the in-state customer. The Massachusetts drop shipment rule considers the in-state wholesaler to be the vendor and requires it to collect and remit the sales tax unless it proves that the out-of-state retailers were engaged in business in Massachusetts. D&H, an in-state wholesaler in such a position, questioned its liability under the drop shipment rule, arguing that the rule required the commissioner, in each transaction, to prove that the retailer was not doing business in the state. D&H also challenged the constitutionality of the rule. The court confirmed that it was the wholesaler’s burden to prove that retailers were doing business in the state as the wholesaler has “readier access to the relevant information” and bears the general burden of claiming a tax abatement. The court also held that the drop shipment rule did not violate the dormant commerce clause because: (1) even if the rule penalized wholesale suppliers with Massachusetts nexus for doing business with out-of-state retailers, the rule would result in a disadvantage, rather than an advantage, for Massachusetts retailers; and (2) the taxpayer failed to demonstrate any unconstitutional burden created by the tax itself. D&H Distrib. Co. v. Commissioner of Revenue, 79 N.E.3d 409 (Mass. 2017).

By Liz Cha and Open Weaver Banks

The North Carolina Supreme Court affirmed the North Carolina Business Court’s decision that Fidelity Bank was precluded from deducting “market discount income” from US bonds for North Carolina corporate income tax purposes. Fidelity Bank acquired US government bonds at a discount, held these bonds until maturity, and earned “market discount income.” Market discount income is the difference between (1) the amount a corporation initially paid for discounted bonds and (2) the amount it received from those discounted bonds at maturity. To determine its taxable corporate income, Fidelity Bank treated the market discount income as taxable income and then deducted this income as interest earned on US government obligations. Fidelity Bank argued that this income should be treated as interest because it is treated that way for federal income tax purposes.

However, the court determined that, while North Carolina law does not define the term “interest,” it should be interpreted in accordance with its plain meaning as involving “periodic payments received by the holder of a bond.” The fact that market discount income is treated as interest for purposes of determining federal taxable income did not mean that it should be treated as “interest” for all purposes under North Carolina tax law. The court also noted that the state legislature has selectively incorporated certain definitions from the Internal Revenue Code into the North Carolina Revenue Act and that if the legislature intended for “interest” to take on the same meaning it would require “specific support in relevant statutory language.” The Fidelity Bank v. North Carolina Department of Revenue, No. 392A16, 393PA16 (N.C. Aug. 18, 2017).

By Chelsea Marmor and Charlie Kearns

The Alabama Tax Tribunal (Tribunal) affirmed the Alabama Department of Revenue’s (DOR) assessment that denied Credit Suisse Boston USA Inc.’s (Credit Suisse) deduction for interest expense paid to a related member. Credit Suisse argued that the interest expense payments were exempt from Alabama’s addback requirement because the expense to its foreign affiliate generated income for the foreign affiliate subject to tax in a foreign jurisdiction, and that the payments had a business purpose. The DOR argued that Credit Suisse failed to submit any documentation showing that the interest expenses it paid to the related companies were subject to tax in a foreign jurisdiction which has an income tax treaty with the United States. The Tribunal found for the DOR because likewise, Credit Suisse failed to provide any documentation to the Tribunal in support of its position, and therefore, the “transactions are presumed to have tax avoidance as their principal purpose.” Credit Suisse First Boston USA Inc. v. Ala. Dept. Rev., Ala. Tax Tribunal, Dkt. No. BIT. 15-1666, 9/07/2017.

The Eversheds Sutherland SALT Team is always excited to see what kind of pets our clients and friends have. Our team features a different pet at the end of every month, and we want to feature YOURS! Featured pets will receive a fun prize from the SALT Team. The deadline for September submissions is Monday, September 25.

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

Don’t have the app? It is available for download in the Apple App Store, Google Play and the Amazon Appstore.

View previously-featured furry friends.

By Dmitrii Gabrielov and Tim Gustafson

The South Carolina Court of Appeals held that all of DIRECTV’s South Carolina customer subscription receipts were properly sourced to the state for purposes of determining DIRECTV’s corporate income tax apportionment factor due to the location of its satellite signal delivery. South Carolina’s apportionment statute requires a taxpayer to source sales of services based on where the taxpayer performs “the income-producing activity.” DIRECTV argued that it generated income through content development, sales and marketing, broadcast operations, and customer service, which were activities it performed primarily outside of South Carolina. The Court of Appeals rejected this argument and found that DIRECTV’s sole income-producing activity related to its South Carolina customer subscription receipts was the delivery of its satellite signal to those customers. The Court of Appeals distinguished a prior decision, Lockwood Greene Eng’rs, Inc., in which it held that an engineering firm must source its receipts based on the engineers’ “place of activity.” The Court of Appeals acknowledged that DIRECTV employs highly-trained engineers and other employees to develop the company’s technology and obtain content, but found that DIRECTV’s customers purchase the end result of the employees’ work, which is the satellite signal delivery. In effect, the Court of Appeals reached a market-based result without explicitly applying a market-based sourcing methodology. DIRECTV, Inc. v. S.C. Dep’t of Revenue, No. 2015-001509 (S.C. Ct. App. Aug. 30, 2017).

On Aug. 28, 2017, in California Cannabis Coalition v. City of Upland, the California Supreme Court held local taxes imposed by taxpayers via initiative are subject to less stringent requirements than taxes imposed by local governments pursuant to Proposition 218. In their article for Law 360, Eversheds Sutherland attorneys Eric Coffill and Robert Merten discuss that this opinion has far-flung ramifications on how local taxes can be imposed in California.

View the full article

On August 31, 2017, the Virginia Supreme Court issued its opinion in Kohl’s Department Stores, Inc. v. Virginia Department of Taxation, holding that only the portion of royalties that are actually taxed by another state falls within its “subject to tax” exception to Virginia’s addback statute for corporate income tax purposes.

  • The Court interpreted the “subject to tax” standard as an “actual” taxation standard.
  • The Court remanded the case to the Circuit Court to determine the portion of the royalty payments actually taxed by another state.
  • Three justices dissented to this opinion finding that the statute is not ambiguous and favored the taxpayer’s application of the statute.

View the full Legal Alert. 

Read our August 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.

FEATURED PUBLICATIONS

  • Videocast: SALT Scoreboard – 2017 Mid-Year Review
    The quarterly Eversheds Sutherland SALT Scoreboard tallies significant state and local tax litigation wins and losses.
  • Sugar-Sweetened Beverage Taxes Burden Taxpayers
    To raise revenue and tackle health concerns, a number of localities have imposed sugar-sweetened beverage (SSB) taxes. However, localities may have limited guidance on how these taxes are administered. Read this Bloomberg BNA article, by Eversheds Sutherland (US) attorneys Jonathan Feldman and Alla Raykin, which discusses the sugar-sweetened beverage tax background, why local SSB taxes are so problematic, and implications for taxpayers.

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Eversheds Sutherland Associate DeAndre Morrow Selected as One of The National Black Lawyers Top 40 Under 40
WASHINGTON—Eversheds Sutherland is pleased to announce that Associate DeAndre R. Morrow has been selected as one of The National Black Lawyers Top 40 Under 40. He joins an elite group of attorneys from Washington DC and across the country as members of the organization composed of outstanding black attorneys under the age of 40 who exemplify superior leadership and achievements in the legal industry and within their communities.