We are pleased to announce that Sutherland has expanded its premier State and Local Tax (SALT) practice with the addition of four associates: Elizabeth S. Cha and Samantha K. Trencs in Washington DC, Nicholas J. Kump in Sacramento, and Hanish S. Patel in Atlanta. 

The new group joins Sutherland’s more than 100-strong tax practice which includes more than 30 full-time SALT attorneys. The four associates will concentrate on state and local tax planning, compliance and controversy, as well as multistate tax and unclaimed property issues across the country.

  • Liz counsels on state and local taxation matters, including tax structuring and planning. She also advises clients on unclaimed property matters, such as voluntary disclosure, audit management and the treatment of gift cards and other stored value card programs. Liz earned her LL.M. in taxation from Georgetown University Law Center, her J.D. from Yeshiva University, and a B.S. from the New York University Stern School of Business.
  • Samantha advises clients on a full range of state and local tax matters, including tax planning, policy and controversy. She regularly counsels on income, franchise, sales and use, and property tax issues. She also advises on multistate audit and litigation matters. Samantha earned her LL.M., with distinction, and a Certificate in State and Local Taxation from Georgetown University Law Center, her J.D., summa cum laude, from the Charlotte School of Law, and a B.A., with distinction, from the University of Western Ontario.
  • Nick assists on an array of multistate tax types, including income, sales and use, franchise and property taxes. He also regularly assists with state and local tax controversy, compliance and planning issues. Nick earned his J.D. from the University of the Pacific, McGeorge School of Law, and a B.A., with honors, from the University of Southern California, Annenberg School for Communication and Journalism.
  • Hanish counsels clients on state and local tax controversy, planning and policy matters. He advises on multistate tax nexus issues and on all tax types, including income, franchise, property, and sales and use tax. Prior to joining Sutherland, Hanish was a senior tax associate in the state and local tax group of Deloitte Tax LLP, where he advised clients on tax planning and refund opportunities, and the state and local tax implications of mergers, acquisitions, dispositions and corporate reorganizations.

Sutherland’s SALT practice has seen significant growth during the past year. Since the second half of 2014, the group welcomed three attorneys in New York: Partner Leah S. Robinson and Counsel Open Weaver Banks and Amy F. Nogid. The practice also welcomed five new associates since February: Charles C. Capouet and Chris Mehrmann in Washington DC, Michael J. Kerman and Michael P. Penza in New York, and Olga Jane Goldberg in Houston.

Today, the U.S. Supreme Court vacated the decision of the Massachusetts Supreme Judicial Court in First Marblehead Corp. v. Commissioner of Revenue and remanded the case back to the court for reconsideration in light of the holding in Comptroller of the Treasury v. Wynne. In First Marblehead, a taxpayer was denied the ability to apportion its loan portfolios to a state other than Massachusetts for purposes of computing its property factor by the Massachusetts Department of Revenue.

View the full Legal Alert.

By Mike Kerman and Andrew Appleby

The Tennessee Supreme Court held that the Tennessee Department of Commerce and Insurance (Department) improperly imposed retaliatory taxes on Pennsylvania-domiciled insurance companies doing business in Tennessee, because Pennsylvania workers’ compensation assessments were not imposed on Tennessee insurance companies, but rather on the insurance companies’ policyholders. Tennessee Code § 56-4-218 authorizes the state to impose a retaliatory tax when another state imposes taxes or obligations on Tennessee insurance companies doing business in that state that exceed the taxes or obligations Tennessee imposes on that state’s insurance companies doing business in Tennessee. Here, Pennsylvania imposed assessments to support three workers’ compensation funds. The statutes authorizing these assessments state that they are imposed on insurers. However, a more recent statute states that the assessments “shall no longer be imposed on insurers,” and instead requires insurers to merely collect the assessments from policyholders. The court determined that this later statute implicitly repealed the original statutes and that the assessments are therefore not imposed on insurance companies directly. Because the assessments are imposed on policyholders rather than insurance companies, Tennessee is not authorized to impose a retaliatory tax on Pennsylvania insurance companies. The court also rejected the Department’s argument that a related regulation, which provides that insurance companies remain responsible for collecting and remitting the total assessment amounts even if policyholders fail to pay, imposes a direct burden on insurance companies. The regulation imposes only a responsibility to “collect and timely remit” payments and does not impose any penalties or fines on insurance companies when policyholders fail to pay, the court concluded. Several New York-domiciled insurance companies filed similar tax refund claims, which the Tennessee Court of Appeals also denied. The Tennessee Supreme Court denied review of the New York cases, stating that the New York statutes differed significantly from the Pennsylvania statutes. Chartis Cas. Co. et al. v. State, No. M2013-00885-SC-R11-CV (Tenn. Oct. 2, 2015).

