On December 31, 2015, the California Supreme Court closed the book on California’s Multistate Tax Compact election saga, unanimously holding that the Compact is not a binding contract among its members and the State was not bound by its provisions before the State’s repeal of the Compact in 2012. 

Citing the Multistate Tax Commission’s amicus curiae brief as much as the Franchise Tax Board’s brief and largely ignoring the Court of Appeal’s lengthy decision, the Supreme Court concluded that the Compact does not satisfy any of the indicia of binding interstate compacts contemplated by the United States Supreme Court in Northeast Bancorp v. Board of Governors, FRS (1985) 472 U.S. 159.

View the full Legal Alert

Read our December 2015 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.
 

  • SALT Pet of the Month: Asa
    Meet Asa, frequently known as “Doodle,” an Australian Shepherd belonging to Sarah Wellings, Director – State and Local Tax at Comcast.

  
 

 
 

 
 

 
 

 
 

 
   

Asa 2.jpg

Meet Asa, frequently known as “Doodle,” an Australian Shepherd belonging to Sarah Wellings, Director – State and Local Tax at Comcast. 
Adopted in the Finger Lake region of New York, this sweet boy celebrated his tenth birthday in August and has been with Sarah since he was just a pup.

Asa is an indoor dog who loves the great outdoors. His favorite activities include swimming, playing Frisbee and hiking. He can be seen enjoying a hike in the Adirondack Mountains last summer in the picture below. Because he is a herding dog, his pack instinct is very strong, and he always wants to be with his people. When he’s put outside, he stays as close to them as he can by lying up against the door until he’s let back in.

This silly guy is incredibly sweet-tempered and loves all people, especially kids. His only dislike is the recorder used by Sarah’s son, Noah. Whenever Noah plays it, Asa runs up to him and licks at his mouth to make him stop.

Asa is very pleased to be December’s Pet of the Month! 

By Evan Hamme and Timothy Gustafson

The California State Board of Equalization (Board) unanimously rejected Craigslist, Inc.’s (Craigslist) argument that California’s adoption of a factor-presence nexus regime in 2009 reflected pre-existing federal constitutional nexus standards pursuant to which Craigslist would be “subject to tax” in jurisdictions where it did not have a physical presence, and would not be required to throw out sales made in such jurisdictions. Pursuant to a written agreement, the California Franchise Tax Board (FTB) had granted Craigslist alternative apportionment for the 2007-2010 tax years, which required Craigslist to exclude from its sales factor sales made in states where Craigslist was not subject to tax under “United States constitutional standards for nexus.” At the time, California law, as interpreted by the Board and the FTB, required taxpayers to have a physical presence in a jurisdiction to be taxable in that jurisdiction. But 2009 legislation changed California’s nexus rules to include a market-based definition, effective January 1, 2011, which established a bright-line, $500,000 threshold for sales in a state to establish nexus. Craigslist filed an amended return in 2011 for the 2007 tax year, and included in its sales factor sales in any jurisdiction where Craigslist had more than $500,000 in sales for 2007 even if Craigslist had never had a physical presence there, arguing that if economic nexus satisfied U.S. constitutional standards in 2009 when expressly adopted by the California Legislature, it necessarily satisfied those same standards two years prior. The FTB argued that the constitutional standards must be determined through the lens of California decisional law, that the 2011 legislation applied prospectively to adapt to changes in the economy, and that a Board ruling in favor of Craigslist would cause significant uncertainty for other taxpayers regarding pre-2011 tax and filing obligations. The Board unanimously agreed with the FTB and denied Craigslist’s appeal, stating at the hearing it would be an “injustice” to allow the “change in law” effective in 2011 to apply to earlier years. Because the amount in controversy exceeds $500,000, the Board will have 120 days from when the appeal becomes final to issue a written decision. Appeal of Craigslist, Inc., Cal. Bd. of Equalization, No. 725838, appeal denied, Dec. 16, 2015.

There’s never a dull moment in Delaware when it comes to unclaimed property. The latest salvo comes by way of a lawsuit filed by the Delaware Department of Finance against Blackhawk Engagement Solutions (DE), Inc. (formerly known as Parago, Inc.), a provider of rebate, reward and incentive programs to retailers and other client companies. As part of an unclaimed property audit being conducted by Kelmar Associates, the Department is seeking to enforce a summons and obtain access to client contracts, uncashed rebate check amounts returned to clients, and the particulars of the rebate checks and payees. The complaint alleges that more than 300 retailers use Parago for rebate fulfillment assistance. 

View the full Legal Alert.

By Samantha Trencs and Andrew Appleby

A South Carolina administrative law judge (ALJ) determined that cell phone insurance is not subject to South Carolina sales tax even though the wireless provider sells it with taxable communication services.

Alltel provided its wireless customers with an option to purchase insurance for the loss, theft or damage to their cell phones (cell phones have a way of accidently finding their way into toilets). Alltel remitted the monthly premiums its customers paid for insurance coverage to Alltel’s insurance agent, who then remitted the premiums to an insurance company.

