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).

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).