By Zachary Atkins and Timothy Gustafson
 
The New Jersey Tax Court held that a mobile telecommunications service provider was not required to reimburse its customers before seeking a $32 million refund of erroneously collected sales tax. As part of a federal court-approved 2010 settlement agreement involving AT&T Mobility and its subsidiaries and affiliates, New Cingular filed a refund claim for New Jersey sales tax it erroneously collected and remitted on sales of Internet access services. If granted, the settlement agreement requires New Cingular to deposit the refund in an escrow account under the supervision of the federal court for distribution to its customers. The New Jersey Division of Taxation denied New Cingular’s refund claim on the grounds that (1) New Cingular failed to demonstrate that it had reimbursed its customers prior to filing the refund claim pursuant to N.J. Stat. Ann. § 54:32B-20(a), and (2) New Jersey law did not permit a refund claim on behalf of a class. The tax court held that there is no requirement that a person reimburse its customers before its refund claim will be considered; rather, New Jersey law requires only that a person reimburse its customers before any refund is paid. The tax court also held that New Cingular’s refund claim was not filed on behalf of a class, notwithstanding the fact New Cingular had more than one million customers who it argued were erroneously charged sales tax. The matter was remanded to the Division for consideration of the substantive validity of New Cingular’s refund claim. New Cingular Wireless PCS, LLC v. Director, Div. of Taxation, No. 000003-2012, 2014 WL 714769 (N.J. Tax Ct. Feb. 21, 2014).

By Maria Todorova and Andrew Appleby
 
In a Technical Memorandum, the New York State Department of Taxation and Finance explained the impact of the holding in Echostar, which addressed the New York sales and use tax resale exclusion for certain purchases made by satellite and cable television service providers. In Echostar, the New York Court of Appeals, New York’s highest court, held that a satellite television service provider’s purchases of equipment qualified for the resale exclusion because the service provider leased the equipment to its customers, and the equipment was not an element of the service. Prior to Echostar, the Department had taken the position, pursuant to TSB-M-94(2)S (Sept. 15, 1994), that the resale exclusion did not apply to purchases of equipment provided to customers to deliver cable or satellite programming because the equipment was used by the television service provider to provide the service and was not resold to customers. In the post-Echostar Technical Memorandum, the Department explained the circumstances under which purchases of equipment by satellite and cable service providers will qualify for the resale exclusion because of Echostar and provided transitional rules for such purchases. The Department further clarified that a service provider can structure its transactions in a manner where the Department will deem that the equipment provided to customers is used by the service provider and is not subject to the resale exclusion. N.Y. Tech. Mem., TSB-M-14(3)S (Mar. 7, 2014) (interpreting In re Echostar Satellite Corp. v. New York Tax App. Trib., 20 N.Y.3d 286, 982 N.E.2d 1248 (2012)).

By Zachary Atkins and Prentiss Willson

The South Carolina Department of Revenue issued a draft revenue ruling that purports to clarify the use of alternative apportionment and combined reporting for corporate income tax purposes. Citing Carmax Auto Superstores West Coast, Inc. v. South Carolina Dep’t of Revenue, 397 S.C. 604, 725 S.E.2d 711 (Ct. App. 2012), cert. granted, (S.C. Aug. 29, 2013), the draft ruling provides that the party invoking alternative apportionment under S.C. Code Ann. § 12-6-2320(A) bears the burden of proving that the standard apportionment method does not fairly represent the taxpayer’s business activity in the state. Surprisingly, the draft ruling fails to mention the additional burden imposed on the party invoking alternative apportionment. As the South Carolina Court of Appeals held in Carmax, the party seeking to use an alternative apportionment method also must prove that its method is reasonable and more fairly represents the taxpayer’s business activity in the state. The draft ruling also explains that the Department may use forced unitary combined reporting as an alternative method of apportionment: “Situations in which the Department has determined that an integral function of the core business operations is performed in separate, but related, corporations requiring a combined unitary filing include the use of purchasing companies, management fee companies, and ‘east/west’ companies.” In such situations, the Department generally will follow a “water’s edge” approach and apply the Finnigan method for apportioning income. Comments and suggestions concerning the draft revenue ruling should be submitted to the Department’s Policy Section by March 21, 2014, and can be e-mailed to the Policy Section here. A public conference has been scheduled for March 26, 2014, at the Department’s Columbia office. The public conference will be held only if it is requested by March 21, 2014. South Carolina Dep’t of Revenue, Rev. Rul. 14-STAFF DRAFT (Feb. 28, 2014).

While meeting in Denver this week, the Multistate Tax Commission’s Income Tax Uniformity Subcommittee advanced two separate projects to develop industry-specific apportionment regulations. One project will look at the electricity sales factor and the other will look at methods to source cloud services and software. Industry-specific apportionment projects like these help demonstrate why the MTC separately struggles with drafting a one-size-fits-all, uniform apportionment rule as they try to amend UDITPA.

Read the full Legal Alert here.

