By Charles Capouet and Maria Todorova

The Franklin County Circuit Court held that Netflix’s subscription-based streaming video service was not subject to Kentucky’s gross revenues tax, excise tax and school tax (telecommunications taxes) imposed on “multichannel video programming service” (MVPS).  Under Kentucky law, MVPS is programming “provided by or generally considered comparable to programming provided by a television broadcast station” and includes cable television service. The court held that Netflix’s streaming video service is ”a vast departure from the linear programming model of traditional cable or broadcast television services” because: (1) it does not provide content in a multichannel format; (2) its content is not linear or sequential programming, i.e., Netflix does not offer or provide content on any predetermined or set schedule; (3) it does not deliver live content; (4) it does not own any facilities or infrastructure capable of transmitting or delivering its streaming service to its customers; and (5) it “enables the customer to craft an entirely unique and personal profile and viewing experience.” The court reasoned that it would be unreasonable to conclude that the General Assembly intended its legislative enactment “to subject to taxation every possible new technological development in the field of transmitting digital content for personal enjoyment.” Therefore, the court concluded that Netflix’s streaming video service is not an MVPS and therefore not subject to Kentucky’s telecommunications taxes. Fin. & Admin. Cabinet, Kentucky Dep’t of Revenue v. Netflix, Inc., No. 15-CI-01117 (Franklin Cnty. Cir. Ct. Aug. 23, 2016).

By Chris Mehrmann and Charlie Kearns

A New Mexico Taxation and Revenue Department administrative hearing officer found that a seller could not use equitable recoupment as a defense to offset gross receipts (sales) tax assessed on its sales of software licenses. In support of its equitable recoupment argument, the seller maintained that third-party lenders that extended loans to the seller’s clients paid gross receipts tax on the seller’s behalf. Rejecting this argument, the hearing officer explained, inter alia, that the software sales and customer loans were separate taxable events— which were each subject to gross receipts tax—and that the lenders paid gross receipts tax on the financing transactions and not the software sales. Therefore, the hearing officer concluded that the seller did not show that the transactions at issue were a single taxable event arising out of the same transaction, which is a requirement for a successful equitable recoupment defense. In re Market Scan Info. Sys., Inc., N.M. Taxation & Revenue Dep’t Admin. Hearings Office, No. 16-44 (Sept. 12, 2016).

By Nicole Boutros and Marc Simonetti

The Illinois Appellate Court held that a defendant out-of-state retailer was not liable under the state’s False Claims Act because it conducted a good faith inquiry into its use tax collection obligations for both its Internet and catalog sales.  The defendant had franchisees operating in Illinois and sold products through a website and catalog, and it sent employees into the state to visit the franchisees about once a year.  The Appellate Court agreed with the trial court that, with respect to the defendant’s Internet sales, the defendant conducted a good faith inquiry into its use tax collection obligation and did not recklessly disregard an obligation to collect the tax.  The court further overturned the trial court’s determination that the defendant did not conduct a good faith inquiry into its use tax collection obligation for catalog sales following its 2005 policy change requiring its franchisees to distribute 1,000 catalogs per year.  The court cited to the reliance on a positive outcome in a prior New York State audit and on annual financial audits as proof that the defendant did not knowingly or recklessly disregard an obligation to collect use tax. People ex rel. Beeler, Schad & Diamond, P.C. v. Relax the Back Corp., 2016 IL App (1st) 151580 (Ill. App. Ct. Oct. 17, 2016).

Read our October 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.

georgia4.jpgMeet Georgia, the five-and-a-half-year-old German Shepherd belonging to Damien Packard, Sutherland’s Senior User Support Coordinator, and his girlfriend Chelsy. The two adopted Georgia last August when a friend moved and couldn’t take Georgia with him.

While with her previous owner, Georgia spent all of her time in the backyard, so she is still working on her social skills. She is a sweet girl, but can be very protective of her family and their personal space.georiga2.jpg

She loves to snuggle and goes wild for bully sticks. When she hears the ice machine in the refrigerator, her face lights up and she runs to the kitchen.

Georgia is so very grateful to be October’s Pet of the Month!

