Meet the marvelous Mr. Momo! Donning a name fit for a (sleepy) god, this two-year-old tabby cat reigns supreme in the home of Olivia Dibb, a SALT staff attorney based in Atlanta.

Olivia brought Momo (short for Morpheus) home after a serendipitous visit to see a group of foster kittens. Momo’s quick nap in Olivia’s lap sealed the deal, leading to a life of luxury filled with endless naps and an abundance of snacks. This mischievous kitty has a particular fondness for treats that are off-limits, like chocolate, always keeping Olivia on her toes.

When he’s not on a snack hunt, Momo is on a mission to open every closed door in sight, firmly believing in the mantra “sharing is caring.” His curiosity knows no bounds!

Welcome to the SALT Pet of the Month family, Momo! 

The Texas Comptroller of Public Accounts held its annual briefing in Austin on September 17 and provided taxpayers with updates regarding audit staffing shortages, pending litigation, recent guidance and related topics.

Solutions for a Texas-Sized Audit and Hearings Backlog

Audit Assistant Director Rosie Julius said that the agency continues to struggle with staffing issues due to increased hiring competition from oil and gas industry, consultancies and the IRS. The Comptroller is roughly 100 auditors short of its target staffing level and hopes to alleviate the problem with changes to its qualification requirements, hiring cycles and office-specific staffing targets. In the past five years, staffing levels at the audit division have fluctuated from a high of 589 to a low of 445, and the Comptroller’s audit volume targets do not change when staffing levels drop. Given the influx of new, inexperienced auditors, taxpayers are encouraged to reach out to audit supervisors if they experience service issues.

The Audit Division implemented the following procedures this year to help increase the efficiency of audits, such as:

  • Bringing forward assignments that use prior audit findings and error percentages to apply to current audit period. (Not available for assignments that were previously settled).
  • Redistributing audits from the Dallas and Houston offices to other offices with staffing ability (or remote auditors), but assigning local auditors for taxpayers that want field visits.
  • Using contract tax examiners for smaller audits. These 35 contractors have completed 1,055 assignments and refunds in FY 2024. Notably, these contractors have used personal email addresses and computers, which raised privacy concerns for some taxpayers.
  • Allowing auditors to approve or deny the research and development (R&D) credit rather than requiring all R&D credit issues to be handled by HQ staff. (Although HQ still appears to be heavily involved in many R&D cases).

The Audit Division is supported by the new Tax Resolution Section of the Hearings Division, which Senior Counsel for Tax Resolutions Matt Jones recently transferred to. This section also offers Independent Audit Review Conferences (IARC), which can help resolve audits before they are billed. The approximate turnaround time for a decision after an IARC is 90 days from the date of the conference but has been quicker recently due to the low volume of conferences.

Hearings and Tax Litigation General Counsel Jim Arbogast said that a number of R&D hearings are pending and his division is working on reducing the high amount of “aging” cases that have been pending over two years. Tax Hearings Attorney Supervisor Dan Neuhoff added that since September 2021, the number of total hearings has crept up to about 1,700 for a staff of 15 hearings attorneys and two supervisors. Tax Litigation Attorney Bree Boyett said that the Comptroller is willing to consider settlement offers from taxpayers interested in having a more expedient resolution to their cases and that approximately two thirds of cases are settled. 

Texas Tax Policy and Guidance

Tax Policy Director Jenny Burleson said that her division is issuing fewer private letter ruling (“PLR”) requests in favor of publishing more regulations in a timely manner. If a taxpayer really wants a PLR and is willing to wait, they should reach out to the tax policy division directly.

Direct Tax Team Lead Julian Daniels (J.D.) highlighted recent franchise tax developments, including the increase of the no tax due (NTD) threshold from annualized total revenue of $1 million to $2.47 million. See Tex. Tax Code § 171.002(d). The tax policy team also released two recent audit memos on benefits for the compensation subtraction (202310005M) and determining the statute of limitation when a taxpayer requests an extension for the report period (202408001M).

Indirect Tax Team Lead Julio Mendoza-Quiro also covered a myriad of guidance released by the Comptroller since the last annual briefing. Highlights include:

Rule changes:

  • Proposed Rule 3.330 (Data Processing Services), was published in the Texas Register on September 13, 2024 with significant revisions to the current rule, including the expansion of “data processing” to specified online services and revocation of the “essence of the transaction” test for data processing transactions in favor of an “ancillary” test. This proposed rule was also the subject of a recent op-ed by Comptroller Hegar. Eversheds Sutherland is closely monitoring Proposed Rule 3.330, with separate alerts forthcoming. The public comment period for this rule closes October 13, 2024.
  • Rule 3.334 (Local Sales and Use Taxes), was adopted and effective July 4, 2024 and is subject of a trial set for October 14, 2024. Some municipalities with processing facilities object to the sourcing provisions in the rule which prevent them from assessing local sales taxes on orders.

