The Virginia Department of Taxation (Department) ruled that a company’s sales of cloud computing services did not create nexus with Virginia for corporate income tax purposes. The Department also said that in applying P.L. 86-272, it uses the same “solicitation” test for both the sales of intangible personal property and tangible personal property. The company licensed basic software from a developer, customized the basic software, and then resold the customized basic software to customers in Virginia including subscriptions to cloud computing services. The company had no tangible personal property in Virginia, but the developer owned and maintained at least one server in Virginia that hosted the software. The Department concluded that the company’s activities did not create more than a de minmis connection to Virginia, but warned the company that the rental and continual use of servers in Virginia are not de minimis activities. In determining whether P.L. 86-272 protected the company, and whether the activities of the developer would be imputed to the company, the Department advised the company to examine its relationship with the developer to ensure that the developer meets the requirements of an independent contractor. The Department said the existence of one or more positive Virginia apportionment factors would create nexus in the state and advised the company to examine its property, payroll and sales factors. The ruling also addressed the company’s responsibility to collect sales and use tax from its customers or pay sales tax to the developer. The Department said the company was not required to pay sales tax or collect sales tax from customers because the provision of cloud computing services is not a transfer of tangible personal property. Va. Public Document Ruling No. 16-135 (Va. Dep’t of Revenue June 24, 2016).
Oregon Tax Court Rules Electricity Sales to California Purchasers May Not Be Sourced to Oregon
By Mike Kerman and Eric Coffill
On remand from the Oregon Supreme Court, the Oregon Tax Court ruled that receipts from sales of electricity to California purchasers cannot be sourced to Oregon. The Oregon Supreme Court had ruled in Powerex Corp. v. Dept. of Rev., 357 OR. 40 (2015) that sales of electricity are sales of tangible personal property under UDITPA and directed the Tax Court on remand to decide whether the transmission systems that carried the electricity were the functional equivalent of common carriers and, if so, the ultimate destination of those sales. On the first question, the Tax Court ruled that the transmission systems were either common carriers or a function equivalent to common carriers. On the second question, the Tax Court ruled that the receipts from the taxpayer’s sales of electricity cannot be sourced to the point of contractual delivery, i.e., the “hub” where the taxpayer contractually agreed to deliver electricity and the point where title passed before the electricity reached its final destination. Rather, the hub is a trading or contractual notion that allows contracting parties to allocate risk of loss and responsibility for transporting electricity to its final destination. The Tax Court ruled that the only sales includible in the Oregon sales factor numerator were those which both parties agreed were sales to purchasers in Oregon. The vast majority of the sales were to the California Department of Water Resources. Powerex Corp. v. Department of Revenue, No. TC 4800.
Oregon Supreme Court Holds that Property of Satellite TV Provider Is Subject to Central Assessment
By Chris Mehrmann and Andrew Appleby
The Oregon Supreme Court held that property owned by DirecTV, Inc., a satellite television provider, was subject to central assessment because DirecTV was engaged in the business of providing “data transmission services,” making it a “communications” business. In reaching its decision, the court explained that data transmission services include “services that provide the means to send data from one computer or computer-like device to another across a transmission network.” The court concluded that DirecTV provided such services, because the company was in the business of transmitting electronically coded data between computer-like devices, including set-top boxes. DIRECTV, Inc. v. Dep’t of Revenue, 360 Or. 21 (Or. 2016).
Virginia Supreme Court Holds City’s Consumer Utility Tax Did Not Apply to Natural Gas Consumed by Power Company
By Hanish Patel and Eric Coffill
The Supreme Court of Virginia held that a city could not impose its consumer utility tax on the natural gas consumed by an electric power company solely for the purpose of generating electricity. Virginia localities are authorized to impose the tax on consumers of natural gas provided by a pipeline distribution company, defined as a corporation which transmits natural gas to a purchaser “for purposes of furnishing heat or light.” The city argued that the electric power company was subject to the tax because it consumed natural gas to create heat in order to power its electricity-generating turbines. The court disagreed, concluding that the statute was not intended to tax natural gas consumed for generating electricity because the definition of a pipeline distribution company omitted the word “power” in the context of “furnishing heat or light”. Additionally, a concurring opinion reasoned that although the electric power company produced heat, it was an incidental byproduct from the generation of electricity. City of Richmond v. Virginia Elec. & Power Co., 292 Va. 70, 787 S.E.2d 161 (2016).
Taxing the Internet Media Stream – South Carolina Determines Streaming Media Charges Are Taxable
By Robert Merten and Madison Barnett
The South Carolina Department of Revenue issued a revenue ruling concluding that charges paid by customers to stream media content over the Internet, such as movies, music and television programs, are subject to state sales and use tax. Under South Carolina law, the statutory definition of “tangible personal property” includes “services and intangibles, including communications.” The Department has long viewed cable and satellite television and other electronic services as taxable communications services, and the revenue ruling characterizes streaming media as the newest method of delivering taxable communications services. The Department’s ruling also said that streaming media charges are taxable regardless of whether they are paid as part of a subscription service, per item or per event. South Carolina Revenue Ruling No. 16-5 (July 16, 2016).
Videocast: Sutherland SALT Scoreboard – 2nd Quarter Highlights
Sutherland SALT tracks and tallies significant state and local tax litigation wins and losses in the quarterly Sutherland SALT Scoreboard publication. In this videocast, Charles C. Capouet and Elizabeth S. Cha share the second quarter highlights from the SALT Scoreboard, including the shift in momentum for state revenue departments and recent results regarding states’ manufacturing exemptions for sales taxes.
View our SALT Scoreboard Videocast.
