Read our April 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.

Whiskey-on-the-couch.jpgMeet Whiskey, a two-and-a-half-year-old Cavalier King Charles Spaniel belonging to Teresa Chiftis, Group Manager-Tax Controversies at Microsoft Corporation, and her husband, Jeff.

During his time as a show dog, this handsome guy used the moniker “Covington Virginia’s Gentleman,” a riff on a type of bourbon whiskey. Keeping with the theme, Teresa and Jeff renamed him “Whiskey” when they adopted him about eight months ago. Other names this sweet boy answers to include Peanut, Whiskey Woo, Woo Woo, and Little Man.

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Whiskey enjoys visiting the park and hiking on nearby trails, though during his first hike, he had no idea what to do when he came upon a fallen log blocking the path. His hiking skills have

 improved tremendously since then, and he now bounds over such obstacles without hesitation.

Whiskey is not a finicky eater and loves all food. He can be a bit skittish but will warm up to just about anyone if treats are involved!

At the end of the day, Whiskey retires to Teresa and Jeff’s bed and almost always manages to position himself so that he and Teresa are touching heads.

He loves his furry brother Rocky and his new parents immensely. Whiskey is a very-deserving Pet of the Month!

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By Charles Capouet and Jeff Friedman

In a 4-4 decision, the U.S. Supreme Court affirmed the Nevada courts’ exercise of jurisdiction over the California Franchise Tax Board (FTB), but held, by a majority of the justices, that the taxpayer could only receive the damages Nevada provides for suits by private citizens against Nevada agencies. The taxpayer, Gilbert Hyatt, sued the FTB in Nevada for abusive audit and investigation practices. The Nevada Supreme Court rejected the FTB’s claims that the U.S. Constitution’s Full Faith and Credit Clause required Nevada to apply California’s sovereign immunity law, holding that Nevada courts, as a matter of comity, would immunize California where Nevada law would similarly immunize its own agencies and officials. The Nevada Supreme Court, however, set aside much of the nearly $500 million in damages awarded by the jury after trial and only affirmed $1 million of the award. Nevada statutes would impose a $50,000 limit in a similar suit against its own officials. The Court held that the Full Faith and Credit Clause does not permit Nevada to award damages against California agencies under Nevada law that are greater than it could award against Nevada agencies in similar circumstances. As a result, the Court held that the taxpayer’s award for damages could not exceed Nevada’s $50,000 limit. Franchise Tax Bd. of California v. Hyatt, No. 14-1175 (U.S. Apr. 19, 2016).

By Evan Hamme and Marc Simonetti

The Texas Comptroller upheld a taxpayer’s separate Franchise Tax return filing position, rejecting an Administrative Law Judge’s finding that the taxpayer and its affiliate shared a strong centralized management structure that required a unitary combined report. Although the companies were commonly owned and shared an administrator, the Comptroller found that, even if the companies shared some centralized management, the companies did not meet the statutory threshold of “strong” centralized management necessary to require a combined return because: (1) the companies operated in completely separate lines of business (the taxpayer ran a cleaning business and its affiliate ran a marketing consulting business); (2) the owner did not participate in the day-to-day management of either company; (3) the companies shared no other employees besides the administrator; and (4) the companies had only one common client. Tex. Cmptl’r Dec. No. 111,557 (Oct. 22, 2015) (released April 2016).

By Elizabeth Cha and Charlie Kearns

In Hegar v. CheckFree Serv. Corp., a Texas Court of Appeals affirmed the trial court’s decision and held that the taxpayer’s online bill pay service was not a taxable data processing service for Texas sales tax purposes. Based on the trial court’s uncontested factual findings, the taxpayer provided “a professional service— facilitated by the use of computers and an electronic commerce system—that required the oversight and management of thousands of certified specialists to achieve the goal of paying the [customer’s bills].” The court of appeals noted that any activities the Comptroller labeled as data processing services were incidental to the professional services provided by the taxpayer. Thus, the court of appeals determined that the “essence of the transaction” was the sale of professional services, not data processing services. Hegar v. CheckFree Serv. Corp., No. 14-15-00027-CV (Tex. App. 14th Dist., April 19, 2016).

Recently proposed Treasury regulations under IRC § 385 would create sweeping changes to the federal income tax treatment of related-party debt. The Proposed Regulations could also have far-reaching effects for state income tax purposes, particularly on the deductibility of intercompany interest expenses in separate company reporting states.

View the full Legal Alert.

Carley.Roberts_TaxAnalysts.jpgSutherland is pleased to announce that Partner Carley A. Roberts has been recognized as one of the “Outstanding Women in Tax” by Tax Analysts, a leading publisher of tax news and analysis.

A group of Tax Analysts editors, reporters and board members reviewed more than 300 submissions, of which only 10 women were honored for having a significant impact on tax practice or tax policy. Carley was recognized for her noteworthy contributions to the California and national state tax communities.

