The Georgia Tax Tribunal has held that an electric utility’s transmission and distribution equipment was not “necessary and integral to the manufacture of tangible personal property” and thus did not qualify for an exemption from Georgia sales and use tax. See Georgia Power Company v. MacGinnitie, Dkt. No. Tax-S&UT-1403540 (Ga. Tax Tribunal, Jan. 5, 2015). This is the latest in a string of cases addressing whether certain transmission equipment is used in a manufacturing process.
 
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By Evan Hamme and Madison Barnett

Applying the “true object” test to software-related services, the Tennessee Department of Revenue determined in a letter ruling that optional services offered in connection with the sale of software would not be subject to sales tax, at least in some circumstances. The taxpayer in this case sells – and charges Tennessee sales tax – on prewritten computer software, software updates/upgrades, and software installation services. The taxpayer also offers optional additional services that are separately invoiced, including training, configuration, project management, data conversion, documentation services, testing, and report writing services. Applying the “true object” test, the Department determined that the additional services generally would not be taxable if provided in isolation. Tennessee’s “true object” test evaluates a transaction involving both taxable and nontaxable components to determine whether the taxable component is the true object or a “crucial,” “essential,” “necessary,” “consequential,” or “integral” element of the transaction. In the Department’s view, if the foregoing is met, then the entire transaction is subject to sales tax, even if the prices of the taxable and nontaxable components are itemized. The Department concluded that the taxability of the additional services would depend on the totality of the circumstances surrounding each client contract. The otherwise nontaxable services could become taxable if provided as a required or integral component of a taxable software installation contract or a software customization contract. Tenn. Letter Ruling No. 14-10 (Oct. 13, 2014).

Read our December 2014 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.

By Mary Alexander and Timothy Gustafson

The Indiana Department of Revenue applied the State’s throwback rule to an Indiana company’s sales to California customers based on a determination that the taxpayer was not subject to tax in California due to P.L. 86-272. Under Indiana law, a sale is attributed to Indiana for sales factor apportionment purposes if the taxpayer is not taxable in the state of the purchaser and the property is shipped from a place of storage in Indiana. According to the Department, this means “an Indiana company’s income derived from its sales to other states is thrown back to Indiana for income tax purposes when the Indiana company’s business activities in those states are protected and are not taxable pursuant to P.L. 86-272.” While the taxpayer provided evidence of (1) its California tax filings for the years at issue, (2) an independent contractor agreement with an individual located in California, and (3) tangible property in California, it also stated in its California returns that it was not doing business in the state. The Department determined the “[t]axpayer’s supporting documentation show[ed] that its business activities in California did not go beyond solicitation[.]” Denying the taxpayer’s protest, the Department concluded that the taxpayer had not met its burden of proof and agreed the throwback of the taxpayer’s sales to customers located in California was appropriate. Ind. Dep’t of Revenue, Letter of Findings No. 02-20140293 (Dec. 4, 2014). 

R with Stephen.jpgMeet Reesie, the nine-year-old Persian cat belonging to Sutherland SALT associate Stephen Burroughs and his wife Jennifer.

The two have owned Reesie since the early days of their marriage when Reesie was just a kitten. According to Stephen, the cat is the embodiment of their first major marriage compromise. Stephen did not want a pet. Jennifer wanted a dog. R single.jpgThey settled on (what Stephen thought would be) a low-maintenance alternative. Stephen grew up with a cat and knew that for the most part, cats did not have to be taken outside for potty breaks or be house trained. A cute fluffy kitty seemed like a reasonable compromise; however, it turned out that Stephen is allergic to cats. Because of Stephen’s allergies, Reesie is shaved twice a year. She hates the process, but loves the result and interacts with the family more in the three to four weeks after a new haircut.  

As a kitten, Reesie survived a leap from the second story of their apartment balcony. She landed on her feet, of course. But out of precaution, she has remained an indoor-only cat, which suits Reesie just fine since her days consist of sleeping, taking periodic breaks to eat and sitting on Jennifer’s lap.  

Reesie is grateful to be chosen as December’s Pet of the Month and wishes everyone a Happy New Year! 

