By Jessie Eisenmenger and Timothy Gustafson

The Missouri Supreme Court held that charges paid by a personal training company to a gym for the rental of office space and limited use of the fitness equipment when conducting personal training sessions are not subject to sales tax. The personal training company paid the gym $6,000 per month to rent office space and market and sell personal training services to the gym’s members. The Missouri Department of Revenue assessed sales tax on the monthly charge, asserting it was a fee paid to a place of recreation taxable under Mo. Rev. Stat. § 144.020.1(2). Because there was no sale of tangible personal property, the Court explained the rental fees would be taxable only if they were for the rendering of a taxable service. In its analysis, the court looked to the plain and ordinary meaning of the phrase “rendering a taxable service” and reasoned that the phrase required an affirmative act, rather than mere passivity. By renting office space and otherwise remaining passive regarding the interactions between the personal training company and its members, the court determined the gym did not perform an affirmative act for the personal training company. Accordingly, the court held the monthly rental fees were not subject to sales tax. Tatson, LLC v. Dir. of Revenue, No. SC94260 (Mo. Feb. 24, 2015).

By Stephanie Do and Madison Barnett

The Ohio Board of Tax Appeals determined that two out-of-state online retailers with no physical presence in Ohio were subject to Ohio’s Commercial Activity Tax (CAT). The Board, declining to rule on the taxpayers’ constitutional arguments, found that the online retailers met Ohio’s statutory bright-line presence nexus test based solely on their volume of taxable sales to Ohio customers. The retailers sold tangible personal property to consumers across the United States, including in Ohio, through their Internet websites hosted on servers outside of Ohio. The retailers’ warehouses and distribution centers were also located outside of Ohio. Although the retailers had no physical presence in Ohio, they did have at least $500,000 in taxable sales to Ohio customers. The retailers argued that they were not subject to the CAT because the Commerce Clause of the U.S. Constitution forbids Ohio from imposing the tax on non-residents with no physical presence in Ohio. The Board declined to review the retailers’ constitutional arguments on the basis that, as an administrative body, it did not have jurisdiction over such arguments. The Board held instead that Ohio statutes do not contain an in-state physical presence requirement. With the initial L.L. Bean constitutional challenge having been settled, these cases may present the vehicle through which the constitutionality of Ohio’s bright-line presence nexus test is finally determined by a court. Crutchfield, Inc., et al. v. Testa, Case Nos. 2012-926; 2012-3068; 2013-2021 (Ohio Bd. Tax App. Feb. 26, 2015); Newegg, Inc., et al. v. Testa, Case No. 2012-234 (Ohio Bd. Tax App. Feb. 26, 2015).

By Charles Capouet and Open Weaver Banks

The Alabama Department of Revenue has proposed an amendment to the state’s rental tax regulation. If finalized, the regulation would tax the rental of “digital transmissions,” such as “on-demand” movies, television programs, streaming video, streaming audio and other similar programs, regardless of the method of transmission or the length of time of the rental. The proposed amendment would also reach certain cable television boxes and related accessories. By statute, the rental tax is levied on persons engaged in the business of leasing or renting tangible personal property. The regulatory proposal would treat cable or satellite television providers, online movie and digital music providers, app stores, and other similar providers of digital transmissions as engaging in the business of leasing tangible personal property and would subject them to the rental tax. The proposed regulation would also apply the rental tax to multipurpose cable boxes that function as digital video recorders or perform other functions in addition to accessing basic cable. Under the proposal, cable television boxes that are used solely to access basic cable are not subject to the rental tax. The Department has scheduled a public hearing to discuss the proposed regulation expanding the scope of Alabama’s rental tax for April 8, 2015. Prop. Ala. Admin. Code r. 810-6-5-.09 (2015).

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.

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).

View the full Legal Alert. 

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.

 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.
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.
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.
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.
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.
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.