At the Multistate Tax Commission (MTC) Executive Committee Meeting in Spokane, Washington, the Arm’s-Length Adjustment Service (ALAS) Advisory Group provided an update on its transfer pricing effort. On May 7, 2015, the Executive Committee approved the Final Program Design for the transfer pricing program (the Program). After receiving approval from the MTC’s Executive Committee, ALAS sought to attain critical mass of states needed to launch the program.

ALAS began its efforts in June 2014. It spent approximately a year designing the Program in order to garner the support – including financial support – of at least seven states. When the Final Program Design was approved, only six states had agreed to participate: Alabama, Iowa, Kentucky, New Jersey, North Carolina and Pennsylvania. With interest lower than anticipated, ALAS continued to solicit state participation over the past three months, but to no avail.

At today’s meeting, incoming Executive MTC Director Greg Matson indicated that no additional states have joined the Program. Two additional states expressed interest, but have yet to formally join. In the coming months, the MTC will meet with four additional states to solicit participation.

Yesterday, the Multistate Tax Commission held its annual meeting in Spokane, Washington. The meeting is the annual event where full MTC member states approve model laws in their final version. The approved versions are then ready for the member states to adopt if they so choose. This year the MTC approved changes to the equitable apportionment provision of the MTC Compact; language edits to use “apportionable” rather than “business” income; edits to the financial institution apportionment regulations; and procedural changes to the MTC bylaws.

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Yesterday, the Multistate Tax Commission held meetings of its Litigation, Uniformity, and Strategic Planning Steering Committees. The meetings were generally dominated by discussions of evolving apportionment issues, including litigation and significant edits to existing regulations. The Uniformity Committee also advanced its new model “engaged in business” statute.

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The Michigan Supreme Court held that an electric utility’s transmission and distribution equipment used for both taxable and exempt purposes qualifies for a partial sales and use tax exemption. See Detroit Edison Co. v. Dept. of Treasury, No. 148753 (Mich. July 22, 2015). This marks the latest in a line of cases addressing whether transmission and distribution equipment is used in processing or manufacturing-like activities.

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Yesterday, the Multistate Tax Commission kicked off its annual conference and committee meetings with meetings of the Audit and Nexus Committees. The MTC’s Audit program continues to grow by adding Iowa, Pennsylvania, Rhode Island and Delaware to the program during the last fiscal year. The MTC Nexus Committee is responsible for administering the National Nexus Program, which includes monitoring policy developments, overseeing the Multistate Voluntary Disclosure Program, and providing legal support to state participants in litigating certain nexus issues. While the Audit Committee is largely closed to the public, the Nexus Committee did conduct much of its work in an open session.

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The Multistate Tax Commission’s Annual Conference and Committee Meetings are being held on July 27-30, 2015, in Spokane, Washington. On Tuesday, July 28, 2015, at approximately 1:00 pm PDT, an MTC working group will present this model market-based sourcing regulation working draft to the MTC’s Uniformity Committee. Many on the working group consider the working draft to be close to the regulation’s final form.

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By Michael Penza and Andrew Appleby

The California Court of Appeal held that California’s disparate treatment of intrastate and interstate unitary businesses discriminated against interstate commerce. California requires taxpayers engaged in a unitary business within and without California to calculate their taxable income using combined reporting, but provides taxpayers engaged in a unitary business wholly within California an election to calculate their taxable income either on a combined reporting or a separate reporting basis (referred to as “separate accounting” by the Court of Appeal). Harley-Davidson argued that the separate reporting election favored intrastate taxpayers by reducing tax liabilities, lowering compliance costs, and increasing their ability to use credits and net operating losses. The court agreed that the tax regime discriminated against interstate commerce, but remanded the case to the trial court to determine whether there is a legitimate justification for the discrimination, which could allow the regime to stand.

The court next considered whether two of Harley-Davidson’s subsidiaries had nexus with California. The subsidiaries at issue were special purpose entities (SPEs) created to securitize consumer finance loans associated with Harley-Davidson motorcycle sales. The SPEs did not have any employees of their own but did have directors and officers that overlapped with another Harley-Davidson subsidiary, Harley-Davidson Credit Corporation (HDCC). HDCC administered the securitization process and serviced loans held by the SPEs, and conducted some of these activities in California. The court held that HDCC acted as an agent for the SPEs and that the agent’s visits to California created nexus for the SPEs. The court determined that due process concerns were satisfied because HDCC’s activities on behalf of the SPEtargeted California. Commerce clause nexus concerns were also satisfied because HDCC’s California activities were “integral and crucial” to the SPEs’ businesses. It should be noted that the “integral and crucial” test previously applied by California courts in Illinois Commercial Men’s Assn. v. State Bd. of Equalization, 34 Cal. 3d 839 (1983), predates the U.S. Supreme Court’s “establish and maintain” the in-state market standard contained in Tyler Pipe Industries v. Dept. of Revenue, 483 U.S. 232 (1987). In the latter case, the court held that nexus may be attributed where it “establishes and maintains” a party’s market. Harley-Davidson, Inc. v. Franchise Tax Board, 187 Cal. Rptr. 3d 672 (Cal. Ct. App. 2015).

