On June 14, 2019, an Illinois Appellate Court held that a taxpayer’s subsidiaries are financial organizations that were excluded from the taxpayer’s Illinois combined return. During 2006, 2007 and 2008, Illinois excluded from a combined return those affiliates that apply a different apportionment method. (Note that, for taxable years ending on or after December 31, 2017, members with different apportionment formulas are no longer excluded from Illinois combined returns.) Financial organizations, which included “sales finance companies,” used a different apportionment method than other types of corporations. In relevant part, a sales finance company is a company engaged in “the business of making loans for the express purpose of funding purchases of … services by the borrower….” The taxpayer’s affiliates made loans to customers to facilitate the purchase of insurance from related insurance companies. The question before the court was whether insurance constituted a service or an intangible. The court concluded that insurance was a service, and therefore, the taxpayer’s subsidiaries were excluded from the Illinois combined return.

Premier Auto Fin., Inc. v. Illinois Indep. Tax Tribunal, 2019 IL App (1st) 172472-U.

July 23 – 24, 2019
Foster City, CA

Link for more details

Eversheds Sutherland is a proud sponsor of the COST State and Local Tax Workshop for Technology Companies in Foster City, California on July 23 – 24, 2019. This one and half day workshop will cover the key state and local tax issues that technology companies (both start-up and established) are facing. Attorneys Jeff Friedman, Michele Borens and Todd Betor will speak on a variety of state and local tax issues.

• Technology – Constantly Evolving – Changing Everything | Tuesday, July 23, 2:30 – 3:30 pm
Michele Borens

• The TCJA and Its Impact on Tech Companies | Wednesday, July 24, 9:20 – 10:30 am
Todd Betor

• What Gigs?: SALT Issues for the Gig Economy | Wednesday, July 24, 1:00 – 2:00 pm
Jeff Friedman

• Ask The Experts | Wednesday, July 24, 3:30 PM – 5:00 pm
Jeff Friedman

On June 28, the New Jersey Tax Court held that the state’s alternative minimum tax (known as the “Alternative Minimum Assessment,” or AMA) – which was repealed for tax years beginning on or after January 1, 2018 – is preempted by P.L. 86-272, a federal statute that bars states from imposing a net income tax on certain out-of-state sellers of tangible goods with specific limited contacts in the State.

The New Jersey Tax Court characterized the AMA as a “de facto CBT [Corporation Business Tax]” and stated: “While attempts to tax everyone fairly is certainly a laudable purpose, the second phase of the AMA obliterates the protections of P.L. 86-272 and is thereby contrary to supremacy of Congressional action as required by the Constitution.”

The court explained: “As pointed out by the taxpayer in this case, to argue that the AMA compensates for the CBT is to recognize that the AMA stands as an obstacle to the congressional mandate of P.L. 86-272. The Legislature’s attempt to “compensate” in this case is nothing more than an effort to ignore P.L. 86-272.”

Out-of-state companies that claim P.L. 86-272 protection could be entitled to AMA refunds for tax years after June 30, 2006, and prior to January 1, 2018.

Stainslaus Food Products Co. v. Div. of Taxation, N.J. Tax Ct., Dkt. No. 011050-2017 (2019)

States have enacted new marketplace facilitator laws designed to impose sales tax obligations on marketplace facilitators related to sales made by third-party sellers. These new sales tax collection obligations on marketplace facilitators create the potential for class-action lawsuits arising out of unintended overcollection of tax.

Today’s Marketplace Monday explores two legislative solutions to overcoming this potentially expensive business risk.


  • Most recently-enacted marketplace facilitator laws prohibit or mitigate the likelihood of class-action lawsuits related to the overcollection of sales taxes.
  • These safeguards allow marketplace facilitators to comply with new tax collection obligations without fearing consumer litigation.
  • States take different approaches to mitigating the risk of overcollection lawsuits, so marketplace facilitators must be aware of their state-specific obligations.

The Problem

Marketplace facilitator laws are a departure from the traditional imposition of sales tax collection obligations on a seller. Now, some states require marketplace facilitators – rather than the seller of goods – to collect tax on third-party sales facilitated through a marketplace platform if certain conditions are met.

Tax overcollection may occur if both a marketplace facilitator and a marketplace seller collect sales tax, or if a marketplace facilitator mistakenly collects sales tax on items that are not subject to a state’s tax.  These errors may occur due to a marketplace facilitator’s unfamiliarity with the item being sold.

