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).
Meet 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 
Rat 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!
By Mary Alexander and Andrew Appleby
The Maine Board of Tax Appeals determined that a non-itemized installation charge was subject to the service provider tax (SPT) when a portion of the charge included the installation of telecommunications equipment. The taxpayer, an Internet service provider, invoiced customers a single “installation charge” for various services, which included connecting a wireless radio to the customer’s router with an Ethernet cable. According to Maine statutory provisions, the “installation, maintenance or repair of telecommunications equipment” is a service subject to the SPT. Given that telecommunications equipment is statutorily defined to include all transmission media that are used or capable of being used in the provision of two-way interactive communications, the board determined that the taxpayer was providing a taxable service. The board also rejected the taxpayer’s argument that the assessment was overstated because it was based on the value of both taxable and nontaxable services. Because the taxpayer did not separately state charges for nontaxable services on the invoice, the board concluded that it had failed to carry its burden of proof. [Corporate Taxpayer] v. Maine Revenue Servs., Docket No. BTA-2013-11 (Me. Bd. Tax App. May 2, 2014).
By Jonathan Maddison and Prentiss Willson
The California Supreme Court held that the state’s tax code provides the exclusive remedy for a dispute over the applicability of the state sales tax to retail transactions, and thus a class of plaintiffs was precluded from seeking a refund from Target, Inc. for erroneously collected sales taxes on takeout coffee sales. The plaintiffs alleged that by representing to its customers that sales tax was collected on coffee sales, Target violated California’s Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA). The plaintiffs asked the court to hold that “a retailer can’t lie to a customer.” The Supreme Court refused to do so, noting that “the clear basis of plaintiffs’ action—that Target represented that it properly was charging and in fact charged sales tax reimbursement on a sale that plaintiffs believe the tax code exempted from taxation—requires resolution of a sales tax law question[.]” The court held that the issue of taxability is first committed to the State Board of Equalization: the tax code contemplates a method by which the taxability of a sale may be challenged and determined through an audit or deficiency made by the Board, or through a taxpayer’s refund claim before the Board, followed by judicial review of the Board’s decision. Thus, the court concluded a cause of action under the UCL or CLRA cannot be reconciled with the mechanisms of the state’s tax code. Further, the consumer protection statutes under which plaintiffs brought their action could not be employed to avoid the limitations and procedures set out by the tax code because if permitted to do so, the primary decision-making role vested in the Board by the tax code would be usurped. Keep in mind that retailers in California bear the incidence of the sales tax. Retailers remit tax to the Board based on gross sales, but they do not collect sales tax from purchasers. Instead, retailers have the option of seeking sales tax reimbursement from their customers. Thus, retailers—not consumers—are the taxpayers under California sales tax law, and only taxpayers may seek refunds or otherwise challenge the taxability of a particular sale. Loeffler v. Target Corporation, Docket No. S173972 (Cal., May 1, 2014).
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:
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.
By Derek Takehara and Pilar Mata
The Magistrate Division of the Oregon Tax Court held that for the tax year 2003, (1) Rent-A-Center, a rent-to-own operator, and its wholly-owned franchising subsidiary, ColorTyme, were not unitary; (2) ColorTyme did not have nexus with Oregon; and (3) Rent-A-Center and its captive insurance subsidiary, Legacy Insurance Co. (Legacy), were unitary. The court began by addressing the proper unitary test to be used for the 2003 tax year. By statute, Oregon required the presence of three factors to demonstrate a sharing or exchange of value: centralized management, centralized administrative functions resulting in economies of scale and a flow of resources demonstrating functional integration. The court rejected the Department’s attempt to retroactively apply 2007 statutory amendments that would have permitted the finding of a unitary business based upon the presence of only one or two of these factors, ruling that the Department’s interpretation was inconsistent with the legislature’s intent. Thus, with regard to Rent-A-Center and ColorTyme, the court held the companies were not unitary because they lacked centralized management, even though the companies shared corporate officers and directors, ColorTyme’s president received Rent-A-Center stock options, and Rent-A-Center’s board discussed ColorTyme as part of its growth strategy. The court observed that “[a] sharing of corporate officers who did not direct or dictate ColorTyme’s operations does not result in centralized management” and that ColorTyme controlled its own franchising operations and acted as an independent business in competition with Rent-A-Center.
