The New York Tax Appeals Tribunal held that a company’s fees related to sales of its labor procurement system were taxable sales of pre-written software.

Taxpayer, Beeline.com Inc., provides services to assist customers in gathering, organizing, managing and assembling their contingent labor force. As part of its service contracts, taxpayer grants its customers license to use its web-based application that automates many processes associated with labor management. The Department assessed the company under the theory that it was selling licenses to use pre-written software, which is taxed as a sale of tangible personal property.

In its analysis, the Tribunal first found that the taxpayer’s system constituted pre-written software. The Tribunal made such determination despite claims by petitioner that the platform could be customized for each particular customer’s needs and preferences, finding that in most circumstances there was limited or no customization. Further, the Tribunal found that, because the taxpayer’s customer agreements provided for licenses to use the software, the consideration paid to the taxpayer was for sales of software.

The Tribunal acknowledged that the primary function test should be applied when determining the taxability of services consisting of both taxable and non-taxable components. But, based on its determination that the transactions in question involved sales of pre-written software, the Tribunal declined to apply the true object test noting that it has “declined to apply a primary function analysis when considering the taxability of mixed bundles of tangible personal property and services.” In drawing this distinction, the Tribunal relied on the fact that retail sales of services are taxable only if enumerated, but sales of tangible personal property are taxable unless exempt.

Ultimately, the Tribunal found that vendor management software technology was the core element of the taxpayer’s business, and was neither ancillary nor incidental to the taxpayer’s services. And, as a result, the taxpayer was engaged in sales of taxable tangible personal property that is subject to sales tax.

Matter of Beeline.com Inc. (No. 829516) (05.02.24)

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: What state’s high court recently held that “pre-book orders” that resulted in the “facilitation of sales” within the state did not qualify as “solicitation of orders” and thus exceeded the protections of P.L. 86-272?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!

In the latest episode of the SALT Shaker Podcast, Eversheds Sutherland attorneys Jeff Friedman and Jeremy Gove welcome UConn School of Law Professor Rick Pomp to discuss Jeff and Professor Pomp’s US Supreme Court cert petition in Ellingson Drainage, Inc. v. South Dakota Department of Revenue.

Jeff, Jeremy and Professor Pomp delve into the case’s background and its various implications, particularly focusing on the application of use tax. They also provide historical context on the relationship between sales and use taxes and explore how Ellingson may violate the external consistency doctrine. Additionally, they discuss the potential consequences of the South Dakota Supreme Court’s decision if left undisturbed by the US Supreme Court.

Their discussion ends with an overrated/underrated question: Are birthday parties overrated or underrated?

For questions or comments, email SALTonline@eversheds-sutherland.com. Subscribe to receive regular updates hosted on the SALT Shaker blog.

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The Third Circuit Court of Appeals upheld a District Court’s dismissal of a taxpayer’s challenge to New Jersey’s partnership filing fee under the tax comity doctrine. The partnership filing fee was enacted by New Jersey in 2002 to offset the costs of reviewing and auditing partnership tax returns. The fee is a flat fee computed based on the total number of partners in the partnership, $150 per partner up to a $250,000 maximum. The taxpayer sought to enjoin the fee alleging that the fee unfairly burdens companies with significant out-of-state operations in violation of the Commerce Clause.

New Jersey sought dismissal for two reasons: the Tax Injunction Act (TIA) and the doctrine of tax comity. The parties disputed whether the TIA applied, with New Jersey arguing that the fee was a “tax” for TIA purposes and the taxpayer arguing that the fee was a “fee” for TIA purposes and therefore outside the scope of the TIA. The District Court and the Third Circuit declined to resolve that question, ruling instead that the suit should be dismissed as a matter of comity under the Supreme Court’s decision in Levin v. Comm. Energy, Inc., 560 U.S. 413 (2010), because the fee was embodied in a “revenue affecting statute” involving matters of “state tax administration” and did not involve any fundamental right or classification that attracts heightened judicial scrutiny and because state courts were “better positioned” to craft a remedy in the event the fee were found to be unconstitutional. 

Energy Transfer LP v. John Ficara et al., No. 22-3347 (3rd Cir. Not Reported 2024).

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: The Supreme Court recently issued its opinion in Moore v. United States, No. 22-800. By which vote did the Court uphold the constitutionality of the section 965 transition tax?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!

Sometimes states intentionally favor domestic commerce, and sometimes they unintentionally discriminate against foreign commerce. In Kraft General Foods Inc. v. Iowa Department of Revenue and Finance, the US Supreme Court made clear that both are illegal. Because most states’ corporate income taxes conform to the Internal Revenue Code (IRC) to some degree, recent federal tax changes set the stage for unintentional (and unconstitutional) discrimination.

In this installment of “A Pinch of SALT” in Tax Notes State, Eversheds Sutherland attorneys Jeff Friedman, Jeremy Gove and Chelsea Marmor analyze the IRC’s disparate capitalization requirements for domestic and foreign research and experimental (R&E) expenditures for tax years beginning in 2022. While the federal government is free to treat foreign commerce differently from domestic commerce, states and localities do not enjoy that same freedom. Thus, when states conform to the IRC and incorporate the federal tax system’s differing treatment of domestic and foreign R&E expenses, that conformity may violate the foreign commerce clause.

Read the full article here.

