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Thank you to everyone who participated in last week’s trivia question!
Last Week’s Question:
In the early twentieth century, states commonly hired private tax collectors on a contingency-fee basis, and they were referred to as this prying animal.
The Answer:
Tax Ferret
Keep an eye out for our next trivia question on Wednesday!
On February 28, 2020, the Oregon Tax Court held that multiple airlines operating as a unitary business should aggregate not only transportation revenue but also other metrics, such as departure ratios, that are factored into the apportionment formula used by Oregon for airline taxpayers. Oregon regulations provide a modified single sales factor apportionment rule for airlines whereby the numerator of the sales factor includes, in part, the taxpayer’s total transportation revenue multiplied by its departure ratio. The Oregon Department of Revenue challenged the taxpayer’s amended returns which did not include a unitary affiliate’s departure ratio, i.e., the ratio of departures of aircraft in Oregon (weighted by cost and value of the aircraft) compared to total departures of aircraft similarly weighted, in the taxpayer’s sales factor. The taxpayer argued that each airline should be considered separately with regard to its departures within the state, citing to the fact that each airline has a separate license and operating certificate form the Federal Aviation Administration. The court disagreed, stating that the Plaintiff’s reading is contrary to the apportionment of business income of a unitary group filing a consolidated return in Oregon. The court held that because the base of income to be apportioned represents the business activity of the entire unitary group, then other metrics incorporated into the apportionment formula, such as the departure ratio, must also reflect the business activity of the entire group.
In addition to the court’s determination of the taxpayer’s unitary group question, the court also held that revenue generated by taxpayer for codeshare sales, i.e., sales made by taxpayer for seats on non-affiliated airline flights, are not considered “transportation revenue” and therefore not included in the taxpayer’s sales factor. Citing to the relationship between the flight data used in the departure ratio and the relationship between the departure ratio and transportation revenue, the court agreed with the taxpayer that such codeshare revenue is not “transportation revenue” because third party airlines, not the taxpayer, operate the flights underlying such sales and thus taxpayer does not receive the benefit of the third party’s flight data for such flights when calculating taxpayer’s departure ratio. Further, the court found that certain income from taxpayer’s rents, interest, and proceeds on the sales of aircraft constituted passive income that should be excluded from the sales factor.
Alaska Airlines, Inc. v. Oregon Department of Revenue, TC-MD 180065N (Oregon Tax Ct. 2020).
On May 4, the California Department of Tax and Fee administration posted Proposed Regulation 1684.5, as well as an April 16 memorandum requesting permission to begin the rulemaking process. The proposed regulations provide definitions for statutory terms, clarify requirements for marketplace facilitators and marketplace sellers to register with the Department for a seller’s permit, and explain the mechanics of a delivery network company’s ability to elect to be deemed a marketplace facilitator.
Louisiana S.B. 476 has will be introduced for debate and vote in the state senate. The bill would require online marketplaces to obtain identifying information of “high-volume third-party sellers.” A third-party high-volume seller is a seller that makes 200 or more sales per year resulting in $5,000 or more in gross revenue. The required identifying information includes bank account information, government-issued identification for an individual representative, government-issued contact information records, and a tax identification number. Online marketplaces would additionally be required to require high-volume third-party sellers to include basic identifying information on consumer product listings and verify that intellectual property is not being infringed. An online marketplace’s failure to comply with the identification requirements would be penalized as a violation of the state’s Unfair Trade Practices and Consumer Protection Law. If passed, the bill would become effective August 1, 2020.
The Texas Supreme Court held that a defense contractor was entitled to a refund of franchise tax because it had incorrectly sourced certain sales of military aircraft made to foreign governments to Texas on its originally-filed returns for the 2005 through 2007 tax years. The contractor produced military aircraft in Texas, which it sold to the US government as well as certain foreign governments. Under federal arms-control laws, defense contractors are not permitted to sell certain products directly to foreign governments. Instead contractors must make these sales through the federal government, which acts as an intermediary by contracting with the foreign government and taking title to the property before it delivers the property to the foreign government. The contractor argued that these sales did not constitute Texas gross receipts because the foreign government was its customer, despite the fact that legal title in the aircraft transferred from the contractor to the US government at the contractor’s facility in Texas. The Comptroller argued that the transactions consisted of two distinct sales: one from the contractor to the US government and a second from the US government to the foreign purchaser. The Comptroller further argued that even if the foreign governments were the relevant buyers of the aircraft at issue, these aircraft were delivered in Texas and thus the receipts from such sales were properly sourced to Texas.
