By Stephen Burroughs and Maria Todorova

The Commonwealth Court of Pennsylvania recently reaffirmed its decision that Level 3’s network infrastructure services (including local dial networks, telephone numbers and modems, i.e., Internet “backbone”) sold to retail Internet service providers (ISPs) constitute non-taxable Internet access services. The Commonwealth Court previously held that the taxpayer’s facility was an access point (point of presence or PoP) that enabled ISP end users to access the Internet, and its services were, therefore, Internet access services exempt from sales and use tax (see previous coverage of the court’s holding here). The Commonwealth sought reconsideration of the court’s holding, primarily arguing that: (1) the taxpayer’s services constituted a mere technological advancement to otherwise taxable telecommunications services (such as port modem management (PMM) services—see America Online, Inc. v. Commonwealth, 932 A.2d 332 (Pa. Cmwlth. 2007) here); and (2) the taxpayer merely directed end users to an ISP homepage and it was the ISP and its PoP—and not the taxpayer—that enabled end users to initiate a connection to the Internet. The court disagreed with the Commonwealth and reaffirmed its prior reasoning that: (1) the “fundamental technological differences” between taxable PMM services and the taxpayer’s Internet backbone services related to what services were provided and not how the services were provided; and (2) it was the taxpayer’s PoP that provided the access point for ISP end users to establish an Internet connection. The Commonwealth has filed a Notice of Appeal to the Pennsylvania Supreme Court. Level 3 Communications, LLC v. Commonwealth, 166 F.R. 2007 (Pa. Cmwlth. Dec. 8, 2016) (en banc). 

 

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Atlanta Office
Pictured from the left: Maria Todorova, Todd Lard, Jonathan Feldman, Pearis Carr, Melissa Bragg, Scott Wright, Hanish Patel, Zack Atkins, Suzanne Palms, Admin Rether White, Stephen Burroughs, Alla Raykin, Madison Barnett 

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New York Office
Pictured from left: Marc Simonetti, Open Weaver Banks, Admin Barbara Keihani-Dubison, Doug Upton, Amy Nogid, Evan Hamme, Leah Robinson, Andy Appleby, Nicole Boutros, Chelsea Marmor

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Sacramento Office
Pictured from left: Eric Coffill, Admin Stephanie Fulps, Nick Kump, Robert Merten, Tim Gustafson, Jessica Allen 


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Washington, DC Office
Pictured from left: Todd Betor, Admin Candice Alba, Charlie Kearns, Jeff Friedman, Admin Debbie Manders, Sam Trencs, DeAndre Morrow, Mike Kerman, Jessie Eisenmenger, Charles Capouet, Stephanie Do 

The Maryland State Bar Association (MSBA) Taxation Section works to further the mutual interest of MSBA members concerned with the law relating to taxes through stimulating the interest of MSBA members and informing them in the law concerning Maryland and Federal taxation; studying proposed improvements and reforms in such laws through legislation and otherwise; and generally promoting the interests and welfare of Bar members and the public in the areas of taxation.

Through 2017, Sutherland SALT will be hosting a live videocast of the MSBA State Tax Study Group’s meetings from 8:30 – 9:30 a.m. Eastern in our Washington, DC office (700 Sixth Street, NW, Suite 700, Washington, DC).

Following is the 2016-2017 MSBA State Tax Study Group schedule:

  • December 20, 2016
    Speaker Renee Nacrelli on “Recent and Pending Litigation; Maryland General Assembly Prognosis”
  • January 17, 2017
    Speaker Vince Guida Jr., Bill Hammond and Jeff Comen on “Update of Cases; Recent and Pending Legislation regarding SDAT”
  • February 21, 2017
    Speaker Michael Higgs on “SDAT Reorganization; Personal Property Tax Developments”
  • March 21, 2017
    Speaker Jay Mascus on “Comptroller Business Collections and Unclaimed Property Issues”
  • April 25, 2017
    Speaker Wally Eddelman and Sarah Dufresne on “Analysis of the Last Session of the Maryland General Assembly; Income Tax Developments”
  • May 16, 2017
    Speaker Chris Riley on “Pending and Enacted Maryland Legislation; Developments in the Maryland Comptroller’s Office”

Members attending are required to sign in and show a photo ID at the lobby security desk, as well as check in with our reception on the 7th floor.