A New York appellate court denied a motor fuel distributor’s (Distributor) motor fuel excise tax refund request on motor fuel brought into the state and delivered to a fuel refiner, marketer, and transporter (Marketer) “pursuant to an exchange agreement … whereby either company was permitted to remove fuel product from the terminal of its counterpart in exchange for similar treatment at a different time and location by the other.” The court found that the Distributor failed to prove that the Marketer had instead paid taxes on the fuel and that the Distributor was thus entitled to a refund. 

The New York Department of Taxation and Finance (Department) audited the Distributor and assessed motor fuel excise tax on approximately 13.8 gallons of motor fuel that it brought into New York between May 2011 and February 2012 and later provided to the Marketer via the exchange transaction. The Distributor later paid the taxes under protest and sought a refund, arguing that the Marketer had instead paid the applicable taxes.

New York imposes the motor fuel excise tax on “the initial importer of motor fuel” into the state. The distributor-seller importing motor fuel into the state must give the purchaser a certification that it had paid, or assumed the responsibility to pay, the tax and passed that amount through to the purchaser in the purchase price. The purchaser would then claim a “tax paid” credit for the taxes on its returns to avoid double taxation.

To prove the Marketer had instead paid the motor fuel excise tax, the Distributor relied on the affidavit of the custodian of the Marketer’s returns during the months at issue. He stated that he had created a workbook that proved the Marketer had paid the taxes because it did not claim the tax paid credits on the motor fuel. The Department’s auditor gave live testimony that the Distributor had failed to demonstrate that the same fuel had been taxed twice, noting what he claimed to be “significant inconsistencies” between the Distributor’s and Marketer’s returns. Based on the evidence, the court held that “given the conflict between the evidence offered through [the parties’ affidavit and testimony], there was an ample basis for the Tribunal to conclude that petitioner failed to establish a clearcut entitlement to a refund.”

In re Global Cos. LLC v. New York State Tax Appeals Trib., 227 A.D.3d 1197 (N.Y. App. Div. 2024).

The Washington Court of Appeals held that the sales of pre-paid telephone airtime purchased from third-party cellular networks by a business (Taxpayer) and resold to individual customers and retailers were subject to the City of Renton’s municipal utility tax.

The utility tax was imposed on the privilege of conducting a “telephone business” within city limits, which was defined as “providing by any person of access to the local telephone network.” Renton Municipal Code 5-11-3(O) (2019). Under the city municipal utility tax, charges to “another telecommunications company” were not taxable. RCW 35A.82.060(1). A “telecommunications company” was an entity “owning, operating, or managing any facilities used to provide telecommunications for hire, sale or resale.” RCW 80.04.010(28). The Taxpayer was not a telecommunications company because it had no physical network facilities of its own.

The Taxpayer made a few arguments as to why its sales were not taxable. First, it argued that the municipal utility tax applied only to “telecommunications companies” because the statutory exception required charges to be imposed upon “another telecommunications company.” The Taxpayer argued that this exception “presume[s] the first taxed entity was also a telecommunications company.” The court rejected this argument because “if the legislature intended for the statute to apply exclusively to ‘telecommunications companies,’ it would have used only that term.” Further, the court held that the legislature’s use of the broader term “telephone business” “evince[d] an intent to grant taxing authority broader in scope than” telecommunications companies.

The court also disagreed with the Taxpayer’s argument that – even if its direct consumer sales were taxable – its wholesale business sales to retailers were exempt from tax as resales. The resale exemption provided that cities “shall not impose the fee or tax on … charges for network telephone service that is purchased for the purpose of resale.” RCW 83A.82.060(1). Reviewing the statutory terms, the court explained that for the exemption to apply, “it is the ‘access’ to a network that must be ‘purchased’ for ‘resale.’” The court explained that no resale occurred in these transactions because the Taxpayer—not the retailers—retained control over the end user’s access to a telephone network. The retailers were thus not selling access to the cellular networks to their customers.

TracFone, Inc. v. City of Renton, 547 P.3d 902 (Wash. Ct. App. 2024).

The California Supreme Court ruled that a corporation’s transfer of its ownership of two Los Angeles supermarkets to a trust that already owned 92.8% of the corporation’s stock was a “change in ownership,” permitting the revaluation of the supermarkets’ real property. Article XIII A of the California Constitution, added by Proposition 13, strictly limits increases in the assessed value of real property unless the property undergoes a “change in ownership.” However, there is no “change in ownership” when the transaction involving a legal entity that “results solely in a change in the method of holding title to the real property and in which proportional ownership interests of the transferors and transferees, whether represented by stock, partnership interest, or otherwise, in each and every piece of real property transferred, remain the same after the transfer.” The Court gave an example of the change in ownership exclusion: two individuals that own two equal shares of real property and then transfer those shares to a corporation in which they each own each shares. In this case, the taxpayers argued there was no change in no ownership because the trust, to whom the real property was transferred, already held all the corporation’s voting stock. But, the transfer resulted in nonvoting stockholders losing any interest in real property.The Court rejected the taxpayer’s argument, holding that a change to nonvoting stock ownership means the proportional ownership interests do not qualify for the exception to a change in ownership. Thus, the Court ruled that a change in ownership had occurred, and a revaluation was permissible.

Prang v. Los Angeles Cnty. Assessment Appeals Bd., 15 Cal. 5th 1152 (2024).