Read our June 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 . 

• Residence Precedence? California State Board of Equalization Considers Issuing Formal Opinion in Taxpayer-Favorable Residency Ruling
The California State Board of Equalization (BOE) has issued a rare ruling on residency topics, finding in favor of individual taxpayers on two issues.
• SALT Pet of the Month: Pico
Meet Pico, the four–year-old Terrier mix belonging to Sutherland State and Local Tax Associate Stephanie Do and her husband, Ben.
• A Proposed Assessment Is Not an Assessment for Statute of Limitations Purposes in Florida
In a closely followed case, a Florida district court of appeal held that a proposed assessment is not an assessment for statute of limitations purposes.
• All Sales Final: Indiana Merchandise Return and Coupon Creation Services Not Taxable
The Indiana Department of Revenue determined that a taxpayer’s sales of merchandise return-related services to retailers are not subject to Indiana sales and use tax.
• Software Training Not Subject to Indiana Sales and Use Tax
The Indiana Department of Revenue found that software training is not subject to sales and use tax because it does not constitute tangible personal property.
• More Than Just a Little Bit – New Jersey Division of Taxation Says Convertible Virtual Currency Transactions, Like Bitcoins, Are Subject to State Sales and Use Tax, Corporation Business Tax and Gross Income Tax
The New Jersey Division of Taxation has issued a technical advisory memorandum (TAM) explaining New Jersey’s tax position that transactions involving convertible virtual currency— “electronic/digital money” with an equivalent or substitute value in real currency, such as bitcoins—are subject to state tax liability, including sales and use tax, corporation business tax and gross income tax.
• Found in Translation: Online Drop Shipment Facilitation Service Not Subject to New York Sales and Use Tax
The New York State Department of Taxation and Finance released an advisory opinion explaining how it will treat drop shipment facilitation services for sales and use tax purposes.
• The Sun Shines on Taxpayers: New York State Tax Appeals Tribunal Grants Appeal in Combined Reporting Case
In yet another taxpayer victory, the recently reconstituted New York State Tax Appeals Tribunal determined that the New York State Department of Taxation and Finance improperly denied the taxpayers’ amended returns, which were filed on a combined basis for the 2005 and 2006 tax years (i.e., prior to the 2007 and 2014 law changes).
• Tyler Pipe II? Washington Court of Appeals Rejects Transactional Nexus Argument, Upholds B&O Tax on Drop Shipments
The Washington Court of Appeals upheld a broad application of the Washington Business and Occupation (B&O) tax to sales between an out-of-state seller and out-of-state purchasers when the products are delivered in Washington.

 

Pico-2_updated.jpgMeet Pico, the four–year-old Terrier mix belonging to Sutherland State and Local Tax Associate Stephanie Do and her husband, Ben. They adopted this sweet girl over Christmas three-and-a-half years ago when she was left at a Baltimore fire station as a puppy.

Stephanie and Ben were told that their new puppy would become a large dog so they held off on naming her. When they realized that their pup had maxed out at 25 to 30 pounds and was not going to be a big dog, Ben, a chemical engineer, named her “Pico” – a metric measurement for one trillionth – i.e., really small.

Stephanie-Pico_updated.jpgPico is a very fast and agile girl who is known for scaling six-foot fences and climbing trees in her pursuit of squirrels. She loves to accompany her parents on long hikes and runs, and if she had it her way, this sociable girl would spend every waking moment with her mom and dad.

When she’s not busy chasing squirrels, she enjoys playing with/destroying her toys. Her favorite toys are the stuffed ones; she likes to poke a hole in them and then tear out all of the stuffing.

Pico is honored to be featured as Pet of the Month!

