New Jersey’s related-member addback provision has five statutory exceptions, but only one is really worthy of comment.
In their article for State Tax Notes, Sutherland attorneys Leah Robinson and Open Weaver Banks examine the exceptions to New Jersey’s related-member addback provision, focusing on the only exception successfully relied on in the state’s tax court—the unreasonable exception.
View the full article reprinted from the March 9, 2015, issue of State Tax Notes.
A day after issuing its decision in Direct Marketing Ass’n v. Brohl, the U.S. Supreme Court decided Alabama Department of Revenue v. CSX Transportation, Inc. The Court held that a rail carrier can show discrimination under subsection (b)(4) of the Railroad Revitalization and Regulatory Reform Act of 1976 by demonstrating that it is subject to differential tax treatment compared to its competitors, but that the tax disparity is permissible if the competitors are subject to another comparable tax or if the state offers another sufficient justification.
View the full Legal Alert.
The Arm’s Length Adjustment Service Advisory Group of the Multistate Tax Commission continued its transfer pricing effort with a teleconference today to discuss its training and implementation program. This initiative has extended over a year, and the MTC is aiming for approval from the Executive Committee by May 2015. States participating on this call included: New Jersey, Connecticut, Georgia, Kentucky, North Carolina, Florida, Iowa, Alabama, Pennsylvania and the District of Columbia.
View the full Legal Alert.
By Jonathan Maddison and Timothy Gustafson
The Indiana Department of Revenue determined that forced combination of an Indiana taxpayer, its wholly owned disregarded entity and its out-of-state parent company was appropriate where the disregarded entity generated 92% of the federal consolidated group’s sales but only 0.14% of the consolidated taxable income for the taxpayer. The taxpayer was a member of a federal consolidated group of companies in the business of manufacturing, distributing and selling consumer goods, and owned a single-member disregarded entity responsible for distributing the consolidated group’s products to third-party customers. At audit, the Department found that the disregarded entity accounted for 92% of the consolidated group’s sales but reported its “Cost of Sales” at nearly three times the “Cost of Sales” reported by the entire consolidated group because the parent company increased the costs of goods sold for intercompany sales to the disregarded entity by 80%. The Department also found the income of the taxpayer was a meager 0.14% of the consolidated taxable income despite the fact that the average taxable income of the consolidated group was generally in the billions. In response, the taxpayer produced a transfer pricing study to justify its reporting position. The Department, however, determined that “transfer pricing studies are not Indiana-approved vehicles for justifying tax expenses through controlled party profits,” and noted the “arms-length” prices in the study had not been revised in over 30 years. The Department did use the study to further justify its decision to force combined reporting, though: “the audit noted that the [transfer pricing] study demonstrated that the Parent Company exerted significant control over its affiliates, including Taxpayer and Risk-Free Distributor and concluded that the entities were unitary and should file on a combined basis.” Ind. Dep’t of State Revenue, Letter of Findings No. 02-20130641 (posted Feb. 25, 2015).
Today the U.S. Supreme Court unanimously held in Direct Marketing Ass’n v. Brohl that the Tax Injunction Act does not bar Direct Marketing Association’s federal lawsuit against Colorado’s sales tax reporting regime. The substantive challenge to the constitutionality of the reporting regime will continue at the Tenth Circuit. Continue reading to find out which the Court held, and which Justice indicated that it was time for the Court to reconsider Quill.
View the full Legal Alert.
Proposed revisions to the Uniform Unclaimed Property Act were under debate this past week in Washington, DC as the Uniform Law Commission Committee to Revise the Uniform Unclaimed Property Act continued the process of crafting a new Uniform Act. The Drafting Committee focused on seven priority issues, including (1) the definition of address; (2) gift cards and stored value cards; (3) life insurance; (4) securities; (5) presumptions of abandonment; (6) definition of holder; and (7) burden of proof.
View the full Legal Alert.
Read our February 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.
