By Zachary Atkins & Prentiss Willson

A California Court of Appeal held that a taxpayer who brought a successful facial challenge against a state taxing scheme met all of the requirements for an award of attorney fees and that the trial court abused its discretion by failing to award the fees. The taxpayer, an individual, sought a $442,000 income tax refund on the theory that Cal. Rev. & Tax. Code §§ 18038.5 and 18152.5 discriminated against interstate commerce by allowing a tax deferral on gains from the sale of qualified small business stock only if the issuing company met certain California property and payroll requirements. The statute was invalidated on Commerce Clause grounds in 2012, Cutler v. Franchise Tax Bd. (2012) 208 Cal.App.4th [146 Cal. Rptr. 3d 244]. However, on remand, the trial court determined that the taxpayer did not meet the elements of California’s “private attorney general” attorney fee statute and could not recover any part of the $685,000 in attorney fees. The appellate court disagreed, holding that the taxpayer met each of the statute’s four requirements. First, the taxpayer’s lawsuit enforced an important right (i.e., the right to operate in interstate commerce free from discrimination) that affected the public interest. Second, the lawsuit conferred a significant benefit on a large class of persons because nondiscriminatory tax statutes that incentivize investment in start-ups benefit the general public. Such investment, the court observed, grows businesses and creates jobs. Third, “the necessity and financial burden of private enforcement” made attorney fees appropriate under the circumstances, specifically, because the taxpayer’s litigation costs greatly exceeded the value of the taxpayer’s refund claim after discounting for the risk associated with obtaining the refund. The court also noted that the taxpayer’s wealth was not a legitimate consideration in determining whether attorney fees were appropriate. Fourth, justice did not require that the attorney fees be paid out of the taxpayer’s recovery.  Cutler v. Franchise Tax Bd. (Sept. 2, 2014, B248270) ___ Cal.App.4th ___ [2014 Cal. App. LEXIS 789]

By Suzanne Palms and Pilar Mata

The Washington Department of Revenue determined that taxpayers have a right to rely on written but not oral instructions from the Department of Revenue. The taxpayer operated an Internet marketing business and sold its services to customers both inside and outside the state. In June 2011, the taxpayer amended its excise tax returns and requested a refund claiming that most of its sales were made outside the state and that, based on the new apportionment method set forth in Rule 19402, effective June 1, 2010, the taxpayer was due a refund of taxes paid on sales that should have been apportioned out of state. The Department granted the refund. Subsequently, the Department audited the taxpayer’s returns and determined that the taxpayer had incorrectly applied the apportionment method. The taxpayer explained that it had applied the apportionment methodology per the instructions given over the telephone by a Department representative. The auditor nonetheless redetermined the taxpayer’s apportionable income and issued an assessment that included penalties and interest. The taxpayer appealed, arguing that the assessment should be waived because of its reliance on the representative’s instructions. On appeal, the Department determined the assessment was properly calculated and that although RCW 82.32A.020 entitles a taxpayer to the right to rely upon written advice from the Department, taxpayers do not have the right to rely upon oral advice pursuant to Excise Tax Advisory (ETA) 3065.  ETA 3065 reasons that taxpayers cannot rely upon the Department’s oral instructions because there is: (1) no record of facts that were presented to the Department’s representative; (2) no record of instructions or information provided by the Department’s representative, which could have been incorrect or incomplete; and (3) no evidence that the taxpayer accurately understood or followed the instructions. A word to the wise: Most, if not all, states only allow taxpayers to rely on written advice. Washington Tax Det. No. 13-0397, 33 WTD 424 (August 28, 2014).

