In January, New York Governor Andrew Cuomo proposed broad corporate tax reform in his budget bill, which is currently winding its way through the legislature. The most significant proposal is a shift from a separate entity reporting regime to a full unitary combined group reporting regime. As part of this combined reporting methodology, the proposal would include captive insurance companies in the combined group—a stark departure from current New York tax law.
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By Derek Takehara and Timothy Gustafson
The Virginia Tax Commissioner ruled that a taxpayer’s provision of electronic document and programming services in conjunction with its delivery of printed materials was not subject to sales and use tax. In addition to its sales of printed materials, the taxpayer provides electronic document services that allow customers and third parties to view electronic documents and transfer them to PDF format via the Internet and provides custom programming services to help customers make their data compatible with the taxpayer’s processing software. Under Virginia law, service charges are generally taxable when billed in connection with the sale of tangible personal property. However, the Commissioner determined the taxpayer’s electronic document services were exempt as nontaxable qualified information services since they were not integral to the taxpayer’s provision of printed materials, were optional and were billed separately. With regard to the programming services, the Commissioner applied Virginia’s “true object” test, noting the customers’ primary goal in paying for the services was for the unique services themselves and not the printed materials. Accordingly, the Commissioner ruled to the extent the taxpayer’s programming services were actually customized for a specific customer, the services qualified for Virginia’s statutory exemptions for custom programs and modifications to prewritten programs. Virginia Rulings of the Tax Commissioner, Document No. 14-14 (Jan. 30, 2014).
By Ted Friedman and Andrew Appleby
The New York State Department of Taxation and Finance issued an Advisory Opinion regarding the availability of Qualified Emerging Technology Company (QETC) facilities, operations and training credits pertaining to purchases of patents and other property related to hollow metal golf ball production. The Department stated that QETC credits for “research and development property” are available only for “tangible property” that is used for “purposes of research and development in the experimental or laboratory sense.” The Department opined that the taxpayer’s purchase of intangible property, including patents, trade secrets and technological know-how, did not qualify as research and development property for QETC credit purposes. However, the Department stated that the taxpayer’s purchase of prototypes and designs of tangible property may qualify as research and development property if the property is used for research and development in the laboratory sense. The Department explained that property is used for research and development in the experimental or laboratory sense if: (1) the information available to the taxpayer does not establish the capability or method for developing or improving a product or process (i.e., an uncertainty exists); and (2) the property is used in an activity intended to discover information that would eliminate this uncertainty. The Department also opined that the taxpayer could not claim QETC credits for “qualified research expenses” because such credits were available for “expenses associated with in‑house research” and associated “dissemination” costs, and the taxpayer had not developed the patents and other property in-house but had purchased the property from a third party. N.Y. Advisory Opinion, TSB-A-14(1)C (Jan. 27, 2014).
By Derek Takehara and Andrew Appleby
Maine Revenue Services issued a Guidance Document for C-corporations regarding state modifications to federal net operating losses (NOLs). In light of Maine’s inconsistent conformity with the federal NOL rules, the guidance contains helpful explanations and examples of Maine’s NOL methodology through the years. For federal tax purposes, losses generally may be carried back two years and forward up to 20 years. Currently, Maine law does not allow any federal loss carryback but does permit income in future years (other than 2009, 2010, and 2011) to be offset by the amount of federal carryback not allowed in Maine. For tax years after 2001, Maine decoupled from the federal carryback provisions, and, for purposes of computing Maine taxable income, federal carrybacks must be offset by an addition modification of the same amount in the year of the carryback. Maine also decoupled from federal carryforward provisions for tax years 2009 through 2011, and federal carryforwards in those years must be also offset with an addition modification. Any of these addition modifications may be recaptured in subsequent years through subtraction modifications to the extent of Maine income not already offset in the year of the loss. No recapture modifications may be made in tax years 2009 through 2011, but they can be claimed beginning with tax year 2012. For tax year 2008, Maine disallows 10% of any loss in excess of $100,000, and recapture modifications are limited to $100,000. Any disallowed subtraction modifications as a result of these 2008 rules may be recaptured in later years. Me. Rev. Serv., Guidance Doc., Modifications Related to Net Operating Losses – Examples for C Corporations (Jan. 2014).
By Madison Barnett and Prenitss Willson
The Mississippi Supreme Court held that a casino operator was entitled to use tax credits—specifically, gambling license fee credits—earned by one combined group member to offset the entire combined group’s liability. Mississippi is generally a separate return state, but taxpayers may elect to file a post-apportionment, nexus-combined return. The Department asserted that the credit could only offset the portion of the combined group’s liability attributable to the individual group member that generated the credit. The court rejected the Department’s argument, reasoning that the credit could be used against the entity’s “income tax liability,” and as the entity is jointly and severally liable for the combined group’s liability, each member’s “liability” is equal to that of the combined group. Miss. Dep’t of Revenue v. Isle of Capri Casinos, Inc., 2012-CA-01419-SCT, 2014 WL 562025 (Miss. Feb. 13, 2014). The court largely relied on a prior case reaching the same result under Mississippi’s now-repealed consolidated return statute, Gen. Motors Corp. v. Miss. State Tax Comm’n, 510 So. 2d 498 (Miss. 1987).