In a significant rebuff of the California State Board of Equalization (BOE), the California Second District Court of Appeal held that a manufacturer’s sale of software on tangible media was exempt from sales tax under the technology transfer agreement (TTA) statutes. Lucent Technologies, Inc. v. State Bd. of Equalization, No. B257808, 2015 WL 5862533. The court also upheld a $2.6 million attorneys’ fees award to the taxpayer after concluding that the BOE’s position was not “substantially justified.” The court also provided a useful framework for analyzing all bundled transactions, not just those involving TTAs. 

View the full Legal Alert.

In Part I of their series for State Tax Notes, Sutherland attorneys Leah Robinson and Evan M. Hamme provided a roadmap describing how to challenge a department of revenue’s assertion that online services are taxable as licenses of software. While focused on New York audits, the roadmap can assist in any similar audit. 

In Part II, Leah and Evan provide a chart detailing every New York Department of Taxation and Finance advisory opinion addressing online services since 2008, when the Department started taking the taxable-as-TPP position. The chart shows that while the Department’s approach has evolved, taxability determinations remain somewhat unpredictable. However, the three factors discussed in Part I of the series often tip the scales in favor of non-taxability.

View the full article, reprinted from the September 21, 2015, issue of State Tax Notes. 

By Olga Goldberg and Amy Nogid

The Wyoming State Board of Equalization held that telecommunications equipment shipped to and temporarily stored in Wyoming by a purchaser before being transported by the purchaser for installation in Montana by the manufacturer was not subject to the state’s use tax. Range Telephone Cooperative, Inc. (Range), a Wyoming-based telephone service cooperative, contracted with an equipment manufacturer, Cyan, Inc. (Cyan), to deliver and install an Ethernet network throughout its system, including in Montana. Cyan shipped the equipment to Range’s headquarters in Wyoming, where it was sorted by Range employees and then stored for three days at a coop member’s Wyoming facility before being transported to Montana by Range’s representatives. The Board’s ruling relied on the parties’ contract under which Cyan retained ownership of and responsibility for the equipment from shipment until the installation project was completed in Montana. The Board rejected the Department of Revenue’s argument that a “continuous shipping stream” would be required to avoid use tax and that the stream was interrupted because Range, rather than a common carrier, took temporary possession of the equipment in Wyoming. In re Appeal of Range Telephone Coop., Inc., Dkt. No. 2014-14 (Wyo. State Bd. of Equalization, Sept. 23, 2015).

By Evan Hamme and Charlie Kearns

A New York State Division of Tax Appeals Administrative Law Judge (ALJ) determined that two-way radio communications services, or walkie-talkie services, are not telephone services subject to New York State’s telecommunications excise tax imposed under Tax Law § 186-e (186-e Tax). The petitioner uses specialized equipment or “repeaters” to strengthen voice signals received from one walkie-talkie and transmit those signals to other walkie-talkies. On audit, the New York State Department of Taxation and Finance (Department) assessed the 186-e Tax on the “repeater category” less amounts from equipment sales. The Department sought to impose the 186-e Tax by arguing a “telecommunications service” includes any transmission of voice signals by radio waves, including walkie-talkie services that use repeaters to strengthen the transmission of the voice signal. However, the petitioner did not establish a connection with the Public Switch Telephone Network (PSTN) (i.e., no dial tone and no ability to call a telephone number), which the petitioner argued is necessary to provide a “telephone service” subject to tax. On administrative appeal, the ALJ agreed with the petitioner, concluding that the legislature intended the 186-e Tax to apply to telephone companies and common carriers, and that the Department’s definition would extend the tax beyond its intended scope. According to the ALJ, the mere “ability to communicate with the holder of the other walkie-talkie” (and no interconnection with the PSTN) did not cause the petitioner’s services to be deemed “telephony” subject to the 186-e Tax. ALJ determinations are non-precedential and may be appealed by the Department. Matter of N.Y. Commc’ns Co., DTA No. 825586 (NYS Div. Tax App. Aug. 13, 2015). 