Pennsylvania’s Approach: Ban Class-Actions Outright

To address the threat of litigation, many new marketplace laws ban class-action lawsuits related to the overcollection of sales tax by a marketplace facilitator. Class-action bans are common in states that place a tax collection obligation on both facilitators and sellers. Pennsylvania’s marketplace law provides an example of a common class-action ban:

A class action may not be brought against a marketplace facilitator or a referrer on behalf of purchasers arising from or in any way related to an overpayment of sales or use tax collected by the marketplace facilitator or the referrer, regardless of whether such action is characterized as a tax refund claim. Nothing in this subsection shall affect a purchaser’s right to seek a refund from the department under other provisions of this article. 72 Pa. Const. Stat. § 7213.5(e).

Therefore, consumers alleging tax overcollection cannot directly sue a marketplace facilitator, but must rather seek refund claims from the Pennsylvania Department of Revenue.

Maine’s Approach: Clearly Place the Tax Collection Obligation Solely on Facilitators

The failure of a state to provide a class-action ban does not necessarily mean that marketplace facilitators are at an increased risk of facing class actions. For example, on June 20, Maine Governor Janet Mills signed a marketplace facilitator law that does not contain a ban on class-action lawsuits relating to the overcollection of tax.

The introduced version of L.D. 1452, filed April 2, contained similar provisions to Pennsylvania’s marketplace law, including an identical class-action ban. However, the class-action ban was removed in the legislative process after the law was amended to place the tax collection burden on marketplace facilitators.

Maine’s newly-enacted law:

  1. Places all tax collection responsibilities on marketplace facilitators that meet certain requirements,
  2. Requires marketplace facilitators to provide a written statement to marketplace sellers informing them that the facilitator (not the seller) will collect the applicable tax, and
  3. Bars marketplace sellers that receive required statement from marketplace facilitators from collecting tax on the same sales.

Therefore, a Maine class-action lawsuit is unlikely to arise out of the double-collection of tax by marketplace facilitators and sellers. However, a marketplace facilitator may be exposed to litigation associated with the overcollection of sales tax due to errors in determining the proper tax rates or the taxability of specific items.

The New York Division of Tax Appeals (DTA) held that the retroactive application of an amended statute did not violate a non-resident individual’s due process rights.  In 2009, the individual entered into an agreement to sell his shares in an S corporation and made an IRC 338(h)(10) election, pursuant to which the transaction was treated as an asset sale for federal tax purposes.  At the time of the sale, the individual was advised by his tax accountant that under a then recently-issued Tax Appeals Tribunal (Tribunal) decision, New York would treat the transaction as a sale of an intangible, i.e., stock, notwithstanding the deemed asset sale treatment for federal tax purposes, and that the gain on the sale would not be subject to New York tax.  In 2010, however, prior to the date on which the individual filed his New York return for the 2009 tax year, New York amended its statute to provide that if shareholders of an S corporation made an IRC § 338(h)(10) election, the gain shall be treated as New York source income allocated based on the State’s rules.  The DTA, relying on a 2015 New York Court of Appeals decision, found that the individual’s reliance on the Tribunal decision was not reasonable.  The DTA explained that the Court of Appeals had determined the Tribunal’s decision was a departure from the Division’s long-standing and articulated policy in administering transactions involving deemed asset sale elections made by non-resident taxpayers, and that the Court of Appeals accepted the validity of the Legislature’s stated aims of curing an incorrect Tribunal decision.

In the Matter of the Petition of Franklin C. Lewis, NY St. Div. of Tax Appeals, DTA No, 827791 (June 20, 2019)

The South Carolina Department of Revenue issued a private letter ruling advising a company that its charges for developing and conducting surveys tailored to its clients’ needs are not subject to sales and use tax as communications services. Although taxable communications services include “charges to access an individual website,” and the company provided its clients with online access to their survey results, the Department determined that the true object of the transaction was the non-taxable professional service. The charges for online access to the survey results were merely incidental to the underlying professional service.

S.C. Private Letter Ruling 19-1

The Maryland Court of Special Appeals upheld the Maryland Tax Court’s decision holding that the State Comptroller can subject an out-of-state holding company to tax because the holding company did not have economic substance apart from its parent, which was conducting business in the state. In addition to upholding the assessment of tax, the Court of Special Appeals also upheld the Tax Court’s abatement of penalties and interest. The Circuit Court for Arundel County had previously reversed the tax court’s decision with respect to abatement of interest.

