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:
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.
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, 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.
Meet 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 
Seven 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!
