On July 14, 2014, the Michigan Supreme Court in a splintered 3-1-3 decision found in favor of IBM’s election to apply the Multistate Tax Compact’s three-factor apportionment formula to
the now-repealed Michigan Business Tax (MBT).
Read the full Legal Alert here.
The Minnesota Department of Revenue updated its Sales Tax Fact Sheet on digital products to explain that webinars (electronically accessed live or prerecorded audio and audiovisual presentations) are exempt from tax provided the following three requirements are met:
(1) Admission to the in-person presentation is not subject to tax
(2) Online participants and the presenter can interact with each other during the presentation and
(3) Any limits on the amount of interaction (and when it occurs) are the same for both online and in-person participants.
Meet Nell, the adorable new Aussie/Great Pyrenees puppy belonging to Doug Mo, Of Counsel on the SALT team in Sutherland’s Sacramento office. Nell was rescued along with her mother and six brothers and sisters from a woodpile by Big Dog Rescue in Sonoma County. Since settling into her new home, Nell has been nicknamed “The Puppy Gator” for her reputation as a biter. She loves all of her toys and unfortunately also thinks any shoes or slippers left out also belong to her. Nell has
two siblings: Libby, a 12-year-old Border Collie/Aussie mix, and Riley, a Lab/Border Collie mix. Both are also rescues, and Riley is featured on the label of the Mo family’s “Fancy Dog” cabernet, and they donate all profits from the wine back to Big Dog Rescue. Cheers to that!
By Stephen Burroughs and Andrew Appleby
The Tennessee Court of Appeals held that the Commissioner had the authority to require Vodafone, a wireless communications provider, to use an alternative apportionment method for Tennessee franchise and excise tax purposes. Vodafone used Tennessee’s statutory cost-of-performance (COP) method to source its telecommunication service receipts. Using Tennessee’s statutory COP method, Vodafone sourced its receipts outside the state because “a greater proportion of the earnings-producing activity” occurred outside Tennessee. Ignoring the statutory COP method, the Commissioner sourced Vodafone’s receipts using customer billing addresses in the state because the statutory COP method resulted in an 89% decrease in Vodafone’s sales factor and created substantial “nowhere income.” In Tennessee, the Commissioner may exercise its alternative apportionment authority only in “limited and specific cases” that involve “unusual fact situations which ordinarily are unique and nonrecurring.” The court ruled that the dramatic reduction in Vodafone’s sales factor constituted a specific and unusual situation—despite the situation being common to all service providers without significant operations or capital assets in Tennessee. Further, the court held that the COP method did not clearly reflect Vodafone’s in-state activity, but did so without analyzing Vodafone’s in-state activity. Citing to the sales factor reduction and presence of “nowhere income,” the court ruled that when the “statutory formula ‘misfires,’” alternative apportionment is appropriate “where the state is entitled to receive more taxes….” The alternative apportionment application in this case is reminiscent of the Mississippi Equifax case, which raised the ire of taxpayers and legislatures alike. Vodafone Americas Holdings Inc. v. Roberts, Comm’r of Revenue, No. M2013-00947-COA-R3-CV (Filed June 23, 2014).
