By Derek Takehara and Andrew Appleby

The Illinois Department of Revenue determined that a wholesale distributor of international telecommunications services could source its long-distance telephone receipts based on its Illinois property factor. The taxpayer, an intermediate international telecommunications carrier, owned and rented equipment in several states, including Illinois. Illinois law provides that a taxpayer must source receipts from the sale of telecommunications services for resale using the same apportionment methodology as sales to end-users (e.g., the location of the service, the billing address, or the location where the call is originated, terminated, inputted or received). However, if the determinative information is not readily available to the taxpayer, the taxpayer may use “any other reasonable and consistent method” to apportion the receipts. Here, the information was not readily available to the taxpayer because the taxpayer had no direct interaction with end-users. Accordingly, the Department permitted the taxpayer to use another reasonable and consistent method. The taxpayer proposed two alternative sourcing methods, including a “property method” (based on a proportion of the net book value of the taxpayer’s total property in Illinois) and a “revenue method” (based on a proportion of gross revenue attributed to the taxpayer’s property in Illinois). However, instead of adopting one of these methods, the Department ruled that the taxpayer could source its receipts using the taxpayer’s Illinois property factor, as long as the taxpayer applied all relevant statutory and regulatory rules, including those requiring property owned to be valued at cost and property rented to be valued at eight times the annual rental rate. Ill. Priv. Ltr. Rul. No. IT 14-0004 (June 4, 2014).

By Stephanie Do and Timothy Gustafson

The Washington State Department of Revenue determined that a telecommunications company’s leases of dark fiber were competitive telephone services and thus subject to retail sales tax. The taxpayer leased dark fiber – unused, unlit fiber optic cable – from various carriers and subsequently “lit” the dark fiber with its own equipment to provide telecommunications services to its own customers. The Department held that the leases of dark fiber were taxable competitive telephone services because dark fiber is a telecommunications “equipment or apparatus” under the plain meaning of those terms, and the taxpayer is a “consumer” of the services because it did not resell the leased dark fiber but instead “lit” the dark fiber to enable the transmission of voice and data communications, which the taxpayer then sold to its customers. The Department also held that dark fiber is not real property because it is not annexed to real property but is instead removable through various access points. In making its determination, the Department overruled a previous ruling involving a fiber optic cable purchase, Determination No. 97-157, which held that “telecommunications equipment or apparatus . . . is the apparatus that allows access to the telecommunications system, such as telephones or faxes,” to the extent it is inconsistent with the Department’s guidance in Excise Tax Advisory 3171.2012 (2012) or its current Determination, both holding that dark fiber is a competitive telephone service. Wash. Det. No. 13-0172R, 33 WTD 463 (2014).

By Mary Alexander and Charlie Kearns

The Missouri Department of Revenue determined in a letter ruling that Bitcoins are intangible property not subject to tax under Missouri’s Sales and Use Tax Law. As explained by the taxpayer, Bitcoins are “a form of digital currency that is created by software and stored electronically.” Here, the taxpayer sold Bitcoins in exchange for paper currency through automated teller machines. Because Missouri sales and use tax is imposed only on transactions involving tangible personal property and specifically enumerated services in Missouri – not intangible property – the Department stated that sales tax did not apply to purchases of Bitcoins. Moreover, the Department explained that the Missouri Sales and Use Tax Law does not contain an enumerated taxable service that would encompass intangible property such as Bitcoins. Mo. Dep’t of Rev. LR 7411 (Sept. 12, 2014). 

Missouri’s letter ruling comes after guidance from the Internal Revenue Service (IRS) that Bitcoins will be treated as property, not currency, for federal tax purposes. California, Kentucky and Wisconsin have also issued administrative guidance stating that payment with Bitcoins does not alter the character of a transaction for sales tax purposes; any business that accepts Bitcoins as payment must collect sales and use tax if it is a taxable transaction. IRS Notice 2014-21 (Mar. 25, 2014); Cal. State Bd. of Equalization Special Notice L-382 (June 2, 2014); Ky. Dep’t of Rev. Sales Tax Facts (June 2014); Wis. Dep’t of Rev. Sales and Use Tax Report 1-14 (Mar. 2014). 

On October 2, in PPL Electric Utilities Corporation v. Director, Division of Taxation, No. 000005-2011, the New Jersey Tax Court determined that federal deductions for the taxpayer’s payments of Pennsylvania gross receipts tax and Pennsylvania capital stock tax are not subject to addback in New Jersey. As a result, taxpayers that added back those taxes (either voluntarily or upon audit), and taxpayers that added back similar taxes paid to other states, should consider filing claims for refunds. Note that New Jersey has a four-year statute of limitations period for filing refund claims, and some taxpayers’ statute of limitations periods for the year ending December 31, 2009, if paid on the last day of the extension period, will expire on October 15, 2014.

View the full Legal Alert.

 

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).