Sutherland’s state and local tax team will host the Sutherland SALT Roundtable Silicon Valley on Tuesday, June 17 at the Sofitel San Francisco Bay in Redwood City, California. The roundtable will take an in-depth look at significant state and local tax issues and developments impacting the technology sector, including:

  • Digital Unrest – Legislation, Litigation and Other Policy Changes Impacting the Tech Sector
  • The Source Code – Unraveling States’ Sourcing Methodologies for Cloud Services, Software and Other Developing Technology
  • Combined Reporting – New York Becomes California’s Little Brother

Click here for more information and to register. Our program is complimentary, and seating is limited. The program is intended for in-house attorneys and tax professionals.

Yesterday the Louisiana 24th Judicial District Court held that a cable service provider’s video-on-demand and pay-per-view video programming are not tangible personal property subject to sales tax. Jefferson Parish had alleged that the programming could be seen and heard and thus fell within the definition of tangible personal property.

Read the full Legal Alert here.

Yesterday the Louisiana 24th Judicial District Court held that a cable service provider’s video-on-demand and pay-per-view video programming are not tangible personal property subject to sales tax. Jefferson Parish had alleged that the programming could be seen and heard and thus fell within the definition of tangible personal property. Following a trial, the court found for the taxpayer and held that the programming is a nontaxable service rather than tangible personal property. Sutherland represented the taxpayer in the matter. Newell Normand, Sheriff and Ex-Officio Tax Collector of Jefferson Parish, Louisiana v. Cox Communications Louisiana, L.L.C., Jefferson Parish 24th Judicial District Court, Case No. 706-766 (Pitre, J.).

In their article for State Tax Notes, “Heads They Win, Tails You Lose: New York Decombination and Discretionary Adjustments,” Sutherland attorneys Marc A. Simonetti, Andrew D. Appleby and Sahang-Hee Hahn assert that the New York State Department of Taxation and Finance applies its combined reporting and discretionary authority provisions arbitrarily to maximize its tax assessments.

Read “Heads They Wing, Tails You Lose: New York Decombination and Discretionary Adjustments,” reprinted with permission from the May 19, 2014 edition of State Tax Notes. 

On June 2, the Arm’s Length Advisory Group (the Group) of the Multistate Tax Commission (MTC) met in St. Louis, Missouri, to begin the process of developing a multistate arm’s length pricing adjustment service. States participating in the meeting included Alabama, Florida, Georgia, Iowa, Kentucky, New Jersey, North Carolina and the District of Columbia. Joe Garrett (Alabama) was elected to chair the Group. The Group is primarily concerned with addressing the inability to effectively conduct transfer pricing audits at the state level. It seeks to create a viable project design sufficiently developed for an operational model by July 2015.
The need for the Group—according to the representatives from the participating states—derives from an inability to successfully rectify corporate income tax returns that states assert are distorted. While most states participating in the Group have applied expense disallowance rules for the better part of a decade, the states still believe that many intercompany transactions not covered by expense disallowance are distortive.
One issue contributing to this problem from the state’s perspective is the lack of substantial resources to successfully enter into a dispute with a taxpayer asserting that a transfer pricing agreement accurately represents the value of an intangible asset. For example, while the taxpayer consults with economists to accurately determine the true market value of an intangible asset, states lament their inability to obtain such a costly, detailed and thorough report. Moreover, states lack the human capital necessary to conduct an extensive transfer pricing audit, thus increasing the demand for the MTC to participate in such audits. New Jersey, the District of Columbia, Alabama and Kentucky have all previously contracted with third-party consultants to assist in transfer pricing assessments or audits.
Two substantive recommendations were offered for discussion by Dan Bucks, the project facilitator. First, to compensate for the lack of state resources, the MTC could develop institutional knowledge and experts with statistical and economic expertise. This expertise would be utilized by participating states to determine the true market value of intangible assets transferred by intercompany agreements. How the economist or other expert would develop the report for the state was still to be determined. With limited public taxpayer financial information, an economist would inherently fail to make a precise calculation without all relevant financial information. Simply put, the economic expertise is useless without the economic figures needed to develop a legitimate transfer pricing report. Ultimately, the viability of an expert to assist the MTC was left unresolved.
Second, the Group discussed the possibility of creating a joint audit function to assist with corporate taxpayer compliance and expedite the development of state institutional audit knowledge. The Group cited the ability of joint audits to “accelerate the training and acquisition of expertise by the staff of individual agencies.” However, it is unclear where—if at all—joint audits in the context of transfer pricing fit in with the current joint audits under the MTC. Moreover, it is unclear how many states would be interested in the joint audit program. For example, Florida indicated that it had no desire to be a part of the joint audit program, but indicated its interest in the development of economic expertise. Surprisingly, several states participating in the Group were intrigued by the apparent success of the District of Columbia’s transfer pricing audit program. The District of Columbia program has been widely criticized for resulting in taxpayer assessments where taxpayers were never actually audited.
The next meeting will take place via teleconference on June 25. The Group will meet in person and via teleconference at the 2014 Annual MTC Conference and Committee Meetings on July 28. Members of the public are invited to join both meetings.

On June 2, the Arm’s Length Advisory Group (the Group) of the Multistate Tax Commission (MTC) met in St. Louis, Missouri, to begin the process of developing a multistate arm’s length pricing adjustment service. States participating in the meeting included Alabama, Florida, Georgia, Iowa, Kentucky, New Jersey, North Carolina and the District of Columbia. Joe Garrett (Alabama) was elected to chair the Group. The Group is primarily concerned with addressing the inability to effectively conduct transfer pricing audits at the state level. It seeks to create a viable project design sufficiently developed for an operational model by July 2015.