For questions regarding the DC simulcast, please contact DeAndre Morrow at deandre.morrow@sutherland.com.

For more information, please visit the MSBA webpage.

 

Read our November 2016 posts on stateandlocaltax.com or read each article by clicking on the title. For the latest coverage and commentary on state and local tax developments delivered directly to your phone, download the latest version of the Sutherland SALT Shaker app.

 

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Meet Lemon and Lime, the one-year-old parakeets belonging to Sutherland SALT Legal Secretary, Barbara Keihani-Dubison.

Barbara received these two little sweeties as a gift from her mom almost six months ago. Lemon is a bright yellow female with streaks of green, and Lime is a yellow male with a green belly.

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They love to chirp and sing. Both have a lot to say and are quite sociable. Barbara wishes she could interpret their “chirps” so that she could understand what it is they are arguing over when they fight. The same goes for when they are content, and the chirping or singing is very steady and sweet. 

Lemon and Lime are delighted to be the only birds ever featured as Pets of the Month!

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By Jessica Allen and Jonathan Feldman

The New York City Tax Appeals Tribunal administrative law judge (ALJ) determined that a taxpayer’s receipts for consulting services should be allocated based on where the services were rendered, not where the solicitation and payment for the services occurred. The taxpayer’s non-commissioned salespeople entered into lump-sum subscription agreements with clients providing access to the taxpayer’s network of independent industry expert consultants. Its research consultants paired clients with the appropriate expert consultants. The Department of Finance excluded the expert consultants from the allocation analysis as independent contractors and allocated receipts based on the location of the taxpayer’s salespeople. However, the ALJ found that the receipts for services should be allocated based on the location of the research managers and consultants, but not the salespeople. Although the salespeople collected the receipts, their efforts did not represent the services for which the client paid the taxpayer. In the Matter of the Petitions of Gerson Lehrman Group, Inc., New York City Tax Appeals Tribunal, Administrative Law Judge Division, TAT(H)08-79(GC), TAT(H)12-38(GC), and TAT(H)12-39(GC), Oct. 4, 2016.

Sutherland SALT is a proud co-sponsor of the COST Pacific NW Regional State Tax Seminar on December 6, 2016, in Seattle, Washington. The Sutherland SALT Team will present an update on significant state tax issues for California, the Pacific Northwest States and certain other significant states around the country, including:

Discussion of State Tax Cases, Issues and Policy Matters to Watch
Speakers: Jeffrey A. Friedman and Michele Borens

Latest Developments on Apportionment
Speakers: Todd A. Lard and Stephanie T. Do

View details, including registration information, here.

 

By Elizabeth Cha and Timothy Gustafson

On October 26, 2016, the South Carolina Court of Appeals reversed a lower court ruling and determined the Department of Revenue (Department) failed to satisfy its burden of showing that the statutory apportionment formula did not fairly represent Rent-A-Center West Inc.’s (RAC) business activities in South Carolina. This case had been stayed pending a final decision in the CarMax Auto Superstores West Coast Inc. v. Dept. of Revenue, 397 S.C. 604 (2014) (see our prior coverage here), in which the South Carolina Supreme Court applied a two-prong test whereby the Department must show that (1) the statutory formula does not fairly represent the taxpayer’s business activity in South Carolina, and (2) its alternative accounting method is reasonable in order to apply alternative apportionment. 

