Read our August 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 Blue, the lovable feline companion of Sutherland SALT admin, Antonia Saenz. An avid Los Angeles Dodgers fan, Tonia named him for the color “Dodger Blue.” He also goes by Boo Boy, Mr. Man Head and My Handsomeness.

Blue is just over three years old and was adopted by Tonia at an animal shelter in Indiana. Tonia only had Blue for two months when she moved back to California, and the two made the long trek over five days in the middle of winter.

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Blue is a sociable boy and loves playing with his best friend Frosty, who belongs to Tonia’s roommate. They never get tired of chasing each other around the house no matter the time of day. Blue will play with anything he can get his paws on, including cat and kid toys, coasters, keys and phones. And all that play time works up an appetite! Whenever Tonia opens the fridge, Blue pushes past her and tries to climb in. He knows where to find the treats. Turkey lunch meat is his favorite!

This silly kitty often tries to “talk” to Tonia. He’ll look right at her, and open and close his mouth several times without making a sound. He’s probably asking for more turkey. When Blue is not chasing Frosty, playing with toys or trying to talk, you can find him sitting by an open window enjoying the breeze. 

Blue is so happy to be August’s Pet of the Month!

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By Nick Kump and Amy Nogid

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).

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.

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).

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).

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). 

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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.

 

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).

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.