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).

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).