Shaking things up in state and local tax
Shaking things up in state and local tax
Upholding retroactive legislation recently enacted by the Michigan Legislature, the Michigan Court of Claims today dismissed multiple cases where taxpayers had appealed the Department of Treasury’s denial of their ability to elect three-factor apportionment under the Multistate Tax Compact. See, i.e., Taskawa America, Inc. v. Department of Treasury, Case No. 11-000077-MT (Mich. Ct. Cl. December 19, 2014).
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The New York State Department of Taxation and Finance has issued guidance on the sales tax, corporation franchise tax, and personal income tax implications of transactions involving convertible virtual currency, such as bitcoins. The Department’s guidance can be found here. The Department explained in its guidance that convertible virtual currency will be treated as intangible personal property, and the resulting New York tax consequences will flow from that characterization.
For New York sales tax purposes, the Department will treat a transaction involving convertible virtual currency transactions as a barter transaction. Because convertible virtual currency is intangible property, according to the Department, the purchase or use of the currency is generally not subject to sales tax. However, if a person transfers convertible virtual currency for taxable goods or services, New York sales or use tax will apply. The tax base (i.e., receipts or consideration) will be determined based on the market value, in U.S. dollars, of the convertible virtual currency at the time of the transaction. The Department’s guidance includes examples and other information, such as registration obligations for persons engaging in convertible virtual currency transactions.
For corporation franchise tax and personal income tax purposes, the Department will follow the IRS Notice 2014-21, which treats convertible virtual currency as property for federal tax purposes.
Other states have addressed bitcoins, as summarized in a recent post by Sutherland’s SALT Team.
Our analysis on the federal implications of using convertible digital currency, including Notice 2014-21, can be found here.
By Open Weaver Banks and Pilar Mata
The Indiana Department of Revenue ruled that a limited liability corporation (LLC) that elected to be taxed as a corporation was entitled to use net operating loss (NOL) deductions generated by its former members. The NOLs in question were generated in tax years 2003, 2005, and 2007 by two C corporations that were members of the LLC. During these years, the LLC had elected to be treated as a pass- through entity for tax purposes. In 2009, the members and the LLC reorganized so that the LLC was the surviving entity, and the LLC made an Internal Revenue Service election to be taxed as a C corporation. The Department ruled that the LLC was entitled to claim the NOL deductions resulting from its members’ losses on the LLC’s 2010 and 2011 returns. The Department reasoned that, under federal law, a deemed liquidation occurred when the LLC elected to be taxed as a corporation. As a result, for federal purposes, the LLC was allowed to carry over the pre-acquisition NOLs of its former members under I.R.C. § 381(c)(1)(A). Since the Department follows Internal Revenue Code guidelines on the treatment of NOLs, the Department concluded that the LLC was allowed to carry forward and utilize its pre-acquisition NOLs on its Indiana gross income tax returns for the 2010 and 2011 tax years, subject to the Department’s verification of the amount of the NOLs. Indiana Letter of Finding 02-20130190 (Oct. 1, 2014)
At its Fall Meeting in Nashville, Tennessee on December 11-12, the MTC’s Executive Committee voted to formally contact states to solidify whether there is sufficient financial commitment to fund any potential MTC transfer pricing program. The MTC also formally announced that Iowa, Pennsylvania and Rhode Island will join the MTC audit program. Additionally, the MTC’s Uniformity Committee voted to use the Massachusetts draft market sourcing regulations as its starting point for the MTC’s own model regulations and worked on its “Engaged in Business” Model Statute.
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On December 9, the U.S. Supreme Court heard oral arguments in the last of three state and local tax cases that it accepted this term – Alabama Department of Revenue v. CSX Transportation, Inc. (CSX II), a case that had previously been before the Supreme Court. CSX Transportation, Inc. v. Alabama Department of Revenue, 562 U.S. 277 (2011) (CSX I). In CSX II, the Court was asked to determine whether Alabama’s taxation of railroads violated the Railroad Revitalization and Regulatory Reform Act of 1974 (4-R Act), 49 U.S.C. § 11501, by taxing railroads, but not their competitors, on their purchases or use of diesel fuel.
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On December 8, 2014, the United States Supreme Court heard oral arguments in the second of three state and local tax cases that it has accepted this term – Direct Marketing Association v. Brohl – to determine the reach of the federal Tax Injunction Act (“TIA”). The TIA provides that federal courts are barred from hearing state tax cases “where a plain, speedy and efficient remedy may be had in the courts of such State.” However, Justice Scalia recognized the importance of federal court jurisdiction over state tax issues. Continue reading to find out what else the Supreme Court had to say about the TIA and state tax administration.
