By Ted Friedman and Madison Barnett

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. The trust was created and governed by laws outside of North Carolina, the Trustee resided outside of North Carolina, and the trust did not own property in North Carolina. Although a beneficiary of the trust resided in North Carolina, she had no control over the trust. Accordingly, the Court upheld an order directing the Department of Revenue to refund income taxes and penalties paid by the trust to the State. Kimberly Rice Kaestner 1992 Family Trust v. N.C. Dep’t of Revenue, No. COA15-896 (N.C. Ct. App. July 2, 2016).

Sutherland SALT releases the second 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 Sutherland SALT Scoreboard also includes our observations on states’ conformity to insurance tax law, states’ manufacturing exemptions for sales taxes, and states’ treatment of the Multistate Tax Compact.

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

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By Nick Kump and Marc Simonetti

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. The taxpayer sold bundled packages for a single price that included electronically transferred computer software with corresponding updates and upgrades, as well as professional services and technical support. The Department explained the state imposes a tax on the sale and use of tangible personal property and certain enumerated services. The taxpayer’s bundled packages were not subject to tax because the software was not tangible personal property, and the related services were not enumerated services. Ga. Letter Ruling SUT-2016-09, Ga. Dep’t of Revenue (issued March 30, 2016).

By Alla Raykin and Jonathan Feldman 

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. Accordingly, the taxpayer was not eligible for the lower business & occupation (B&O) tax rate applicable to the activities of insurance producers or agents. While the taxpayer was a licensed insurance producer, the ALJ concluded that its gross receipts were not from commissions and fees on licensed activities and that the insurance policyholders were unaware of the taxpayer when receiving its mailings on behalf of in-state insurers. Det. No. 15-0277, 35 WTD 246 (2016).

By Zachary Atkins and Charlie Kearns

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.” The taxpayers, subsidiaries of a British utility, entered into a series of complex agreements—deferred subscription agreements—to sell and repurchase stock. The agreements were meant to constitute debt for U.S. federal and state tax purposes and equity under U.K. law, which strictly forbids debentures between a U.K. entity and a foreign subsidiary. The specific issue was whether, under the relevant provisions of the agreements, the share repurchase was mandatory, in which case there was an “unqualified obligation to repay,” or merely discretionary. The court found that the provisions were ambiguous because they contained both mandatory and discretionary language. The court found no error in the board’s decision to give little weight to the taxpayers’ evidence regarding their subjective intent and agreed that the  taxpayers’ twin goals of international tax arbitrage and avoiding the creation of debentures under U.K. law were more reliable considerations. Ultimately, the court held that the taxpayers failed to meet their burden of proving that the agreements constituted true indebtedness or an “unqualified obligation to repay.” Nat’l Grid Holdings, Inc. v. Comm’r of Revenue, No. 14-P-1662 (Mass. App. Ct. June 8, 2016).

By Hanish Patel and Amy Nogid

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. As such, the taxpayer was not entitled to use the Compact’s alternative apportionment election for the tax years after Minnesota’s repeal of the provision. Additionally, the Minnesota Supreme Court noted that even if Minnesota’s adoption of the Compact created a binding contractual obligation, it would have been invalid, running afoul of the Minnesota Constitution’s mandate that “[t]he power of taxation shall never be surrendered, suspended or contracted away.” Kimberly-Clark Corp. v. Comm’r of Revenue, No. A15-1322 (Minn. June 22, 2016).

Even those of us who practice in the state and local tax (SALT) field have been exposed to federal judicial tax doctrines. Many have been applied by state courts in SALT matters and have even been codified by some states. Read about the origins of the following four lesser known doctrines, and learn how these doctrines may be used by taxpayers and states in the SALT context: 

  • The Manifest Injustice Doctrine
  • The Square Corners Doctrine
  • The Unmistakability Doctrine
  • The Doctrine of Election

Read the full State Tax Notes article by Sutherland SALT attorneys Amy Nogid and Hanish Patel.

The New York State Department of Taxation and Finance issued two advisory opinions determining that surplus lines insurance companies are subject to uncapped insurance franchise tax instead of premium tax.

  • The Department’s position treats authorized non-life insurance companies differently than unauthorized non-life insurance companies.
  • The Department rejected the insurance companies’ argument that New York’s direct placement tax or surplus lines tax is imposed in lieu of the insurance franchise tax for surplus lines companies.
  • The conclusions in these advisory opinions may violate the federal Nonadmitted and Reinsurance Reform Act and may be contrary to legislative intent.

View the full Legal Alert.

Read our June 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.

mollisquare1.JPGMeet Molli, the 11-year-old English Bulldog of Jaimie Lee, Indirect Tax Senior Manager at Uber. Molli is a sociable gal, who would much rather spend time with her two-legged friends and family than other dogs. This special pup loves to be the center of attention and enjoys her life as an only child.

She loves when friends come over to visit and remembers good friends by name. She even manages to make friends while riding in the car. Molli sits in the backseat and looks out the window at her many admirers. Her favorite activities include playing with toys like her tennis ball, squeaky Kong tennis ball, and rope toys for tugging and playing take-away.

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This social gal has her quirks. Even though she has her own comfy dog bed, she would much rather be in Jaimie’s bed. She likes to burrow her way under all the blankets until her nose is the only thing you can see. She gets called “burrito dog,” when she pulls this move.

Molli is an indoor dog, but loves the outdoors. She enjoys going to the beach, where you’ll find her playing in the sand and occasionally getting soaked by an ocean wave. Her favorite vacation spots are Sonoma, Napa and downtown Seattle where she walks to Pike Place Market. When she’s not on vacation, you can find her outside, soaking up the sun and enjoying the city views.

Molli is thrilled to be featured as June’s Pet of the Month!

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