Apportionment formulas sometimes produce unfair results. To rectify the unfairness, taxpayers can (and should) use an alternative apportionment formula to apportion corporate income. In their article for TEI’s Tax Executive journal, Eversheds Sutherland attorneys Jeff Friedman and Sebastian Iagrossi focus on a troubling aspect of alternative apportionment— some states require pre-approval of an alternative apportionment formula. Pre-approval is not only bad tax policy, but it may also be illegal. 

Read the full article here.

The Arkansas Supreme Court held that a taxpayer’s interest expense is allocable to Arkansas resulting in a refund. This decision is an example of a taxpayer successfully arguing that it can fully deduct – rather than apportion – its interest expense in its state of commercial domicile. 

Arkansas adopted the Uniform Division of Income for Tax Purposes Act (UDITPA). Pursuant to UDITPA, income and expenses are apportioned if they are, or are related to, business income. If, however, the income or expense constitutes, or relates to, nonbusiness income, the item is allocated to the taxpayer’s state of domicile. 

The taxpayer, domiciled in Arkansas, was spun off from its parent company. As part of the spinoff transaction, the taxpayer incurred debt that was ultimately paid to its former parent company. On its originally filed Arkansas tax return, the interest expense related to this debt was deducted against its apportionable income. The taxpayer amended its Arkansas return to allocate (rather than apportion) the interest expense which resulted in a refund. The Arkansas Department of Finance and Administration (DFA) rejected the refund claim on the basis that the interest expense is properly classified as an apportionable expense. 

The Supreme Court agreed with the taxpayer that the expense is properly allocable to Arkansas because the spinoff was an extraordinary, nonrecurring event. The court distinguished the spinoff debt from the taxpayer’s other borrowing. Interestingly, the court also rejected the DFA’s fairness argument – that it would be unfair to allow the taxpayer to allocate the deduction to Arkansas because the taxpayer apportioned the interest deduction on other states’ tax returns. The court concluded that “[i]t is not the role of this court to adjust Arkansas tax returns based on unfairness to Tennessee, Mississippi, or other states.” 

Hudson v. Murphy Oil USA, Inc., 2024 Ark. 179.

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: On November 5, 61% of voters in Charleston County, SC rejected a proposal to increase what tax?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!

On November 20, 2024, the Pennsylvania Supreme Court concluded that its decision to invalidate a limitation (or “cap”) on net operating loss (NOL) carryforwards should be applied prospectively only.

The issue of whether to provide retroactive relief to taxpayers injured by the NOL cap arose based on two of its prior decisions:

  • In Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, 171 A.3d 682 (Pa. 2017), the Court struck down the NOL cap as violating the Uniformity Clause of the Pennsylvania Constitution.
  • In General Motors Corp. v. Commonwealth, 265 A.3d 353 (Pa. 2021), the Court had held that Nextel applied retroactively. That decision is now reversed.

The Court applied the three-factor Chevron test developed by the United States Supreme Court, see Chevron Oil Co. v. Huson, 404 U.S. 97 (1971). Under the Chevron test, when considering whether to apply a decision retroactively, courts must consider: (1) whether the decision in question established a new principle of law; (2) whether retroactive application of the decision would forward the operation of the decision; and (3) whether the relevant equities favor prospective application. Because the Court found that each of the three factors supported the prospective-only application of Nextel, the Court determined that the General Motors Court erred in applying Nextel retrospectively.

Alcatel-Lucent USA Inc. v. Commonwealth of Pennsylvania, No. 8 MAP 2023.

Members of our SALT team are pleased to join the NYU School of Professional Studies’ 43rd Institute on State and Local Taxation, held December 16-17, 2024 in New York City. The Institute will provide insightful updates, practical advice, and in-depth analysis of the latest developments and current issues in state and local taxation. The full agenda can be found here.

Sessions featuring members of our team include:

  • Transfer Pricing – Should Form Control? – Maria Todorova
    • In this session, panelists will review the nuts and bolts regarding intercompany transactions and state transfer pricing audits and discuss the key issues and updates.
  • Overview and Preview of Federal Constitutional Issues – Jeff Friedman
    • In this session, panelists will provide a spirited preview of the most significant constitutional cases in state taxation over the past year as well as a preview of important cases to watch in the coming year.
  • TaxTok – The Timely New Name for “What’s Happening Everywhere Today” – Jeremy Gove
    • Like its social media kin, TaxTok is a platform for sharing and discovering short topics. In this session, expert “influencers” will provide a rundown of what you need to know about SALT developments affecting taxpayers.

Eversheds Sutherland is a proud sponsor of the Institute on State and Local Taxation. We hope to see you there!

On November 18, 2024, the New York Tax Appeals Tribunal (TAT) determined that Sunoco, Inc. (R&M) Combined Affiliates (Sunoco) was not entitled to include receipts from buy/sell agreements in its New York receipts factor because they were derived from inventory exchanges, not bona fide sales for monetary consideration.