The Texas Supreme Court agreed with the contractor, holding that the US Government’s involvement as intermediary in sales of aircraft to foreign governments was a “condition of sale” and thus disregarded for franchise tax purposes under Texas’ statute, which was modeled on the Uniform Division of Income for Tax Purposes Act provisions governing the sale of tangible personal property. In particular, the Court found that under the “unique circumstances” presented by the contractor’s transactions, the pertinent customers for Texas franchise tax purposes were the foreign governments for whom the aircraft were manufactured and to whom they were ultimately delivered. The Court did not address the secondary question raised in the case, regarding whether Texas is a place of delivery state or an ultimate destination state. Instead, the Court ruled that the sales were sourced outside of Texas under either interpretation because the buyer was the foreign government and the jets were delivered to the foreign governments outside of Texas.
Lockheed Martin Corp. v. Hegar, Dkt. No. 08-0566 (Tex. May 1, 2020).
The New York Department of Taxation and Finance recently published an advisory opinion stating that a taxpayer’s New York corporate income tax filing status should be determined by “what activity [a taxpayer] is principally engaged in” and by whether 50% of its aggregate gross receipts in a taxable reporting period are from such activities. The Department concluded that the purpose of a taxpayer’s formation was not dispositive of whether it is an Article 9 or Article 9-A filer for New York state purposes.
The petitioner was a limited liability company providing long-distance telecommunications services and an Article 9 filer, which merged with an Article 9-A franchise tax filing company. Following the merger, the petitioner asserted that it will derive more than 50% of its receipts from activities subject to taxation under Article 9-A. Under the Department’s advisory, to the extent that more than 50% of the Petitioner’s aggregate gross receipts in a taxable reporting period were derived from other than Article 9 activities, it should therefore be classified as an Article 9-A filer.
Advisory Op. TSB-A-20(1)C, N.Y.S. Dep’t of Tax. & Fin. (Jan. 8, 2019) (published April 20, 2020).
The Ohio Board of Tax Appeals upheld the Tax Commissioner’s disallowance of the “bulk credit” upon a second audit of the same transactions. During an initial audit, the taxpayer had provided purchases throughout the country, and the auditor estimated those purchases with an Ohio ship-to address and then applied a “last resort” bulk credit against the assessment to account for use tax accrued and report on the taxpayer’s use tax returns. At the taxpayer’s request, a re-audit was conducted, with additional information to tie individual transactions. Upon re-audit, the total assessment was reduced, but the bulk credit was disallowed. The Tax Commissioner stated that for the re-audit, the auditor used a more accurate line item audit, and eliminated the need for the estimated bulk credit, since applying the credit would result in double counting of non-taxable transactions.
The Board of Tax Appeals determined that the second method was more accurate, and rejected the taxpayer’s argument that the re-audit did not account for use tax actually paid. However, the Board of Tax Appeals would not address the issue of whether the transactions were taxable, because that issue had not been raised in the appeal. The Board rejected the taxpayer’s argument that it was entitled to a refund based on the original audit. Instead, the Board of Tax Appeals stated that the methodology used in the second method was more accurate, and there was no evidence that the transactions had been double taxed.
Computer Svcs. Corp. v. McClain, No. 2017-65 (Apr. 20, 2020).
Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!
We will award prizes for the smartest (and fastest) participants.
This Week’s Question
In the early twentieth century, states commonly hired private tax collectors on a contingency-fee basis, and they were referred to as this prying animal.
E-mail your response to SALTonline@eversheds-sutherland.com.
The prize for the first response to today’s question is a $20 UBER Eats gift card.
Answers will be posted on Monday. Be sure to check back then!
On Monday, May 11, 2020, the California Assembly Judiciary Committee approved AB 2570 (Stone), which expands the state’s False Claims Act (FCA) to cover certain tax matters. Specifically, AB 2570 applies the FCA to claims, records, or statements made on or after January 1, 2021, under the Revenue and Taxation Code if damages pleaded in an action under the act exceed $200,000. The bill passed along party lines, with Democrats voting in favor and Republicans opposing, and now moves to the Assembly Appropriations Committee. We are following this legislation closely and will provide updates on future developments.