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By Alla Raykin and Tim Gustafson

The Colorado Department of Revenue determined that energy purchased by a television broadcaster is exempt from sales tax when used to transmit broadcasts, but taxable when used for other office purposes. Colorado imposes sales tax on electricity and natural gas for commercial consumption. The Department analyzed possible exemptions applicable to the broadcaster’s use of energy and concluded that the 1937 statute exempting “radio communication” extends to television broadcasting today. However, the exemption, read narrowly, does not extend to energy used for office lighting, computers, printers, cameras, stage lighting and heating of office space. CO GIL-16-014. 

The Louisiana Department of Revenue has proposed a new regulation expansively interpreting Louisiana’s recently enacted related party expense addback statute.  

  • Earlier this year, Louisiana enacted a new statute requiring taxpayers to add back interest expenses, intangible expenses and management fees paid to related members, subject to certain exceptions.
  • The Proposed Regulation seeks to adopt definitions, impose compliance and documentation requirements, and place additional limitations on intercompany expense deductions.
  • Comments on the Proposed Regulation should be due by November 29, with a public hearing scheduled for November 30.

View the full Legal Alert.

By Ted Friedman and Madison Barnett

The Maryland Tax Court held that the Comptroller’s policy of not allowing carryforwards of unsubtracted exempt federal obligation interest violates the Supremacy Clause of the U.S. Constitution. Under the Comptroller’s policy, interest earned on Maryland obligations is subtracted in its entirety when computing Maryland taxable income. As a result, Maryland obligation interest is included in the taxpayer’s Maryland NOL and can be carried forward and deducted in later years. The same is not true for interest earned on federal obligations. The Comptroller allows the federal obligation interest to be deducted until there is no Maryland taxable income, but any excess may not be used to increase the taxpayer’s Maryland NOL carryforward. The Court determined that the Comptroller’s policy violates the Supremacy Clause by discriminating against those who hold federal obligations in favor of those who hold state obligations. As a result, the taxpayer was permitted to carryforward its excess federal obligation interest deductions. Branch Banking & Trust Co. v. Comptroller of the Treasury, No. 13-IN-OO-0076 (Md. Tax Ct. Aug. 12, 2016).

Sutherland SALT releases the third edition of its SALT Scoreboard, a quarterly publication that tracks significant state tax litigation and controversy developments and tallies the results of taxpayer wins and losses across the country. Our quarterly publication features Sutherland’s observations regarding important state tax decisions and identifies trends by issue, state and forum as they emerge during the year. This issue of the Sutherland SALT Scoreboard includes our observations on False Claims Act and class action cases, the Tax Injunction Act, and states’ treatment of fees vs. taxes.

View our Sutherland SALT Scoreboard results from the third quarter of 2016!

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Sutherland SALT releases the third edition of the “SALT Scoreboard,” a quarterly publication that tracks significant state tax litigation and controversy developments and tallies the results of taxpayer wins and losses across the country. Our quarterly publication features Sutherland’s observations regarding important state tax decisions and will identify trends by issue, state and forum as they emerge during the year. This issue of the SALT Scoreboard includes Sutherland’s observations on the Tax Injunction Act, states’ treatment of fees vs. taxes, and states’ sourcing of receipts for corporate income taxes. In our Third Quarter Spotlight (see page two), we review the significant False Claims Act and class action cases decided this year.

Sutherland is a proud sponsor and host of the TEI New York State and Local Chapter Meeting on Wednesday, November 9, at Sutherland’s New York Office. The Sutherland SALT Team will be discussing the changing state and local tax landscape from counsel’s perspective. Topics will include:

  • State Income Tax Litigation You Need to Know About
  • Speakers: Michele Borens and Amy F. Nogid
  • SALT Legislative and Regulatory Trends
  • Speakers: Todd A. Lard and Andrew D. Appleby
  • Top 10 Sales and Use Tax Cases
  • Speakers: Marc A. Simonetti and Open Weaver Banks
  • Hot Topics in State and Local Tax
  • Speaker: Jeffrey A. Friedman
  • New York Tax Reform – Controversial Issues in Implementing the New Regime
  • Speaker: Leah Robinson and Nicole D. Boutros

View registration and event details.