By Olga Goldberg and Andrew Appleby

The Texas Court of Appeals held that a taxpayer was not entitled to elect the Multistate Tax Compact (MTC) three-factor formula because the Texas franchise (margin) tax is not an “income tax,” as defined in the MTC. Specifically, the court ruled that the franchise tax is not “imposed on or measured by net income.” Relying on the plain meaning, dictionary definition of “net income,” the court reasoned that all expenses must be deducted for a tax to qualify as an “income tax.” For franchise tax purposes, conversely, a taxpayer’s margin is computed by deducting a flat amount unrelated to expenses (e.g., 30%) or certain limited expenses (e.g., costs of goods sold). The court also rejected the taxpayer’s reliance on Int’l Bus. Machines Corp. v. Dep’t of Treasury, 852 N.W.2d 865 (Mich. 2014), which held that Michigan’s modified gross receipts tax was an “income tax” under the MTC. Because the Michigan tax was a “variation of net income,” the court determined that the tax was not “sufficiently similar” to Texas’s franchise tax.

Because the MTC election applies only to an income tax, the court did not decide the taxpayer’s two other issues: (1) whether the single-factor formula repealed the election by implication; and (2) whether the MTC is a binding, interstate compact. However, the opinion indicates that the Legislature intended to exclude the three-factor formula election when it restructured the franchise tax in 2006. Graphic Packaging Corp. v. Hegar, No. 03-14-00197-CV (Tex. App.—Austin July 28, 2015, no pet. h.).

By Stephen Burroughs and Amy Nogid

The Superior Court of Arizona, Maricopa County, rejected the Department of Revenue’s request that rental car companies be granted only prospective relief from the court’s earlier decision which declared the car rental charge illegal. The voter-approved surcharge was enacted for the Arizona Tourism and Sports Authority to finance the Arizona Cardinals’ football stadium and other tourism-related activities. The superior court, however, had declared it illegal because the Arizona Constitution requires that taxes relating to the operation or use of vehicles be used for highway-related purposes. Stadium financing and tourism promotion fell outside of this limitation. In its latest ruling, the superior court said that car rental companies are entitled to refunds under Arizona precedence interpreting McKesson v. Division. of Alcoholic Beverages & Tobacco. The court observed that refunds would result in a windfall to car rental companies because they generally pass the surcharge on to their customers. While the court noted that McKesson might permit prospective-only relief if retroactive application would result in a windfall to taxpayers, it also acknowledged that it was bound by two decisions of the Arizona court of appeals mandating retroactive relief when a tax is declared illegal. 

The court did not address whether a car rental company must refund the illegal tax to its customers prior to claiming a refund for itself. This may be in response to dicta from the resolution of a 2007 class action suit brought by customers challenging the same tax. There the court of appeals stated that because the incidence of the car rental surcharge fell on car rental companies, if it were declared illegal car rental companies would receive the refund and not be required to pass the refund on to customers. This stands in contrast to several other jurisdictions which generally require that vendors, as a prerequisite to a valid refund request, first refund the contested amounts to their consumers. Saban Rent-A-Car LLC v. Ariz. Dep’t of Revenue, TX 2010-00189 (Sup. Ct. Maricopa Cnty. July 28, 2015). 

Sutherland Asbill & Brennan LLP invites you to join us for a State and Local Tax Roundtable in Houston, Texas on September 10.This program will cover a variety of topics, including:

  • State Taxation of Commodities Trading Transactions 
  • SALT Issues in M&A 
  • Alternative Apportionment: Can Two Play that Game? 
  • Credits and Incentives 

Since late 2008, the New York State Department of Taxation and Finance has routinely taken the position that charges for application service provider services, software as a service, or other online services may be subject to New York sales tax as licenses of software. Some sellers began collecting sales tax on this basis, and the Department has audited and assessed many sellers who did not.

In their article for State Tax Notes, part one of a two-part series, Sutherland attorneys Leah Robinson and Evan M. Hamme provide a roadmap for challenging a “remote access” audit. While the article focuses on a New York audit, the approach should be considered in other states as well.

View the full article, reprinted from the July 27, 2015, issue of State Tax Notes.