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Rely at Your Own Risk: Taxpayer Properly Applies Georgia Regulation, Loses The Georgia Tax Tribunal held that for sales and use tax purposes contractors are per se consumers of tangible personal property and thus are ineligible for: (1) the sale for resale exclusion, and (2) a regulatory exclusion for property temporarily stored in Georgia while in interstate commerce. |
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SALT Pet of the Month: Scout Meet Scout, the handsome 13-year-old German Short Hair belonging to Denise Helmken, Sr. Manager, State Income and Franchise Tax at General Mills. Denise inherited Scout three and a half years ago. |
| Indiana Sees Distortion, Attacks Intellectual Property Arrangement The Indiana Department of State Revenue upheld an audit determination that an intellectual property arrangement between a parent company and its wholly owned subsidiary distorted the parent company’s income. |
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Financial Institution Cannot Assign Loans Based on Activities of Third Parties, Says Massachusetts Supreme Judicial Court The Massachusetts Supreme Judicial Court refused to allow a taxpayer, a financial institution, to assign its loan portfolios based on the location of third-party loan servicing activities for purposes of calculating its financial institution excise tax property factor. |
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A Real Loss for New York: ALJ Rejects Hypothetical Application of Net Operating Loss A New York State Division of Tax Appeals Administrative Law Judge held that for banking franchise tax purposes a taxpayer did not have to utilize a net operating loss carryover in a year in which the taxpayer did not pay tax on its entire net income base. |
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Oklahoma Tax Commission Sounds Off on Whether Background Music Is Subject to Sales Tax The Oklahoma Tax Commission determined in a letter ruling that certain sales of background music are subject to Oklahoma state sales tax. |
| South Carolina Court Changes the Channel on Cost of Performance Sourcing The South Carolina Administrative Law Court found that South Carolina does not source sales of services with a strict cost of performance method. |
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Virginia Supreme Court Holds That State Tax Commissioner’s Interpretation Prevails Over County Commissioner’s Interpretation in BPOL Case The Virginia Supreme Court held that the Arlington County Commissioner must defer to the Virginia Tax Commissioner regarding the methodology for calculating a local Business, Professional, and Occupational Licenses tax deduction. |
| Washington State Maintains the Straight and Narrow Path: DOR Finalizes Interim Policy on Getty Images Case The Washington State Department of Revenue issued an Excise Tax Advisory making clear that Getty Images, Inc. v. City of Seattle, 260 P.3d 926, 163 Wash. App. 590 (Wash. Ct. App. 2011), does not represent a major departure from established law in the context of affiliate transactions for purposes of the state’s business and occupation tax. |
Meet Scout, the handsome 13-year-old German Short Hair belonging to Denise Helmken, Sr. Manager, State Income and Franchise Tax at General Mills. Denise inherited Scout three and a half years ago. Since he is an indoor dog and a sweetheart, how tough could he be? Well, during his first week at home, Scout managed to put a three foot-hole in the screen door when he decided he had enough of the outdoors and was ready to be back inside. Thankfully, he has since learned to wait for the door to be opened for him and has not made additional doggy doors.
Scout will warm his way into your heart, even if you are not a dog person. 
Scout enjoys dining on just about anything that’s edible and is the perfect height for eating directly off the counter if you are not watching. He has helped himself to more than one dessert and has eaten an entire stick of butter. He’s also been caught foraging for treats in Denise’s purse and has chewed packs of gum and tubes of chapstick.
This sweet boy considers himself a lap dog and is an avid TV viewer – Scout’s favorite program is “Too Cute” on Animal Planet. Scout is so pleased to be February’s Pet of the Month!
By Zachary Atkins and Andrew Appleby
The Indiana Department of State Revenue upheld an audit determination that an intellectual property arrangement between a parent company and its wholly owned subsidiary distorted the parent company’s income. The parent company, a separate-return filer for Indiana, adjusted gross income for tax purposes, and transferred to the subsidiary, in an I.R.C. § 351 transaction, the right to sublicense the parent company’s intellectual property. The subsidiary was not required to pay royalties to the parent company for the use of the intellectual property. The subsidiary sublicensed the intellectual property to foreign affiliates in exchange for royalties, which the subsidiary paid as non-taxable dividends to the parent company. The parent company reported considerable expenses, including expenses related to the maintenance, development, and enhancement of the intellectual property, and large net operating losses on its Indiana returns for the years in question. The subsidiary, in contrast, reported nominal expenses while collecting more than $200 million in royalty income. The Department concluded that the arrangement, which it characterized as non-arm’s-length, was distortive because it allowed the parent company to claim significant expenses while earning substantial income in the form of non-taxable dividends. Exercising its discretionary authority to allocate the Indiana income of related entities to fairly reflect a taxpayer’s Indiana income, the Department allocated the subsidiary’s royalty income to the parent company to correct the perceived distortion. Ind. Dep’t of State Revenue, Letter of Findings No. 02-20140358 (posted Jan. 28, 2015)
By Robert P. Merten III and Open Weaver Banks
The Oklahoma Tax Commission determined in a letter ruling that certain sales of background music are subject to Oklahoma state sales tax. The Commission was asked to provide written guidance on whether state sales tax would apply to the provision of background music to customers paying monthly fees for the music, either via satellite stream to a receiver, or via music disc or Internet download to a music player. The Commission determined that to the extent the transmission of music itself is not tangible (i.e., via satellite stream or Internet download), and the monthly fees associated with the music delivery are separately stated from the sale or lease of any tangible personal property, the fees paid by the customer for such music are not subject to Oklahoma sales tax. On the other hand, the Commission ruled that charges for the sale or lease of any tangible receiving equipment, music players or music discs are subject to Oklahoma sales tax. Therefore, although the background music may not be the primary focus to its audience, it is still a taxable focus for the state of Oklahoma. Oklahoma Tax Commission Letter Ruling LR-14-008 (May 18, 2014).
