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.  

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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By Charlie Kearns
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, found here, which treats convertible virtual currency as property for federal tax purposes.
Other states have addressed bitcoins, as summarized here 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 Charlie Kearns

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.

View the full Legal Alert.

View the full Legal Alert.

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.

View the full Legal Alert.

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)