On August 7, the Chicago Department of Finance delayed the effective date of the imposition of the Personal Property Lease Transaction Tax on cloud computing services from September 1, 2015, to January 1, 2016. However, the Department did not delay the effective date of the imposition of the Amusement Tax on streaming services. Chicago will seek to impose the Amusement Tax on streaming services beginning September 1, 2015.

View the full Legal Alert.

Read our July 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.

• Hog Wild: In Harley-Davidson, California Court of Appeal Finds Discrimination, Affirms Nexus
The California Court of Appeal held that California’s disparate treatment of intrastate and interstate unitary businesses discriminated against interstate commerce.
• SALT Pets of the Month: the Packard Crew
Meet Archon, Little Allu, Ifrit, Parunga and Zegan, all belonging to Damien Packard, user support coordinator in the Houston office, and his wife Chelsy.
• No Appeal From Georgia Tax Tribunal’s Decision on Texas Franchise Tax
Eight months ago, the Georgia Tax Tribunal held in Rosenberg that the Texas franchise tax (TFT) is a tax “on or measured by income” that qualifies for the pass-through entity owner’s subtraction modification available to individual Georgia residents (See prior coverage).
• Bridging the Gap: Illinois Provides Guidance on Videoconferencing Broker and Bridging Services
The Illinois Department of Revenue issued a General Information Letter explaining how it will apply retailers’ occupation tax (ROT) and telecommunications excise tax (TET) to videoconferencing services.
• A Reasonable Result in Massachusetts: Related Party Interest Deductions Allowed Under the Unreasonable Exception
In a significant taxpayer win, the Massachusetts Appellate Tax Board (ATB) held that intercompany interest payments from a wholly owned subsidiary to Massachusetts Mutual Life Insurance Company (MassMutual) were bona fide loans and were deductible for excise tax purposes.
• Out of Steam: Nuclear Power Company Loses Bid for New York Manufacturing Tax Credits
A New York appellate court denied a nuclear power company’s bid for manufacturing tax credits, finding that equipment used at two power plants to produce steam and water during the electricity generation process was not used for manufacturing.
• Room for Sale: Rent-to-Own Is a Retail Trade Under the Texas Franchise Tax
The Texas Court of Appeals ruled that Rent-A-Center is primarily engaged in retail trade and thus qualifies for the lower 0.5% franchise tax rate available to retailers and wholesalers.

 

Thumbnail image for IMAG1068_Fotor.jpgMeet Archon, Little Allu, Ifrit, Parunga and Zegan, all belonging to Damien Packard, user support coordinator in the Houston office, and his wife Chelsy.

Archon is a German Shepherd that celebrated his first birthday in May. Along with Little Allu, the Chilean rose hair tarantula, he was a birthday gift for Chelsy last year.

Of the many pets Damien and Chelsy have owned together, Archon is the first canine to join the Packard pack. This sweet boy enjoys visits to the dog park, training sessions and playing with the vacuum cleaner.

Archon and the vacuum cleaner weren’t always on friendly terms; it used to terrify him. Chelsy and Damien had the idea to scold the appliance as if it were another dog so Archon wouldn’t feel threatened. Now, whenever Chelsy takes the vacuum cleaner out of the closet, Archon immediately tries to play with it. He’ll puppy bow, bark and hop around.  Sometimes when it’s left out, Chelsy finds Archon sleeping next to it or licking it.

Archon dislikes the sounds of plastic bags and cardboard – the rustling, popping and tearing send him running for cover – usually to the safety of the computer room, under Damien’s desk. His favorite treats include ice cubes, peanut butter, yogurt and bully sticks, and his most treasured toy is a six-foot squeaker snake that he carries around everywhere.

Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for 20131228_200530_Fotor_Fotor_Collage_Fotor.jpgThe Packard household is not limited to only snakes of the squeaker variety. Damien and Chelsy also own two ball pythons, Parunga and Zegan. They, like Ifrit the veiltail betta fish, were rescued from a negligent pet store.Thumbnail image for 20150515_213915_Fotor_Fotor_Collage_Fotor.jpg

Both pythons are calm and gentle and prefer to stay in their terrariums. Feeding day is an exciting time for these two, and they definitely show it. Parunga gets what is commonly referred to as the “wobbles,” and Zegan will waggle his tail when he grabs his dinner. Archon loves to watch the snakes eat – Chelsy thinks it might be the smell of the feeder rats that Archon is really interested in.

