The MTC continued its foray into transfer pricing. In a highly anticipated meeting, the MTC engaged with seven economics firms—all of which could potentially offer their services to the MTC—to determine how best to tackle state transfer pricing issues. With a target date of Summer 2015 for implementation of a robust transfer pricing audit program, this meeting provided insight into the potential vendors the MTC might hire to assist with its program. Read more to find out what they had to say.

View the full Legal Alert. 

Sutherland’s Tax Team will host the Sutherland Tax Roundtable Silicon Valley on Thursday, October 9 at the Four Seasons Hotel Silicon Valley in Palo Alto, California. The roundtable will take an in-depth look at significant state and local tax issues and developments impacting the technology sector, including:

  • Tax Considerations of a Global Workforce
    • Employment tax considerations for inbound and outbound assignments
    • Nexus and permanent establishment risks
    • Employment tax sourcing considerations for equity and deferred compensation
    • U.S. tax considerations for employment arrangements including expatriates (FBAR, FATCA, Section 402(b), Section 457A), secondments, employment companies and other structures
  • Through a Blurred Lens – Update on State Tax Transparency Developments
    • Taxpayers’ access to state tax information through the use of Freedom of Information Act-type statutes, discovery and taxpayer bill of rights
    • State information-sharing statutes and practices
    • Best practices to manage documentation and privileged communications
  • Wine Me, Dine Me, Woo Me to Your State – The Recent Surge in State Tax Credits and Incentives Offerings 
    • Overview of recent surge in credit and incentive offerings
    • State willingness and desire to attract and retain business
    • Transparency of offerings and the rise of public scrutiny of large incentive packages, including best practices for maintaining confidentiality

    Click here for more information and to register. Our program is complimentary. Seating is limited. This program is intended for in-house attorneys and tax professionals. CPE and CLE credit will be offered.

Click here to read our September 2014 posts on stateandlocaltax.com or read each article by clicking on the title. A printable PDF is also available here. 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 Stephanie Do and Andrew Appleby

The Massachusetts Department of Revenue addressed the possible expiration and subsequent retroactive enactment of the federal Internet Tax Freedom Act (ITFA). The Department advised Internet Service Providers (ISPs) to continue to rely on Technical Information Release (TIR) No. 05-8 (July 14, 2005), until further notice, to determine the taxability of telecommunications services and Internet access services. In TIR 05-8, the Department recognized that Massachusetts had not historically taxed charges for Internet access by ISPs to Massachusetts customers, but that prior to November 1, 2005, Massachusetts was not prohibited by ITFA from taxing telecommunications services purchased by ISPs to provide Internet access. A federal amendment to the ITFA in 2004 broadened the definition of “Internet access” to include telecommunications services purchased, used, or sold by an ISP to provide Internet access. As a result of the expanded definition, states, including Massachusetts, were prohibited from taxing such telecommunications services. In addition to redirecting taxpayers to TIR 05-8, the Department also advised that taxpayers may rely on section 1106 of the ITFA regarding the taxation of bundled charges, including Internet access. The Department anticipates providing additional guidance if the ITFA expires. Mass. TIR 14-10 (Sept. 11, 2014).

Thumbnail image for Thumbnail image for Thumbnail image for Thumbnail image for ClayWithSam.jpgMeet Samwise Fleming (Sam for short), the lovable eight-year-old Golden Retriever belonging to Clay Fleming of Revel Consulting. Sam has been with Clay since he was just a pup – coming home to reside in the Pacific Northwest in July 2006.

Known for its many scenic outdoor activities, Woodinville, Washington, is a popular spot for hot air balloon enthusiasts, but Sam is definitely not one of them! While out on a walk one day, Sam saw a hot air balloon and immediately dropped to his belly, his legs splayed out at his sides. Clay had to struggle to drag (and eventually carry) Sam home from his walk. Years later, after moving to Whidbey Island, poor Sam would see a blimp and have nearly the same reaction.  Thumbnail image for Sam 1.jpg

This sweet boy enjoys belly scratches, and he and his owner both share a passion for playing with bright shiny objects for hours on end. As for musical interests, Sam has a fondness for the greats, and enjoys crooners, especially Frank Sinatra. Sam is thrilled to be September’s Pet of the Month!

Thumbnail image for Sam_Laughing.jpg

By Derek Takehara and Andrew Appleby

The Minnesota Supreme Court upheld the Minnesota Department of Revenue’s imposition of sales tax on a software company’s sale of partially customized software because the taxpayer failed to separately state customization charges on customer invoices. The taxpayer licensed software that analyzed information on retailers’ cash registers. The taxpayer always customized the software to fit the retailers’ needs, but never separately stated customization charges on its invoices. By statute, Minnesota law provides that sales of prewritten computer software are subject to sales tax. Partially prewritten and partially customized software is considered entirely prewritten software, but customized portions of software are exempt from sales tax to the extent they are reasonable and separately stated. Applying the plain meaning rule to interpret the unambiguous statute, the court held that the taxpayer’s failure to separately state customization charges subjected the entire transaction to sales tax. The court rejected the taxpayer’s alternative substance-over-form argument because the taxpayer presented inadequate evidence that, in substance, it was selling purely customized software. Finally, the court upheld penalties because the taxpayer failed to show it reasonably relied on the advice of its accountant. LumiData, Inc. v. Comm’r of Revenue, No. A14-0254 (Minn. Sept. 10, 2014).