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By Zachary Atkins & Jonathan Feldman
The Georgia Tax Tribunal held that the Texas Franchise Tax (the “TFT”) is a tax “on or measured by income” and allowed a Georgia resident, who indirectly owned an interest in a pass-through entity, to adjust his federal adjusted gross income for the amount of the entity’s income taxed in Texas for purposes of computing his individual Georgia taxable income. The pass-through entity was an LLC that operated in Texas and filed entity-level TFT reports. The Georgia Department of Revenue denied the taxpayer an adjustment (i.e., a reduction) to his individual Georgia taxable income to account for the amount of the LLC’s income that was subject to the TFT. According to Ga. Code Ann. § 48-7-27(d)(1)(C), individual residents who own an interest in a pass-through entity may reduce their federal adjusted gross income by the amount of the entity’s income that is “taxed in another state which imposes a tax on or measured by income.” The Department asserted that the TFT is not a tax on or measured by income but instead is a privilege or gross receipts tax and, in the alternative, that an adjustment is permissible only if the tax in question is a tax on or measured by net income. The tribunal disagreed, concluding that the TFT is a tax “on or measured by income” under either a broad or restrictive definition of “income” or “gross income” and regardless of whether one’s TFT liability is computed as 70% of total revenue, total revenue less cost of goods sold, or total revenue less compensation, because the calculation always begins with total revenue. The tribunal found that this conclusion was consistent with the legislative purpose of avoiding double taxation of the same income for pass-through entities and their individual owners. The tribunal also rejected the Department’s attempt to limit the availability of the adjustment to taxes on or measured by net income, explaining that such an interpretation would violate even the most basic rules of statutory construction. H. Alan Rosenberg v. Douglas J. Macginnittie, Commissioner, Georgia Department of Revenue, No. 1414626 (GA Nov. 25, 2014)
By Nicole Boutros and Andrew Appleby
The New Jersey Supreme Court held that the New Jersey Division of Taxation improperly exercised its discretion when it refused to waive its imposition of $1.8 million in late payment penalties and tax amnesty penalties. The taxpayers, five subsidiaries of United Parcel Service of America (collectively, UPS), used a cash management system for intercompany transfers but did not report New Jersey corporation business tax (CBT) related to the transfers. The State assessed the CBT, imposed the two types of penalties at issue, and assessed interest, asserting that the intercompany transfers were actually loans upon which the State could impute interest income. The New Jersey Superior Court, Appellate Division, upheld the lower court’s determination that the State abused its discretion by imposing the penalties, explaining that UPS had reasonable cause to waive penalties because the taxability of the intercompany transfers was an issue of first impression. The New Jersey Supreme Court agreed and further explained that a taxpayer’s “honest misunderstanding of fact or law that is reasonable in light of the experience, knowledge and education of the taxpayer” supported a finding of reasonable cause to waive late payment penalties. Additionally, the court held that the imposition of tax amnesty penalties, which apply to taxpayers that fail to pay any state tax, did not apply to taxpayers that timely filed returns and paid their tax liabilities, but whom the State assessed on audit. The court emphasized that the legislative history of the tax amnesty penalties supported its determination that the State could not impose such penalties on deficiencies discovered through an audit of UPS’s timely filed returns. United Parcel Serv. Gen. Servs. Co. v. Dir., Div. of Taxation, No. 072421 (N.J. Dec. 4, 2014).
Read our November 2014 posts on stateandlocaltax.com or read each article by clicking on the title. To read our commentary on the latest state and local tax developments as they are published, be sure to download the Sutherland SALT Shaker mobile app.
By Evan Hamme and Timothy Gustafson
A California Superior Court held that passive membership in a limited liability company (LLC) is insufficient to meet California’s statutory “doing business” standard. In Swart Enterprises, Inc. v. California Franchise Tax Board, an Iowa corporation with no business activities or physical presence in California invested in a fund organized as a California LLC. Despite its previous Technical Advice Memorandum (TAM) finding that passive investment in an LLC did not create nexus with California, the Franchise Tax Board (FTB) asserted that Swart Enterprises, Inc. was “doing business” in the state by virtue of having previously purchased an interest in the fund two years prior to the tax year in question. Because the LLC had elected under federal and California law to be treated as a partnership for tax purposes, the FTB argued that “partnership” must be interpreted to mean a general partnership, and that each LLC member, like a general partner in a partnership, would presumptively have control over the management of the business. The court disagreed. Under California law, the fund was organized as a “manager-managed LLC” rather than a “member-managed LLC”; thus, Swart had no control over the management of the fund. Nor did Swart have a sufficient percentage interest to indirectly control its management, because Swart’s investment gave it only 0.2% ownership of the fund. Accordingly, the court held that Swart was not doing business in California. Notably, while the litigation was pending, the FTB issued a TAM effectively changing the position espoused in its earlier TAM and asserting that passive LLC members were subject to tax in California. After analyzing the California case law relating to limited partnership interests, the court stated there was “no legal authority” for the conclusions drawn by the FTB under the new the TAM. The court did not reach Swart’s contentions that subjecting Swart to California’s corporate franchise tax would violate the due process clauses of the California and United States Constitutions. Also, the court did not address the FTB’s constitutional and standing arguments. Swart Enterprises, Inc. v. California Franchise Tax Board, Case No. 13CECG02171 (Cal. Super. Ct. Nov. 13, 2014).
