On February 11, the United States Senate approved a permanent extension of the Internet Tax Freedom Act (ITFA), which previously passed the House of Representatives on December 15, 2015. Additionally, ITFA’s Grandfather Clause, which allows certain states to continue to tax Internet access, is phased out. President Obama is expected to sign the permanent extension into law.

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By Evan Hamme and Marc Simonetti

The Texas Court of Appeals held that sovereign immunity bars Machete’s Chop Shop’s declaratory judgment action because Machete failed to plead that the Texas Film Commission acted ultra vires when it denied Machete’s grant application for the 2010 film, Machete. Machete alleged that the Texas Film Commission lacked authority to deny its grant application because the Commission initially approved the application after reviewing a copy of the script, and the script never changed prior to the film’s release. Although a Texas statute required the Commission to review a final script to determine if a film’s content contained “substantial changes” from the initial script, the Texas Court of Appeals interpreted the statute to permit the Commission to deny an application at any time—even if the script had not changed since initial approval—if the Commission determined the film contained inappropriate content or content that portrays Texas or Texans in a negative fashion. Machete’s Chop Shop, Inc. v. Tex. Film Comm’n, et al., No. 03-14-00098-CV (Tex. Ct. App. Jan. 29, 2016).

By Chris Mehrmann and Scott Wright

The Alabama Tax Tribunal invalidated a regulation requiring a direct pay permit holder, Tyson Chicken, Inc. (Tyson), to purchase all items tax-free, finding that the regulation was both unreasonable and unduly burdensome. Although Tyson purchased most items tax-free using its direct pay permit, Tyson employees used corporate credit or purchase cards (referred to as “P-Cards”) when doing so was impractical. The Alabama Department of Revenue argued, however, that the subject regulation required Tyson to purchase all items tax-free, including the P-Card purchases, and report and pay the applicable tax directly to the Department—even if those transactions were clearly taxable. Rejecting this argument, Chief Tax Tribunal Judge Bill Thompson invalidated the regulation, finding that it was both unreasonable and unduly burdensome. Tyson Chicken, Inc. v. Dep’t of Revenue, Docket. No. S 15-1338 (Ala. Tax. Tribunal Feb. 2, 2016).

By Jessica Eisenmenger and Amy Nogid

The West Virginia Office of Tax Appeals (OTA) upheld a sales tax assessment against an out-of-state company that provided taxable outside maintenance services such as snow removal and window cleaning in the state via independent contractors. The Administrative Law Judge reasoned that since “nothing happens” unless the independent contractors perform the services in West Virginia, and the activities conducted by the contractors “create and maintain in totality the [company’s] market,” substantial nexus existed for the company in West Virginia. West Virginia Administrative Decision No. 12-432 U (W. Va. Office of Tax Appeals Jan. 30, 2015) (released Jan. 27, 2016).

By Stephanie Do and Carley Roberts

The U.S. Court of Appeals for the Eleventh Circuit affirmed dismissal of a taxpayer’s complaint, arising from the Alabama Department of Revenue’s assessment and collection of state income tax, for lack of subject matter jurisdiction under the Tax Injunction Act (TIA). The court held that the TIA prohibited granting the taxpayer’s request for injunctive relief, declaratory relief and monetary awards for damages because the requested relief enjoined, suspended or restrained Alabama’s ability to assess its taxes. The court further explained that Alabama law provided “plain, speedy, and efficient” remedies for tax assessment challenges available to the taxpayer. Kelly v. Ala. Dep’t of Revenue, No. 15-12124 (11th Cir. 2016).

By Olga Goldberg and Leah Robinson

The West Virginia Office of Tax Appeals (OTA) ruled in favor of a rail transportation company subject to use tax on fuel used in West Virginia because the West Virginia State Tax Department (Department) incorrectly applied the credit against use tax for sales tax paid to “another state.” First, the OTA held that there was no statutory basis for the Department’s use of two different formulas to approximate fuel used in West Virginia: one formula to compute use tax, which resulted in a higher use tax liability, and a different formula to compute the credit, which resulted in a lower available credit. Second, the OTA concluded that the credit must include sales tax paid to out-of-state localities to pass the internal consistency test of the federal dormant Commerce Clause. The OTA agreed with the taxpayer that denial of the credit would result in multiple taxation of identically situated taxpayers in a manner that was not fairly apportioned and that unconstitutionally discriminated against interstate commerce. West Virginia Office of Tax Appeals, Redacted Decision, Docket Nos. 12-477 RMFE & 13-273M (Jan. 23, 2015).