By Jessica Kerner and Timothy Gustafson

The New York Department of Taxation and Finance advised a website operator, through which restaurants offer meals for sale, that it was not subject to sales tax on the fees it charged to the restaurants for services provided. The website allows approximately 5,000 restaurants in more than 27 cities to offer food for sale and customers to pay for the food online. When a customer places an order through the website, the customer remits payments for the meal and sales tax to the website operator. The website operator, in turn, remits the funds collected from the customer to the restaurant, retaining a marketing service fee. The restaurant is responsible for remitting sales tax to the appropriate taxing authority. The website operator also charges restaurants a one-time activation fee, a menu update fee and a fixed monthly marketing partnership fee. In return, the website operator compiles, drafts and displays information about the restaurant on the website. The Department determined the website operator provides Internet advertising services and fulfillment services to the restaurants and, as such, is not a vendor of restaurant sales. Further, the Department concluded that as a provider of fulfillment services, the website operator cannot be treated as a co-vendor that is jointly responsible for the sales tax because New York statutes prohibit an unaffiliated provider of fulfillment services from being treated as a vendor.  TSB-A-14(27)S, 8/20/14 (released 8/29/14).

Earlier this year, the Washington Legislature adjourned without passing an extension of the state’s high-technology research and development tax incentives. In this edition of A Pinch of SALT, we discuss the history of Washington’s R&D tax incentives and the potential impact if the incentives are allowed to expire.
View the full article, reprinted from the August 11, 2014 issue of State Tax Notes

Earlier this year, the Washington Legislature adjourned without passing an extension of the state’s high-technology research and development tax incentives. In this edition of A Pinch of SALT, Sutherland SALT’s Michele Borens and Todd Betor discuss the history of Washington’s R&D tax incentives and the potential impact if the incentives are allowed to expire.

View the full article, reprinted from the August 11, 2014 issue of State Tax Notes.

 

Click here to read our August 2014 posts 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.

Clydesdales 3.jpgMeet Isabella and Zelda, the latest additions to the family of Carley Roberts, partner in Sutherland’s Sacramento office, and her husband, Jeremy (you may recall some of Carley’s other pets, featured here and here). These Clydesdales (technically Shires, a type of “draft” or working horse) joined the Roberts’ ranch in September to be companions for their other Clydesdale, 007. Seven lost his half-brother suddenly in 2008 and was never the same, often spotted with his head down in the pasture. For years Carley and Jeremy tried to mix isabella_the_horse.jpgSeven with other non-draft horses, but he remained an outcast. Isabella and Zelda came to the ranch as babies, five and six months old, from Indiana and were led to Seven’s pasture. He immediately began calling out to them in anticipation, while all of the other horses ran the other way. Could it be that he recognized his own kind? Yes! The three have been inseparable ever since. Seven does not let the two out of his sight, and likewise the two fillies look to Seven for protection from the other horses on the ranch. People may say animals do not have the same emotions as humans, but Seven, Isabella and Zelda certainly have us believing otherwise, and we are thrilled to feature these two beauties as Pets of the Month!

By Stephen Burroughs and Andrew Appleby

A Vermont Superior Court held that the Commissioner of Taxes unconstitutionally applied the unitary business principle to AIG and its subsidiary, Stowe Mountain Resort. Stowe operates a ski resort, lodging and conference business in Vermont. None of AIG’s other 700 subsidiaries resemble a ski resort, and the Commissioner acknowledged that AIG was not actively involved in Stowe’s ski business. The Commissioner’s argument for unitary combination was based on AIG’s purported active management of Stowe’s financial operations, including the following administrative level findings: loans by AIG not made at arm’s length, management of expansion efforts at the resort by AIG, AIG’s assistance with financial and asset management expertise and various centralized corporate services, and AIG’s provision of marketing support through resort discounts offered to AIG employees. The Commissioner ultimately argued that Stowe was dependent upon AIG loans for its financial viability, and a separate accounting would not capture the true financial picture of AIG’s involvement with Stowe’s operations. But the Commissioner’s findings lacked one critical ingredient—adequate support from the record. The court held that the Commissioner’s findings “far outrun the evidence, which unambiguously shows that Stowe was a discrete business that did not send taxable value out of state in any appreciable way.” AIG offered uncontradicted testimony from several key AIG executives and independent Stowe consultants, whose testimony combined to describe a discrete business enterprise. Accordingly, the court held the Commissioner’s finding of unity at the administrative level was outside the constitutional boundaries of the unitary business principal. This decision represents an important taxpayer victory, as it is one of the first court decisions to apply the unitary business principle to Vermont’s combined reporting statutes. AIG Insurance Mgmt. Services, Inc. v. Vermont Dept. of Taxes, No. 589-9-13 (Vt. Sup. Ct., July 30, 2014).

