By Elizabeth Cha and Scott Wright

The Texas Court of Appeals held that a seismic data gathering company was entitled to a cost of goods sold (COGS) deduction for costs of labor and materials incurred to acquire and process seismic data for its clients. Pursuant to Tex. Tax Code § 171.1012(i), a taxpayer may include costs from “furnishing labor or materials to a project for the construction … of real property” in its computation of COGS. The Comptroller had denied the taxpayer’s COGS deduction because the Comptroller characterized the taxpayer as a service provider to companies engaged in the exploration and production of real property (i.e., oil and gas wells). The court rejected this view and agreed with the taxpayer’s position that its activities satisfied the statute because the taxpayer’s seismic services and products were integral to the customer’s oil well drilling process. Hegar v. CCG Veritas Serv. (U.S.) Inc., No. 03-14-00713-CV (Tex. App. Third Dist. Mar. 9, 2016).

On March 22nd, South Dakota Governor Daugaard signed into law Senate Bill 106, the passage of which may be the ultimate vehicle to challenge Quill at the U.S. Supreme Court. With landslide support in the South Dakota Senate and House of Representatives, S.B. 106 adopts an economic nexus standard for sales tax remittance and allows for an expedited challenge by the state. Because the bill will take effect on “the first day of the first month that is at least fifteen calendar days from the date” it is signed by Governor Daugaard, the bill will be effective May 1, 2016.

View the full Legal Alert.

By Nicole Boutros and Andrew Appleby

A federal court dismissed a class action lawsuit against Whole Foods, finding the consumers lacked standing because they could not demonstrate they purchased any of the mislabeled foods for which they claimed Whole Foods systemically overcharged. The consumers alleged that Whole Foods engaged in deceptive trade practices and had been unjustly enriched because it overcharged customers by mislabeling the weight of products and that Whole Foods added tax to non-taxable items. This court’s swift dismissal of this lawsuit stands in stark contrast to many battles taxpayers have faced in convincing other courts to dismiss class action and False Claims Act lawsuits throughout the United States. In re Whole Foods Market Group, Inc. Overcharging Litigation, No. 15 Civ. 5838 (PAE) (S.D.N.Y. Mar. 1, 2016).

By Chris Mehrmann and Amy Nogid

The U.S. Court of Appeals for the Fourth Circuit affirmed the Maryland district court’s determination that it lacked specific personal jurisdiction over a Brazilian poultry exporter, BRF S.A. (BRF), under the Due Process Clause of the U.S. Constitution. Perdue Foods LLC (Perdue), which sold poultry using the “PERDUE” mark, bought the underlying action against BRF, which sold poultry using the “PERDIX” mark, alleging that BRF breached an agreement with a Maryland choice-of-law clause under which it had agreed to abandon using a version of its PERDIX mark to avoid customer confusion. Id. The district court granted BRF’s motion to dismiss for lack of personal jurisdiction, finding that Perdue failed to allege facts sufficient to establish that BRF had the requisite minimum contacts with Maryland. Id. In affirming the lower court’s decision, the Fourth Circuit explained that BRF had no employees or property in Maryland, conducted no business in Maryland, and that the alleged breach of the agreement occurred outside of Maryland. Id. Although the Court of Appeals acknowledged that personal jurisdiction may be established through a single contract with a resident of the forum, and that the choice-of-law provision weighs in favor of jurisdiction, the court found that the agreement expressly prevented BRF from doing business in Maryland with its trademark and therefore did not demonstrate that BRF purposefully availed itself of the privilege of doing business in the state. Perdue Foods LLC v. BRF S.A., No. 14-2120 (4th Cir. Feb. 19, 2016).

By Charles Capouet and Andrew Appleby

A New York State Division of Tax Appeals ALJ determined that payments by a corporation to its captive insurance company did not qualify as deductible insurance premiums because the arrangement lacked risk shifting and risk distribution. The taxpayer primarily owned and operated convenience stores and gas stations, and insured risk related to these operations to its captive insurance company.   

