By Stephanie Do and Andrew Appleby

The Indiana Department of Revenue determined that an out-of-state wireless communications equipment wholesaler’s in-state business activities were protected by P.L. 86-272, and therefore, the wholesaler did not have nexus for Indiana corporate income tax purposes. The wholesaler’s in-state activities were limited to shipping products to Indiana customers by common carrier and a sales employee who worked from his home office. The sales employee only solicited sales orders of the wholesaler’s products, not any services offered by the wholesaler. The sales orders were approved and fulfilled out-of-state. The Department evaluated the totality of the wholesaler’s business activities to determine whether its in-state activities were within the protection of P.L. 86-272. The Department reasoned that the wholesaler’s business activities were protected as either activities related to soliciting tangible personal property orders or as activities that did not rise above the de minimis level. Ind. Dep’t of Revenue, Letter of Findings No. 02-20130167 (Mar. 26, 2014).

By Nicole Boutros and Pilar Mata

The Texas Comptroller determined that a taxpayer’s “digitizing” services provided to oil and gas industry clients were taxable data processing services for Texas sales and use tax purposes. The services at issue consisted of taking well log data from the client; analyzing, manipulating and interpreting such data; and providing the output of the data. The taxpayer argued such services were not taxable because they fell under an exception that excludes the use of a computer to facilitate “the application of the knowledge of the physical sciences…E.G., the use of a computer to provide interpretive or enhancement geophysical services” from the definition of taxable data processing. The Comptroller, however, disagreed and held that the taxpayer was processing client data for the purpose of providing the data to its client in a requested format and that such data extraction, manipulation, storage and conversion constituted a taxable data processing service under Texas law. Tex. Comp. Dec. 108,154 (Dec. 12, 2013).  

Click here to read our March 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.

We hope you enjoy this very special edition of the Sutherland SALT Shaker newsletter.

In this issue:

  • Colorado Considering New “Bummer Taxes” on Transactions Related to Consumption of Marijuana
  • BOE Rules that P.L. 86-272 Is Not Applicable in California
  • Maryland Proposes a “Relative Tax”
  • Blow the WhISTLE! Proposed Legislation Startles State Tax Community
  • New York Amends False Claims Act to Encourage Tax Directors to Report Employees Who Make Errors on Returns
  • MTC “Super-Audits” to Become the Norm in 2014
  • SALT Pet of the Month: Sparkles the Unicorn!

Read the full April 1, 2014 Sutherland SALT Shaker newsletter.

Francois1.jpgMeet Le Petit Prince Francois Malvar (Francois for short). Francois is a seven-month-old adorable Maltipoo belonging to Ana Malvar, Senior Indirect Tax Manager at Microsoft. Francois has a lot of energy and loves to run around and play in the sun. He also loves to cuddle with his mommy. Ana fell in love with Francois instantly when they met, and they have been inseparable ever since. Francois even accompanied Ana on her most recent trip to Seattle and will be joining her there again in a few weeks.Francois2.jpg

Francois has many fans on Instagram and is contemplating starting his own Twitter page. For the Oscars, Francois wore a tux (pictured) and later in the evening had a wardrobe change into a glittery vest and cufflinks. He might be little (only 6.5 pounds), but Francois loves to play with the big dogs, and his best Thumbnail image for Francois3.jpgfriend is a Beagle mix named Chloe. The two even like to share a crate sometimes.

Francois is looking forward to meeting everyone on the Sutherland team!

By Madison Barnett and Andrew Appleby

The Florida Department of Revenue determined that a company providing television viewing data and analytics services must source its receipts from such services to the location of its customers, despite (1) the state’s majority costs of performance souring rule and (2) that the taxpayer appeared to incur the majority of its costs outside of the state. After questioning the policy wisdom of the costs of performance rule and reviewing two cases from other states, the Department adopted a narrow view of what constitutes the “income-producing activity.” The Department ultimately concluded that no costs of performance analysis was required because “[t]he income producing activity in the present case occurs wholly within Florida if the Taxpayer’s customer is located in Florida.” While the Department has issued a number of costs of performance rulings in the past several years, this ruling is particularly noteworthy for the depth of its analysis on the issue and its potential conversion of the regulatory costs of performance rule to a market sourcing rule in application. Fla. Dep’t of Revenue, TAA 13C1-011 (Nov. 21, 2013) (released Feb. 18, 2014).

Today, the Maryland Court of Appeals held that Maryland may tax out-of-state Delaware holding companies that license patents to their parent company, which was doing business in Maryland. Gore Enterprise Holdings, Inc. v. Comptroller of the Treasury and Future Value, Inc. v. Comptroller of the Treasury. The ramifications of this decision are significant because it calls into question whether a corporation must file a Maryland tax return if it engages in intercompany transactions with an in-state related parent company and also because it conflates the unitary business principle with the economic substance/business purpose doctrine.

Maryland’s high court determined that the Maryland Tax Court had applied the correct legal standard: whether the Delaware holding companies had “no economic substance as separate business entities.” The Maryland Tax Court had held that the holding companies were dependent upon their parent company because of a dependence on the parent company for their income, a circular flow of cash and the “general absence of substantive activity from either [holding company] that was in any meaningful way separate from Gore.” Importantly, the Court of Appeals dismissed as “window dressing” the holding companies’ acquisitions of patents from third parties and the license fees paid from third parties. Sutherland provided counsel to Gore in this matter. We will provide further analysis and commentary about this decision.

Today, the Maryland Court of Appeals held that Maryland may tax out-of-state Delaware holding companies that license patents to their parent company, which was doing business in Maryland. Gore Enterprise Holdings, Inc. v. Comptroller of the Treasury and Future Value, Inc. v. Comptroller of the Treasury. The ramifications of this decision are significant because it calls into question whether a corporation must file a Maryland tax return if it engages in intercompany transactions with an in-state related parent company and also because it conflates the unitary business principle with the economic substance/business purpose doctrine. 

Read the full Legal Alert here.

By David Pope and Pilar Mata

The New York Attorney General’s office posted a press release on March 14, 2014 announcing that Lantheus Medical Imaging (Lantheus) and Bristol-Myers Squibb (BMS), Lantheus’s former parent, agreed to a $6.2 million settlement for a claim filed pursuant to New York’s False Claims Act (FCA). Under New York’s FCA, a person that knowingly files, or conspires to knowingly file, a “false claim” is subject to civil penalties, including treble damages. The FCA defines “false claim” as any request or demand for money or property that is fraudulent and presented to a state or local government, including claims made under the tax law, with certain limitations. The FCA provides incentives for whistleblowers to bring action, including awards up to 30% of the recovered proceeds. Here, the New York Attorney General alleged that Lantheus and BMS failed to pay $2.2 million of New York State franchise taxes, New York City corporation taxes and Metropolitan Transit Authority surcharges from 2002 to 2006. A whistleblower initiated the case in May 2012 via a “qui tam” action. This case is particularly interesting, and concerning, because the whistleblower who initiated the case was a tax services provider and received approximately $1.1 million for initiating the claim. Additional details surrounding the case are limited because the case is sealed. Anonymous v. Anonymous, Case No. 102892/2012, Supreme Court of the State of New York, County of New York.