By Sahang-Hee Hahn and Pilar Mata
The Illinois Department of Revenue determined that a taxpayer’s cloud computing receipts should be sourced for sales factor purposes using a market-based approach because the receipts were derived from services. The taxpayer was an information technology hosting services provider engaged in a business that focused on the delivery and support of dedicated and public cloud computing for its customers. The Department relied upon the principles contained in IRC section 7701(e) to characterize the taxpayer’s cloud computing contracts as service contracts. In reaching this conclusion, the Department noted the following: (1) customers do not acquire an ownership interest in, or take physical possession of, the taxpayer’s hardware and software; (2) customers do not control the taxpayer’s hardware or software; (3) customers do not obtain a significant economic or possessory interest in the taxpayer’s hardware or software; (4) the taxpayer bears the risk of substantially diminished receipts or substantially increased expenditures if the taxpayer fails to perform under the contract; (5) the taxpayer uses the hardware and software to provide services concurrently to unrelated customers; and (6) the total contract price substantially exceeds the rental value of the hardware and software for the contract period (noting that the taxpayer provides its customers with remote customer support). Based on the foregoing, the Department determined that because the taxpayer’s cloud computing contracts are services contracts, the receipts should be sourced for sales factor purposes using market sourcing. In Illinois, this methodology first looks to the location where the customer receives the benefit. In this case, because the taxpayer was not able to determine where a customer was physically located when the customer accessed the taxpayer’s servers, the Department indicated that the services will be deemed received at the location of the office from which the customer ordered the services; if that location cannot be determined, the services will be deemed received at the customer’s billing address. The Department further determined that if the taxpayer is not taxable in the state in which services are deemed received, such receipts must be excluded from the numerator and denominator of the taxpayer’s sales factor. This ruling is effective for tax years ending on or after December 31, 2009. Ill. Priv. Ltr. Rul. No. IT 14-0003 (April 24, 2014).
By Kathryn Pittman and Andrew Appleby
In a post-audit challenge by a taxpayer, the Virginia Tax Commissioner addressed entity classification, nexus and royalty add-back issues. The Commissioner found that the taxpayer did not provide sufficient evidence that its single member LLC was a disregarded entity or that certain entities were financial institutions. Turning to nexus, the Commissioner determined that certain entities did not have positive apportionment factors or nexus in Virginia—and their exclusion did not distort income—so they could not be included in the Virginia consolidated group. Finally, the Commissioner determined the subject-to-tax exception to Virginia’s royalty add-back provision applied, but only to the extent that the income was subject to tax in other states. Va. P.D. No. 14-62 (May 6, 2014).
On June 25, the Arm’s Length Adjustment Services Advisory Group of the Multistate Tax Commission met via teleconference to continue the process of developing a multistate arm’s length pricing adjustment service. States participating in the meeting included Alabama, Florida, Georgia, Iowa, Kentucky, North Carolina, Pennsylvania and the District of Columbia. The primary focus of the meeting was to follow up from the June 2 meeting in St. Louis.
Read the full Legal Alert here.
On June 25, the Arm’s Length Adjustment Services Advisory Group (the Group) of the Multistate Tax Commission (MTC) met via teleconference to continue the process of developing a multistate arm’s length pricing adjustment service. States participating in the meeting included Alabama, Florida, Georgia, Iowa, Kentucky, North Carolina, Pennsylvania and the District of Columbia. The primary focus of the meeting was to follow up from the June 2 meeting in St. Louis.
Continue Reading MTC Speaks with Potential Transfer Pricing Vendors
By Stephen Burroughs and Andrew Appleby
The Florida Department of Revenue determined that the sale of remote storage and cloud computing services, along with related data transfer fees, are information services not subject to Florida sales tax or Communication Service Tax (CST). The taxpayer’s remote storage service grants customers access to servers for data storage. The taxpayer’s cloud computing service, which falls into the Infrastructure as a Service model, provides computing resources. The taxpayer also charges a data transfer fee when a customer requests data be transferred to a specific server location. The Department determined that neither the remote storage nor cloud computing services offered by the taxpayer involve a customer paying for the transmission or routing of information. Rather, each offers a customer the capability to store and retrieve data—hallmarks of a nontaxable information service. Further, the Department determined that the taxpayer does not provide licenses for software or tangible personal property with the remote storage or cloud computing services because a customer need not download software or have direct use of the taxpayer’s servers to utilize the services. And while data transfer utilizes a communication service to move customer data between servers, the charge is for making “the data or the computing power available [and] accessible” at a specific data center location, not “the ability to ‘transmit, convey, or route’ data.” Fla. Dep’t of Revenue, Tech. Asst. Advisement, TAA 14A19-001 (Mar. 13, 2014).
