Eversheds Sutherland (US) is a proud sponsor of the TEI Dallas SALT Day 2017 taking place October 17, 2017, in Dallas, Texas. The Eversheds Sutherland SALT Team presents, and details of their presentations are below:

“State and Local Income Tax Litigation – Cases Not to Miss”
Speakers: Carley Roberts and Liz Cha

“Sales and Use Tax Update”
Speakers: Todd Betor and Ted Friedman

“Current Developments in Unclaimed Property”
Speakers: Liz Cha and Ted Friedman

“California’s Major Tax Agency Shakeup: What Now?”
Speakers: Carley Roberts and Tim Gustafson

“State and Local Tax Aspects of Mergers and Acquisitions”
Speakers: Todd Betor and Ted Friedman

View details, including registration information, here. 

By Huy “Mike” Le and Andrew Appleby

The New York State Tax Appeals Tribunal (Tribunal) held that the Department’s assessment of two non-admitted German insurance companies violated the United States-Germany Tax Treaty’s anti-discrimination clause and the US Constitution’s Foreign Commerce Clause.

The alien non-admitted non-life insurance companies had no premiums from sources in the United States. The insurance companies’ activities in New York and the United States were limited to holding interests in limited partnerships that owned real estate in New York and throughout the United States. The insurance companies did not challenge whether they had nexus with New York. An Administrative Law Judge (“ALJ”) previously determined that the insurance companies, as non-admitted non-life insurance corporations, were properly subject to insurance franchise tax, not premium tax. The ALJ also affirmed the Department’s alternative allocation method, which applied an entity theory and imposed tax only on the distributive share from the partnerships using the partnerships’ allocation factors. See previous coverage here. 

The Tribunal affirmed the ALJ’s reasoning. However, the Tribunal ultimately reversed the ALJ’s final conclusion based on an argument that the insurance companies had not raised at the ALJ level. The Tribunal concluded that the Department’s assessment discriminated against the insurance companies based on their status as alien insurers, which violated the United States-Germany Tax Treaty and the Foreign Commerce Clause. Although treaties generally do not apply to state and local taxes, the anti-discrimination provision generally does apply. 

The Tribunal compared the alien insurance companies’ treatment to the treatment of an otherwise similarly situated domestic, non-New York insurance company. The Tribunal determined that the Department’s assessment imposed a more burdensome tax treatment on the alien insurance companies. A crucial fact in these cases was that the alien insurance companies had zero premiums in the United States, and zero United States effectively connected income from premiums. 

The Tribunal also briefly noted that, although it did not have to decide the issue, the Department’s assessment would impede the federal government from “speaking with one voice” in regulating foreign trade, which would violate the Foreign Commerce Clause. In re Bayerische Beamtenkranekenkasse AG, DTA No. 824762 (N.Y. Tax App. Trib. Sept. 11, 2017); In re Landschaftliche Brandkasse Hannover, DTA No. 825517 (N.Y. Tax App. Trib. Sept. 11, 2017).  

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Meet Dante and DaVinci, two mini donkeys (aka “the donkey doodles”), belonging to Paychex Inc. Manager of State and Local Tax Dee Waldruff and her family. Dee’s thoroughbred, Alice, and her retired racing Greyhound, Indy, were previously featured as Pets of the Month in March 2015. Dante and DaVinci joined the Waldruff family shortly thereafter when Dee saw that they were available in a Facebook group post. The donkeys’ previous owner had passed away, and family members were trying to re-home the pair. Dee knew when she saw them that they had to be part of the family.  

Dante and DaVinci joined two horses, three dogs, two cats and a pony on the Waldruff property affectionately referred to as the “Walderosa.”  They quickly became quite the security team, alerting everyone with their loud braying anytime a stranger or animal wandered onto the property.

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Finding suitable names for the donkeys was not the easiest of tasks. Dee and her daughter went back and forth with ideas for weeks. Aragorn and Legolas, Buckbeak and Hedwig, Button and Bobbin were all considered, but nothing fit until they landed on Dante and DaVinci.   

Adding the donkey doodles to the Waldruff herd was admittedly the perfect solution to Dee’s mid-life crisis. She says, “Some people want fancy cars, I wanted mini donkeys.” If you ask her husband, he believes it was a moment of insanity. Either way you look at it, they are wonderful additions to the family and bring smiles to everyone they meet.

We are thrilled to feature Dante and DaVinci as our September Pets of the Month!

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

By Mike Kerman and Jonathan Feldman

The Delaware Chancery Court held that a town’s $27,000 building permit “fee” was in substance a tax that could not be levied against a tax-exempt water and sewer authority. The town assessed the fee upon the water and sewer authority before it would issue a permit to construct a water storage tank. Whether the town could impose such a charge depended on whether it was properly characterized as a fee or a tax, regardless of its label as a fee. The distinction, the court said, is that a fee is directly related to a service received or a burden contributed by the payer, and is intended to offset the government’s costs of regulating or policing the conduct or risks. A tax, in contrast, is an enforced contribution (not a voluntary payment) imposed without any relationship to specific benefits received by the taxpayer. Based on this distinction, the court found the building permit fee to be a tax because it was calculated without regard to any benefits to the authority and would be used within the town’s general revenue fund. The record failed to show that the town would incur costs anywhere near the $27,000 charge in processing the authority’s permit. Thus, there was no direct relationship between the $27,000 and the benefits received or burdens contributed by the tax-exempt water and sewer authority, therefore the tax could not be imposed. Camden-Wyoming Sewer & Water Auth. v. Town of Camden, C.A. No. 12347-VCS (Del. Ch. Sept. 18, 2017).

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.