In his State of the State address at the beginning of the year, Texas Governor Greg Abbott tasked the Legislature with enacting meaningful business tax relief. The Legislature responded by reducing the franchise (also called the margin) tax rate and creating new exemptions and incentives for sales tax. At the same time, however, the Legislature cut funding for several economic incentive programs and added an additional layer of review by creating an Economic Incentive Oversight Board. 

In their article for State Tax Notes, Sutherland attorneys Leah Robinson and Olga Jane Goldberg discuss recent tax changes in Texas and conclude that the Legislature at least partially fulfilled the governor’s request to cut taxes.

View the full article reprinted from the August 31, 2015, issue of State Tax Notes.

By Michael Penza and Timothy Gustafson

The Virginia Tax Commissioner upheld an upward adjustment to a taxpayer’s payroll factor attributing to Virginia all compensation that the taxpayer had reported to the Virginia Employment Commission (VEC) for purposes of the state’s unemployment insurance tax. The taxpayer, a Virginia-based contractor providing security services for the United States government, reported to the VEC compensation paid to employees working exclusively in foreign countries as an administrative convenience, even when the compensation was not properly reportable. In its Virginia payroll numerator, though, the taxpayer included only compensation that was subject to Virginia income tax withholding, despite the state’s regulatory presumption that compensation reported to the VEC equals compensation attributable to Virginia for purposes of the payroll factor. The taxpayer argued that including this information was a better reflection of compensation paid or accrued in Virginia given the location of its employees. The Commissioner rejected the taxpayer’s argument and upheld the adjustment because: (1) compensation subject to Virginia income tax withholding does not necessarily equal compensation attributable to Virginia for purposes of the payroll factor; and (2) the taxpayer did not provide sufficient evidence showing that the compensation reported to the VEC actually included compensation paid to employees working exclusively outside of Virginia. However, the Commissioner sent the matter back to the audit staff to consider any additional evidence the taxpayer might present to show which employees worked solely outside of Virginia. Va. Pub. Doc. No. 15-166 (Aug. 18, 2015).

By Mike Kerman and Open Weaver Banks

The Washington Court of Appeals held that for local business and occupation (B&O) tax purposes, a securities broker with employees in its Seattle office must source to Seattle the receipts from commissions for services performed by the employees via phone and Internet. Under the city ordinance implementing the state’s required apportionment formula for local B&O tax, service income is sourced to Seattle if: (i) the customer is located in the city; or (ii) the greater proportion of the service income-producing activity is performed in the city than in any other location, based on costs of performance, and the taxpayer is not taxable at the customer location; or (iii) the service income-producing activity is performed within the city, and the taxpayer is not taxable at the customer location. For several years, the city has interpreted “customer location” to be the place where the majority of physical contacts with customers occur. In this case, because the taxpayer’s services were provided by phone and Internet, it had no physical contacts with customers. Therefore, the court held that the taxpayer must source all of its receipts from commissions earned from services provided by employees in its Seattle office to Seattle, where the majority of its income-producing activities occurred, rather than only commissions earned from services provided to customers located in Seattle. Although the court recognized that some of the taxpayer’s activities occurred outside of the Seattle area, it found that the taxpayer failed to provide any documentation or support for its non-Seattle activities. Wedbush Sec., Inc. v. City of Seattle, No. 71932-7-I (Wash. Ct. App. Aug. 10, 2015). 

By Michael Penza and Amy Nogid 

The U.S. Court of Appeals for the Eleventh Circuit invalidated Florida’s rental tax imposed on the Seminole Tribe of Florida’s (the Tribe) leases of tribal land to non-Indian corporations, but upheld Florida’s utility tax collected from the Tribe. 

The Tribe operated casinos on two of its reservations; non-Indian corporations entered into leases with the Tribe to operate food courts at the casinos. The court affirmed the district court and held that the Indian Reorganization Act (IRA), which prohibits states from taxing lands held in trust by the United States on behalf of Indian tribes, preempts application of Florida’s rental tax on the non-Indian corporations’ lease payments to the Tribe. Relying on the U.S. Supreme Court’s decision in Mescalero Apache Tribe v. Jones, 411 U.S. 145 (1973), the Eleventh Circuit held that the ability to lease property is a fundamental privilege of property ownership, and that a tax on that privilege, such as Florida’s rental tax, amounted to a tax on the land itself, thereby violating the IRA. The court rejected Florida’s argument that the rental tax was a transactional tax rather than a tax on the land.

However, the court reversed the district court and upheld Florida’s utility tax collected from the Tribe related to utility services provided on the Tribe’s reservations. The court’s ruling hinged on determining the legal incidence of the utility tax. States are categorically barred from taxing Indian activity on reservations, but may tax non-Indian activity on reservations if not otherwise prohibited by federal law. The district court had found that the legal incidence of the utility tax was on consumers, likening it to a sales tax, and that an explicit pass-through provision of the tax to consumers was not required. The Eleventh Circuit, on the other hand, found that the legal incidence of the utility tax fell on the utility companies, and the utility companies were not legally required to pass the tax on to their customers. The court also found that unlike the rental tax, the utility tax was not preempted by federal law, even though electricity was essential to tribal activities, because there was no demonstrated Congressional intent to regulate utility use on tribal lands. Seminole Tribe of Florida v. Stranburg, No. 14-14524 (11th Cir. Aug. 26, 2015), aff’g in part and rev’g in part (S.D. Fla. Sept. 5, 2014). 