The ALJ concluded that this cell phone insurance arrangement constituted insurance under South Carolina law, which is not subject to sales tax. Even though Alltel offered the insurance with its taxable communication service, the ALJ reasoned that the insurance was not inextricably intertwined with the communication service because the insurance was optional. Additionally, Alltel did not provide the insurance. Rather, a licensed insurance agent and insurance company provided the coverage. Therefore, the insurance charges were not subject to South Carolina sales tax. Alltel Commc’ns, Inc. v. South Carolina Dep’t of Rev., Dkt. No. 11-ALJ-17-0603-CC (S.C. Admin. Law Ct. Nov. 13, 2015). 

By Elizabeth Cha and Amy Nogid

Pennsylvania’s Commonwealth Court agreed with the Department of Revenue (Department) that the Department’s letter rulings addressing the taxability of actual transactions were not subject to review by the Board of Finance and Revenue (Board). Members of BJ’s Wholesale Club, Inc. (Taxpayers) alleged that they were due a refund of sales taxes because tax should only have been collected on the net amount of the sales price on taxable items after reduction for the value of the manufacturer’s coupon. The Department’s Office of Chief Counsel had issued two letter rulings concluding that Taxpayers’ purchases were properly taxed in full because the receipts did not adequately describe the items to which the coupons related. Taxpayers petitioned the Board to overturn the letter rulings, but the Board dismissed on the basis that it did not have jurisdiction to reverse letter rulings. The court agreed that letter rulings are a subset of advisory opinions and are not appealable under either the Taxpayer’s Bill of Rights or other statutory provisions addressing claims for refunds.

While the letter rulings here are arguably refund denials since they relate to actual and not hypothetical transactions, and are not “advisory opinions” which provide guidance on future transactions, this decision is consistent with the positions of many state revenue departments (and confirmed by many state courts) that review is available for only certain types of notices that constitute “jurisdictional” documents. Myers v. Commw., No. 706 F.R. 2014 (Pa. Commw. Ct. Nov. 24, 2015).

In another taxpayer victory, the New Jersey Superior Court, Appellate Division held that an intangible holding company was not required to throw out any of its so-called “nowhere receipts” from an affiliated tobacco company in computing the denominator of its receipts factor. In Lorillard Licensing Company LLC v Dir., Div. of Taxation, the court held that New Jersey’s economic nexus standard must be applied to determine whether a corporation is “subject to tax” in other jurisdictions for purposes of New Jersey’s Throw-Out Rule. Further, the court held that it is irrelevant whether the corporation actually filed returns in or paid tax to those other jurisdictions. The Appellate Division agreed with the Tax Court that “New Jersey has no legitimate interest in considering the tax policy and practices of other States when determining whether to apply the Throw-Out Rule.” 

View the full Legal Alert.

By Suzanne Palms and Charlie Kearns

The Commonwealth Court of Pennsylvania held that network infrastructure services (including local dial networks, telephone numbers and modems, i.e., Internet “backbone”) sold to Internet service providers (ISPs) to provide Internet access to end users were not subject to Pennsylvania sales and use tax. The commonwealth court found that the taxpayer, a facilities-based provider of backbone services, was not subject to Pennsylvania sales and use tax on its sales because such transactions were charges for access to the Internet excluded from the definition of taxable “telecommunications service.” Under Pennsylvania sales tax law, “[c]harges for access to the Internet” includes access to the Internet but does not include “telecommunication services purchased by an [ISP] to deliver access to the Internet to its customers.” 72 P.S. § 7201(rr)(3)(B).

On audit, the Pennsylvania Department of Revenue (Department) assessed sales tax for the tax periods January 1, 2000, through April 30, 2003, on the grounds that the taxpayer’s sales of Internet backbone services were taxable sales of telecommunications service. Specifically, at issue was the taxpayer’s sale of services to America Online, Inc. (AOL), a retail ISP. The commonwealth court distinguished the America Online, Inc. v. Commonwealth, 932 A.2d 332 (Pa. Cmwlth. 2007), case in which it previously held that port management services offered by a third-party service provider were taxable telecommunications services. Here, the commonwealth court found that there were fundamental technological differences between the taxpayer’s service and the service at issue in the AOL case. In AOL, among other relevant facts, the third-party service provider controlled and managed the analog calls that traveled along its network to the taxpayer’s modems. In this case, however, the analog calls traveled from end users through the taxpayer’s modems and over the taxpayer’s network, which then converted the analog calls to digital signals via Internet protocol. The commonwealth court next found that because the taxpayer’s facility was an access point that established an end user’s connection with the Internet (a “Point of Presence” or “PoP”), the taxpayer’s Internet backbone service constituted “Internet access service” per se. Thus, unlike the service at issue in AOL, which in the court’s view was telecommunications service purchased by ISPs to provide Internet access service, the taxpayer’s service in this case provided end users with a connection to the Internet at the taxpayer’s PoP facility. Accordingly, the commonwealth court determined that the taxpayer’s backbone services fell squarely within the Pennsylvania statutory exclusion for “[c]harges for access to the Internet.”

Of note, the taxpayer in Level 3 also argued that the Department’s assessment of sales tax on its Internet backbone services violated the Internet Tax Freedom Act, 46 U.S.C. § 151 (ITFA). However, because the commonwealth court resolved the case under Pennsylvania sales tax law, it did not address the taxpayer’s ITFA preemption argument. Level 3 Communications, LLC v. Commonwealth of Pennsylvania, 166 F.R. 2007 (Commw. Ct. Oct. 15, 2015).