By Jessie Eisenmenger and Timothy Gustafson

In a Technical Assistance Advisement, the Florida Department of Revenue determined the proper sourcing methodology for income from twelve different types of sales by an online service provider (OSP) for Florida sales factor purposes. The OSP collects data that it distributes to its customers by a variety of methods, including print, email, and access to an interactive online network, for a fee. The Department grouped the receipts from the OSP’s sales into four broad categories: (1) receipts from sales of tangible personal property; (2) receipts from licensing of intangible property; (3) receipts from providing access to an interactive network; and (4) receipts from the sale of services. The Department first reiterated that the OSP’s sales of tangible property such as hardcopy publications are sourced to Florida if the property is delivered or shipped to a purchaser in Florida. Next, the Department held that “significant” royalty payments made from third parties located in Florida who have entered into licensing agreements with the OSP are sourced to Florida. Without defining “significant,” the Department reasoned that the apportionment factor is meant to reflect how income is generated and if an item of income is a “significant” part of a taxpayer’s income, then factor representation is appropriate. However, because the OSP’s predominant business activity generated revenue from the three other categories, the Department ruled that royalties should be included in the numerator and denominator of the OSP’s sales factor only if they are “significant” income to the OSP.

Finally, the Department concluded that the sourcing of the OSP’s interactive online database depended upon the location of the customer, as did the sourcing of the OSP’s sales of remote services. Regarding the latter, Florida law sources such sales to Florida if the “income producing activity” is wholly performed in the state. Under the Department’s interpretation, the income producing activity occurs where the customer is located. Fla. Dep’t of Revenue, Tech. Asst. Advisement, TAA 13C1-007 (Oct. 25, 2013).

By Stephanie Do and Open Weaver Banks

The Indiana Department of Revenue determined that an out-of-state taxpayer improperly sourced tuition received from its Indiana students taking online learning courses on a cost of performance basis. The taxpayer provided educational services through local campus courses and online learning programs. In computing its Indiana sales factor, the taxpayer sourced to Indiana tuition income received from Indiana students taking local campus courses in Indiana, but did not include tuition from Indiana students taking online courses in the numerator of its sales factor.The taxpayer asserted that income received from its Indiana students taking online courses should not be included in the numerator of its Indiana sales factor based on the cost of performance apportionment methodology because the location of the taxpayer’s online campus personnel, “eCampus” platform, curricula development, online servers, and marketing activities were all outside of Indiana. The Department disagreed with the taxpayer’s assertion, finding that the cost of performance methodology was inappropriate because the Department sought to tax only the taxpayer’s income producing activities “that occurred in Indiana.” However, if a cost of performance methodology applied, the Department contended, the result would be the same. According to the Department, the taxpayer’s services “took place here in Indiana because Indiana is the location where the students purchased Taxpayer’s services and participated in Taxpayer’s classes.” Although the Department disagreed with the taxpayer’s cost of performance methodology, the Department abated the imposition of an underpayment penalty because the taxpayer exercised ordinary business care and prudence. Ind. Department of Revenue, Letter of Findings No. 02-20130359 (Nov. 1, 2014).

By Ted Friedman and Andrew Appleby

The New Jersey Tax Court held that a corporation was not required to add back electric utilities taxes paid to North Carolina and South Carolina to determine the corporation’s entire net income subject to the New Jersey Corporation Business Tax (CBT). The Tax Court concluded that the electric utilities taxes paid by the corporation are not taxes “on or measured by profits or income, or business presence or business activity” within the meaning of New Jersey tax law and are not, therefore, required to be added back to the corporation’s federal taxable income for CBT purposes. The Tax Court reasoned that the legislative history of the applicable law clearly indicates that the add back provision is intended to capture only taxes paid to other states on a taxpayer’s net corporate income, and that the electric utilities tax paid by the corporation do not fit into this category. The Tax Court’s conclusions comported with its recent holding in PPL Electric Utilities Corp. v. Director, Division of Taxation, 28 N.J. Tax 128 (N.J. Tax Ct. Oct. 2, 2014), in which it determined that federal deductions for a corporation’s payments of Pennsylvania gross receipts tax and Pennsylvania capital stock tax are not subject to add back in New Jersey. Duke Energy Corp. v. Dir., Div. of Taxation, No. 010448-2008 (N.J. Tax Ct. Dec. 2, 2014).

View Sutherland’s full Legal Alert regarding the Tax Court’s decision in PPL Electric and the refund opportunities associated with the deductibility of other states’ taxes.

The South Carolina Supreme Court issued its decision in CarMax Auto Superstores West Coast, Inc. v. S.C. Dep’t of Revenue, Opinion No. 27474 (S.C. Dec. 23, 2014), holding that the South Carolina Department of Revenue bore the burden of proof to invoke the use of an alternative apportionment method and failed to meet its burden.
 
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Today the Louisiana Fifth Circuit Court of Appeal held that a cable television provider’s video-on-demand (VOD) and pay-per-view (PPV) programming services are not tangible personal property and therefore not subject to sales tax. Newell Normand, Sheriff and Ex-Officio Tax Collector for the Parish of Jefferson v. Cox Communications Louisiana, LLC, Case No. 14-CA-563 (La. App. 5 Cir. December 23, 2014). Sutherland represented Cox in the matter.

View the full Legal Alert.