By Evan Hamme and Madison Barnett

The Washington State Department of Revenue (DOR) issued an Excise Tax Advisory (ETA) making clear that Getty Images (Seattle), 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 (B&O) tax. Getty Images, a City of Seattle B&O tax case, involved a corporation (Getty Seattle) that received $1 million per year as compensation for services provided to affiliates under the group’s General and Administrative Services Agreement. Getty Seattle, however, withdrew substantial additional funds from the group’s cash management account to cover the costs of providing the services. Getty Seattle recorded an account payable for each withdrawal, but had not repaid these amounts at the time of an audit. Ignoring the group’s written agreement and the unpaid accounts payable, the City issued an assessment for the $302 million Getty Seattle withdrew from the cash management account, asserting that the withdrawals constituted taxable compensation for services. The Washington State Court of Appeals ultimately upheld the City’s assessment. Though Getty Images was decided under the City’s B&O tax, taxpayers were initially uncertain on whether the state would adopt a similar approach under the state’s B&O tax and attempt to tax a variety of intercompany transactions. In a 2012 interim statement, the DOR said that it did not consider Getty Images a major departure from established law, and that the DOR would continue its practice of excluding bona fide dividends and non-taxable cash management account distributions from the state’s B&O tax base. The DOR’s new ETA formalizes that interim policy, advises that the DOR will “not presume that a transfer of funds between affiliates is compensation for services,” and that Getty Images does not “represent a change in law for purposes of evaluating the continuing validity of any letter ruling issued by the Department.” Wash. Excise Tax Advisory, ETA 3194.2015 (Jan. 22, 2015).

By Nicole Boutros and Open Weaver Banks

A New York State Division of Tax Appeals Administrative Law Judge (ALJ) held that for banking franchise tax purposes a taxpayer did not have to utilize a net operating loss (NOL) carryover in a year in which the taxpayer did not pay tax on its entire net income base. The taxpayer had a federal and New York State loss for the 2005 tax year, carried its federal NOL to the 2006 and 2007 tax years, and deducted the full New York State NOL in the 2007 tax year. The taxpayer did not deduct the New York State NOL in the 2006 tax year because its entire net income for that year was a negative number and, therefore, the taxpayer was required to pay tax on its higher taxable asset base instead. On audit, the state sought to treat the taxpayer as if it had deducted the majority of its 2005 New York State NOL against its 2006 entire net income and reduced the taxpayer’s 2007 NOL deduction by the same amount. The ALJ held that the Department could not require the taxpayer to “hypothetically apply” its NOL to a year in which the taxpayer’s tax liability on its entire net income base, even without the NOL deduction, triggered an alternative tax base. The ALJ explained that, while New York Tax Law limits a taxpayer’s New York State NOL to the taxpayer’s federal NOL, it does not set a minimum New York State NOL a taxpayer must utilize. Furthermore, New York Tax Law cannot require such a result because a taxpayer always pays the federal corporate income tax on income, whereas a taxpayer may not always pay the banking franchise tax on an income base. The ALJ’s decision potentially creates refund opportunities for taxpayers that deducted NOLs in years in which they did not pay tax on entire net income. The decision also could impact a taxpayer’s “prior net operating loss” pools for tax years beginning on or after January 1, 2015. In the Matter of TD Holdings II, Inc., DTA No. 825329 (N.Y. Div. of Tax App.  Jan. 22, 2015). 

By Charles Capouet and Timothy Gustafson

The South Carolina Administrative Law Court found that South Carolina does not source sales of services with a strict cost of performance method. The taxpayer, a broadcasting corporation, provides access to digital television entertainment via satellite dishes across the United States, including South Carolina. On audit, the South Carolina Department of Revenue disallowed the taxpayer’s use of “inconsistent” sourcing methods, including the cost of performance method, and asserted that instead the taxpayer should have calculated its South Carolina income tax liability using a “gross receipts” apportionment method and sourced its receipts from South Carolina subscribers to the state. The court found that South Carolina does not use strict cost of performance sourcing because the language of the state’s apportionment statute differs from that of section 17 of the Uniform Division of Income for Tax Purposes Act (UDITPA) in two major respects: (1) the South Carolina legislature did not include the phrase “cost of performance” in the statute; and (2) the statute “does not include language indicating the sourcing of receipts to South Carolina is all-or-nothing based on whether ‘a greater portion of the income-producing activity is performed in this state than in any other state.’” Instead, the applicable statute attributes sales to South Carolina to the extent the income-producing activity is performed within the state. Dish DBS Corp. v. South Carolina Dep’t of Revenue, No. 14-ALJ-17-0285-CC (S.C. Admin. Ct. Feb. 10, 2015).