Unfair Apportionment in Arkansas: ALJ Requires Taxpayer to Use Marked-Based Method to Apportion Services Income
By Chris Mehrmann and Carley Roberts
An administrative law judge (ALJ) of the Arkansas Department of Finance and Administration upheld the denial of a taxpayer’s corporate income tax refund claim, after the taxpayer attempted to amend its returns to apply the cost of performance method of sourcing income. Arkansas has adopted section 18 of the Uniform Division of Income for Tax Purposes Act, which grants the Department discretionary authority to require taxpayers to utilize alternative apportionment methods when the prescribed method produces an inequitable result. By refusing to process the taxpayer’s amended returns, the Department required the taxpayer to use market-based sourcing in place of the applicable cost of performance method. In finding that the Department did not abuse its discretion, the ALJ stated that application of the cost of performance method would omit three of the taxpayer’s four Arkansas revenue streams. Notably, the ALJ explained that the Department’s determination was not unreasonable, because the taxpayer had originally used market-based sourcing for its interstate sales on its returns. Redacted Decision, Docket Nos.16-267, 16-268, 16-269 (Ark. Dep’t of Fin. & Admin, June 21, 2016).
Sutherland SALT Shaker: July 2016 Digest
Read our July 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.
- Software + Services = No Tax: Bundles of Electronically-Transferred Software and Related Services Not Subject to Georgia Sales and Use Tax
The Georgia Department of Revenue (Department) released a letter ruling stating that a taxpayer’s sales of computer software and related services were not subject to sales and use tax. - SALT Pets of the Month: Noel and Honey
Meet Noel and Honey, the beloved guinea pigs of Sutherland SALT Counsel Open Weaver Banks. - Money for Nothing: Massachusetts Appeals Court Finds Intercompany Financing Transactions Did Not Constitute Genuine Indebtedness
The Massachusetts Appeals Court upheld an Appellate Tax Board decision disallowing interest expense on certain intercompany financing transactions because the underlying agreements did not establish an “unqualified obligation to repay.” - Compact, But No Contract: Minnesota Supreme Court Holds Compact Did Not Create Binding Contractual Obligation
The Minnesota Supreme Court held that Minnesota’s adoption of the Multistate Tax Compact (Compact) did not create a binding contractual obligation and, as a result, the state’s subsequent repeal of the Compact’s alternative apportionment election provision was not prohibited as unconstitutionally impairing contractual obligations. - Keep It in the Family: North Carolina Appellate Court Finds Taxation of Trust Violates Due Process
The North Carolina Court of Appeals held that it would violate Due Process to impose income tax on an out-of-state inter vivos trust because the trust lacked a sufficient connection with North Carolina. - Washington ALJ Rules Out-of-State Insurance Provider’s Marketing Subject to Business & Occupation Tax as Other Services
An administrative law judge (ALJ) held that a taxpayer’s activities in Washington were not selling, soliciting or negotiating insurance in the state, but rather marketing other in-state insurance companies’ products and receiving commissions from those marketing materials. - Don’t Take This Personally: Wisconsin Court Holds State Does Not Have Jurisdiction Over Mississippi DOR
The Wisconsin Court of Appeals held that Wisconsin courts lacked personal jurisdiction over the Mississippi Department of Revenue so as to subject it to a lawsuit in the state.
SALT Pets of the Month: Noel and Honey
Meet Noel and Honey, the beloved guinea pigs of Sutherland SALT Counsel Open Weaver Banks.
Noel, the white guinea pig, is roughly three years old, and Honey is about a year old.
Open has had a constant stream of guinea pigs since she was a teenager, except for a few years when her children were little. Though it was really Open who needed the guinea pigs, she convinced her husband that it was their kids who needed them, and he built a deluxe double-decker guinea pig cage for the new arrivals.
Guinea pigs become accustomed to your day–to-day routine. As soon as Honey and Noel hear Open’s voice in the morning, they start calling “weep, weep, weep!” in their loud, squeaky voices. When they hear Open chopping vegetables in the kitchen, they “weep, weep, weep” incessantly because they know they’ll get the end of a carrot or the top of a strawberry. Noel and Honey’s diet consists of lots of carrots, red peppers, cucumbers, broccoli, brussel sprouts and watermelon rinds. During the summer, they enjoy lettuce and kale from Open’s garden.
A favorite activity for Noel and Honey is “maze running.” When Open hasn’t dropped off the family’s recycling for a while, her son will set up a maze for the guinea pigs on the kitchen floor using all of the boxes and whatever else he can find. He’ll hide little treats for the guinea pigs throughout the maze and then let them run around. Honey and Noel scuttle all over the place and seem to enjoy the exercise and change in routine.
Noel and Honey are incredibly honored to be the first guinea pigs featured as Pets of the Month!
Don’t Take This Personally: Wisconsin Court Holds State Does Not Have Jurisdiction Over Mississippi DOR
By Charles Capouet and Jonathan Feldman
The Wisconsin Court of Appeals held that Wisconsin courts lacked personal jurisdiction over the Mississippi Department of Revenue so as to subject it to a lawsuit in the state. An individual taxpayer asserted that the Mississippi DOR had filed a fraudulent tax lien against him. The taxpayer moved from Mississippi to Wisconsin and sued the DOR in Wisconsin court for improperly attempting to collect on the tax lien. The court engaged in a due process analysis to determine whether a Wisconsin court would have personal jurisdiction over the DOR. The court held that the DOR did not have minimum contacts with Wisconsin when the only contacts asserted involved sending letters and making phone calls to the taxpayer at his Wisconsin residence in an attempt to collect on the alleged delinquent tax debt. Bernegger v. Thompson, No. 2015AP2168 (Wis. Ct. App. July 21, 2016).