By Mike Kerman and Maria Todorova

Last month, the Hawaii Department of Taxation launched the Administrative Appeals and Dispute Resolution (AADR) Program, an informal appeals process intended to resolve tax disputes without litigation. Taxpayers may apply for AADR if they received a Proposed Notice of Assessment, a Final Notice of Assessment, or a Notice and Demand of Penalty. Note that applying for AADR does not toll applicable appeal deadlines. Haw. Dep’t of Taxation, Announcement No. 2016-03: New Appeals Program to Resolve Tax Disputes Quicker (Feb. 1, 2016).

By Todd Betor and Eric Coffill

On January 20, a Denver trial court ruled that Agilent Technologies World Trade, Inc. (World Trade), a holding company with no property or payroll of its own, cannot be included in its parent’s combined corporate income tax return. The court found that World Trade did not meet the definition of “includible C corporation” for combined return purposes because the Department of Revenue’s own regulation provides that only a company with 20% or more of its property or payroll factors assigned to locations in the United States can be combined and, here, World Trade had zero property or payroll of its own. The court also rejected the Department’s claims that the “economic substance doctrine” and/or an IRC section 482-type “arm’s length pricing” statute provide a vehicle for including World Trade in its parent’s combined group. As a result of the trial court’s decision, the Department issued a notice cautioning taxpayers not to rely on the regulation at issue – 1 CCR 201-2, Reg. 39-22-303.12(c) – until further notice, except as it applies to Foreign Sales Corporations. Agilent Technologies, Inc. v. Department of Revenue, District Court, City and County of Denver, Case No. 2014CV393, Order filed Jan. 20, 2016.

By Chris Mehrmann and Charlie Kearns

The Tennessee Department of Revenue has issued guidance explaining that the retail sale of, use of, or subscription to a computer software maintenance contract is subject to sales and use tax when: (1) the maintenance contract is sold as part of a taxable sale of computer software; (2) the underlying software is installed on a computer located in Tennessee; or (3) the location of the underlying software is unknown by the seller, but the purchaser’s residential or primary business address is located in Tennessee. The Department noted that additional tax is not imposed on any repairs or maintenance performed as part of the computer software maintenance contract. However, if any repairs or maintenance are not covered by the contract, then those transactions are subject to sales and use tax. Finally, the Department stated that separate sales of support services (e.g., help desk and customer service support) are not subject to sales and use tax, provided that: (1) the purchaser is not required to purchase the support services in connection with the computer software maintenance contract; and (2) the support services do not include the installation, transfer, repair or maintenance of the computer software. Tenn. Dep’t of Revenue, Notice No. 15-25 (Dec. 1, 2015).

By Elizabeth Cha and Charlie Kearns

Effective for tax years beginning on or after January 5, 2016, the Illinois Department of Revenue adopted amendments to 86 Ill. Adm. Code Sec. 100.3380 that establish special rules for the inclusion in the Illinois sales factor of certain (1) income, gains and losses from hedging transactions; and (2) gains and losses from foreign currency exchanges. First, the Department’s amended regulation generally provides that taxpayers must exclude from the numerator and denominator of the Illinois sales factor any income, gain or loss from a transaction identified as a “hedge” for federal income tax purposes, notwithstanding a taxpayer’s facts and circumstances. Borrowing from federal income tax concepts, the amended regulation also establishes several exceptions to this general rule of exclusion for certain “identified” or “integrated” hedging transactions. Second, the Department establishes special rules in the amended regulation with respect to foreign currency gains and losses, i.e., Internal Revenue Code § 988 transactions. Under the new rules, a taxpayer may include a foreign currency gain or loss in its Illinois sales factor only if the income to which the foreign currency gain or loss relates is also included in the sales factor. However, the amended regulation concludes that taxpayers shall exclude from their Illinois sales factors any foreign currency gains and losses “with respect to expense.”