The Maryland Comptroller assessed ConAgra Brands, Inc. (Brands) for the 1996-2003 tax years, arguing that the Brands was nothing more than a conduit used to shift its affiliates’ income out of Maryland. Brands had no employees or property in Maryland and did not otherwise conduct business in the state. However, Brands held and managed the intellectual property of a number of affiliated companies, all of which were owned by ConAgra Foods, Inc. (ConAgra), and many of which did business in Maryland. Brands licensed the trademarks to the ConAgra subsidiaries from which they had been acquired in exchange for annual royalty payments. These annual royalties were the primary source of Brands’ income and were ultimately paid to ConAgra through various intercompany transactions.

The Court of Special Appeals applied a “substantial evidence” standard of review to the Tax Court’s decision, and found that there was substantial evidence for the Tax Court’s decision findings that Brands depended on ConAgra and its subsidiaries for the majority of its income, there was a circular flow of money from ConAgra and affiliates to Brands and back to ConAgra, Brands relied on ConAgra for its core functions, and Brands lacked any meaningful substantive activity apart from ConAgra. As a result, the Court of Special Appeals agreed with the Tax Court that, based on the Maryland Court of Appeals’ decision in Gore Enterprise Holdings, Inv. v. Comptroller of the Treasury, Brands lacked economic substance as a business separate from ConAgra. Additionally, the Court of Special Appeals upheld the use of an alternative apportionment method, based on a blended apportionment factor using the apportionment factors of ConAgra and its subsidiaries, citing once again to the Gore decision.

ConAgra Foods RDM, Inc. v. Comptroller of the Treasury, No. 1940 (Md. Ct. Spec. App. June 27, 2019). For more information on the tax court’s prior decision in this case, see our previous post, here.

On June 26, 2019, the New York Court of Appeals held that a price comparison service was taxable as an information service because the information was not personal or individual in nature, which would exclude the service from sales tax.

The taxpayer operated a chain of grocery stores. As part of its pricing strategy, the taxpayer engaged a company to monitor competitors’ prices. The taxpayer selected the products and specific competitors’ locations to be investigated. The provider would then create a confidential report based on the pricing data collected. Under New York law, information services are subject to sales tax unless the information is personal or individual in nature. Here, the Court held that the pricing information and reports could not be personal or individual in nature because such information was derived from a non-confidential and widely-accessible source – the shelves of the taxpayer’s competitors. As such, the pricing service was a taxable information service.

Significantly, the Court confirmed its single rule for construing exemptions, deductions and exclusions, “each of which operates to negate the taxpayer’s obligation to pay the otherwise applicable tax.” Under this rule, exclusions are interpreted the same as exemptions and deductions and trigger a presumption in favor of taxation. In a concurrence, one justice commented on the practical impact of this rule: “in New York, the taxpayer always loses.” Wegmans Food Markets, Inc. v. Tax App. Trib., No. 56 (N.Y. June 26, 2019).

The South Carolina Administrative Law Court (ALC) held that it could not enforce a Department of Revenue (Department) summons for delivery records issued to a North Carolina freight carrier that regularly transported out-of-state furniture into South Carolina. The Department’s summons requested records of all deliveries the company made into South Carolina, including each purchaser’s name, address, delivery date, and a description of products delivered, for the period of May of 2016 through December of 2017. South Carolina law vested the Department with the power to issue summons for records “relating to any matters which the department has the authority to investigate or determine,” but the ALC concluded that it lacked the authority to enforce the statutory remedy for failure to comply against a “registered North Carolina business [that] was served in North Carolina.”

Dep’t of Revenue v. SunBelt Furniture Xpress, Inc., No. 19-ALJ-17-0110-IJ (S.C. Admin. Law Ct. June 11, 2019)

While group exercise classes led by instructors are especially popular these days, a recent decision subjects such classes to a special New York City sales tax. In a May 23, 2019, decision, a New York Administrative Law Judge (ALJ) determined that SoulCycle, Inc. indoor cycling classes were subject to a special New York City 4.5% sales tax.

In their article for Bloomberg Tax, Eversheds Sutherland attorneys Open Weaver Banks and Chelsea Marmor discuss how the company failed to convince the ALJ that the state sales tax exemption for “participatory sports” should extend to the city’s sales tax.

Read full article here.