On June 2, 2015, the U.S. House of Representatives Judiciary Committee’s Subcommittee on Regulatory Reform, Commercial and Antitrust Law conducted a hearing on three state tax bills: the Mobile Workforce State Income Tax Simplification Act, the Digital Goods and Services Tax Fairness Act, and the Business Activity Tax Simplification Act.
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By Nicole Boutros and Andrew Appleby
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). At the lower level, the administrative law judge (ALJ) found that the group did not satisfy the combined reporting filing requirements because it failed to prove the existence of a unitary business and failed to prove that filing on a separate return basis resulted in a distortion of the group’s income (a required element for the tax years at issue).
In reversing the ALJ decision, the Tribunal applied the Mobil 3-factor unitary test (functional integration, centralized management and economies of scale) to determine that the entities were engaged in a unitary business. Specifically, the Tribunal found that the entities (1) were functionally integrated by engaging in the same activity of selling software and related services (in the same or related lines of business), despite the differences between the specific products and services; (2) had centralized management through the corporate strategic planning, budgeting and central office functions (accounting, tax, insurance, legal, human resources, purchasing, marketing and technology); and (3) obtained economies of scale through consolidated purchasing (achieving “significant discounts and reduced costs”), consolidated debt service (subsidiary guarantees, factoring receivables and negative borrowing covenants), and cross-selling of products and services.
Further, the Tribunal determined that distortion resulted from separate filings because the parent: (1) provided the centralized management functions to the subsidiaries without reimbursement; (2) provided the centralized cash management system without reimbursement and access to interest free loans; and (3) benefited from reduced borrowing costs because of factoring the receivables. The Tribunal acknowledged that many of the factors that demonstrated a unitary business also gave rise to a distortion of income. In the Matter of the Petitions of SunGard Capital Corp. & Subsidiaries et al., DTA Nos. 823631, 823632, 823680, 824167, 824256 (N.Y. Tax App. Trib. May 19, 2015).
Read our May 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: Callie and Cutie Meet Callie and Cuite, aka “Callie Poo” and “Cutie Pie”, the nine-and-a-half-year-old Domestic Short Hairs belonging to Margie Tiffert, Senior Manager, State Taxes at Fluor Corporation. |
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| • | Hubba, Hubba, Hubba! Money, Money, Money! Who Do You Trust? California and North Carolina Differ on the Constitutionality of Taxing Undistributed Foreign Trust Income The California Franchise Tax Board (FTB) issued an information letter explaining that a trust is taxable in California if any of the following three conditions are met: (1) the trust has income from California sources; (2) a trustee is a resident of California; or (3) a non-contingent beneficiary is a resident of California. |
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| • | Tennessee Follows Illinois and Expands Direct Placement Tax on Non-Admitted Insurance Illinois enacted a direct placement tax on non-admitted insurance in 2014. However, there is a strong movement in Illinois to repeal or narrow the tax. |
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| • | Better Out than In: Texas Court Upholds Property Tax Assessment on Stored Natural Gas A Texas court ruled that natural gas stored in an underground reservoir is subject to property tax, whether or not the gas is in interstate commerce. |
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| • | Tax-Free Conferencing: Vermont Commissioner of Taxes Rules Conference Bridging and Meeting Collaboration Software Services Not Subject to Sales Tax The Vermont Commissioner of Taxes determined that conference bridging and meeting collaboration software services provided to Vermont customers were not subject to sales and use tax. |
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| • | Washington Plays the Name Game: Domain Name Registration Services Are Subject to Sales Tax The State of Washington Department of Revenue issued public guidance explaining that the initial sale of a domain name by a registrar is subject to retail sales or use tax. |
Meet Callie and Cutie, aka “Callie Poo” and “Cutie Pie,” the nine-and-a-half-year-old Domestic Short Hairs belonging to Margie Tiffert, Senior Manager, State Taxes at Fluor Corporation.
These sisters have been with Margie since they were eight weeks old. Margie hadn’t planned on going home with two kittens the day she adopted them, but when she was told they were littermates and had never been separated – she couldn’t leave with only one.
Cutie (the larger one) thinks she is the world’s biggest paperweight. Whenever Margie is working at her desk at home, Cutie likes to make herself comfortable on top of a pile of papers, forcing Margie to pull them out from under her to look at them.
Both girls are a bit shy. When the doorbell rings, they head under the bed (or at least under the comforter). Visitors won’t see them for an hour or more, and then two cute little faces will peer around the corner. Eventually, once they are at ease, Callie and Cutie will allow a lucky guest to pet them.
They are not timid at all when it comes to treats and love nearly all kinds – except the healthy ones like grain free or tartar control. They are particularly fond of deli ham. Margie wouldn’t recommend making a sandwich without sharing. She also doesn’t recommend leaving your drink unattended. One day she came back in the room and caught Callie drinking from her glass. Margie wonders how many other beverages she’s unknowingly shared with the girls over the years!
