On January 12, 2017, the California Court of Appeal held in a published opinion that a taxpayer passively holding a 0.2 percent interest in a California-based limited liability company (CA LLC) was not “doing business” in the state for purposes of being subject to California’s franchise tax. The court reasoned as follows:

  • Under California Revenue Code Section 23101, “doing business” means “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit” (emphasis added) and the taxpayer did not “actively” engage in any transaction because it had held its investment in the CA LLC for several years prior to the tax year in issue and played no role in the CA LLC’s‎ operations.
  • The CA LLC’s election to be treated as a partnership for federal income tax purposes did not mean that the taxpayer should be treated as a general partner (which would impute the partnership’s activities to the taxpayer and cause the taxpayer to be doing business in California) because a tax election for one purpose does not necessarily control for all taxation purposes in all circumstances.
  • After resolving the case on statutory grounds, the court expressly declined to consider any constitutional issues.

View the full Legal Alert.

On January 5, 2017, a New York State Division of Tax Appeals administrative law judge (ALJ) determined that a taxpayer’s electronic bill payment and presentation receipts constitute “service” receipts and not “other business receipts,” and are properly sourced where the service is performed. In the Matter of the Petitions of Checkfree Services Corp. 

  • New York taxpayers received additional guidance on the important issue of whether online services constitute “service” receipts, and how those receipts should be sourced, for New York corporate franchise tax purposes. 
  • An ALJ found for a taxpayer on this same issue previously. In Expedia, another ALJ confirmed the taxpayer’s position that travel reservation facilitation receipts, and online advertising receipts, constitute “service” receipts that are sourced to the location of performance. In the Matter of the Petition of Expedia, Inc.
  • The ALJ’s analysis in Checkfree largely mirrors the sound analysis in Expedia. Both determinations concluded that the taxpayer performed a “service” under the term’s plain meaning; that a “service” does not require human involvement; that the taxpayer did have some human involvement even though the service had an automated component; and that “service” receipts are properly sourced where performed, which is the taxpayer’s location, not the customer’s location.

View the full Legal Alert.

We are pleased to announce that Sutherland has been named Tax Practice Group of the Year for the third consecutive year by Law360, a nationwide legal news service. The award is given annually to firms that had the biggest wins and worked on the most important deals over a one-year period.

Sutherland’s Tax Practice Group has received numerous awards for client service, most recently being named Tax Advisory Firm of the Year for the fourth consecutive year by Captive Review, the leading trade publication focused on risk management and captive insurance. The group’s attorneys are also regularly featured in a range of “best of” and “who’s who” lists, including The Best Lawyers in America, Chambers USA: Guide to Leading Business Lawyers, The Legal 500: United States and Super Lawyers.

A group of Law360 editors reviewed 619 submissions, of which 80 firms covering 34 practice areas were recognized. Sutherland was one of just five firms selected by Law360 for recognition in the Tax category.

View the full press release.

By Alla Raykin and Eric Coffill

The Massachusetts Appellate Tax Board (ATB) upheld the Commissioner’s assessment, resulting from a denial of a subsidiary’s securities corporation classification for corporate excise tax purposes. Companies classified as securities corporations receive favorable excise tax treatment under G.L. c. 63, § 38B(a), including not being subject to inclusion in the parent’s combined group. The ATB found that classification required either submitting an application before the end of the taxable year or having a classification from the Commissioner from a previous taxable year. The Commissioner denied the classification because the company did not file the required application. The ATB determined that the Commissioner’s prior acceptance of returns without audit did not constitute acquiescence to the classification. Without the classification, the subsidiary should have been included in the parent’s combined reporting group, which resulted in a higher tax liability for both the subsidiary and its parent. Techtarget, Inc. v. Commissioner of Revenue, No. C314725, ATB 2016-481 (Mass. App. Tax Bd. Nov. 18, 2016).

By Zack Atkins and Tim Gustafson

The Washington State Department of Revenue ruled that an out-of-state baker whose only in-state “presence” was its use of in-state independent commissioned sales representatives to solicit orders had substantial nexus with Washington and therefore was subject to the state’s business and occupation (B&O) tax. The taxpayer contracted with the in-state representatives to solicit orders in a territory that included Washington. All orders were sent to the taxpayer outside of Washington for approval. Relying on the state statute and administrative rules in effect at the time and case law standing for the proposition that substantial nexus for B&O tax purposes can be established through the use of independent agents contracted to perform in-state activities, the Department concluded that the independent commissioned sales representatives provided significant services that enabled the taxpayer to establish and maintain a market in Washington. The Department also found that, even though shipment was made by common carrier and title passed to the customers outside of Washington, the taxpayer’s sales to Washington customers occurred in Washington because the baked goods were received there. Commercial law and UCC “delivery” terms, the Department said, are not dispositive for B&O tax purposes. Det. No. 16-0149, 35 WTD 613 (2016).