By Charles C. Capouet and Madison J. Barnett

The Indiana Department of Revenue determined that a taxpayer’s sales of merchandise return-related services to retailers are not subject to Indiana sales and use tax. The Department addressed the taxability of three services: (1) the Merchandise Authorization Service (MAS), which utilizes the taxpayer’s proprietary database and risk-scoring computer model to determine whether a retailer-client should accept its customers’ merchandise returns; (2) the Discount Coupon Service, which generates coupons for its retailer-clients’ customers when they make returns; and (3) the product integration services. The Department ruled that the taxpayer’s MAS and Discount Coupon Service were non-taxable services and did not constitute taxable tangible personal property, specified digital products, prewritten computer software or telecommunication services. Also, the MAS was not subject to Indiana sales tax because it was a customized information service. Further, the Discount Coupon Service was a non-taxable service because the coupons were customized to each of the retailer’s customers, the customers did not pay fees for individual coupons, and the fee was based on a percentage of sales generated by transactions in which the coupon is redeemed. Finally, the product integration services were non-taxable because they were professional or personal services not transferred in conjunction with tangible personal property. Ind. Revenue Ruling No. 2013-05ST (May 27, 2015).

By Evan M. Hamme and Open Weaver Banks

The New York State Department of Taxation and Finance released an advisory opinion explaining how it will treat drop shipment facilitation services for sales and use tax purposes. The petitioner uses proprietary software to create an Internet-based “hub” through which a web-based merchant orders products from a supplier and directs the supplier to ship the product directly to the end customer (i.e., drop shipments). The Department’s analysis focused on two components of the services: (1) transmitting information between merchants and suppliers (the transmission component); and (2) translating merchant data into a format compatible with the supplier’s computer systems (the translation component). Finding that the translation component is more valuable to merchants than the transmission component, because merchants could easily transmit information to suppliers through traditional means (e.g., mail or fax), the Department determined that the primary function of the services is the translation component. Further, since the translation component constitutes data processing, the Department concluded that the drop shipment facilitation services are not subject to sales and use tax. N.Y. Advisory Opinion, TSB-A-15(20)S (May 26, 2015).

By Charles C. Capouet and Andrew D. Appleby

The Indiana Department of Revenue found that software training is not subject to sales and use tax because it does not constitute tangible personal property. The Department audited the taxpayer and assessed additional use tax on its purchase of a software license agreement. Nearly half of the software license agreement’s cost was for remote software training. Following a protest and a hearing, the Department found that the training expenses were not subject to Indiana sales or use tax because: (1) the cost of the training was billed separately from the cost of the software, (2) the training expenses were accounted for separately in the purchaser’s dealings with the vendor, and (3) the cost paid for the training does not represent the purchase of “tangible personal property.” Ind. Letter of Findings No. 04-20140684, Ind. Dep’t of State Revenue (May 27, 2015).

By Robert P. Merten III and Prentiss Willson

The New Jersey Division of Taxation has issued a technical advisory memorandum (TAM) explaining New Jersey’s tax position that transactions involving convertible virtual currency— “electronic/digital money” with an equivalent or substitute value in real currency, such as bitcoins—are subject to state tax liability, including sales and use tax, corporation business tax and gross income tax. For purposes of the sales and use tax, the Division of Taxation will treat convertible virtual currency transactions as barter transactions, where both transacting parties give something of value to the other in order to receive something in value in return. As such, sales or use taxes will be due from both parties to the transaction. For purposes of the corporation business tax and the gross income tax, New Jersey is following the Internal Revenue Service’s lead towards treating convertible virtual currency like property, such that taxpayers will realize gains or losses on sales or exchanges of convertible virtual currency. The full New Jersey TAM can be found here. 

By Evan M. Hamme and Madison J. Barnett

The Washington Court of Appeals upheld a broad application of the Washington Business and Occupation (B&O) tax to sales between an out-of-state seller and out-of-state purchasers when the products are delivered in Washington. Although the taxpayer maintained a research and product development facility in Washington, none of the activities performed by the taxpayer at that facility were related to the sales in question. The court analyzed two types of sales: (1) sales that the taxpayer’s out-of-state customer directed the taxpayer to ship to the customer’s customer in Washington (“drop shipment sales”); and (2) sales made by the taxpayer’s out-of-state office to an out-of-state customer that were delivered to the customer’s facility in Washington (“national sales”). First, the court held that both categories of sales were subject to tax under the B&O imposition statutes based on the fact that the only transfer of possession took place in Washington, even if the buyer taking possession was not the taxpayer’s customer. The court disregarded two regulations cited by the taxpayer and interpreted the regulations to impermissibly narrow the B&O imposition statutes. The taxpayer then argued that the state could not rely on its nexus with the taxpayer as an entity, because the state lacked transactional nexus with both categories of sales. Citing Tyler Pipe, the court disagreed, holding that case law permits state taxation of transactions not directly related to a taxpayer’s in-state activities as long as such in-state activities “were significant in establishing and maintaining a market for [the taxpayer’s] goods in the state.” The court found that the taxpayer’s in-state market research and product development were significant in developing the taxpayer’s Washington market for the goods sold, and that Washington could therefore constitutionally tax both the drop shipment and national sales. Avnet, Inc. v. State of Wash., Dep’t of Revenue, No. 45108-5-II (Wash. Ct. App. Apr. 28, 2015).

