By Mike Kerman and Andrew Appleby

The South Carolina Administrative Law Court determined that a satellite television provider must source its subscription receipts to South Carolina based on the percentage of in-state subscribers. The administrative law judge (ALJ) determined that South Carolina is not a “strict” costs of performance state for apportionment purposes because its statute looks only to where the taxpayer’s income-producing activity occurs, and does not include the phrase “based on costs of performance.” The ALJ rejected the taxpayer’s characterization of its income-producing activities as acquiring programming and content, operating satellites, and installing and repairing equipment, minimizing these activities as “preparatory.”  The ALJ instead looked only to the “final act” that produced the taxpayer’s income—the delivery of the satellite signal into a subscriber’s home and onto a television screen. Because the delivery of a signal occurs completely within South Carolina for in-state subscribers, the ALJ determined that all receipts from in-state subscribers must be sourced to South Carolina. Although the ALJ also determined that South Carolina does not source services based on a market approach, the ALJ acknowledged that the decision “mimics” the result that would be reached through market-based sourcing. Dish DBS Corp. v. South Carolina Dep’t of Revenue, No. 14-ALJ-17-0285-CC.

By Marc Simonetti and Douglas Upton

The Louisiana Supreme Court concluded that limestone purchased for the dual purpose of absorbing sulfur during the generation of electricity and producing ash for sale to third parties was excluded from the definition of a “sale at retail” by application of the “further processing exclusion” under the Louisiana sales tax. The court affirmed the application of the three-pronged test enumerated in International Paper, Inc. v. Bridges for determining whether the purchase of raw materials was eligible for the further processing exclusion—namely, whether “1) the raw materials become recognizable and identifiable components of the end products; 2) the raw materials are beneficial to the end products; and 3) the raw materials are materials for further processing and…are purchased with the purpose of inclusion in the end products.” In applying such test to the limestone at issue, the court reversed the judgments of the trial court and court of appeals, holding that the end product into which the raw materials were included need not be the primary product produced and that the raw material’s inclusion in the sold end product need not be the primary purpose for which the taxpayer purchased the raw material for the exclusion to apply. Rather, it was sufficient for purposes of the exclusion that the inclusion of the raw material into a sold by-product was a purpose for which the taxpayer purchased the raw material. Bridges v. Nelson Indus. Steam Co., __So.2d__, No. 2015-C-1439 (La. May 3, 2016).

By Jessica Eisenmenger and Todd Lard

The Supreme Court of the State of New York, New York County held that a telecommunications company was liable for both New York City’s Utility Tax and the City’s Unincorporated Business Tax (UBT) because the taxpayer was only lightly regulated by, rather than under the supervision of, the New York State Public Service Commission (PSC). The court reasoned that the level of control the PSC exercised over the taxpayer did not rise to the level of supervisory control that would make the taxpayer a utility exempt from the City’s UBT. Sprint Commc’ns Co.  v. City of New York Dep’t of Fin., No. 154499/14 (N.Y. Sup. Ct. N.Y. Cty. Apr. 25, 2016).

In their article for State Tax Notes, Sutherland attorneys Jonathan Feldman, Stephen Burroughs and Timothy Gustafson analyze the Multistate Tax Commission’s Arm’s-Length Adjustment Service (ALAS) program. While most taxpayers instinctively cringe at any new MTC initiative, the ALAS program is a potential positive for corporate taxpayers due to some disturbing trends arising in state corporate income tax audits:

  • States have increasingly used statutory variations of IRC section 482 to either disregard entities and intercompany transactions as shams or deny intercompany expense deductions without performing any substantive transfer pricing analysis.
  • State tax authorities often justify those adjustments by arguing that either:
    all intercompany transactions, no matter the underlying terms, are per se non-arm’s-length; or
    they lack the resources to determine whether an intercompany transaction satisfies the arm’s-length standard.
  • These justifications misapply state’s transfer pricing authority and the ALAS may provide a superior alternative.

View the full article reprinted from the April 25, 2016, issue of State Tax Notes.

Georgia Governor Nathan Deal has signed into law several significant tax bills, affecting various Georgia tax matters, including sales and use taxes, property taxes, corporate income taxes and state tax credits, which:

  • Adjust Georgia’s statutory interest rates applicable for both assessments and refunds for all tax types, as well as create new procedural requirements for sales tax refund claims.
  • Address the calculation of both the Georgia Jobs Tax Credit and Quality Jobs Tax Credit.
  • Authorize counties to exempt inventory at e-commerce fulfillment centers under the freeport exemption and also allows the Department of Revenue greater oversight over a counties’ taxation of property.

View the full Legal Alert.

By Nick Kump and Carley Roberts

The Indiana Tax Court held that the plain language of Indiana’s utility receipts tax (URT) does not require taxpayers to separately state taxable and nontaxable receipts on their returns. The URT provides that nontaxable receipts are taxable if such “receipts are not separated from the taxable receipts on the records or returns of the taxpayer.” The utilities taxpayer provided the amount of taxable receipts on its returns, but did not state its nontaxable receipts including the receipts for nontaxable connection fees. The Indiana Department of Revenue contended the taxpayer’s connection fees were taxable because the taxpayer did not expressly separate them from the taxable receipts. The court explained that providing taxable receipts “necessarily require[s]” taxpayers to separate taxable and nontaxable receipts, and the URT “merely requires the taxpayer to show on the return that the amount of nontaxable receipts has been separated from the taxable receipts.” Thus, the court concluded that requiring taxpayers to also separately state nontaxable receipts would add an element in the URT that the Legislature did not require. Hamilton Se. Utilities Inc. v. Dep’t of Revenue; Ind. Tax Ct., No. 49T10-1210-TA-00068, Apr. 29, 2016. 