By Zack Atkins and Marc Simonetti

A federal district court denied a taxpayer’s motion to dismiss a lawsuit brought under the New York False Claims Act (FCA) for lack of subject matter jurisdiction and remanded the action to state court. The relator, an Indiana University professor, alleges that Citigroup violated the FCA by deducting net operating losses on its New York franchise tax returns while knowing that it was not entitled to such deductions under the New York Tax Law. The federal government acquired a substantial interest in Citigroup under its Troubled Asset Relief Program. While IRC § 382 generally limits net operating loss carryforwards that can be deducted after an “ownership change,” the IRS issued multiple notices indicating that it would not treat such acquisitions as ownership changes. The relator claims that Citigroup underpaid its tax liability because the IRS’s notices are invalid and therefore cannot be relied upon or, alternatively, that the notices were never incorporated into the New York Tax Law. The federal district court observed that while Citigroup’s arguments for dismissal—all of which were grounded in state law—were “potentially meritorious,” the lawsuit “does not truly present a federal question.” The lawsuit calls into question the validity of the IRS’s notices but the court held that the relator lacks standing to challenge the validity of the notices. Because it could conceivably resolve the relator’s FCA claim without deciding whether the IRS’s interpretation of IRC § 382 was arbitrary and capricious, the court concluded that the relator’s complaint did not necessarily raise a federal issue and therefore remanded the case to state court. State ex rel. Rasmusen v. Citigroup, Inc.

By Mike Kerman and Open Weaver Banks

The West Virginia Supreme Court held that a credit for taxes paid to other states on purchases of motor fuel is constitutional only if interpreted to include taxes paid to subdivisions of other states. The court determined that a credit that applies only to taxes paid to other states, and not localities, would violate both the fair apportionment and discrimination prongs of the U.S. Supreme Court’s Complete Auto test. If the court did not interpret the credit to include local taxes, a taxpayer who purchased motor fuel in a state without a local tax, or a taxpayer who purchased motor fuel in-state, would have a lower overall tax burden than a taxpayer who purchased motor fuel subject to a state and local tax. This would create a total tax burden on interstate commerce that is higher than an intrastate transaction, and therefore discriminate against interstate commerce. Although the statute’s terms apply only to allow a credit for taxes paid to other states, the court interpreted it to apply to local taxes as well, to avoid an unconstitutional application. No. 15-0935. 

By Chelsea Marmor and Madison Barnett

The California Court of Appeal upheld Comcast’s $2.8 million franchise tax refund. The court determined that: (1) Comcast and its subsidiary QVC were not unitary, such that QVC was properly excluded from Comcast’s combined group, and (2) a termination fee Comcast received from a failed merger constitutes apportionable business income. Comcast and QVC were not unitary because Mobil Oil’s three hallmarks of a unitary relationship—centralized management, functional integration and economies of scale—were not present.  The court concluded that because QVC’s day-to-day operations were conducted by QVC’s management independently from Comcast a non-unitary finding was justified. On the second issue, the court held that a merger termination fee satisfied California’s transactional test for business income. Sutherland represented the taxpayer in this matter. ComCon Prod. Serv. I Inc. v. Franchise Tax Bd., No. B259619 (Cal. Ct. App. 2016).

Tinkering with a state’s interest provisions can be a hidden way to increase revenue without expanding the base or increasing the tax rate—an important work-around for legislators who have pledged not to increase taxes. However, fundamental fairness requires states to follow specific tenets related to interest provisions. View this State Tax Notes article, which outlines four tenets that states should follow to ensure sound tax policy:

  • Interest provisions should be neutral and evenhanded;
  • Interest should compensate parties for the time value of money;
  • The legislature, not the tax department, should set the applicable interest rate; and
  • Interest provisions should be predictable and consistent.

Read the full State Tax Notes article by Sutherland SALT attorneys Jonathan Feldman and Samantha Trencs.

By Jessica Allen and Jeff Friedman

The Tennessee Department of Revenue (Department) released a letter ruling stating that a taxpayer’s charges for use of its web-based interface are subject to sales and use tax as the sale of ancillary services. The taxpayer’s proprietary software allows users to communicate through text and other messages on a single centralized web-based interface. The Department explained that the state imposes tax on the sale of telecommunications services and ancillary services. Telecommunication services are defined to include the transmission of data. Ancillary services include services associated with telecommunication services. Because the taxpayer’s web-based interface was “associated with, or incidental to, the provision of telecommunication services,” the interface qualifies as the sale of taxable ancillary services and therefore is subject to sales and use tax. Tenn. Letter Ruling 16-09, Tenn. Dep’t of Revenue (issued Nov. 10, 2016).