Memorandums:

Private Letter Rulings:

  • 202402021L – Stating that tax applies to lump-sum monthly rental charge covering the rental of equipment, software, leasehold improvements, and training services.
  • 202402023L – Holding that a taxpayer’s website analytics products and services are not information services, but rather taxable as data processing or as the sale or license of software. (See also 202402020L addressing the taxability of website design, marketing and consulting services).
  • 202407022L – Determining that materials incorporated into the construction of railroad tracks or roadbeds (“riprap”) are essential to the operation of locomotives and trains and are exempt from sales and use tax. This includes items such as sub-ballast, riprap, and steel and precast culverts.

Noteworthy Cases

Cases highlighted during this year’s annual briefing include:

  • Hibernia Energy LLC v. Hegar – The Supreme Court of Texas declined to review this case in which the state argued that a taxpayer’s gains the sale of oil and gas property, which it did not include on line 11 of schedule K of its federal partnership tax returns were reportable as income. This case is significant because it is the first to address how flow-through status for federal purposes is converted to taxable entity status for Texas franchise tax. 
  • Anadarko Petroleom Corp v. Hegar – A dispute regarding whether a $4 billion payment related to the Deepwater Horizon oil spill is a cost of goods sold for franchise tax purposes.
  • NuStar Energy LP v. Hegar – A case where the Comptroller’s position is that a taxpayer’s bunker fuel sales are sourced to Texas despite the fuel being purchased by out-of-state customers and a federal ban on the use of this fuel within 200 miles of the U.S. coast.
  • RJR Vapor v. Hegar – A dispute about whether a taxpayer’s pouches (VELO) containing nicotine isolate were taxable as a tobacco product.
  • Geo Group Inc. v. Hegar – A case concerning whether a for-profit prison company is an instrumentality of the state such that it is entitled to the government sales and use tax exemption.

Finally, Comptroller staff noted that future tax cases will be heard by Texas’ new Fifteenth Court of Appeals. The court has exclusive statewide civil intermediate appellate jurisdiction over appeals involving the State and its officers and challenges to the constitutionality of a state statute, such as a tax law. The court also has exclusive jurisdiction over appeals from the Texas Business Courts, involving cases dealing with business disputes valued at more than $10 million.

A Steady Economic Outlook

In his opening remarks, Comptroller Glenn Hegar noted that the state continues to have healthy cash reserves and rainy-day funds compared to peer states. Revenue Estimating Division Director Tetyana Melnyk reported that the economic growth for Texas is stable with slightly higher growth rates expected for 2024 and slightly lower than average growth rates expected for 2025. Inflation also helped Texas revenues by contributing approximately 18 billion in additional sales tax collections over the past three years. Texas’ sales tax inflation boost offset the impact of sales tax declines associated with the depletion of excess pandemic-related household savings, which appear to have been completely exhausted around March of 2024. Where any of Texas’ surpluses will make lawmakers amenable to taxpayer-friendly changes in the next legislative session remains to be seen and will be covered in next year’s Texas Comptroller Annual Briefing.

Coverage of Previous Briefings:

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: Earlier this year, the American Catalog Mailers Association (ACMA) successfully challenged California’s recent guidance on P.L. 86-272, modeled after the Multistate Tax Commission’s (MTC) revised P.L. 86-272 guidance. AMCA recently filed a motion for summary judgement in which other state to challenge a state regulation that is based on the MTC’s revised P.L. 86-272 guidance?   

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!

On Wednesday, September 18, SALT attorneys Michele Borens, Jeff Friedman, Maria Todorova and Jeremy Gove will provide various SALT updates to TEI’s Seattle Chapter.

Sessions and speakers include:

  • Jeff Friedman – WA DOR update
  • Michele Borens, Jeremy Gove – To Pay or Not to Pay, That is the Question!
  • Jeff Friedman, Maria Todorova – Are You Gross? Net?
  • Michele Borens, Jeff Friedman, Maria Todorova – Uniformly Not Uniform

At long last, the California Franchise Tax Board (FTB) issued a Notice of Proposed Rulemaking today to amend FTB’s market sourcing regulation: California Code of Regulations, title 18, section 25136-2 (“Reg. 25136-2”). This is the latest step in a long journey that began over seven years ago, when FTB held its first interested parties meeting (IPM) on the subject in January 2017. After five additional informal IPMs, each with its own iteration of draft amendments, the governing three-member Board authorized the agency to begin the formal amendment process in September 2021. Now, three years later, that process begins.

