Yesterday the Los Angeles Superior Court held that Comcast did not establish a unitary relationship with its 57% owned subsidiary, QVC. The court found for Comcast and held that the evidence presented at trial demonstrated that none of the unitary tests were satisfied.
Read the full Legal Alert here.
Today the Los Angeles Superior Court held that Comcast did not establish a unitary relationship with its 57% owned subsidiary, QVC. The court found for Comcast and held that the evidence presented at trial demonstrated that none of the unitary tests were satisfied. Finally, the court found for the state and held that Comcast’s receipt of a $1.5 billion termination fee constituted business income. Sutherland represented Comcast in the matter. Stay tuned for our analysis of the decision. ComCon Production Services I, Inc. v. California Franchise Tax Bd., Los Angeles Superior Ct Case No. BC489779.
By Todd Betor and Andrew Appleby
The Chief Administrative Law Judge (ALJ) of the New York City Tax Appeals Tribunal ruled that The McGraw-Hill Companies, Inc., may source its receipts from Standard & Poor’s (S&P) public credit rating business using an audience-based method. The ALJ first determined that S&P’s ratings receipts are “other business receipts” because the receipts are not derived from a service or tangible personal property. Therefore, the ALJ determined that the receipts should be sourced as an “other business receipt” on a destination (market) basis. The ALJ next determined that S&P is functionally equivalent to a publisher, and thus the Constitution requires New York City to tax S&P similarly to publishers, absent a compelling government interest. Because New York City tax law requires publishers to source receipts based on the audience in the city, the ALJ held that S&P’s ratings receipts should be sourced similarly based on its New York City audience. In the Matter of the Petition of The McGraw-Hill Cos., Inc., Determination No. TAT(H)10-19(GC) et al., (N.Y.C. Tax Trib. Feb. 24, 2014).
By Zachary Atkins and Andrew Appleby
The New York Supreme Court, Appellate Division, affirmed a 2013 trial court ruling denying Sprint Nextel Corporation’s motion to dismiss the attorney general’s False Claims Act complaint. In a slip opinion, the Appellate Division concluded that N.Y. Tax Law § 1105(b)(2), which the state attorney general contends imposes tax on sales of intrastate and interstate wireless voice services sold for a fixed periodic charge, is not preempted by the federal Mobile Telecommunications Sourcing Act. The attorney general alleges that Sprint violated the New York False Claims Act by failing to collect tax on interstate wireless voice service bundled with taxable wireless services and sold for a single, monthly charge. Sprint has taken the position that interstate wireless voice service, whether separately stated or bundled, is nontaxable. Regardless, Sprint contends that the fact it did not collect tax on sales of bundled interstate wireless voice service was based on a reasonable interpretation of the applicable tax law, which would defeat the state’s False Claims Act cause of action. The Appellate Division also affirmed the trial court’s ruling that civil penalties, including treble damages, authorized by the False Claims Act are not barred by the Ex Post Facto Clause of the U.S. Constitution The case will proceed to trial before the New York Supreme Court unless Sprint appeals the decision to the New York Court of Appeals. People v. Sprint Nextel Corp., No. 103917/2011 (N.Y. App. Div. Feb. 27, 2014).
Click here to read our February 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 Sahang-Hee Hahn and Pilar Mata
The Texas Comptroller has amended its regulation governing the sales tax treatment of cable television services. The revised regulation defines for the first time several terms related to the cable television services industry; adopts a destination-based sourcing rule for intrastate sales of streaming video; and taxes “bundled cable services.” Of particular interest, the Comptroller defines a “cable system” as the “system through which a cable service provider delivers cable television or bundled cable service” and states that it may comprise “any or all of the following: tangible personal property; real property; and other media, such as radio waves, microwaves, or any other means of conveyance now in existence or that may be developed.” Texas’s regulatory definition of “cable system” now exceeds the scope of the term as defined by the FCC. The amended regulation also revised the definition of “cable television service” to encompass all forms of video programming, including streaming video, whether provided via the Internet or other technology. Sutherland submitted comments related to the proposed definition of “cable television service” prior to the adoption of the new regulation, which the Texas Comptroller acknowledged but did not incorporate. The regulatory amendments became effective on February 16, 2014. 34 Texas Admin. Cd § 3.313.
Meet Anthony, Dakota and Annabelle, the lovable orange tabbies belonging to Kathy Minde, Director of State and Local Tax at Lennox International. The Minde family is partial to orange tabbies—Kathy’s first cat was an orange tabby, and in addition to these three, Kathy also has two orange tabby “grandcats.” Anthony—known as big cat—is the alpha. Dakota and Annabelle are sisters, which is quite unusual as only 5% of orange tabbies are female. Anthony and Dakota like to cuddle (as pictured), and Annabelle (pictured under the lamp) thinks she is a dog. 