Archon and his exotic siblings are honored to be featured as the July Pets of the Month!

Thumbnail image for 10308355_796746953670897_1683682816579929667_n_Fotor_Fotor.jpgThumbnail image for Thumbnail image for Thumbnail image for 20140527_213652_Fotor_Fotor.jpg

 

 

By Olga Goldberg and Madison Barnett

The Texas Court of Appeals ruled that Rent-A-Center is primarily engaged in retail trade and thus qualifies for the lower 0.5% franchise tax rate available to retailers and wholesalers. The Comptroller argued that the rent-to-own business is a rental service rather than the sale of merchandise in a retail trade. The court rejected the Comptroller’s argument, stating that “[t]he Tax Code asks whether revenues from Rent-A-Center’s activities in retail trade exceed those from activities in other trades, but the Comptroller frames the question as asking whether Rent-A-Center’s revenues from sales exceed its revenues from leases.” (Emphasis in original.) The court held that Rent-A-Center’s rental-purchase agreements were more like sales than leases because a customer can acquire title at any time by paying the purchase price, title to 97% of merchandise eventually passed to a customer, and items sold in an average of 20 months. Rent-A-Center, Inc. v. Hegar, No. 03-13-00101-CV, 2015 WL 3654559 (Tex. App. – Austin June 11, 2015, no pet. h.), mtn. for reh’g denied (July 27, 2015).

The specific issue raised by this case was resolved by the Legislature beginning with report year 2014. In 2013, the Legislature amended Tex. Tax Code § 171.0001(12) to expressly include “rental purchase agreement activities” in the definition of “retail trade.” 

By Mike Kerman and Timothy Gustafson

The Illinois Department of Revenue issued a General Information Letter explaining how it will apply retailers’ occupation tax (ROT) and telecommunications excise tax (TET) to videoconferencing services. The taxpayer that sought the letter acts as a broker to match customers that need videoconferencing services with affiliates that operate videoconferencing facilities. The taxpayer also provides “bridging” services, by connecting the customer’s videoconferencing device to an affiliate’s videoconferencing device through an IP address and monitoring the connection during the conference, and may also provide Internet service to the customer through an Integrated Services for Digital Network connection. The Department explained that a customer’s rental of an affiliate’s videoconferencing facility is not subject to ROT as long as no tangible personal property is transferred to the customer. Additionally, the Department noted that “telecommunications” subject to TET do not include value-added services in which computer processing applications are used to act on the form or content of information for purposes other than transmission. Thus, these services are not subject to TET as long as they are separated from taxable telecommunications charges in the company’s books and records. If the nontaxable service charges are not separated, the entire charge is taxable as a sale of telecommunications. Ill. Dept. of Rev., General Information Letter ST-15-0028-GIL (May 14, 2015). 

By Chris Mehrmann and Open Weaver Banks

A New York appellate court denied a nuclear power company’s bid for manufacturing tax credits, finding that equipment used at two power plants to produce steam and water during the electricity generation process was not used for manufacturing. The taxpayer argued that the process of creating steam and water – both qualifying “goods” for purposes of the credit – should be viewed separately from the process of generating electricity, which is excluded from the credit. In rejecting the taxpayer’s claim, the court explained that the power plants were engaged in the “unitary process” of generating electricity, and that it was inappropriate to “artificially divide” the production of water and steam from the production of electricity for tax purposes. Even after analyzing the claimed equipment in isolation, the court found that it was not used for manufacturing: “Here, the water that is converted to steam by petitioner’s assets is then converted back to its original form as water and then to steam again in an ongoing, continuous cycle that makes no permanent change in the water and yields no final product. This is more akin to recycling than to manufacturing.” Constellation Nuclear Power Plants LLC v. Tax Appeals Tribunal, 2015 NY Slip Op. 06183 (N.Y. App. Div. July 16, 2015).