By Sahang-Hee Hahn and Pilar Mata

The New Jersey Tax Court ruled for Toyota Motor Credit Corp. on three issues for New Jersey Corporate Business Tax purposes. Specifically, the court upheld the taxpayer’s gain calculation method using an upwardly adjusted federal tax basis; upheld the taxpayer’s departure from federal bonus depreciation rules; and set aside the Division’s application of the throwout rule to the taxpayer’s receipts for tax years 2003-2006. The taxpayer operated a vehicle leasing business whereby it leased vehicles to consumers and sold the used vehicles after the lease period ended. On the gain calculation issue, the court analogized the taxpayer’s case to a prior decision, Moroney v. Director, Div. of Taxation, 376 N.J. Super. 1 (App. Div. 2005), and ruled the gain from the sale of used vehicles could be calculated using a tax basis upwardly adjusted for depreciation deductions taken for federal tax purposes. On the decoupling issue, the court held that the Division’s regulation constituted an unreasonable exercise of authority because it limited the State’s decoupling provision to property acquired after January 1, 2002 for a fiscal year beginning on or after January 1, 2002, whereas the governing statute states that New Jersey’s decoupling provisions apply to property acquired after September 10, 2001 and before September 11, 2004. On the throwout issue, the court determined that the Division could not “throw out” receipts sourced to Nevada, South Dakota and Wyoming from the taxpayer’s receipts factor denominator because it had sufficient contacts with each state to merit the inclusion of such receipts. The court noted the taxpayer had paid tax to Nevada on its lease receipts and that such fact was irrelevant to whether the tax was on the taxpayer’s business activity or a sales tax. The court also ruled the taxpayer had a sufficient in-state presence in South Dakota and Wyoming through its in-state property or payroll. This case provides helpful guidance for taxpayers seeking either to compute gains using a non-federal tax basis or to defend against the Division’s throwout adjustments for prior tax years. Toyota Motor Credit Corp. v. Dir., Div. of Taxation, Dkt. No. 002021-2010 (Aug. 1, 2014).

By Ted Friedman and Andrew Appleby

The Indiana Department of Revenue determined that an Indiana taxpayer owed use tax on its rental of equipment from a related entity. After concluding the taxpayer was involved in a retail transaction when it rented equipment from a related entity, the Department imposed use tax on the taxpayer’s storage, use or consumption of the equipment in Indiana. The taxpayer asserted an equitable argument, contending that because its related entity paid tax at the time of the related entity’s purchase of the equipment, and the related entity did not request a refund of such tax from the Department, the taxpayer should receive credit for the amounts paid by the related entity against the use tax on the rental transactions. The Department concluded that the taxpayer and its related entity were two separate taxpayers, and whether the related entity was responsible for the tax on its original purchase of equipment or could have filed a refund claim due to an exemption was “irrelevant to and beyond the scope” of the taxpayer’s protest for the rental transactions at issue. Ind. Dep’t of Revenue, Letter of Findings No. 04-20130697 (July 30, 2014).

By Stephen Burroughs and Prentiss Willson

Indiana’s Department Revenue determined that the sale of prepaid phone cards and prepaid cell phones are “telecommunication services” subject to Indiana’s Utility Receipts Tax (URT). The URT is an income tax imposed upon the receipts a taxpayer receives from the sale of utility services. Included within utility services are telecommunications services, defined in part as “the transmission of messages or information.” Without analysis, the Department concluded that because the taxpayer is in the business of selling prepaid phone cards and prepaid wireless phones, the taxpayer is in the business of selling telecommunications services consisting of the transmission of messages or information. The Department did not address whether prepaid texting and internet access are telecommunication services subject to the URT because the taxpayer did not separately state such charges in its records or returns. Indiana will tax otherwise nontaxable receipts unless a taxpayer segregates the two in its books and records. As a result, the Department did not distinguish between the prepaid ordinary phone service and the perhaps nontaxable texting and internet access components in applying the URT to the taxpayer’s gross receipts from the bundled transactions. Ind. Dep’t of Revenue, Letter of Findings No. 40-20140076 (July 30, 2014).