By Douglas Upton and Timothy Gustafson

The New York State Department of Taxation and Finance issued an Advisory Opinion concluding that a retail operator of kiosks selling various prepaid telecommunication plans and additional telecommunication rights for existing plans was subject to New York sales and use tax collection and remittance requirements, but was not subject to the additional excise tax on telecommunication service providers imposed by section 186-e.2(a) of the New York Tax Law. Specifically, the Department determined that the sale of the prepaid calling services was the sale of taxable telecommunication services subject to sales and use tax, unless the service charge was expressly for Internet access, either as a standalone charge or a broken-out component of other charges (charges for Internet access were not taxable because the Internet Tax Freedom Act, 47 U.S.C. § 151 n applied). However, the kiosk operator was not a telecommunication service provider subject to the additional excise tax because the kiosk operator was “merely facilitating the sale of telecommunication service between the carrier liable for the telecommunication services being sold, and the customer” and did not furnish or sell the transmission of the telecommunication service. N.Y. Advisory Opinion, TSB-A-16(2)C (Apr. 25, 2016).

By Andrew Appleby

The New York City Tax Appeals Tribunal reversed an administrative law judge (ALJ) and determined that a health maintenance organization (HMO) was subject to the New York City general corporation tax.

In Aetna, the parties stipulated that all the requirements for combination had been satisfied, so the sole issue was whether the New York City preclusion for insurance companies applied. If the HMOs were doing an insurance business in the state, the HMOs could not be included in the combined group for general corporation tax purposes. At the ALJ level, the ALJ looked to various sources to analyze whether the HMO was doing an insurance business, including a U.S. Supreme Court case, and ultimately determined that the HMO was doing an insurance business and could not be included in the combined group. Notably, however, the Tax Appeals Tribunal relied heavily on New York State’s regulatory structure. The Tribunal determined that HMOs were regulated almost entirely under the Public Health Law, not the Insurance Law, and therefore were not doing an insurance business in the state (although the Tribunal disregarded two Insurance Department opinions that arguably treated HMOs as insurance companies). The Tribunal also looked to a 2009 New York Tax Law amendment that stated that HMOs are subject to insurance franchise tax (Article 33), not corporate franchise tax (Article 9-A). The Tribunal rejected Aetna’s argument that the amendment was a clarification, and instead considered it a reclassification based on legislative history. The Tribunal reversed the ALJ and determined that the HMO was not doing an insurance business in the state and was properly included in the combined general corporation tax return. In The Matter of Aetna, Inc., TAT(E)12-3(GC), TAT(E)12-4(GC) (NYC Tax App. Trib. June 3, 2016).

By Charles Capouet and Madison Barnett

The New York City Tax Appeals Tribunal held that a bank filing a combined New York City bank tax return properly excluded from its combined group a Connecticut investment subsidiary that primarily held mortgage loans secured by non-New York property. Where there are substantial intercorporate transactions among banking corporations or bank holding companies engaged in a unitary business, New York City law presumes that a combined return is required. The Tribunal held that although there were substantial intercorporate transactions, the combined report presumption was rebutted because the intercompany transactions were conducted at arm’s length, and the transactions and entities had non-tax business purposes and economic substance. The Tribunal determined that “[a]lthough it is clear that the tax purposes [of forming the investment subsidiary] were substantial, separating the non-New York loans from [the New York bank] was a sufficient non-tax business purpose to support the transactions.” As a result, New York City could not require the bank to include its investment subsidiary in its combined New York City bank tax return. In re Astoria Fin. Corp. & Affiliates, No. TAT (E) 10-35 (BT) (N.Y.C. Tax Appeals Tribunal May 19, 2016).