By Charles Capouet and Andrew Appleby

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 (“BPOL”) deduction. Arlington County levies a BPOL tax based on the gross receipts attributed to activities conducted at an Arlington definite place of business. Virginia allows a deduction for any gross receipts attributable to business conducted in another state or foreign country where the taxpayer is liable for a tax based on income. Virginia law does not prescribe a methodology to calculate the deduction. The Arlington County Commissioner determined that the deduction must be established by manual accounting. On appeal, the Virginia Tax Commissioner determined that the Arlington County Commissioner used an incorrect methodology; if manual accounting is impossible to calculate the deduction, the taxpayer must use payroll apportionment. The lower court rejected the Virginia Tax Commissioner’s methodology as “erroneous, contrary to law and precedent, and arbitrary and capricious in its application.” The Virginia Supreme Court reversed, holding that because Virginia law leaves unresolved the permissible methodology for calculating the deduction, “the plain and unambiguous statutory language allows for the administrative agency whose duty it is to administer and enforce the tax laws—that is, the Department of Taxation and the Tax Commissioner—to decide how such a deduction may be calculated.” Nielsen Co. (US) v. Cnty. Bd. of Arlington Cnty., 767 S.E.2d 1 (Va. Jan. 8, 2015).

 

By Zachary Atkins & Prentiss Willson

The Massachusetts Supreme Judicial Court (SJC) 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. The taxpayer earned flow-through interest income through its residual beneficial interests in trusts that owned securitized student loans. The taxpayer was a holding company and did not have employees, payroll, tangible property or office space but, as indicated on its tax returns, it had a principal office in Massachusetts. Under Massachusetts law, a loan is located in Massachusetts if it is properly assigned, based on a preponderance of substantive contacts, to the taxpayer’s regular place of business in the state. Second, when the taxpayer assigns a loan to a place outside Massachusetts that is not a regular place of business, there is a rebuttable presumption that the preponderance of substantive contacts with respect to the loan occur in the Commonwealth if the taxpayer’s commercial domicile was in the Commonwealth at the time the loan was made. The taxpayer, which did not have a regular place of business in Massachusetts, assigned the loans to locations of third-party loan servicers outside Massachusetts and reported a zero property factor for each of the tax years at issue. The SJC determined that the loans in question did not have any substantive contacts in Massachusetts because the taxpayer did not have a regular place of business in Massachusetts. Consequently, the SJC upheld the Appellate Tax Board’s determination that, according to the default rule, the loans were assignable to Massachusetts because the taxpayer’s commercial domicile was in Massachusetts. First Marblehead Corp. v. Comm’r of Revenue, No. SJC-11609 (Mass. Jan. 28, 2015)

New York’s corporate tax reform includes sweeping changes affecting nearly every aspect of its corporation franchise tax.

In their article for State Tax Notes, Sutherland Partners Leah Robinson and Marc A. Simonetti review what New York corporate taxpayers should be doing now to be ready for the state’s corporate tax reform measures that will affect their 2015 tax returns.

View the full article reprinted from the February 9, 2015, issue of State Tax Notes.

By: Stephen Burroughs & Timothy Gustafson

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. The taxpayer is a government contractor that constructs and installs electrical distribution systems at U.S. military airfields in Afghanistan. The taxpayer purchased property out-of-state and temporarily held the property in Georgia prior to shipping it overseas for use in the construction projects. Pursuant to Georgia Regulation 560-12-2-.54, property purchased out-of-state and stored in Georgia is subject to sales and use tax “provided such property has become a part of the mass of the property in [Georgia].” Since the temporarily-stored property had not become part of the mass of property in Georgia, the Tribunal acknowledged that if the regulation controlled, the taxpayer would prevail. But the Georgia Department of Revenue disavowed the regulation, arguing that it was inconsistent with Georgia statutes. Despite the regulation being re-promulgated subsequent to the relevant statutory change, the Tribunal agreed with the Department and declared the regulation to be “at odds with the current statute” and therefore “not controlling.” The Tribunal cautioned that the “case is thus illustrative of the dangers of unthinking reliance on the language of a regulation or undue deference to asserted administrative expertise.” Inglett & Stubbs Int’l, Ltd., v. Riley, No. Tax-IIT-1340253 (Ga. Tax Tribunal Feb. 11, 2015).  

There has been significant controversy in New York regarding whether receipts from services—particularly those that may be delivered via the Internet—constitute “service” receipts or “other business receipts” for corporate franchise tax apportionment purposes. The distinction between “service” receipts and “other business receipts” is crucial because prior to 2015, New York Tax Law generally required sourcing for “service” receipts based on the location of performance, and market sourcing for “other business receipts.”

View the full Legal Alert.

New York Governor Andrew Cuomo introduced his 2015-2016 budget and accompanying legislation on January 19, 2015 (the 2015 Budget Bill). If enacted, New York’s tax law will be significantly altered for the second time in two years. The sales tax provisions of the legislation will tax most intercompany transactions and will also accelerate the payment of sales tax on leases. The corporate income tax provisions make many tweaks to the substantial tax reform changes enacted last year. Several of the provisions impact the taxation of telecommunications service providers subject to tax under Article 9. The proposed legislation also contains substantial changes to New York City’s General Corporation Tax that largely conform to the State’s tax reform initiative.

View the full Legal Alert.

Read our January 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.