By Robert P. Merten III and Prentiss Willson

Massachusetts has published its final revised market-sourcing regulation (830 CMR 63.38.1), effective for tax years beginning on or after January 1, 2014. The final revisions to these rules, among other things, conform the regulation with recent state law amendments requiring taxpayers to use market-based sourcing principles in determining the sales factor for apportioning income for sales of other than tangible personal property, and to include a large number of examples to help illustrate and explain the application of the revised regulation. Of particular note, the final revisions expand the categories of services (specifically, to include professional services) for which taxpayers will be permitted to use a rule of extrapolation. This “extrapolation rule” allows taxpayers with insufficient information regarding a sale’s delivery location to approximate the location based on sales in which the taxpayer does have sufficient information.

The Massachusetts market-sourcing regulation developments have been closely watched in the tax world and are proving to be highly influential. Indeed, the Multistate Tax Commission (MTC) approved a model market-sourcing drafting project in July 2014 to implement changes to the sourcing of sales of other than tangible personal property under Section 17 of the Multistate Tax Compact (UDITPA). The project working group has been using the Massachusetts regulation as a starting point for model drafting and discussions. This MTC working group meets on a weekly basis to discuss this project. These discussions are open to the public. MTC Section 17 Model Marketing-Sourcing Regulations.  

Martin1.jpg

Meet Martin, a very lucky Jack Russell Terrier who was adopted by SALT legal secretary Candice Alba 13 years ago. This sweet boy was first fostered by a friend of Candice’s who had rescued him from an abusive home. When Candice met the pup, he was hiding under the front seat of her friend’s car, with only his tail and hind legs showing. Candice told her friend, “He’s mine!” and took him home that day. 

Candice_Martin.jpgNamed after singer/songwriter Martin Gore of Depeche Mode, this sweet boy needs no coaxing at mealtime. When it comes to food, he just can’t get enough! He loves to eat and isn’t choosy – he’ll eat whatever is in front of him.

Going outside and being taken on walks are Martin’s favorite activities (after eating, of course). He spends most of his time indoors – and though his greatest love is food – Martin is afraid of the kitchen. At first, Candice thought his fear was limited to only her kitchen until Martin visited her parents and in-laws.

Also on his list of things to avoid are the Alba children. Martin may not be fond of kids, but he certainly enjoys destroying their toys! Candice estimates he owes her at least a few hundred dollars for dolls and stuffed animals ruined over the years. 

By Robert P. Merten III and Open Weaver Banks

The Washington Court of Appeals held that a Honda automobile dealership was subject to state business and occupation (B&O) tax on more than $1 million in “dealer cash” payments the dealership received over a four-year span from manufacturer American Honda as part of an incentive program. The court dismissed two arguments the dealership presented in an attempt to obtain a tax refund. First, the court concluded that the dealership participated in a taxable “business activity” discrete from the dealership’s normal business of selling cars at retail by accepting American Honda’s offer to apply for dealer cash, selling particular models during specific times, documenting those sales, applying to the manufacturer for dealer cash, and then accepting payment of the dealer cash from American Honda. Second, the court held that dealer cash was not a tax-exempt rebate, adjustment or discount, because the dealership’s purchases of vehicles from American Honda were not made “subject to” the dealer cash payment. This opinion follows and upholds previous decisions on this issue against the dealership taxpayer by the Board of Tax Appeals and the Thurston Superior Court. Steven Klein Inc. v. State of Washington, Dep’t of Revenue, 336 P.3d 663 (Wash. Ct. App. 2014).

By Derek Takehara and Andrew Appleby

The New Mexico Department of Taxation and Revenue granted a combined reporting group’s corporate income tax protest by allowing the group to claim a deduction for net operating losses (NOLs) that two of its members generated and reported previously on a separate entity basis. The taxpayer was the parent corporation of a group of affiliates, which included three entities doing business in New Mexico. In prior years, the three affiliates filed New Mexico corporate income tax returns on a separate basis, and two of the three affiliates generated NOLs. The taxpayer elected to file a combined report for the year at issue, and the Department initially disallowed the taxpayer’s attempt to claim the NOLs previously generated by two of the affiliates. The Department based its decision on a regulation prohibiting combined reporting groups from deducting NOLs established by a corporate member reporting on a separate basis. However, a different regulation, which incorporates federal law, specifically allows NOL deductions after a change of reporting method. New Mexico uses federal taxable income as the starting point to determine state taxable income, but statutorily excludes several items otherwise allowable under federal law. Federal law allows consolidated groups to deduct their members’ NOLs arising in separate return years. The Department’s hearing officer reasoned that nothing in New Mexico’s statutory scheme altered the federal rules and concluded that the regulation the Department relied upon was contrary to the legislature’s intent. Therefore, the NOL carryforward generated by separate filers was allowed. In the Matter of the Protest of Covenant Transportation Group Inc., N.M. Tax’n & Rev. Dep’t, No. 14-45 (Dec. 29, 2014).

