By Chris Mehrmann and Madison Barnett

The New York State Department of Taxation and Finance issued an advisory opinion explaining that the petitioner’s Internet-based document transfer subscription plans are not subject to sales and use tax. Because the primary purpose of the transactions is to facilitate the transfer of files over the Internet, the Department concluded that the plans constitute non-taxable “bridging” services rather than taxable sales of prewritten software, even though a limited download of software is involved. N.Y. Advisory Opinion, TSB-A-16(6)S (Feb. 25, 2016).

On March 24, the Georgia General Assembly passed House Bill 960, which would adjust the statutory interest rate applicable to tax assessments and refunds and addresses other issues related to refund claims for Georgia sales and use taxes. H.B. 960 passed the legislature while the Georgia Department of Revenue continues to consider regulatory action that would eliminate the payment of interest on sales and use tax refund claims for purchases made with direct pay permits. H.B. 960 is currently awaiting Governor Nathan Deal’s signature.

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By Charles Capouet and Eric Coffill

In Private Letter Ruling ST 15-0016-PLR, the Illinois Department of Revenue explained the application of the temporary storage exemption to the imposition of use tax on the in-state storage of equipment. Illinois’ temporary storage exemption applies where the property is acquired outside Illinois and, after a temporary stay in the state, is shipped out of and used solely outside of Illinois. First, the temporary storage exemption applies when a customer orders equipment from the taxpayer that it acquires from outside of Illinois, the customer requests that the taxpayer store the equipment in the taxpayer’s Illinois warehouse for a period of time, the customer is invoiced and the title transfers after the equipment arrives at the Illinois warehouse, and the taxpayer ships the equipment to the out-of-state customer via common carrier. Second, the exemption does not apply when the taxpayer orders the equipment based instead on an internal forecast or per customer instructions, places the equipment in its inventory when it arrives at the Illinois warehouse, invoices the customer and transfers title if the customer has not requested shipment within 180 days, and ships the equipment only after receiving further instructions from the customer. However, the interstate commerce exemption applies because the taxpayer is obligated to physically deliver the goods from a point in Illinois to a point outside of Illinois, not to be returned to a point within Illinois, as long as delivery is actually made. Third, the temporary storage exemption applies when the taxpayer acquires the equipment from outside of Illinois, the property is shipped to and stored at the Illinois warehouse temporarily, the taxpayer performs services on the equipment, and the product is stored at the warehouse until the customer provides instructions for shipment out-of-state. Ill. Private Letter Ruling No. ST 15-0016-PLR, Ill. Dep’t of Revenue (issued Nov. 13, 2015).

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.

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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).