The court next held that ColorTyme did not have nexus with Oregon because its activities did not satisfy the state’s “doing business” regulation. During 2003, ColorTyme derived franchise fees and royalties from seven in-state franchisees, and ColorTyme employees visited Oregon for eight days. The court characterized ColorTyme’s activities as “sporadic and non-recurring” and held they were insufficient to rise to the level of “doing business” in the state. Because the court ruled ColorTyme lacked nexus under the state’s regulation, it did not undertake a constitutional nexus analysis.
Finally, with regard to Rent-A-Center and Legacy, the court held the companies were unitary under the three-part statutory test. The parties did not dispute that Rent-A-Center and Legacy shared centralized management and were functionally integrated, so the court only addressed whether centralized administrative functions resulting in economies of scale were present. The court reasoned that Legacy’s creation to provide insurance for Rent-A-Center’s unitary group relieved members of the group from the burden of administering the insurance function and created a financial benefit for the entire group. In the court’s opinion, this resulted in economies of scale sufficient to demonstrate the requisite sharing or exchange of value for a finding that Legacy was unitary with the Rent-A-Center group. Rent-A-Center, Inc. v. Dep’t of Revenue, No. TC-MD 111031D (Or. T.C. May 12, 2014).
By Zachary Atkins and Pilar Mata
The Louisiana Supreme Court rejected the Louisiana Department of Revenue’s attempt to look through a foreign single member limited liability company (SMLLC) and assess its owner for unpaid sales tax. The owner, a resident of Louisiana, formed the SMLLC under the laws of Montana and caused it to purchase a recreational vehicle (RV) from a Louisiana dealer. As the court noted in its opinion, Montana LLCs are commonly used to avoid paying sales tax on RVs because Montana is the only state that does not impose a sales tax on the purchase of such vehicles by residents. The fact that the owner formed the SMLLC solely to avoid paying tax was undisputed, but the court held that the Department could not ignore the SMLLC’s separate existence and assess the owner for unpaid sales tax. The Montana SMLLC was validly formed, and the bill of sale, certificate of title and purchase agreement for the RV indicated that the SMLLC was the buyer. Therefore, as explained by the court, the Department should have assessed the SMLLC if it believed sales tax was due. The court dismissed the Department’s argument that it should be permitted to pierce the veil of the SMLLC, noting that the Department raised this argument only after the owner challenged the assessment. Furthermore, Louisiana law provides that the personal liability of members of a limited liability company is governed by the law of the state of organization—in this case Montana—and the Department never applied Montana law in deciding whether the SMLLC’s veil could be pierced. The court also rejected the Department’s assertion that the SMLLC’s veil could have been pierced on the grounds of fraud, holding that the Department presented no evidence of fraud, that tax avoidance (as distinguished from tax evasion) is not tantamount to fraud, and that “[a] finding that the formation of an LLC solely for tax avoidance and not for any ‘legitimate’ purpose constitutes fraud would have destabilizing implications for Louisiana law.” Thomas v. Bridges, No. 2013-C-1855, 2014 WL 1800076 (La. May 7, 2014).
Although the Thomas case arose in the context of a sales tax assessment, the emphasis on separate legal entity status is consistent with the Louisiana Court of Appeals’ decision in UTELCOM, Inc. v. Bridges, 77 So.3d 39 (La. Ct. App. 2011), cert. denied, 83 So.3d 1046 (La. 2012), which held that a corporation’s passive ownership interest in a limited partnership doing business in Louisiana will not, in and of itself, subject the corporation to the Louisiana corporate franchise tax.