The Multistate Tax Commission plans to announce that they are accelerating their development of a transfer pricing audit program by soliciting the assistance of Dan Bucks, the former MTC Executive Director and Montana Director of Revenue. New Jersey recently asked the MTC to consider hiring transfer pricing auditors to assist in its Joint Audit Program and to help states with complex transfer pricing audits. The MTC subsequently reached out to states to gauge interest and possible funding. Nine states have already expressed interest in funding the cost of obtaining the additional expertise. Interestingly, the list of interested states includes both separate return states and combined reporting states. Bucks has been tasked with leading a “working group” to explore the MTC’s options for transfer pricing audits. The MTC currently has 21 open income tax audits and closed only two audits through the first half of the 2014 fiscal year, which ends June 30, 2014. Adding another layer of complexity from transfer pricing audits likely will not improve the MTC’s audit timeliness without adding significant additional resources. Sutherland’s SALT Team will monitor the MTC’s transfer pricing efforts.

By Kathryn Pittman and Andrew Appleby

The Ohio Tax Commissioner determined that billing and collection services were nontaxable debt collection services rather than taxable automatic data processing services. The taxpayer provided a variety of billing and collection services to physicians, health care practitioners and other medical personnel. These services included billing patients and performing collection-related activity, preparing reports related to the status of patient accounts, performing data entry for insurance classification, and printing and mailing billing statements to clients. The Commissioner found that the billing and collection services provided by the taxpayer constituted nontaxable debt collection services, while providing patient reports and performing data entry were taxable automatic data processing services. The Commissioner determined that the charges for providing reports and data entry should be separately stated. The Commissioner also concluded that the fees for printing and mailing the billing statements were subject to tax as sales of tangible personal property. Ohio Tax Comm’r Op. No. 14-0002 (Feb. 4, 2014).

The Multistate Tax Commission plans to announce that they are accelerating their development of a transfer pricing audit program by soliciting the assistance of Dan Bucks, the former MTC Executive Director and Montana Director of Revenue. New Jersey recently asked the MTC to consider hiring transfer pricing auditors to assist in its Joint Audit Program and to help states with complex transfer pricing audits. The MTC subsequently reached out to states to gauge interest and possible funding.

Read the full Legal Alert here.

By Todd Lard

While meeting in Denver this week, the MTC’s Income Tax Uniformity Subcommittee advanced two separate projects to develop industry-specific apportionment regulations. The first project will examine the sourcing of electricity. MTC staff presented research on how states source electricity for income tax purposes. The staff concluded that while 31 states treat electricity as tangible personal property for sales factor purposes, there is little uniformity in how sales of electricity are reflected in the factor. The staff also noted that litigation and an increasing number of taxpayers requesting a specific apportionment methodology indicate uncertainty. After hearing the staff presentation, the Subcommittee voted to continue the project in an educational phase. The Subcommittee specifically instructed the staff to examine a prior model regulation drafted by NESTOA, involve industry, and to consider lateral issues like P.L. 86-272 and nexus. The second apportionment project is a newly launched effort to examine whether a model regulation to source cloud services and software is desirable. MTC staff will research the issues and report back to the Subcommittee when they next meet. Several states, including Washington, Idaho and North Dakota, offered to provide the research they have already done on the issue. Separately, the MTC is debating a broader “modernization” of UDITPA’s apportionment methodology, but industry-specific projects like these demonstrate the difficulty of drafting a one-size-fits-all, uniform apportionment rule.

By Ted Friedman and Timothy Gustafson

The Missouri Department of Revenue determined that clients of a moving company were not subject to sales tax on boxes provided by the company and used to move the clients’ belongings. As part of the company’s moving services, it provided boxes for clients to pack their belongings. Any boxes that were still in useable condition after the move were taken back by the company. The Department reasoned the “true object of the transaction” was the nontaxable moving services, not the boxes, and concluded the clients were not subject to sales tax on use of the boxes. The Department noted, however, the company should pay sales or use tax on its purchase of the boxes used in its moving services. Mo. Ltr. Rul. No. LR 7343 (Jan. 14, 2014).

By Suzanne Palms and Pilar Mata

The Florida Department of Revenue determined that sufficient reasonable cause had been established to allow a taxpayer to discontinue filing a consolidated Florida corporate income tax return because the taxpayer had experienced “substantial growth.” The Department noted that the taxpayer’s employees, assets and income had increased, and the taxpayer had expanded its service offerings since electing to file a consolidated return. According to the Department, these factors demonstrated that the taxpayer had experienced major changes in business circumstances such that the Department could grant permission to the group to deconsolidate pursuant to Rule 12C-1.0131(3)(b)2.a., F.A.C. The Department required deferred gains realized for federal tax purposes to be reported on the taxpayer’s last consolidated return. Once a taxpayer group has elected to file a Florida consolidated return, the group must continue to file consolidated unless the Department approves a request to file separate returns. There have been a number of deconsolidation requests made by taxpayers over the past few years, but the requests are typically denied by the Department. Those requests that are approved are often subject to restrictions. Tech. Assistance Advisement No. 13C1-008 (Oct. 25, 2013, released Feb. 18, 2014).