By Zack Atkins and Timothy Gustafson

The Oregon Tax Court held that the Multistate Tax Compact (Compact), which allows for an equally weighted, three-factor apportionment formula, was an illusory contract and its terms had been effectively disabled by the Oregon Legislature. The statute in question, ORS 314.606, provides that in case of conflict the provisions of ORS 314.605 to 314.675, which codified the Uniform Division of Income for Tax Purposes Act, trump the provisions of ORS 305.655, which codified the Compact. The taxpayer argued that ORS 314.606 violated, among other things, the Contract Clause of the Oregon Constitution and the Contract and Compact Clauses of the U.S. Constitution. The court concluded, as a threshold matter, that ORS 314.606 was intended to disable the Compact election rather than provide taxpayers with an alternative means of apportioning their income. The court also held that the state’s codification of the Compact did not create a statutory contract because, under Oregon law, any promises the state purportedly made when it adopted the Compact lacked consideration. The terms of the Compact gave member states the unconditional right to withdraw at any time without having to satisfy any conditions precedent, and it contained no reciprocal promises. The court also observed that member states had modified or disabled provisions of the Compact for years without any objection from other member states, which was evidence that the member states regarded the Compact as non-binding. Based on the foregoing, the court held that ORS 314.606 did not impair any contractual obligations in violation of the Oregon Contract Clause or the federal Contract Clause. The court noted that even if a statutory contract had been created, the federal Contract Clause would not have barred the state from disabling the Compact election (and thus modifying its financial obligations) because doing so was reasonable and necessary to serve two important public purposes: protecting the fisc and ensuring that all businesses are on equal footing. Health Net, Inc. v. Dep’t of Revenue, No. 5127, 2015 WL 5249431 (Or. Tax Ct. Sept. 9, 2015).

By Charles Capouet and Timothy Gustafson

The Oregon Supreme Court held that an out-of-state taxpayer providing voice and data telecommunications services over a global network was required to use a transactional approach to source sales of other than tangible personal property for Oregon sales factor purposes under Oregon’s costs of performance method. Sales are sourced to Oregon if a greater proportion of income-producing activity is performed in Oregon than in any other state, based on costs of performance. The taxpayer’s network, managed from a global operations center in New Jersey, worked together as an integrated whole and was used to provide all of the taxpayer’s services at issue. While the taxpayer provided voice and data service on its own facilities, the “last-mile service” was provided by a local exchange carrier, for which the taxpayer paid the local carrier an access fee. In calculating its Oregon income tax liability under the Department of Revenue’s costs of performance sourcing rule, the taxpayer included business activities associated with its network operations in determining its income-producing activity. Because the taxpayer’s cost accounting study demonstrated that the costs related to such activities were incurred in New Jersey and exceeded those in Oregon, the taxpayer did not source its sales to Oregon. However, the court concluded that the taxpayer’s study did not identify the correct income-producing activities, noting that Oregon’s rule defining “income producing activity” looks to each particular “item of income” and defers to the Department’s “plausible” interpretation of that term as relating to individual sales (e.g., per minute charges for phone calls or flat-rate monthly subscriptions). Accordingly, the court held that the taxpayer failed to carry its burden to show that greater costs of performance of the transactions and activity to produce each individual sale, excluding the overall network costs, were incurred outside of Oregon. AT&T Corp. v. Dep’t of Revenue, 357 Or. 691 (Or. 2015).

By Michael Penza and Timothy Gustafson

The Utah State Tax Commission ruled that a Utah-based manufacturing and marketing company’s payroll factor must include compensation paid to a third-party “professional employer organization” (PEO) pursuant to a lease agreement for employees working at the taxpayer’s Utah facilities. The employees signed employment agreements with the PEO, and the PEO paid the employees’ salaries and withheld taxes for purposes of the Federal Insurance Contribution Act. The taxpayer, however, supervised and disciplined the employees; made all hiring and firing decisions; controlled the employees’ work schedules and working conditions; and provided the employees with new-hire orientation, on-the-job training and an employee handbook. Nevertheless, the taxpayer reported a zero Utah payroll factor, excluding all compensation it paid the PEO for the leased employees’ services while reporting deductions for salaries and wages on its federal tax returns. Rejecting the taxpayer’s position, the Tax Commission found that: (1) the taxpayer’s extensive control over the leased employees created an employer-employee relationship at common law; and (2) the taxpayer’s exclusion of the leased employees’ compensation from its payroll factor did not fairly reflect its Utah business activities. Accordingly, the compensation paid to the PEO for the “hundreds of people working in Utah” for the taxpayer was properly includable in the taxpayer’s payroll factor. Utah State Tax Commission, Appeal Nos. 05-0594; 05-1764 (decided Nov. 15, 2011; released Oct. 13, 2015). 

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).