The long saga of Michigan’s Multistate Tax Compact election continued on Wednesday with oral argument before the Michigan Court of Appeals. A packed courtroom witnessed a 1.5 hour proceeding before an active three-judge panel. The arguments focused primarily on: (1) whether legislation can retroactively repeal the state’s adoption of the Multistate Tax Compact; (2) whether a retroactive repeal violates due process; (3) whether the contractual terms of the Compact require only prospective repeal; and (4) whether the legislation violated separation of powers.

View the full Legal Alert.
Read our August 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: Zander
    Meet Zander, the seven-year-old Great Pyrenees belonging to Sutherland SALT Associate Madison Barnett and his family.

 

From September 1, 2015, through October 30, 2015, the Comptroller of Maryland will administer a Tax Amnesty Program for tax periods beginning before December 31, 2014. Eligible taxpayers that participate in the Program will receive a waiver of certain civil penalties and a reduction of 50% of the interest associated with certain delinquent taxes.

View the full Legal Alert.

Thumbnail image for _MG_0332.jpgMeet Zander, the seven-year-old Great Pyrenees belonging to Sutherland SALT Associate Madison Barnett and his family. Already a proud dog owner of two handsome pups, Madison hadn’t planned on adding a third to the Barnett household. That plan changed abruptly four years ago when he nonchalantly showed his wife and daughters an email about a dog whose family had been killed in a tornado. Zander was the lone survivor. Madison explains, “One minute I was reading an email, the next minute my daughters were sobbing, and four hours later I had a new dog living with me. I’m still not sure what happened.”

Rescued through Great Pyrenees Rescue Atlanta, Zander is fiercely loyal and fiercely stubborn. If he thinks something is dangerous, he runs to the kids to guard them. If he thinks a command is ridiculous, he won’t bother to acknowledge it and does what he wants. There is no convincing him that he is not supposed to do things like lick birthday cakes.

Zander spends his time indoors and out. While outside, he enjoys adding his personal touch to the backyard landscape design. If he notices the plants looking too healthy, he immediately gets to work digging them up or trampling them.

Thumbnail image for Thumbnail image for FinsihedProof.jpgZander is also a skilled escape artist. He can open any door in the house and let himself out, and according to Madison, privacy has become a thing of the past. The Barnetts have considered creating a YouTube channel for this canine Houdini to show him plotting and executing his escapes. Even an “escape proof” crate they bought online was no match for Zander. He managed to get out within 15 minutes.

Though he tips the scales at over 100 pounds, this sweet, sociable boy thinks he belongs on everyone’s lap. Guests stare at him in horror while he careens his body into them so he can climb up and get comfortable. He is honored to be August’s Pet of the Month! 

By Charles Capouet and Timothy Gustafson

The Supreme Court of Missouri denied a Missouri corporation’s sales tax refund claims on its sales of trade show displays shipped to out-of-state customers because it did not prove that the title to the goods transferred outside of Missouri. Missouri exempts from sales tax retail sales made in interstate commerce, looking at when title to the goods passes to the purchaser, rather than the ultimate destination of the goods, to determine whether the exemption applies or sales tax is owed. Thus, for the Court, whether sales tax was owed on the transactions depended solely on whether title to the displays transferred inside or outside of Missouri. The only documentary evidence the taxpayer provided of title passage, however, was a blank order form setting out standard terms and conditions for purchase of displays, including a provision that delivery was “F.O.B. manufacturer.” Without evidence of a specific alternative agreement about title passage, the Court held the course of dealing as reflected in the display order governed. In this case, the terms of the display order evidenced that the title transferred to the purchaser upon delivery of the goods to the shipper, within Missouri, for shipment out of state to the customer. Accordingly, the Court concluded the taxpayer was not entitled to a sales tax refund for sales of goods shipped out of state. VisionStream, Inc. v. Dir. of Revenue, No. SC94441, 2015 WL 3978835 (Mo. Jun. 30, 2015) (en banc). 

By Nicole Boutros and Amy Nogid

The New Jersey Tax Court ruled that the Division of Taxation (“Division”) properly required a foreign (non-New Jersey domesticated) corporation to file corporation business tax (“CBT”) returns reporting licensing revenue from its parent attributable to New Jersey, based on New Jersey’s economic presence nexus standard, despite the parent’s royalty expense addback in computing its CBT liability. The licensing subsidiary filed CBT returns before New Jersey’s enactment of the addback provision; once the parent corporation became obligated to add back the royalty expenses to its income, the licensing subsidiary ceased filing CBT returns, asserting that the parent’s royalty expense addback captured the income. In rejecting the subsidiary’s position, the court explained that the subsidiary was taxable under New Jersey’s CBT subjectivity provisions (specifically, the economic presence nexus standard), and that such provision and the royalty addback provision do not operate in the alternative, as neither provision contains a cross-reference to or an exception with respect to the other provision. The court also rejected the argument that requiring the subsidiary to file a return when the parent had already added back the royalty payments it made to the subsidiary would result in unconstitutional double taxation. The court explained that statutory and regulatory mechanisms existed to eliminate the possibility of double taxation, including the payor’s ability to assert relief under the unreasonableness exception to the addback statute and the Division’s “subject to tax” exception, as well as the payee’s ability to request discretionary relief from the Division (“Section 8” relief). Failing to take advantage of any of the relief mechanisms made the subsidiary’s claim of unconstitutional double taxation “questionable.” The court, nevertheless, left open the possibility for Section 8 relief once the subsidiary filed the returns and emphasized that the Division must ensure that it taxes such income only once. Spring Licensing Grp., Inc. v. Dir., Div. of Taxation, No. 010001-2010 (N.J. Tax Ct. Aug. 14, 2015).