By Stephen Burroughs and Andrew Appleby

The Alabama Court of Civil Appeals ruled in favor of an out-of-state life insurance company regarding the calculation of its Alabama net worth tax – the Business Privilege Tax (BPT). The BPT requires an insurance company to calculate its Alabama net worth based on the ratio its Alabama premium income bears to its total direct premiums received nationwide. The taxpayer included its annuity considerations within its premium calculation. The Department excluded the annuities from the premium calculation because, for purposes of Alabama’s premium tax, the term “premium” excludes annuity considerations. In holding that “premiums” include annuity considerations for purposes of the BPT, thus ruling in favor of the taxpayer, the Court found that: (1) the definition of “premium” the Department relied upon is limited specifically to the chapter of the Insurance Code imposing the premium tax; (2) the premium tax law definition of “premium” should not be read in pari materia with the BPT because the two taxes are not similar and do not cover the same subject matter; (3) other definitions of “premium” within the Insurance Code include annuity considerations; and (4) the insurance industry (including Schedule T, upon which the BPT is calculated) often uses the terms “premiums” and “considerations” interchangeably. In light of the Court’s holding, insurance companies doing business in Alabama may want to examine their BPT apportionment methodology. Ala. Dept. Revenue v. Am. Equity Inv. Life Ins. Co., No. 2130933 (Ala. Civ. App. Jan. 16, 2015).  

By Zack Atkins 

Reversing a district court decision, the Iowa Supreme Court held that a cable company selling Voice over Internet Protocol (VoIP) service can be assessed centrally as a telephone company for property tax purposes. Historically cable property has been assessed at the local level in Iowa. The property of telephone companies—owners or operators of any “telephone line”—has long been assessed by the Iowa Department of Revenue, which allocates property values among the appropriate local taxing districts. The cable company in question sold cable television, Internet access and VoIP services to Iowa customers over its hybrid fiber-coaxial cable network, which originally had been constructed and installed to provide only cable television service. The company used fiber and coaxial cable to provide VoIP service, but the company maintained that it did not own any traditional telephone lines (i.e., copper wire) and therefore did not qualify for “telephone company” treatment. The Iowa Supreme Court, however, concluded that a cable or wire used to provide telephone service (VoIP service in this case) is a telephone line within the meaning of the state’s central assessment laws, as informed by ordinary dictionary definitions. In so holding, the court said that the state’s central assessment laws did not require that the “line” be made of any particular material. Rather, the meaning of “telephone line” could change with evolving technology as long as there is a “line” and a service comparable to traditional telephone service being provided. The court found further support for its conclusion in the company’s marketing materials, which, in the court’s view, advertised VoIP service as “a standard telephone operation.” The court also disagreed with the company’s argument that its classification should turn on the primary use of a hybrid fiber-coaxial cable network, which the company claimed was in its cable television business. The court held that the Iowa laws governing the property tax treatment of telephone companies did not provide for a primary use test. Kay-Decker v. Iowa State Bd. of Tax Review, No. 13-0925, 2014 WL 7202763 (Iowa Dec. 19, 2014).

Undoubtedly, New Jersey Governor Chris Christie, the State Legislature, the Tax Court and the Division of Taxation have their own lists of resolutions for 2015. 

However, in their article for State Tax Notes, Sutherland attorneys Leah Robinson and Open Weaver Banks suggest numerous New Year’s resolutions for New Jersey, including publishing an audit manual and adopting a mailbox rule for filing protests of a tax assessment.

View the full article reprinted from the January 5, 2015, issue of State Tax Notes.

By Evan Hamme and Madison Barnett

The Tennessee Department of Revenue determined that computer-related services provided on an hourly basis by an IT staffing agency are subject to sales tax in certain instances. Under Tennessee law, the sale of computer software is subject to sales tax, including when the software is created on a customer’s premises. The Department evaluated the job functions of six types of IT personnel provided by the taxpayer to businesses to determine whether each type would be taxable if provided on a stand-alone basis. Of the six job functions, programmers and database administrators were determined to involve software programming and thus always be subject to sales tax. The taxpayer’s other four IT-personnel – including business analysts, systems designers, quality assurance personnel, and project managers – were determined to generally not provide services that are taxable on a stand-alone basis. Applying Tennessee’s “true object” test, however, the Department concluded that when taxable services are provided on the same project as non-taxable services, the charges for all of the taxpayer’s personnel who worked on that project are subject to Tennessee sales tax. In the Department’s view, when programmers and database administrators work on the same project with other IT-personnel, the totality of the circumstances suggests that the true object of the transaction is the sale or creation of computer software. The Department also noted that to prove that certain receipts are for nontaxable services rather than taxable software sales, the taxpayer must keep detailed records, including: (1) records that identify the projects on which each type of IT-personnel worked; (2) records showing the hours each staffer worked and the job functions performed on each project; and (3) contracts that generally specify the job and project descriptions, and job classifications, for the employees provided. Tenn. Ltr. Rul. No. 14-11 (Oct. 30, 2014; released Dec. 8, 2014).

By Jessica Kerner and Open Weaver Banks

The South Carolina Department of Revenue determined that charges for a web-based application used to process insurance claims are the sale of a non-taxable data processing service rather than a communications service. The company providing the service collects claims information for a customer from the customer’s insurance carrier(s), ensures the information is accurate and complete, reaches out to the insurance carrier when needed, and transforms the information into a standardized format. The completed claims are loaded into a computer database and delivered to the customer through the Internet. The customer pays for the service based on the number of claims managed, the number of insurance carriers used, the number of users accessing the system, and the amount of time/effort needed to perform the services. The Department based its conclusion that the service is a non-taxable data processing service on the fact that the seller manipulates the customer’s insurance claim information, and the customer accesses the online system to obtain the information that has been manipulated by the seller. The Department further explained that if the seller did not manipulate the customer’s insurance claim information and only provided a service that allowed the customer to access a website to use software to enter its own claim information, keep track of the information, create reports, i.e., perform its own data processing of its information, then the service would be a taxable communications service. SC Private Letter Ruling #14-5 (December 10, 2014).