The proposed amendments largely mirror those found in the draft circulated in advance of FTB’s last informal IPM in June 2021. Among other things, the amendments include simplifying presumptions for sourcing receipts from services related to real property, tangible personal property, and individuals, special sourcing rules for receipts from asset management services, and a special assignment rule for professional services provided to more than 250 customers. See our prior coverage (here and here) for additional information on the proposed amendments and background on the entire process. If adopted, the amendments will apply to taxable years beginning on or after January 1, 2024.

FTB will accept written comments on the proposed amendments until October 31, 2024. FTB also will hold a public hearing on the draft language if it receives a written request for a hearing at least 15 days prior to the close of the comment period.

From back-to-school shopping to packing lunchboxes, it’s clear the new school year has already begun! Let’s look forward to another season of growth and early mornings as we move into fall.

Amidst the excitement of the new school year, we gathered some photos from members of our Eversheds Sutherland SALT family. Join us in celebrating these young scholars and wishing them a successful year! 

1: Legal secretary Melissa Bragg’s daughters Madelyn (5th grade) and Emma (11th grade)

2, 4: Associate Cat Baron’s son Beau

3: Partner Jonathan Feldman’s son Micah (6th grade)

5: Counsel John Ormonde’s daughters Audrey and Betsy

6: Paralegal specialist Jaime Lane’s son Cooper (9th grade) and daughter Cassidy (7th grade)

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: Which state’s supreme court recently agreed to hear a case involving the denial of a sales and use tax exemption to a private correctional facility because it failed to establish that it was an agency or instrumentality of the state or federal government?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!

The Iowa Department of Revenue ruled that while a data center property owner and its tenant can both independently qualify for the sales tax exemption for data center businesses, the property owner and the tenant cannot aggregate their investments to meet the minimum investment requirement. Iowa law provides a sales tax exemption for data center businesses for the price of computers and equipment necessary for maintenance and operation of the data center business and property. Iowa Code § 423.3(95). To qualify for the exemption, the businesses must meet certain requirements, including a minimum investment made at an Iowa location of two hundred million dollars within the first six years of operation in Iowa. The DOR found that the language of the exemption (“an entity whose business among other businesses, is to operate a data center”), indicated that a data center business consists of a singular entity and therefore did not allow for two data centers to both qualify under the same set of facts. The DOR further found that the tenant and property owner could not aggregate their investments to meet the minimum threshold because the statute does not contain words such as “collective,” “aggregate investment,” or similar language. However, the DOR found that a data center property owner and a data center tenant based at the same physical location can both qualify for the exemption as long as they each independently meet the minimum requirements.

In the Matter of T5 Data Centers LLC 3344 Peachtree Rd NE Atlanta, Georgia 30326, Iowa Declaratory Order No. 439443.

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: Which state’s legislature recently concluded a special session by enacting property tax relief that caps local property tax growth and distributes property tax credits to school districts?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!

The New York State Division of Tax Appeals determined that income from the vesting of restricted stock units of a nonresident taxpayer were subject to New York State personal income tax based on the taxpayer’s performance of services in New York during the restricted stock units’ vesting period. The Tribunal also determined that dividends on stock paid out of a deferred compensation plan were not New York source income because the stock on which the dividends were paid had vested before the dividends were issued.

There were two sources of income at issue for the nonresident taxpayer: income from the vesting of restricted stock units and dividends paid out of a deferred compensation plan on restricted stock units that had substantially vested.

The nonresident individual taxpayer argued that the income from the vesting of the restricted stock units was New York source income only to the extent that the taxpayer worked in New York (i.e., a workday allocation method). However, the administrative law judge concluded that the restricted stock units fell within the ambit of a state tax regulation governing the determination of New York source income from restricted stock, 20 NYCRR 132.24. That regulation provided that income from compensation received from stock appreciation rights or restricted stock is New York source income if at any time during the “allocation period” a nonresident individual performed services in New York State for the corporation granting such options. The allocation period is the time from when the stock was received to the earliest of the date that the stock is substantially vested, the individual’s services terminate, or the date that the stock is sold. 

With respect to the dividend income, the ALJ determined that, because the stock on which such dividends were issued had vested prior to the issuance of the dividends, the dividends were “clearly not taxable” to the nonresident taxpayer.

In the Matter of the Petition of Adams, Det’n DTA No. 850026 (N.Y. Div. of Tax App. Aug. 8, 2024).