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).

Sutherland SALT has launched 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 will feature 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 SALT Scoreboard presents the results for the first quarter of 2016, along with some of the most significant developments.

View our official announcement and our SALT Scoreboard results from the first quarter of 2016!

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By Zack Atkins and Eric Coffill

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. The retailer relied on in-state teachers to collect orders and money from students and others and then distribute the purchased items to the appropriate people. The tribunal found that the retailer had a physical presence in Alabama, and thus Commerce Clause nexus with the state, by virtue of the in-state presence and activities of the teachers. The retailer, Scholastic Book Clubs, Inc., has litigated the same issue in a number of jurisdictions, and the tribunal’s decision puts Alabama in line with Connecticut, California, Kansas and Tennessee, and at odds with Michigan, Arkansas and Ohio. Scholastic Book Clubs, Inc. v. Ala. Dep’t of Revenue, No. 14-374 (Ala. Tax Trib. Mar. 25, 2016).

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Sutherland SALT is shaking things up again in state and local tax. We are pleased to announce several new enhancements to our SALT Shaker app. These improvements give users more options to customize and search content, making it even easier to be one step ahead with the latest coverage and commentary on state and local tax. Check out our new features! 

 

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By Mike Kerman and Open Weaver Banks

The Virginia Tax Commissioner ruled that an out-of-state corporation had nexus with Virginia because an employee performed accounting, human resources, payroll and customer support functions from a home office in Virginia. The Commissioner explained that out-of-state corporations are subject to Virginia corporate income tax if they have sufficient in-state business activity, unless their in-state activities are protected by P.L. 86-272 or are de minimis. The Commissioner ruled that the employee’s activities exceeded the protection of P.L. 86-272 because they were accounting and administrative services rather than solicitation, and because her activities caused the corporation to have a Virginia payroll factor. The Commissioner concluded that there was insufficient evidence to determine whether the employee’s activities were de minimis in relation to the taxpayer’s overall business. Va. Pub. Doc. No. 16-15 (Mar. 3, 2016).

By Jessica Eisenmenger and Jeffrey Friedman

The New York State Tax Appeals Tribunal sustained a determination by a Department of Taxation and Finance Administrative Law Judge that receipts obtained from the sale of retail pricing information services are subject to sales tax. Under New York law, information services are taxable, but services that are personal or individual in nature are excluded from tax. RetailData, LLC collects retail store pricing information from publicly available sources. However, RetailData’s service includes client-specific price investigations and reports that are customized for each client. The Tax Appeals Tribunal reasoned that this service does not qualify for the personal service exclusion because the source of its information is publicly available. In the Matter of the Petition of RetailData, LLC, DTA No. 825334 (N.Y. Tax App. Trib. Mar. 3, 2016).

 

Read our March 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 mobile app.
 
 

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Meet Rock, Paper and Scissors—beloved pets of SALT Partner Marc Simonetti. 

Marc loves his pets, but they demand a large amount of attention and only thrive in office environments. But Marc doesn’t mind bringing them to work because they are excellent helpers when it comes to keeping Marc on task. Rock, Paper and Scissors are “office pets” since they require a large desk on which to play, and scissors doesn’t do well with Marc’s young children at home.

Marc rescued Rock, who is actually a SALT rock breed, from a local restaurant famous for “cold cheese pizza.” Paper was stuck in the printer outside of Marc’s office for more than a week before Marc came to her rescue. Marc adores her despite her wrinkles. Scissors followed Marc home from lacrosse practice last fall, and they’ve been buddies ever since.

All three have unique quirks that make Marc a proud pet-owner, and he loves bragging to his colleagues. Rock is subdued and likes to sit in a sunny spot by the window. Paper likes to have her tummy rubbed and helps Marc keep his office organized. Scissors is a very good hip-hop dancer—he can really “cut a rug”!

APRIL FOOLS!