By Zachary T. Atkins and Open Weaver Banks

In a closely followed case, a Florida district court of appeal held that a proposed assessment is not an assessment for statute of limitations purposes. The Florida Department of Revenue generally has three years to “determine and assess” any tax, penalty or interest due. The Department has long believed that issuing a notice of proposed assessment prior to the expiration of the three-year period satisfies the statute. After conducting a sales and use tax audit, the Department issued a notice of proposed assessment approximately two months before the expiration of the agreed-upon, extended statute of limitations period. The notice indicated that the proposed assessment would become a final assessment after 60 days unless the taxpayer submitted an informal protest. The taxpayer did not submit an informal protest but instead filed a complaint against the Department challenging the validity of the assessment on the grounds that it did not become final prior to the expiration of the statute of limitations. Although the statutory term “assess” was not defined in the general statute of limitations, the court looked to a separate provision in the tax statutes that tolls the “statute of limitations upon the issuance of final assessments” if the taxpayer follows certain informal conference procedures. In finding the Department failed to issue a timely assessment, the court concluded that the legislature could have used the broader term “assessments” if it believed that a proposed assessment was an assessment for statute of limitations purposes. Separately, the taxpayer and the Department had agreed to extend the statute of limitations period for the tax periods under audit to March 31, 2011. The district court of appeal rejected the trial court’s conclusion that the written agreement extended the statute of limitations period with respect to the first sales and use tax period to March 31, 2011, and the statute of limitations for each subsequent period by another month thereafter. Thus, the agreed-upon date applied to all of the tax periods under audit. Verizon Bus. Purchasing, LLC v. State of Fla., Dep’t of Revenue, No. 1D14-3213, 2015 WL 3622356 (Fla. 1st DCA June 11, 2015).

By Robert P. Merten III and Timothy A. Gustafson

The California State Board of Equalization (BOE) has issued a rare ruling on residency topics, finding in favor of individual taxpayers on two issues. First, the BOE found that the taxpayers established domicile in Washington three months earlier than the Franchise Tax Board claimed, because they purchased a fully furnished $2.8 million home, registered to vote, registered automobiles and obtained driver’s licenses in the state. Although the taxpayers only spent six days in Washington and 64 days in California during the pertinent time frame, they sufficiently established that their time spent in California was only for a “temporary or transitory purpose” between post-retirement trips. Second, the BOE concluded that the taxpayers were not liable for $3.7 million in California income tax on payments from a California partnership made to liquidate the newly retired taxpayer’s partnership interest because such payments were non-taxable distributions as opposed to taxable distributive shares or guaranteed payments with a California source. Because the amount at issue was more than $500,000, the BOE must follow its ruling with a written decision. The BOE is currently considering whether the written opinion should take the form of a precedential formal memorandum or a non-precedential summary decision. If the former, then taxpayers will be provided with official BOE California residency guidance for the first time in years. Appeal of Michael J. and Mary E. Bills, Cal. St. Bd. of Equal. (heard May 28, 2015).

New Jersey law contains a little-known, one-sentence provision with substantial implications for companies contesting corporate tax assessments in the New Jersey Tax Court: Filing a Tax Court complaint for one tax year causes the statute of limitations period for assessing additional tax for all subsequent open years to remain open—with no defined closing date—for any issues contested in the Tax Court complaint.

In their article for State Tax Notes, Sutherland attorneys Leah Robinson and Open Weaver Banks discuss how New Jersey corporate taxpayers may inadvertently waive the statute of limitations period for assessment by filing a Tax Court complaint. They also review implications for the law and suggest ways it could be best applied.

View the full article.