She and the family’s Border Collie/Corgi mix, Gabriel, will cuddle, and Annabelle insists on having him lick her. If he doesn’t give her attention, she plops on her side in front of him, rolls on her back, and reaches her paws up to grab his snout. Thank you to Kathy, Anthony, Dakota and Annabelle for answering our call for more feline Pets of the Month!
By Jessica Kerner and Charlie Kearns
The Massachusetts Department of Revenue determined that the sale of access to an online database was not subject to sales and use tax because the “object of the transaction” was nontaxable data processing services rather than taxable prewritten software. The taxpayer sells subscriptions to a website that allows purchasers and suppliers of various goods to access a database containing shipping information. The taxpayer populates the database with information it gathers from several sources, including customer-supplied data and third-party data. In addition to obtaining information about businesses and shipments, the taxpayer’s customers may e-mail suppliers or purchasers through the taxpayer’s website and obtain a customized, analytical report utilizing the database information on the website. To provide these services, the taxpayer must use software that organizes, extracts and manipulates all relevant data elements. While the taxpayer’s customers execute an agreement to access the website, the customers never download any software. Under Massachusetts law, the sale or other transfer of a right to use software on a server hosted by the taxpayer or a third party is subject to sales or use tax. However, where there is no separate charge for the software, and the object of the transaction is acquiring a good or service other than the software, Massachusetts sales or use tax generally does not apply. In this ruling, the Department determined that regardless of whether the charge for the subscription is bundled with a charge for the additional services, the “object of the transaction” is access to the database, not the use of the software that makes that information available. Therefore, the Department concluded that the taxpayer is selling nontaxable database services. Mass. Ltr. Rul. No. 14-1 (February 10, 2014).
By Mary Alexander and Timothy Gustafson
In an administrative order, the Oregon Department of Revenue (1) repealed a rule related to Oregon’s Multistate Tax Compact (MTC) statute, (2) changed the method for utility and telecommunication providers to elect a double-weighted sales factor and (3) provided instructions on the time to adjust a return based on another taxing authority’s correction. Effective October 7, 2013, Oregon repealed ORS 305.655, which included the provisions of the MTC authorizing the use of an evenly-weighted three-factor apportionment formula. The administrative order made conforming changes by repealing the corresponding rule, OAR 150-305.655. The administrative order also amended the method whereby taxpayers engaged in utilities or telecommunications may elect to use a double-weighted sales apportionment factor. Pursuant to OAR 150-314.280(3), a taxpayer may make the election by completing schedule AP and using the double-weighted sales apportionment factor on an original or amended tax return. Finally, OAR 150-314.410(4) now provides that the Department may mail a Notice of Deficiency at any time within two years after the Department receives notice of a change from the IRS, another state’s taxing authority, or a report required to be filed by the taxpayer. The amended rule includes examples of its application. Or. Adm. Order No. REV 11-2013 (eff. Jan. 1, 2014).
By Kathryn Pittman and Andrew Appleby
A Colorado state district court issued a preliminary injunction preventing the Colorado Department of Revenue from enforcing Colorado’s out-of-state seller use tax reporting statutes and related regulations. These rules require out-of-state sellers that do not collect Colorado sales tax to notify their Colorado purchasers—and the Department—of the amount of sales made to facilitate use tax reporting and collection. The court determined there was a reasonable probability that the plaintiff would succeed on the merits of its Commerce Clause challenge before the state court that the reporting requirements are facially discriminatory. This decision falls on the heels of a series of federal decisions involving the same reporting requirements. In 2010 and 2012, a federal district court issued first a preliminary injunction, and then a permanent injunction, respectively, against enforcing Colorado’s reporting requirements. On appeal, the U.S. Court of Appeals for the Tenth Circuit held that the federal district court had no jurisdiction to consider the injunctions because of the Tax Injunction Act. The Tenth Circuit then remanded the case to the federal district court to lift the injunction, which it did in December 2013. Soon after, the plaintiffs filed in state court asserting comparable causes of action. This is an important and groundbreaking case because it addresses the constitutional implications of reporting requirements for sellers without nexus with the taxing jurisdiction. Direct Marketing Assoc. v. Colorado Dep’t of Rev., Case No. 13CV34855 (Denver Dist. Ct. Feb. 18, 2014).