The Maryland Chamber of Commerce has entered the battle against Maryland’s unconstitutional personal income tax regime. Filing as amicus curiae before the U.S. Supreme Court in Maryland State Comptroller of the Treasury v. Wynne, the Maryland Chamber identified the fatal flaw with Maryland’s personal income tax: by not providing full relief to Maryland residents for income taxes paid to other states, Maryland subjects its residents to multiple taxation.

View the full Legal Alert.

By Ted Friedman and Prentiss Willson

The Texas Comptroller determined that for Texas franchise tax purposes the apportionment factor of an out-of-state taxpayer engaged in the provision of technical training could not be adjusted to account for certain costs incurred in preparing and marketing the training sessions. The training sessions that were sold in Texas were taught by instructors located in Texas for the benefit of attendees located in Texas. The Comptroller explained that, for services performed within Texas, the focus is on the specific, end-product acts for which the customer contracts and pays to receive, not on nonreceipt-producing, albeit essential, support activities. The Comptroller reasoned that the activities performed at the taxpayer’s out-of-state headquarters were undoubtedly necessary and essential to the creation and marketing of the training services sold in Texas. However, the act the taxpayer’s customers contracted for and paid to receive, and the act that produced the receipts at issue, was the training performed in Texas. The Comptroller determined that the taxpayer’s apportionment factor must be based on the location where the training sessions were performed, not on the location where the developmental costs were incurred. Tex. Comp. Decision 107,606 (July 28, 2014).

By Jessica Kerner and Pilar Mata

The Georgia Department of Revenue determined that a company’s cloud-based applications and related services are not subject to Georgia sales and use tax. The company maintains and operates hardware and software on servers located outside of Georgia that it uses to support its customers’ telecommunications equipment, including voice, video, messaging, presence, audio, web conferencing, and mobile capabilities. The company’s customers provide their own telephone equipment and access the company’s cloud applications through the customers’ existing telecommunications, Internet, or network connections obtained through third parties. The Department concluded that cloud-based applications and hosting services are not subject to sales and use tax because Georgia does not tax these services. Moreover, the company’s services are not taxable telecommunications services because the company does not sell local exchange or cellular telephone services, which are the only telecommunications services subject to Georgia sales and use tax. The Department also ruled that the company’s purchase of hardware and software for the provision of such cloud-based services was not a sale for resale because the customers do not receive title, possession, use or control of the company’s hardware or software. Ga. LR SUT-2014-05 (June 9, 2014).

The Department’s determination is the latest in a series of conflicting rulings issued by other states based upon the same or similar facts, including:

  • Colorado (Colo. Priv. Ltr. Rul. No. PLR-13-006 (Sept. 18, 2013) (Taxpayer is providing a taxable intrastate telephone service).
  • Illinois (Ill. Gen. Info. Ltr. ST 13-0074-GIL (Nov. 26, 2013) (Service is not a telecommunications service).
  • Missouri (Mo. Priv. Ltr. Rul. No. LR 7248 (May 24, 2013) (Service is a taxable telecommunications service). (See our previous coverage here:  https://www.stateandlocaltax.com/noteworthy-cases/missouri-cashes-in-on-the-cloud-telecommunication-companys-cloud-services-subject-to-sales-tax/)
  • New Mexico (N.M. Rul. No. 401-13-2 (June 26, 2013) (Taxpayer is selling a license to use hardware and software subject to gross receipts tax).
  • Ohio (Ohio Tax Opinion No. 14-0001 (Feb. 4, 2014) (Service is a taxable data processing service).
  • Utah (Utah Priv. Ltr. Rul. No. 13-003 (Dec. 4, 2013) (Taxpayer is selling the use of prewritten computer software, which is taxed as tangible personal property).

On September 18, 2014, the New York State Tax Appeals Tribunal decided its first combination case addressing the 2007 changes to New York’s combined reporting regime: Matter of Knowledge Learning Corporation and Kindercare Learning Centers, Inc. Reversing a prior determination by an Administrative Law Judge, the Tribunal held that the taxpayers did indeed meet their burden of proving that combined reporting was proper by demonstrating the existence of substantial intercorporate transactions. The Tribunal’s decision provides guidance for taxpayers in determining the types of documents and testimony that can establish the existence of substantial intercorporate transactions and demonstrate that those transactions were entered into for valid business purposes and had economic substance.

View the full Legal Alert.