By Samantha Trencs and Amy Nogid

A Washington State administrative law judge (ALJ) denied a business and occupation (B&O) tax protest from a German pharmaceutical corporation with no physical presence in the state after finding that the royalty income from products sold in Washington far exceeded Washington’s economic nexus threshold. The double taxation relief available in the treaty between the U.S. and Germany did not prevent Washington from imposing the B&O tax since the corporation could exclude income taxed by Washington in its German tax base. Additionally, the ALJ found that if the treaty’s non-discrimination provision applied to state and local taxes, the B&O tax did not discriminate against foreign businesses, because the tax applies equally to both U.S. and non-U.S. businesses that derive royalty income in the state. Det. No. 15-0251, 35 WTD 230 (05/31/2016).

By Stephen Burroughs and Scott Wright

The Supreme Court of Arkansas recently upheld use tax assessments imposed upon a contractor that purchased and installed equipment used in a water treatment facility expansion. Arkansas exempts from sales and use tax purchases of machinery and equipment used to create or expand a manufacturing or processing facility in the state. While the purchased equipment was used for the expansion, the court ultimately concluded that the facility’s water treatment process did not constitute “manufacturing” for purposes of the sales and use tax exemption. The court reasoned that manufacturing requires a transformation—raw material must emerge from the manufacturing process as a different article “having a distinct name, character or use.” The taxpayer argued, and two dissenting justices agreed, that the water treatment process transformed contaminated river water into consumable drinking water. The court’s majority, however, disagreed and concluded that “[i]t was water in the beginning, and it was water in the end.” Walther v. Carrothers Constr. Co. of Ark., LLC, 2016 Ark. 209, No. CV-15-799 (Ark. 2016).  

By Chris Mehrmann and Leah Robinson

The Ohio Supreme Court held that the Due Process Clause of the U.S. Constitution precluded Ohio from taxing a nonresident individual on an apportioned share of his gain from the sale of a limited liability company that conducted business in the state. During the relevant time period, Ohio Rev. Code § 5747.212 required any investor owning at least 20% of a pass-through entity to treat gain or loss from the sale of the entity as business income, which is apportioned using the state’s standard three-factor formula. The court held that section 5747.212 was unconstitutional as applied to the seller, because the gain arising from the sale lacked the requisite connection with Ohio under the Due Process Clause. In so holding, the court explained that the seller was not part of the entity’s unitary business because the seller merely provided “stewardship” services, rather than actively managing the business. Corrigan v. Testa, Slip Op. No. 2016-Ohio-2805 (Ohio May 4, 2016).

Read our May 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.

  • Alabama Tax Tribunal Determines Out-of-State Bookseller Has Nexus, Joins “Club”
    The Alabama Tax Tribunal concluded that an out-of-state retailer was required to collect and remit use tax on the sales of books and educational materials to in-state teachers and students, and that neither the Due Process Clause nor the Commerce Clause impeded the Alabama Department of Revenue’s authority to assess the seller for uncollected tax.
  • SALT Pet of the Month: Scout
    Meet Scout, this month’s Pet of the Month, submitted through our SALT Shaker App by the founder of the State Tax Foundation, Gary Peric.
  • New York Court Holds That Telecommunications Company Is Not a NYC Utility
    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).

Scout on pier.jpgMeet Scout, this month’s Pet of the Month, submitted through our SALT Shaker App by the founder of the State Tax Foundation, Gary Peric.

A real cutie of a pup, Scout is a mini Golden Doodle. Born in 2014 to a Golden Retriever mother and a miniature Poodle father, Scout celebrated his second birthday this month. Happy birthday, Scout!

The Perics, who have relocated to the Chicagoland area from Tampa, named their sweet pup in anticipation of their son’s attainment of the rank of Eagle Scout.

Scout has been with the Perics since he was eight weeks old, and they have enjoyed watching him grow up. He is a wonderful buddy and loves playing with other dogs as well as with all of the neighborhood kids.

Scout’s favorite activity is lying on the pier at the family’s home in Indiana. Scout also enjoys playing with his half-sister Wrigley (previously featured as SALT Pet of the Month in September 2015). The two siblings are inseparable and continue to share a unique talent of standing on their hind legs and waving to people with their front paws (likely from the poodle in them). 

Scout on pier head down.jpg

Scout is so very happy to be May’s Pet of the Month!    

Scout with Wrigley.jpg

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).