Notably, the ALJ analyzed federal case law to determine whether the taxpayer’s insurance arrangement constituted “insurance” for state tax purposes. Although there have been several taxpayer-favorable decisions at the federal level recently, the ALJ determined that this taxpayer’s facts did not fall within those decisions. The favorable federal decisions analyzed situations where the taxpayer had several entities that insured risk to an affiliated captive insurance company at the brother-sister level (i.e., the insureds were not the captive’s parents). This taxpayer held all of its operations in one parent corporation, which also owned the captive. Therefore, the ALJ determined that there was not requisite risk shifting and risk distribution, and that the taxpayer could not deduct premiums paid to its captive insurance company for New York corporate franchise tax purposes. The outcome likely would have been different if the taxpayer had a parent holding company with multiple subsidiaries (including the captive) below it. In re Stewart’s Shops Corp., DTA No. 825745 (N.Y. Div. Tax App. Mar. 10, 2016).

By Evan Hamme and Andrew Appleby

The Oklahoma Supreme Court held that an initiative to amend the state’s constitution does not violate the state’s constitutional rule that a public vote to amend the constitution must address only one general subject (one general subject rule). Although the proposed constitutional amendment contains multiple sections making multiple proposals, the court held that the initiative was valid under the one general subject rule because each proposal “is germane to creating and implementing the Oklahoma Education Improvement Fund.” A three-justice dissent would have invalidated the initiative because it requires the public to vote simultaneously on numerous proposals, including raises for public school teachers and an increase to the sales and use tax rate, with public support varying for each proposal, thus resulting in the exact type of “logrolling” the one general subject rule is meant to prohibit. In re Initiative Petition No. 403 State Question No. 779, Case No. 114425 (Okla. Sup. Ct. Jan. 12, 2016).

By Hanish Patel and Marc Simonetti

The Florida Department of Revenue (DOR) determined that the sale of certain online membership benefits—early, exclusive access to products and deals and unlimited cloud data storage—were not subject to Florida sales tax or the Communications Service Tax (CST). However, the DOR added that the taxpayer’s purchase of reorder button devices, which are provided for free to certain customers and allow customers to reorder products by pressing a button, are subject to Florida use tax when they are delivered in Florida because they are tangible personal property. This recent Technical Assistance Advisement (TAA) builds upon prior TAAs addressing the taxability of the same taxpayer’s other online membership benefits such as streaming video content and shipping discounts. In clarifying the 2014 TAAs, the recent TAA also confirmed that only the portion of the membership fees attributable to the taxable streaming video service is subject to the CST, but if such charges are not separately allocable in the taxpayer’s books and records, then the entire membership fee will be subject to the CST. Fla. Dept. of Revenue, T.A.A. No. 14A-010 (Apr. 7, 2014); T.A.A. No. 14A19-006 (Dec. 19, 2014).

A New York State Division of Tax Appeals administrative law judge issued three determinations addressing the tax implications for unauthorized insurance companies, both life and non-life. Significant uncertainty has surrounded New York State’s taxation of unauthorized insurance companies since New York State amended its insurance tax provisions in 2003. The Department of Taxation and Finance even issued a technical memorandum in 2012 reversing its prior position on unauthorized life insurance company taxation. These ALJ determinations provide much needed clarity, although questions still remain.

View the full Legal Alert.

Waiting until the federal return is prepared and then simply allowing that return to flow through to the New York returns could be a dangerous approach, leaving you scrambling, missing some election opportunities, and potentially being subjected to penalties.

Over the next few months, State Tax Notes’ In a New York Minute column will publish several installments addressing questions about 2015 New York returns. View part one, authored by Leah Robinson and Amy Nogid, which addresses decisions that must be made on an original, timely filed New York State franchise tax and New York City general corporation tax return.          

Stay tuned for the next installment, which will address issues regarding investment income classification and treatment, including what happens to taxpayers that missed the October 1, 2015, identification deadline. Additional installments will discuss 80/20 company issues, apportionment, losses and manufacturer provisions.

By Jessica Eisenmenger and Amy Nogid

The Florida Department of Revenue determined that software upgrades that are delivered electronically are not subject to sales tax because the upgrade was a stand-alone version of the software and did not rely on the earlier, physically-delivered software to operate. The Department also determined that sales tax does not apply to the maintenance and support services related to the electronically-delivered software upgrade because the services are not taxable on their own and are not bundled with the sale of tangible personal property. Finally, the Department advised the taxpayer that it must secure refunds from the vendor and not the Department. If the vendor refused to refund the tax, it could receive a refund from the Department if it provided an Assignment of Rights from the vendor. Fla. Dep’t of Revenue, Tech. Assist. Adv. No. 15A-015 (Oct. 26, 2015).