By Olga Jane Goldberg and Open Weaver Banks
A Texas court ruled that natural gas stored in an underground reservoir is subject to property tax, whether or not the gas is in interstate commerce. Without actually deciding whether the natural gas was in interstate commerce, the Houston Court of Appeals (1st District) held that tax on the stored gas did not violate the Commerce Clause of the U.S. Constitution. The court took care to distinguish Peoples Gas, Light, and Coke Co. v. Harrison Central Appraisal District, 270 S.W.3d 208, 218-19 (Tex. App. – Texarkana 2008, pet. denied), in which the Texarkana Court of Appeals exempted natural gas from property tax because its owner, a natural gas marketer, had no substantial nexus with Texas. The Houston court stressed that Peoples Gas did not have any employees or facilities in Texas; did not have any control over where the unrelated, interstate pipeline company stored Peoples’ natural gas; and had an existing contract to deliver the gas to Chicago. Conversely, ETC Marketing, Ltd., maintained offices and employees in Harris County, Texas; specifically contracted to store its natural gas with its intrastate affiliate, Houston Pipeline; and had not pre-sold the gas stored in the Harris County reservoir to any out-of-state customers. Thus, the court found ETC Marketing had substantial nexus because it purposefully chose to store the gas in Texas “to serve its own business purpose.” ETC Marketing, Ltd. v. Harris County Appraisal District, No. 01-12-00264-CV, 2015 WL 2090399 (Tex. App. – Houston [1st Dist.] May 5, 2015).
A recording of the Sutherland SALT Quick Call: Deciphering Wynne with Professor Walter Hellerstein is now available. In this Quick Call, Jeff Friedman and Professor Hellerstein discuss the U.S. Supreme Court’s decision in Maryland Comptroller v. Wynne and its implications.
By Jessie Eisenmenger and Andrew Appleby
The State of Washington Department of Revenue issued public guidance explaining that the initial sale of a domain name by a registrar is subject to retail sales or use tax. A domain name is a unique name that allows users to access a website without using the website’s Internet Protocol (IP) address. Individual users cannot access the global domain name clearinghouse, but instead must use a third-party domain name registrar to purchase a domain name. Under Section 82.04.050(8)(A) of the Revised Code of Washington (Code), taxable retail sales include sales of digital automated services to consumers. A digital automated service is defined under Section 82.04.192(3) of the Code as “any service transferred electronically that uses one or more software applications.” In a prior determination, Det. No. 11-0081, 32 WTD 46 (2013), the Department determined that domain name registration services are digital automated services because the registrar transfers the domain name to the purchaser electronically. In this guidance, the Department makes clear that the initial sale of a domain name by a registrar is a digital automated service subject to retail sales and use tax. Washington Department of Revenue, Tax Topics: Domain Name Registration Services (May 7, 2015).
Illinois enacted a direct placement tax on non-admitted insurance in 2014. However, there is a strong movement in Illinois to repeal or narrow the tax. Tennessee has now legislatively expanded its direct placement tax on non-admitted insurance, falling in line with many other states, including Illinois. Previously, Tennessee imposed a direct placement tax only on limited lines of insurance (such as marine insurance). Many states are now focusing on direct placement taxes after the Nonadmitted and Reinsurance Reform Act (NRRA) altered the tax landscape. The NRRA, part of the Dodd-Frank legislation, mandates that only an insured’s home state may impose tax on premiums paid for non-admitted insurance. Tenn. SB 82, amending Tenn. Code Ann. § 56-2-411.
By Michael Penza and Timothy Gustafson
The California Franchise Tax Board (FTB) issued an information letter explaining that a trust is taxable in California if any of the following three conditions are met: (1) the trust has income from California sources; (2) a trustee is a resident of California; or (3) a non-contingent beneficiary is a resident of California. The letter elaborated that where a trust accumulates income from both California and foreign sources, California taxes 100% of the California source income, plus a percentage of the foreign source income reflecting the proportion of trustees and beneficiaries residing in California to trustees and beneficiaries residing outside of California. California FTB Information Letter No. 2015-02 (April 21, 2015).
The information letter is consistent with the California Supreme Court’s ruling in McCulloch v. Franchise Tax Board, 390 P.2d 412 (Cal. 1964), which held that California could tax a foreign trust’s undistributed income based on a beneficiary’s California residence without violating the federal Constitution. A North Carolina Superior Court, however, reached the opposite conclusion in The Kimberley Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue. In Kaestner, the trust’s only connection to the state was through its beneficiary, a North Carolina resident. The trust did not hold any real or personal property in North Carolina; it did not generate any income from direct investments in North Carolina; it did not maintain any records in North Carolina; and its sole trustee did not reside in North Carolina. Accordingly, the court held that the federal Due Process Clause prevented North Carolina from taxing the trust’s undistributed income because: (1) the trust did not have a physical presence in the state, or derive any income from sources within the state; and (2) the trust did not receive any benefits from the state that could justify the tax imposed. Similarly, the court held that the Commerce Clause prevented the state from taxing the trust because: (1) the trust did not have substantial nexus with the state; and (2) the tax was not fairly related to the services provided by the state. The Kimberley Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue, Docket No. 12 CVS 8740 (N.C. Super. Ct., April 23, 2015).
Following Monday’s U.S. Supreme Court decision that Maryland’s personal income tax regime is unconstitutional, join Sutherland SALT and Professor Wally Hellerstein, University of Georgia Taxation Law Professor and author of State Taxation, on Thursday, May 21 at 2:00 p.m. EST for a discussion including an analysis and potential implications of the Court’s ruling. To learn more or to register, click here.