By Mike Kerman and Charlie Kearns

The Indiana Department of Revenue (Department) found that a medical research company that purchased software licenses was entitled to an exemption from use tax for purchases of taxable computer software as long as it could show the licenses were ultimately used outside of Indiana. The Department added that an exemption is not permitted where a company shows that its licenses were not used in Indiana but fails to show that they were used elsewhere (“nowhere licenses”). Indiana provides a use tax exemption for property that is stored in the state temporarily awaiting subsequent use outside of Indiana. The taxpayer purchased software licenses from multiple vendors and, in each case, used only a portion of the licenses. For example, the taxpayer purchased 1,000 licenses from one vendor, but only used 63 of the licenses. Of those 63 licenses, the taxpayer only used two in Indiana and used the other 61 outside of the state. The Department explained that the taxpayer’s 937 “nowhere licenses” were not exempt from use tax based on the temporary storage exemption, because the taxpayer could not show that they were subsequently used out of state. Rather, only the 61 licenses that the taxpayer could show were used outside of Indiana were exempt. For use tax purposes, the “nowhere licenses” were effectively “used” in Indiana because the taxpayer purchased them and accepted delivery in Indiana, even though it did not actually employ the licenses. Ind. Letter of Findings No. 04-20140506, Ind. Dep’t of State Revenue (Aug. 26, 2015).

On September 30, the U.S. House of Representative voted in favor of H.R. 719, which includes provisions extending the Internet Tax Freedom Act through December 11, 2015. The bill, passed earlier in the day by the Senate, will now head to the President for his signature. If signed into law, this temporary extension will give Congress another opportunity to consider whether to re-extend the ITFA moratorium for another set time period or to make the moratorium permanent.

History of the Internet Tax Freedom Act

ITFA prohibits states from taxing Internet access and also prohibits the multiple or discriminatory taxation of electronic commerce. President Bill Clinton signed the ITFA moratorium into law on October 21, 1998. Congress has since extended ITFA four times: in 2001, 2004, 2007 and 2014. President Obama signed the most recent extension, H.R. 83, which extended the moratorium through September 2015. Thus, absent this extension, ITFA will expire on October 1 of this year. Because Congress enacted ITFA in 1998, limited guidance exists as to how the states would tax Internet access in the law’s absence.

By Jonathan Feldman and Stephen Burroughs

A mere 28 days after oral argument, a three-judge panel of the Michigan Court of Appeals unanimously upheld a Court of Claims decision that sanctioned the Michigan Legislature’s retroactive withdrawal from the Multistate Tax Compact in 2014 PA 282, by ruling for the Michigan Department of Treasury in the consolidated appeal. The court held that the retroactive repeal of the Compact and the three-factor election within did not violate the Contract Clauses of the state or federal constitutions, reasoning that the Compact did not contractually bind Michigan from exercising its full legislative power. Accordingly, the Compact was subject to Michigan law concerning the interpretation of statutes. The court held that the retroactive repeal satisfied the Due Process Clauses of the state and federal constitutions because: (1) taxpayers generally do not have a vested right in the continuing validity of taxing statutes; (2) because the Legislature had a legitimate purpose for giving retroactive treatment to 2014 PA 282; and (3) because the six-and-one-half year retroactive period was sufficiently modest. The court also struck down the taxpayers’ separation-of-powers argument, asserting that the Legislature has the authority and obligation to amend a statute it believes has been misconstrued by the judiciary and that 2014 PA 282 did not reverse a decision or repeal a final judgment. Finally, the Court held that the retroactive repeal does not discriminate against interstate commerce, violate taxpayers’ First Amendment rights to petition the government, or defy any other Michigan constitutional provision. The court noted that the application of 2014 PA 282 to IBM’s appeal of its 2008 tax year decided by the Michigan Supreme Court was not at issue here. Sutherland will provide additional analysis as this case moves through the appellate process. Gillette Comm Operations N Am & Subsidiaries v. Department of Treasury, No. 325258 (Mich. Ct. App. 2015) (consolidated with 49 other appeals).