By Mike Kerman and Amy Nogid

The Texas Comptroller of Public Accounts concluded that a Texas-based national radio network must apportion its advertising receipts based on the ratio of radio stations that license and broadcast its programming from Texas compared to the total number of radio stations that license and broadcast such programming. The taxpayer develops, produces and syndicates radio programming, and generates receipts by incorporating customers’ advertisements into the programming. The taxpayer licenses the programming to radio stations across the country, and uploads the programming to satellites for the radio station licensees to download and broadcast to their respective audiences. The Comptroller found that the taxpayer’s receipts are from the performance of a service and must be sourced to where the service is performed. The Comptroller stated that it is “well-established” that where services are performed depends on the “specific, end-product acts for which the customer contracts,” and not on support activities. Here, the Comptroller determined the end-product act for which the customers contract is the radio stations’ broadcasts of the customers’ advertisements. Thus, the Comptroller concluded that the taxpayer must source its advertising receipts based on where radio stations broadcast the advertisements to their audiences, using the percentage of Texas radio stations that license programming compared to the total number of radio stations that license programming. Tex. Private Letter Ruling No. 143010942 (Apr. 21, 2016).

The Ohio Supreme Court recently heard oral arguments in three cases that could test the constitutionality of the Ohio commercial activity tax (CAT). These cases turn on whether the CAT’s “bright-line” nexus standard violates the dormant Commerce Clause of the United States Constitution. The Ohio Department of Taxation argues, among other things, that the taxpayers’ “virtual” presence in Ohio satisfies substantial nexus as required by the dormant Commerce Clause. If decided on the merits, these cases may have far-reaching consequences for online sellers of goods and services.

In their article for Law360, Sutherland attorneys Jeffrey Friedman and Chris Mehrmann discuss the three cases and review the potential arguments that states will use in both defending factor-based nexus standards and asserting jurisdiction over remote retailers.

View the full article, published by Law60 on May 6, 2016.

By Nicole Boutros and Eric Coffill

The New York State Tax Appeals Tribunal determined that a taxpayer subject to the Article 32 bank franchise tax must use its net operating loss deduction to reduce its entire net income to zero in years in which the bank franchise tax was paid by the taxpayer on an alternative, non-income tax base. The Tribunal reached its decision notwithstanding that the taxpayer would have paid the bank franchise tax on an alternative tax base even without applying the NOL deduction. While New York State tax reform changed the NOL computation for tax years beginning on or after January 1, 2015, taxpayers can still carry over pre-tax reform NOLs to post-tax reform years using the “prior net operating loss” subtraction. As such, New York State bank franchise tax and corporation franchise tax taxpayers may want to consider how this decision affects their unabsorbed NOL base in pre-tax reform years, as such NOLs will enter into their prior net operating loss subtraction pool. In the Matter of the Petition of TD Holdings II, Inc., DTA No. 825329 (N.Y. Tax App. Trib. Apr. 7, 2016).

For the second year, Sutherland Asbill & Brennan LLP is delighted to join TEI’s Audit & Appeals Seminar, sponsor, and lead a full day dedicated to state and local tax controversies covering:

  • Understanding the State Tax Controversy Lifecycle
    Speakers: Marc A. Simonetti, Sutherland; Pilar Mata, Tax Executives Institute
  • Best Practices for Preparing and Managing State Tax Audits
    Speakers: Madison J. Barnett and Michele Borens, Sutherland
  • Best Practices for Protests and Litigation
    Speakers: Timothy A. Gustafson and Carley A. Roberts, Sutherland
  • A Luncheon Panel Comprised of Distinguished State Tax Court Judges
    Panel:
    • Thomas Hammond, Chairman of the Massachusetts Appellate Tax Board
    • Roberta Moseley Nero, President and Commissioner of the New York State Tax Appeals Tribunal
    • Bill Thompson, First Chief Tax Tribunal Judge of the Alabama Tax Tribunal
    • Pilar Mata (Moderator), Tax Executives Institute
  • Settlement Strategies: Getting to Yes!
    Speakers: Jonathan A. Feldman and Leah Robinson, Sutherland
  • Coordinating Federal, State and Multistate Tax Audits and Controversies
    Speakers: Andrew D. Appleby and Maria M. Todorova, Sutherland
  • Industry Perspective of Managing Audits and Litigation
    Panel:
    • Stephanie Anderson, State Tax Counsel at Amazon.com
    • Jaimie Lee, Indirect Tax Senior Manager at Uber USA LLC
    • Jen Galbreath, Director, State and Local Tax Audits at Comcast Corporation
    • Nick Kory, Director and Senior Tax Counsel at IBM Corporation
    • Jeffrey A. Friedman (Moderator), Sutherland

The program will take place June 13-15* in Boston, Massachusetts:

  • June 13-14 – Insights and Skills for Federal Tax Controversy Success
  • June 15 – Managing State and Local Tax Controversies, sponsored by Sutherland

Sutherland also invites attendees to join us for the Red Sox vs. Orioles baseball game the evening of Tuesday, June 14. Join us and register for TEI’s Audits & Appeals Seminar today!

Click here for event details and registration information. #TEIAuditseast

*TEI is also hosting an Audits & Appeals Seminar May 17-19 in Santa Clara, California. The programming for Day 3 will focus on international tax controversies in challenging jurisdictions.

**Limited number available. Official RSVP invite will go out to TEI Audits & Appeals registrants at a later date.