By Hanish Patel and Marc Simonetti

In a Chief Counsel Ruling, the California Franchise Tax Board (FTB) ruled that, for purposes of determining its sale factor, a financial information provider should source the sales of its information services based on where the taxpayer’s customer receives the benefit of the service, and not where the ultimate customer (the taxpayer’s customer’s customer) receives the benefit.  The taxpayer provides financial data—real-time stock quotes, company screenings and other market research data—to business entity customers that, in turn, use the data to manage portfolios and offer products to their own customers. Additionally, the FTB ruled that the taxpayer could identify and measure the location of the benefit received based on the relative computing power usages of its customers because the computing power correlated to the fees received for the service. Cal. FTB Chief Counsel Ruling No. 2015-02 (released Feb. 19, 2016).

 By Liz Cha and Todd Lard

Applying the “true object” test to the taxpayer’s web-based services, the Tennessee Department of Revenue ruled that charges for granting access to the taxpayer’s website for purposes of obtaining information would not be subject to sales tax. While the access to web-based services is tax-exempt as a sale of services, a subscription to the taxpayer’s web-based technology solution system that allows a customer to manage its own information is taxable as a sale of remotely accessed software. However, the taxpayer’s purchase of the technology solution system from a third party qualifies for a sale for resale exemption if it provides the third party with a properly completed resale certificate. Tennessee Letter Ruling No. 16-01, 01/26/2016.

By Charles Capouet and Charlie Kearns

The Georgia Department of Revenue released a letter ruling stating that a taxpayer’s health-related information service was not subject to sales and use tax. The service includes a web portal to provide health information and track the user’s personal results and the in-person performance of an annual biometric health assessment. The taxpayer’s service was not taxable because Georgia does not expressly designate the service as taxable. Ga. Letter Ruling SUT-2015-03, Ga. Dep’t of Revenue (issued Apr. 16, 2015, released Feb. 2016).

By Mike Kerman and Andrew Appleby

The Louisiana Court of Appeals held that a paperboard products manufacturer was entitled to refunds of sales tax it paid on purchases of chemicals it used in the manufacturing process under the “further processing” exclusion. The chemicals met the exclusion’s three-part test because they: (1) were identifiable components of the end paperboard product; (2) benefitted the paperboard by increasing its mass, conductivity, size and strength; and (3) were purchased with the purpose of being included in the paperboard. Graphic Packaging Int’l, Inc. v. Lewis, No. 50,371-CA (La. Ct. App. Feb. 3, 2016).

Yesterday, the U.S. Court of Appeals for the Tenth Circuit issued its opinion in Direct Marketing Association v. Brohl, reversing the district court’s order granting summary judgment. The Tenth Circuit held that Colorado’s notice and reporting requirements imposed on non-collecting retailers did not violate the dormant Commerce Clause because they neither discriminated against, nor unduly burdened, interstate commerce. In determining that Colorado’s law did not violate the dormant Commerce Clause, the Tenth Circuit further held that the application of Quill v. North Dakota is narrowly limited to sales and use tax collection.

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By Stephen Burroughs and Tim Gustafson

The Massachusetts Supreme Judicial Court denied a freight company’s Commerce Clause challenge to the application of an unapportioned use tax on its vehicles purchased out-of-state but used in Massachusetts. The company used its trucks to deliver freight in multiple states, but the court upheld taxation of the vehicles’ full value, in part, because a statutory “catch-all” exemption disallowed any application of the use tax that violated the U.S. Supreme Court’s decision in Complete Auto. The court reasoned that the “catch-all” exemption prevented hypothetical scenarios from invaliding a use tax assessment under the internal consistency test because transactions that result in actual double taxation are exempt from Massachusetts use tax. The court also concluded that the unapportioned use tax was externally consistent because it was not out of proportion to the company’s use and storage of its vehicles in Massachusetts, and the company was not subject to imposition of multiple sales or use taxes in other jurisdictions. Finally, the court determined that the vehicle use tax did not impermissibly burden interstate commerce simply because Massachusetts chooses to tax an activity that most states exempt—the in-state use or storage of vehicles engaged in interstate commerce. Regency Transp., Inc. v. Comm’r of Revenue, 473 Mass. 459, 42 N.E.2d 1133 (Ma. 2016).

By Nicole Boutros and Jeff Friedman

The Director of the Arizona Department of Revenue affirmed an Administrative Law Judge determination that a taxpayer must pay the Transaction Privilege Tax on sales of access to the taxpayer’s subscription-based online research service. The Director reasoned that these sales were taxable as rentals of tangible personal property—and not non-taxable services—because the taxpayer’s customers had sufficient control and use of the taxpayer’s software and could manipulate the software content for their specific needs. The Director rejected the taxpayer’s assertion that the common understanding of the taxpayer’s trade or business was the provision of database access and content, or that the transaction’s dominant purpose was database browsing and searching. Ariz. Dep’t of Revenue Director’s Decision, No. 201400197-S (Oct. 27, 2015).

By Zack Atkins and Eric Coffill

A Virginia trial court held that royalties paid to related members that are reported to, but not taxed by, other states do not qualify for the exception to the state’s corporate income tax addback statute. In granting summary judgment in favor of the Virginia Department of Taxation, the court said that intangible expenses paid to related members must be added back to a taxpayer’s federal taxable income unless the payments to the related member are “subject to a tax based on or measured by net income or capital.” Construing this exception narrowly against the taxpayer, the court equated the statute’s “subject to” language to actual taxation. Kohl’s Dep’t Stores, Inc. v. Va. Dep’t of Taxation, 91 Va. Cir. 499 (Va. Cir. Ct. Feb. 3, 2016.).

On October 31, 2016, the Virginia Supreme Court granted the taxpayer’s Petition for Appeal.  Briefing for the appeal will likely be completed in 2017. Kohl’s Dep’t Stores, Inc. v. Va. Dep’t of Taxation, 91 Va. Cir. 499 (Va. Cir. Ct. Feb. 3, 2016), Petition for Appeal granted, No. 160681 (Va. Oct. 31, 2016).”

By Ted Friedman and Carley Roberts

The West Virginia Office of Tax Appeals (OTA) ruled that an out-of-state corporation, with no physical location or employees in West Virginia, owed sales and use tax on sales of garage equipment in the state. The OTA determined that the corporation had nexus with West Virginia based on its purposeful utilization of persons in the state who provided leads, sales information, equipment installation, training and follow-up, coupled with the activities of an independent contractor who functioned as its sales representative in the state, because such activities established and maintained a market for the corporation in West Virginia. West Virginia Administrative Decision No. 14-081 CU (W. Va. Office of Tax Appeals Oct. 14, 2015) (released Jan. 27, 2016).

By Mike Penza and Madison Barnett

The New York Supreme Court, Albany County, held that New York’s unapportioned vehicle registration fees violated the Commerce Clause. The court found that the flat fees—imposed on all carriers operating motor vehicles in New York—were indistinguishable from those struck down by the U.S. Supreme Court in American Trucking Ass’ns., Inc. v. Scheiner, 483 U.S. 266 (1987). The court rejected the state’s arguments that the fees (i) were too small ($15 and $4) to be of constitutional significance, and (ii) could not be apportioned without creating an “enormous and costly administrative burden.” Owner Operator Indep. Drivers Ass’n v. New York State Dep’t of Taxation and Fin., No. 005551/2013 (N.Y. Sup. Ct. Albany Cty. Jan. 22, 2016).