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.

Noel & Honey.jpgMeet Noel and Honey, the beloved guinea pigs of Sutherland SALT Counsel Open Weaver Banks.

Noel, the white guinea pig, is roughly three years old, and Honey is about a year old.

Open has had a constant stream of guinea pigs since she was a teenager, except for a few years when her children were little. Though it was really Open who needed the guinea pigs, she convinced her husband that it was their kids who needed them, and he built a deluxe double-decker guinea pig cage for the new arrivals.

Guinea pigs become accustomed to your day–to-day routine. As soon as Honey and Noel hear Open’s voice in the morning, they start calling “weep, weep, weep!” in their loud, squeaky voices.  When they hear Open chopping vegetables in the kitchen, they “weep, weep, weep” incessantly because they know they’ll get the end of a carrot or the top of a strawberry. Noel and Honey’s diet consists of lots of carrots, red peppers, cucumbers, broccoli, brussel sprouts and watermelon rinds. During the summer, they enjoy lettuce and kale from Open’s garden.

Honey.jpg

A favorite activity for Noel and Honey is “maze running.” When Open hasn’t dropped off the family’s recycling for a while, her son will set up a maze for the guinea pigs on the kitchen floor using all of the boxes and whatever else he can find. He’ll hide little treats for the guinea pigs throughout the maze and then let them run around. Honey and Noel scuttle all over the place and seem to enjoy the exercise and change in routine.

Honey & Noel.jpg

Noel and Honey are incredibly honored to be the first guinea pigs featured as Pets of the Month!

By Charles Capouet and Jonathan Feldman

The Wisconsin Court of Appeals held that Wisconsin courts lacked personal jurisdiction over the Mississippi Department of Revenue so as to subject it to a lawsuit in the state. An individual taxpayer asserted that the Mississippi DOR had filed a fraudulent tax lien against him. The taxpayer moved from Mississippi to Wisconsin and sued the DOR in Wisconsin court for improperly attempting to collect on the tax lien. The court engaged in a due process analysis to determine whether a Wisconsin court would have personal jurisdiction over the DOR. The court held that the DOR did not have minimum contacts with Wisconsin when the only contacts asserted involved sending letters and making phone calls to the taxpayer at his Wisconsin residence in an attempt to collect on the alleged delinquent tax debt. Bernegger v. Thompson, No. 2015AP2168 (Wis. Ct. App. July 21, 2016).

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.