By Christopher Chang and Andrew Appleby
In an action challenging the constitutionality of two New York flat highway taxes, a New York trial court ruled in favor of the taxpayer, denying a motion to dismiss filed by the New York State Department of Taxation and Finance. The taxpayer made clear in its opposition to the Department’s motion that it relies on the U.S. Supreme Court decision in American Trucking Associations, Inc., 483 U.S. 266 (1987) to assert that New York State’s flat vehicle registration and decal charges violate the Commerce Clause. In American Trucking Associations, the U.S. Supreme Court determined that two Pennsylvania flat vehicle taxes violated the Commerce Clause, in part, because the taxes effectively imposed a higher charge per mile on out-of-state vehicles. The New York trial court determined that the U.S. Supreme Court’s Commerce Clause analysis in American Trucking Associations, coupled with the factual allegations in the taxpayer’s complaint, were sufficient to set forth a cognizable Commerce Clause cause of action by the taxpayer. The trial court also denied the Department’s motions to dismiss the plaintiff’s claims for refund, injunctive relief and prospective relief, but did grant the Department’s motion to dismiss the second cause of action in the complaint involving a Due Process challenge. The outcome of this case could impact a number of unapportioned taxes—interested taxpayers should keep an eye on this case as it makes its way through the New York courts. Owner Operator Ind. Drivers Assoc. v. New York State Dep’t of Taxation & Fin., N.Y. Slip Op. 30226 (U) (N.Y. Sup. Ct., Jan. 28, 2014).
By Zachary Atkins and Timothy Gustafson
The Indiana Department of State Revenue issued two letters of findings in which it concluded that a multistate corporation and its subsidiary were not entitled to source their receipts from franchise agreements based on costs of performance (COP) for corporate income tax purposes. The parent corporation entered into franchise agreements with in-state franchisees, which operated and provided hotel accommodations. The parent corporation also granted the franchisees the right to use intellectual property and receive services in Indiana. The subsidiary, which owned real estate outside Indiana that it leased to the parent corporation for use as a reservation call center, also provided Indiana franchisees with services, including corporate management functions, training, and marketing and promotion. The parent and the subsidiary, neither of which had real property or employees in Indiana, asserted that all receipts from licensing intangibles and performing services under the franchise agreements should be sourced outside Indiana because nearly all of the income-producing activity, based on COP, occurred outside Indiana. The Department rejected the taxpayers’ positions, concluding (1) the income from the intellectual property was attributable to Indiana because its value derived from the taxpayers’ ability to exploit the intellectual property in Indiana; and (2) even if the COP statutory provisions applied, the taxpayers’ income-producing activity was deemed performed in Indiana because the franchise agreements had a business situs in Indiana. Indiana State Dep’t of Revenue, Letter of Findings Nos. 02-20130047 & 02-20130048 (Jan. 29, 2014).
For every cat submitted as a potential SALT Pet of the Month via the Sutherland SALT Shaker app, we will donate $10 to Lost Dog & Cat Rescue Foundation: Helping Animals Find their Way Since 2001. Despite the lack of felines featured in the 2013 SALT Pet of the Year contest, we know there are well-loved SALT cats out there. We need to find them. Here’s how to enter:
1. Download the Sutherland SALT Shaker mobile app on your smartphone.
2. Navigate to the Pet of the Month page using the menu button in the top left corner.
3. Click “Submit a Pet” to upload a photo and enter details about your pet.
By Madison Barnett and Timothy Gustafson
The Michigan Court of Appeals held that a provider of event planning and coordination services presented sufficient evidence to support its costs of performance sales factor sourcing method, under which it sourced services receipts to the location where the event occurred. Over the Department’s arguments that the taxpayer failed to prove its costs of performance, the court found the taxpayer’s witness testimony, together with spreadsheets documenting each year’s costs of performance, to be “competent, material, and substantial evidence” sufficient to prove the taxpayer’s claim. The court reversed the lower court’s award of attorney fees to the taxpayer, however. Although it may have been the case, as the lower court found, that the state “failed to follow the clear language of the statute . . . and its own guidance,” the court concluded that the state’s misconduct occurred at the audit level, and no improper documents had actually been filed with the lower court. Schoeneckers, Inc. v. Dep’t of Treasury, Dkt. No. 313311, 2014 WL 308856 (Mich. App. Jan. 28, 2014) (unpublished).
Click here to read our January 2014 posts on stateandlocaltax.com 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.