By Stephen Burroughs, Jonathan Feldman and Open Weaver Banks

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. The subsidiary (HoldCo) was a holding company for MassMutual’s non-insurance subsidiaries. The Department of Revenue argued that HoldCo’s interest payments to MassMutual and subsequent deductions did not arise from true debt because a commercial bank would not lend money to an unrelated debtor on the terms evidenced by the notes at issue. The Department also contended that the convertibility of HoldCo’s notes to equity evidenced a relationship inconsistent between that of an unrelated creditor and debtor. MassMutual claimed that its loans to HoldCo were not motivated by tax considerations, but primarily for the valid business purpose of boosting its risk-based capital score (RBC Score) and providing financing for HoldCo’s investments. 

The ATB first determined that the notes satisfied Massachusetts’ definition of bona fide debt, based on a 17-part test established under prior law. HoldCo issued the notes for a valid business purpose; improving MassMutual’s RBC Score allowed it to carry a lower regulatory reserve. Further, MassMutual was active in the credit markets as a third-party lender but operated under a different lending model than commercial banks, thus rendering comparisons to them irrelevant. 

Next, the ATB held that HoldCo’s interest payment deductions satisfied Massachusetts’ “unreasonable” exception to its related party interest add-back requirement. Already finding that the notes constituted bona fide debt, the ATB further found that the notes were entered into for a valid, non-tax business purpose, were supported by economic substance, and the interest deducted reflected fair value and consideration. Although the interest paid on the notes provided a tax benefit to HoldCo, the ATB stated that the lending arrangement was not entered into as part of a tax avoidance scheme, and it was appropriate for MassMutual to finance the expansion of HoldCo’s subsidiaries in a manner that benefitted the MassMutual business as a whole. Massachusetts Life Ins. Co. v. Comm’r of Revenue, Docket Nos. C305276, C305277 (Mass. App. Tax Bd. June 12, 2015).

By Madison Barnett and Jonathan Feldman

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). Practitioners have been anxiously awaiting word on whether the ruling would be appealed and for guidance on how to calculate the subtraction modification. The remaining issues in the case have been settled, and the Tribunal has issued a Final Consent Order, which includes the following:

  1. The parties agreed not to appeal the earlier TFT ruling.
  2. The individual owner’s subtraction modification was calculated by multiplying the partnership’s pre-apportioned, Georgia-adjusted income by the partnership’s apportionment factor in each state where it was subject to a qualifying tax (e.g., the TFT), then multiplying the result by the owner’s distributive share percentage.
  3. The TFT report year used for the above calculation is the report year that covers the accounting period coinciding with the taxpayer’s relevant tax year (i.e., the entity’s 2009 TFT report was used to determine the individual owner’s subtraction modification on his 2008 Georgia individual return).

Georgia resident owners of pass-through entities subject to the TFT should consider the impact of this case when filing their 2014 returns and the impact on all tax years open under Georgia’s statute of limitations. Rosenberg v. Riley, No. 1414626, Final Consent Order (Ga. Tax Trib. July 13, 2015).

We are pleased to announce that Amy F. Nogid has joined Sutherland’s State and Local Tax (SALT) practice as counsel in New York. Prior to joining Sutherland, Amy was of counsel at Morrison & Foerster LLP.

Amy represents clients in all aspects of state and local taxation matters at the administrative, trial and appellate levels, including the U.S. Supreme Court. She brings a wealth of knowledge in the areas of New York State and New York City tax issues, litigation and controversy matters, voluntary disclosures and multistate planning.

As a former assistant chief in the Tax and Bankruptcy Division of the New York City Law Department for more than 12 years, Amy brings extensive knowledge of a broad range of taxes, including income, franchise, sales and use, excise and other transaction-based taxes. She has also advised industry-leading clients across the country in unclaimed property matters, such as the treatment of virtual payables, gift cards, uncashed rebates and payroll cards.