Sunoco refined and marketed oil, and entered into buy/sell transactions to alleviate costs associated with the transportation of oil to a customer’s location. Between 2007 and 2010, Sunoco included the sell side of these transactions in the denominator of its New York receipts factor on the basis that it constituted sales of tangible personal property to third parties for a price and, therefore, bona fide sales for purposes of calculating the company’s business allocation percentage (BAP). The New York Division of Taxation disagreed at audit.

On appeal, the TAT determined that the buy/sell transactions constituted exchanges of inventory, followed by a sale to an end customer.  The TAT stated that the transactions were not sales for purposes of Sunoco’s BAP calculation, “as they lacked independent economic substance separate from the end customer sale” and that Sunoco “would not have agreed to sell oil in a buy/sell transaction unless oil was to be acquired in return.”  Further, the TAT held that net-out agreements demonstrated the buy/sell transactions were actually inventory exchanges and not bona fide sales for monetary consideration. Accordingly, the TAT denied the refund.

In re Sunoco, Inc. (R&M) Combined Affiliates, No. 829399 (N.Y. Tax App. Trib., Nov. 18, 2024).

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: For tax years beginning after December 31, 2025, corporate franchise taxpayers that are part of a combined group in which jurisdiction will transition to the Finnigan method of apportionment?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!

On Friday, December 6, 2024, the Texas Comptroller held a public hearing in Austin, TX regarding the proposed changes to the data processing regulation (section 3.330) published in the Texas Register on September 13, 2024. Several parties submitted written comments in response to the proposed regulation, including the Texas Taxpayers and Research Association (TTARA) and the Council On State Taxation (COST). Both TTARA and COST requested the public hearing.

Eight individuals spoke during the hearing: two from TTARA, one from COST, two marketplace sellers, one representative from Dell Technologies, and two attorneys. The general undertone was that the Comptroller’s proposed rule exceeds to scope of the data processing statute, Texas Tax Code section 151.0035, and the expanding the statute is the legislature’s job, not the Comptroller’s.

Several of the comments related to the proposed regulation’s preamble, specifically addressing:

  • The Comptroller claiming it has exclusive authority to interpret revenue laws;
  • The proposed regulation disavowing the essence of the transaction test in favor of the ancillary services test, when the essence of the transaction test was created by the Texas Supreme Court and the Comptroller does not have the power to overrule the Supreme Court; and
  • The notion that no one purchases data processing for its own sake, which multiple speakers highlighted as not being true and gave various examples of common data processing services that involve processing data.

In addition to the comments targeting the preamble, multiple commentators also addressed:

  • The proposed regulation’s state and local sourcing provisions, with the speakers requesting additional clarity; and
  • The increased cost of doing business that the proposed change will impose on marketplace sellers.

The Comptroller did not take questions and did not offer any comments in response to the testimony that was offered. The Comptroller concluded the hearing by stating that they are considering the written comments and the hearing testimony, and hope to publish the adopted version of the regulation in early 2025. The Comptroller also stated that the upcoming Texas legislative session may have an impact on the timing of the regulation’s implementation. Separately, legislation has been prefiled that would exempt payment processing services provided by marketplace providers.

Members of our SALT team are looking forward to several presentations this week. Here are the highlights:

California Tax Foundation’s 2024 Webinar Series

On Tuesday, December 10, SALT Counsel John Ormonde will examine California local tax election results and identify potential trends in local tax policy. This session is part of the California Tax Foundation’s 2024 webinar series. Register here.

TEI Ethics Webinar

Also on December 10, SALT Partners Tim Gustafson and Dan Schlueter will explore ethical dilemmas facing state tax professionals as part of TEI’s second annual webinar series focused on ethics. Register here.

2024 Georgia Department of Revenue and Tax Bar Liaison Committee Meeting

On Wednesday, December 11, SALT attorneys Jonathan Feldman and Alla Raykin will discuss the establishment of Georgia’s new judicial branch tax court in an event hosted by the Tax Law Sections of the Atlanta Bar Association and State Bar of Georgia. Register here.

2024 New Mexico Tax Law Symposium

Also on December 11, SALT Partner Jeff Friedman will present a SALT litigation update during the 2024 New Mexico Tax Law Symposium. This day-long institute will focus on updates to New Mexico and federal tax law, equity considerations for tax practitioners, and the ethics of tax law practice.

Please welcome our December SALT Pet of the Month, Rush! This six-year-old Collie resides with Jay Roberts, senior manager of international tax at Janus Henderson Investors, in the foothills of Denver, CO.

This curious Collie got his name from his active personality, constantly running around as a puppy. He particularly enjoys going on hikes and camping with his family and has a penchant for Milk Bones. His only pet peeve is when the trash can is rolled up the driveway. Notably, this is the only time this Rush barks.

At home, he has been known to stir up a bit of mischief. Rush is a huge foodie with a particular taste for Mexican food. One day, he found his way to a crockpot full of red chile beef when Jay was running an errand. When Jay returned, he discovered that Rush had eaten roughly three pounds of meat! As you can guess, Rush had quite a tummy ache, and Jay had to quickly come up with another plan for dinner. As for Rush, he would do it all over again, every single day of the week.

We are pawsitively thrilled for Rush to join the SALT Pet of the Month family!