Carley is a nationally recognized California tax litigator, who has developed a significant practice handling cases involving many of California’s most critical state and local tax (SALT) issues, including some of the most important corporate income and sales/use tax cases in litigation and on appeal. She represents a wide range of clients, including technology and financial service providers, energy businesses, retailers, manufacturers, communications providers and media businesses.

“This award is a fitting tribute to Carley’s commitment to her clients and dedication to advancing the SALT community,” said Sutherland Managing Partner Mark D. Wasserman. “We congratulate her on this wonderful honor.”

In 2007, Carley revived the California Tax Policy Conference—the leading conference on developments in the bellwether state for state tax policy. She chaired that event through 2014 and has given selflessly to the California State Bar’s Taxation Section and the California tax community.

Carley has been the recipient of numerous awards and is regularly featured in the legal profession’s “best of” and “who’s who” lists. Most recently, she was recognized as a key influencer in SALT and was featured in a “State Tax Spotlight,” published by State Tax Today, one of Tax Analysts’ weekly print publications. Carley was also named a Law360 2014 Tax MVP of the Year for having the biggest wins and making the most significant contributions to the SALT community.

View the complete Tax Analysts “2016 Outstanding Women in Tax” list.

By Stephen Burroughs and Michele Borens

The Circuit Court of Henrico County, Virginia, recently affirmed a ruling by the Commissioner of the Virginia Department of Taxation (Commissioner) that determined a cable provider’s set-top boxes are not “machines” for local property tax purposes and therefore not subject to Henrico County property tax. Virginia statute classifies property used in a cable television business, though tangible in fact, as intangible property not subject to local property tax. However, the statute excludes machines, tools, office furniture and other specific items from this general rule to permit their local assessment. Henrico County argued that the cable provider’s set-top boxes were taxable as “machines” under the statute. The court first determined that the statute in question was ambiguous because multiple definitions of the word “machine” could reasonably be used to alter the statute’s scope, then (1) recognized that ambiguous tax statutes are construed against taxation, and (2) afforded great weight to the Commissioner’s interpretation of the statute in the original ruling. The Commissioner relied on legislative history and its own contemporaneous fiscal impact statements to conclude that in 1984, the General Assembly specifically intended to exclude cable set-top boxes from local property tax when it removed “tuners” and “converters” from the statute, thus permitting taxation of specific types of cable property. The court also found persuasive several other Virginia circuit court decisions that found cable set-top boxes to be intangible property and therefore excluded from local property tax. Ultimately, Henrico County did not carry its burden of proving that the Commissioner erred in ruling for the taxpayer. Dir. of Finance of Henrico Cnty. v. Verizon Online, LLC, No. CL 13-3050 (Henrico Cnty. Cir. Ct., Mar. 2, 2016). 

By Ted Friedman and Leah Robinson

The Michigan Court of Appeals reversed a trial court ruling and held that three companies did not constitute a statutorily defined “unitary business group” for Michigan Business Tax (MBT) purposes. It was undisputed that there was insufficient “direct” ownership among the companies to give rise to a “unitary business group,” so the court examined whether there was sufficient “indirect” ownership, as that term is used in the MBT’s definition of “unitary business group.” The court determined that the trial court erred in using the federal income tax definition of “constructive” ownership when defining the “indirect” ownership requirement.  The court reasoned that at the point where the trial court acknowledged that the federal tax laws do not address a “comparable context,” under Michigan law it should have used the ordinary rules of statutory construction. The court concluded that the plain and ordinary meaning of “indirect” ownership is “ownership through an intermediary,” and ultimately held that, when applying the definition of “unitary business group” to the facts, no unitary business group existed because none of the involved companies owned, through an intermediary or otherwise, more than 50% of any other company. LaBelle Mgmt., Inc. v. Mich. Dep’t of Treasury, No. 324062 (Mich. Ct. App. Mar. 31, 2016).

By Charles Capouet and Todd Lard

The New Jersey Tax Court ruled on the sourcing of mortgage-related receipts received by a bank and also held that the Division of Taxation could not throw out receipts from the bank’s denominator. The taxpayer originated loans for its New Jersey borrowers through its New Jersey lending office employees and also acquired loans made by third-party New Jersey brokers to New Jersey borrowers. The taxpayer performed loan-related functions, such as underwriting, outside of New Jersey, and pooled the loans for sale to certain government-sponsored entities in exchange for mortgage-backed securities that it simultaneously sold to broker-dealers. The tax court held that the taxpayer was required to include, in its New Jersey receipts factor numerator, interest income, origination fee income and gross proceeds of sales attributed to loans to New Jersey borrowers. However, loan service fee income and income on sales of loan servicing rights were not includible in the New Jersey factor. Finally, the tax court followed the Superior Court of New Jersey, Appellate Division’s decision in Lorillard Licensing Company LLC v. Director, Division of Taxation, holding that the Division could not exclude receipts from the taxpayer’s denominator because the taxpayer had nexus with other states under New Jersey nexus standards. Flagstar Bank, FSB v. Dir., Div. of Taxation, Dkt. No. 019335-2010 (N.J. Tax Ct. Mar. 22, 2016).