RAC did not own or operate any stores in South Carolina, and thus its South Carolina revenue arose solely from the licensing of RAC intellectual property (IP) to RAC-affiliated companies for use in their stores in South Carolina. Accordingly, the numerator of RAC’s single receipts factor apportionment formula was comprised of the South Carolina licensing receipts and the denominator included all of RAC’s nationwide revenue from its retail stores and licensing activities. The Department argued that including the retail sales in the denominator diluted the gross receipts ratio and invoked alternative apportionment. However, the Department’s auditor did not offer any specific evidence to support its argument that the standard apportionment method did not fairly represent RAC’s business activities in the state. The court concluded that the Department presented the same level of evidence in this case as it did in CarMax, which was insufficient to meet the Department’s burden on the issue of whether the statutory formula fairly represented RAC’s business activity in South Carolina. Rent-A-Center West Inc. v. South Carolina Department of Revenue, No. 2012-208608 (S. Ct. App. Oct. 26, 2016).

By Douglas Upton and Andrew Appleby

The New Jersey Tax Court determined that credit card issuers must source to New Jersey all of their interest and interchange fee receipts, and half of their credit card service fees, from New Jersey accountholders. The Tax Court concluded that the Division of Taxation’s regulations required the taxpayers to source their interest receipts based on the location of their cardholders, rejecting the taxpayers’ argument that the interest receipts were not so integrated with a business carried on in New Jersey as to acquire a New Jersey tax situs. The Tax Court further determined that credit card interchange fees constituted interest for corporation business tax purposes, noting that the taxpayers treated the interchange fees as an original issue discount for federal income tax purposes and that the interchange fees amounted to a fee charged for the use of money. The Tax Court also held that the Division of Taxation’s 25/50/25 sourcing regulation (i.e., sourcing 25% of receipts to the where the service originates, 50% to where the service is performed, and 25% to where the service terminates) applied to source 50% of credit card service fees from New Jersey cardholders to New Jersey because the service was performed where the cardholder received the benefit of such service, in New Jersey.  Finally, the Tax Court found that the Division of Taxation could not apply the throwout rule to any of the taxpayers’ receipts because the Division of Taxation failed to point to any state that would not have jurisdiction to tax the taxpayers’ sales if New Jersey’s economic nexus standard applied.  Bank of Am. Consumer Card Holdings v. N.J. Div. of Taxation, __ N.J. Tax __, 2016 WL 5899786 (N.J. Tax. Ct. Oct. 6, 2016).

By Zachary Atkins and Open Weaver Banks

The New Jersey Tax Court held that apportioning all of a company’s income to New Jersey for corporate business tax purposes, even with the allowance of a credit for taxes paid to separate-return states, failed to fairly reflect the company’s business activities in New Jersey.  The court also rejected the company’s contention that it was entitled to use a three-factor formula. Prior to 2011, corporate taxpayers without a “regular place of business” outside New Jersey were required to use a 100% apportionment factor, while taxpayers that maintained a regular place of business outside the state were required to use a three-factor apportionment formula. The company in question, which was headquartered in New Jersey, did not have a regular place of business outside the state and so was required to use the 100% apportionment factor.  The Division of Taxation responded to the company’s request for relief on audit by allowing a credit for taxes paid to separate-return states. The tax court concluded that the 100% apportionment factor, even with the credit, did not fairly reflect the company’s in-state business activities because it produced tax liabilities that were, depending on the year, double or triple the tax liabilities produced by the three-factor formula. Nonetheless, that in itself did not entitle the company to use the three-factor formula, the court said. The court agreed with the Division that strict application of the three-factor formula would have produced an unfair result because, while the company’s offices, employees and operations were in New Jersey, the three-factor formula would have resulted in apportionment factors of approximately 30%.  The court noted, too, that because the company was in the business of offering equipment lease financing to customers of related entities, the leased equipment—located in all 50 states—reduced the company’s property factor. The court remanded the case to the Division so that further adjustments to the statutory apportionment factor could be considered. Canon Fin. Servs., Inc. v. Director, Div. of Taxation (N.J. Tax Ct. Oct. 13, 2016).