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).

By Jessica Eisenmenger and Todd Lard

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). The court reasoned that the level of control the PSC exercised over the taxpayer did not rise to the level of supervisory control that would make the taxpayer a utility exempt from the City’s UBT. Sprint Commc’ns Co.  v. City of New York Dep’t of Fin., No. 154499/14 (N.Y. Sup. Ct. N.Y. Cty. Apr. 25, 2016).

In their article for State Tax Notes, Sutherland attorneys Jonathan Feldman, Stephen Burroughs and Timothy Gustafson analyze the Multistate Tax Commission’s Arm’s-Length Adjustment Service (ALAS) program. While most taxpayers instinctively cringe at any new MTC initiative, the ALAS program is a potential positive for corporate taxpayers due to some disturbing trends arising in state corporate income tax audits:

  • States have increasingly used statutory variations of IRC section 482 to either disregard entities and intercompany transactions as shams or deny intercompany expense deductions without performing any substantive transfer pricing analysis.
  • State tax authorities often justify those adjustments by arguing that either:
    all intercompany transactions, no matter the underlying terms, are per se non-arm’s-length; or
    they lack the resources to determine whether an intercompany transaction satisfies the arm’s-length standard.
  • These justifications misapply state’s transfer pricing authority and the ALAS may provide a superior alternative.

View the full article reprinted from the April 25, 2016, issue of State Tax Notes.

Georgia Governor Nathan Deal has signed into law several significant tax bills, affecting various Georgia tax matters, including sales and use taxes, property taxes, corporate income taxes and state tax credits, which:

  • Adjust Georgia’s statutory interest rates applicable for both assessments and refunds for all tax types, as well as create new procedural requirements for sales tax refund claims.
  • Address the calculation of both the Georgia Jobs Tax Credit and Quality Jobs Tax Credit.
  • Authorize counties to exempt inventory at e-commerce fulfillment centers under the freeport exemption and also allows the Department of Revenue greater oversight over a counties’ taxation of property.

View the full Legal Alert.

By Nick Kump and Carley Roberts

The Indiana Tax Court held that the plain language of Indiana’s utility receipts tax (URT) does not require taxpayers to separately state taxable and nontaxable receipts on their returns. The URT provides that nontaxable receipts are taxable if such “receipts are not separated from the taxable receipts on the records or returns of the taxpayer.” The utilities taxpayer provided the amount of taxable receipts on its returns, but did not state its nontaxable receipts including the receipts for nontaxable connection fees. The Indiana Department of Revenue contended the taxpayer’s connection fees were taxable because the taxpayer did not expressly separate them from the taxable receipts. The court explained that providing taxable receipts “necessarily require[s]” taxpayers to separate taxable and nontaxable receipts, and the URT “merely requires the taxpayer to show on the return that the amount of nontaxable receipts has been separated from the taxable receipts.” Thus, the court concluded that requiring taxpayers to also separately state nontaxable receipts would add an element in the URT that the Legislature did not require. Hamilton Se. Utilities Inc. v. Dep’t of Revenue; Ind. Tax Ct., No. 49T10-1210-TA-00068, Apr. 29, 2016. 

By Mike Kerman and Amy Nogid

The Texas Comptroller of Public Accounts concluded that a Texas-based national radio network must apportion its advertising receipts based on the ratio of radio stations that license and broadcast its programming from Texas compared to the total number of radio stations that license and broadcast such programming. The taxpayer develops, produces and syndicates radio programming, and generates receipts by incorporating customers’ advertisements into the programming. The taxpayer licenses the programming to radio stations across the country, and uploads the programming to satellites for the radio station licensees to download and broadcast to their respective audiences. The Comptroller found that the taxpayer’s receipts are from the performance of a service and must be sourced to where the service is performed. The Comptroller stated that it is “well-established” that where services are performed depends on the “specific, end-product acts for which the customer contracts,” and not on support activities. Here, the Comptroller determined the end-product act for which the customers contract is the radio stations’ broadcasts of the customers’ advertisements. Thus, the Comptroller concluded that the taxpayer must source its advertising receipts based on where radio stations broadcast the advertisements to their audiences, using the percentage of Texas radio stations that license programming compared to the total number of radio stations that license programming. Tex. Private Letter Ruling No. 143010942 (Apr. 21, 2016).