The need for the Group—according to the representatives from the participating states—derives from an inability to successfully rectify corporate income tax returns that states assert are distorted. While most states participating in the Group have applied expense disallowance rules for the better part of a decade, the states still believe that many intercompany transactions not covered by expense disallowance are distortive.

One issue contributing to this problem from the state’s perspective is the lack of substantial resources to successfully enter into a dispute with a taxpayer asserting that a transfer pricing agreement accurately represents the value of an intangible asset. For example, while the taxpayer consults with economists to accurately determine the true market value of an intangible asset, states lament their inability to obtain such a costly, detailed and thorough report. Moreover, states lack the human capital necessary to conduct an extensive transfer pricing audit, thus increasing the demand for the MTC to participate in such audits. New Jersey, the District of Columbia, Alabama and Kentucky have all previously contracted with third-party consultants to assist in transfer pricing assessments or audits.

Two substantive recommendations were offered for discussion by Dan Bucks, the project facilitator. First, to compensate for the lack of state resources, the MTC could develop institutional knowledge and experts with statistical and economic expertise. This expertise would be utilized by participating states to determine the true market value of intangible assets transferred by intercompany agreements. How the economist or other expert would develop the report for the state was still to be determined. With limited public taxpayer financial information, an economist would inherently fail to make a precise calculation without all relevant financial information. Simply put, the economic expertise is useless without the economic figures needed to develop a legitimate transfer pricing report. Ultimately, the viability of an expert to assist the MTC was left unresolved.

Second, the Group discussed the possibility of creating a joint audit function to assist with corporate taxpayer compliance and expedite the development of state institutional audit knowledge. The Group cited the ability of joint audits to “accelerate the training and acquisition of expertise by the staff of individual agencies.” However, it is unclear where—if at all—joint audits in the context of transfer pricing fit in with the current joint audits under the MTC. Moreover, it is unclear how many states would be interested in the joint audit program. For example, Florida indicated that it had no desire to be a part of the joint audit program, but indicated its interest in the development of economic expertise. Surprisingly, several states participating in the Group were intrigued by the apparent success of the District of Columbia’s transfer pricing audit program. The District of Columbia program has been widely criticized for resulting in taxpayer assessments where taxpayers were never actually audited.

The next meeting will take place via teleconference on June 25. The Group will meet in person and via teleconference at the 2014 Annual MTC Conference and Committee Meetings on July 28. Members of the public are invited to join both meetings.

 

On June 2, the Arm’s Length Advisory Group of the Multistate Tax Commission met in St. Louis, Missouri, to begin the process of developing a multistate arm’s length pricing adjustment service. tates participating in the meeting included Alabama, Florida, Georgia, Iowa, Kentucky, New Jersey, North Carolina and the District of Columbia.

Read the full Legal Alert here.

Click here to read our May 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.

By Ted Friedman and Andrew Appleby

The Indiana Department of Revenue determined that an audit correctly required a distribution and manufacturing subsidiary of a tobacco company to file a combined return with its corporate affiliates. The Audit Division concluded that the subsidiary’s income, as reported, did not fairly reflect its Indiana source income because of the financial effects of a $700 million inter‑divisional loan between the tobacco company and the tobacco company’s U.S. affiliates. The subsidiary paid 100% of all interest costs on the loan, but certain loan proceeds flowed to other subsidiaries that were not required to repay any portion of the loan. The Department determined that the Audit Division was justified in requiring the subsidiary and its corporate affiliates to file a combined return because of the distortive effects of the loan. On audit, the subsidiary did not present an alternative to combination. The subsidiary did, however, subsequently present an alternative methodology to the Department. The Department acknowledged its statutory responsibility to fully explore reporting alternatives before requiring a combined return and requested the Audit Division to review the subsidiary’s alternative methodology to determine whether it fully addressed the Audit Division’s original concerns. Ind. Dep’t of Revenue, Letter of Findings No. 02-20130427 (Apr. 30, 2014).

By Zachary Atkins and Timonthy Gustafson

The Indiana Department of State Revenue determined that a corporation that entered into a factoring arrangement with its parent did not have nexus for Indiana Financial Institutions Tax (FIT) purposes. The out-of-state corporation purchased accounts receivable from its parent and, thereafter, was responsible for servicing those accounts. The parent had nexus with Indiana, but the out-of-state subsidiary contended it did not have nexus and had never conducted the business of a financial institution in Indiana. According to Indiana regulations, a corporation is deemed to be conducting the business of a financial institution and is subject to the FIT if 80% or more of its gross income during the taxable year is derived from extending credit, leasing that is the economic equivalent of extending credit, or credit card operations. The Department concluded that purchasing and collecting on accounts receivable, which involves routine payment for a purchase within an established period of time, is not the same as extending credit or purchasing loans, which involve the return of money or property with or without interest. Accordingly, the out-of-state corporation was not conducting the business of a financial institution and thus was not subject to Indiana’s FIT. Ind. Dep’t of Revenue, Letter of Findings No. 18-20130319 (Apr. 30, 2014).

Newton Pets 2.jpgMeet Sherman, Flash and Olsen, a loving trio of pups belonging to Kristina Newton from Hewlett-Packard. Sherman is a four-year-old Lab mix who aspires to become a therapy dog—he recently finished his first training course (way to go, Sherman!). Sherman also may be mom’s favorite, but don’t tell the others! Flash is a six-year-old Basset Hound who enjoys napping and watching Texas A&M Aggie football (really!). And last but not least, Olsen, a three-year-old Newton Pets 1.jpgRat Terrier, enjoys chasing his laser pointer (and thanks Sutherland for the toy!). All three are rescue dogs and call Brenham, Texas home. As we approach the dog days of summer, the Newtons are ready to beat the Texas heat in their stylish shades!