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.

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.