By Mary Alexander and Andrew Appleby

The Missouri Department of Revenue determined that a Missouri-based seller was required to collect and remit sales tax on sales to a Missouri-headquartered customer despite the fact that the items were shipped to the customer’s out-of-state locations. The seller fulfilled the orders by delivering the purchased items to a common carrier on the customer’s account and was not responsible for items lost in transit. Missouri Regulation 12 CSR 10-113.200 provides that a sale of tangible personal property is subject to sales tax if “title to or ownership of the property transfers in Missouri unless the transaction is in commerce.” Under Regulation 12 CSR 10-113.200(3)(A), title transfers “when the seller completes its obligations regarding physical delivery of the property….” Because the seller had no obligation to deliver the items outside of Missouri, i.e., the orders were delivered to the common carrier in Missouri under the customer’s account, the Department determined that the seller completed its delivery obligations by delivering the purchased items to the common carrier. Thus, the Department concluded that Missouri sales tax applied because delivery to the customer occurred in Missouri. Mo. Private Letter Ruling, No. LR 7340 (Dec. 20, 2013).

By David Pope and Timothy Gustafson

The New Jersey Tax Court drafted a letter to the Superior Court of New Jersey, Appellate Division, to amplify the Tax Court’s August 9, 2013, taxpayer-favorable decision applying New Jersey’s “Throw-Out Rule” in Lorillard Licensing Co. LLC v. Division of Taxation, Docket No. A-2033-13T1. In Lorillard, the Tax Court held that the taxpayer must apply New Jersey’s economic nexus standard for purposes of calculating its receipts factor denominator pursuant to New Jersey’s Throw-Out Rule. Lorillard, a trademark holding company, did not have any physical presence in New Jersey but conceded that it had economic nexus based upon its licensing of trademarks in the state pursuant to the New Jersey Supreme Court’s decision in Lanco, Inc. v. Director, Div. of Tax., 879 A.2d 1234 (N.J. 2005), aff’d, 908 A.2d 176 (2006), cert. denied, 551 U.S. 1131 (2007). Although Lorillard conceded economic nexus, it argued the same rules that gave it nexus must be applied for purposes of calculating its receipts factor denominator pursuant to the Throw-Out Rule. In Whirlpool Props., Inc. v. Director, Div. of Taxation, 26 A.3d 446 (N.J. 2011), the New Jersey Supreme Court determined the Throw-Out Rule applied solely to receipts from sales to states that lacked jurisdiction to impose a tax. The Tax Court’s letter reaffirms its summary judgment decision and reiterates that the holdings in Lanco and Whirlpool must be applied consistently for purposes of applying New Jersey’s economic nexus standard. The Tax Court did not mince words in its letter, stating “[t]he Director tests the limits of his credibility by asserting that the same licensing agreement that makes [Lorillard] subject to tax in New Jersey does not also make [Lorillard] subject to tax elsewhere.”  The New Jersey Division of Taxation appealed the Tax Court’s Final Order on December 30, 2013. Lorillard Licensing Co. LLC v. Director, Division of Taxation, Letter to Superior Court of New Jersey, Appellate Division, January 14, 2014.

By Zachary Atkins and Prentiss Willson

The Missouri Department of Revenue issued a letter ruling in which it determined that the sale or rental of streaming video content is not subject to Missouri sales or use tax. The service in question allowed customers to purchase or rent video content and to stream the content through devices like computers and televisions via the Internet. The Department analogized the facts to the sale of canned software delivered over the Internet, which, according to Missouri regulations, is nontaxable because the software is not delivered in a tangible medium. Likewise, in the case of streaming video content, customers do not receive tangible personal property when they purchase or rent the content, and therefore the purchase or rental is not subject to sales or use tax. Missouri Dep’t of Revenue, Letter Rul. No. 7338 (Dec. 20, 2013).

By David Pope and Andrew Appleby

The Indiana Department of Revenue determined that storage of advertising catalogs in Indiana, for a taxpayer’s out-of-state clients, did not create corporate income tax nexus for such clients. The taxpayer, located in Indiana, stored and distributed catalogs for its clients. Indiana does not define “doing business” statutorily, but the Department considered Indiana’s regulatory definition to determine whether the taxpayer’s out-of-state clients had corporate income tax nexus by storing advertising catalogs in the state. The Department reasoned that the “mere presence” of catalogs did not generate any income, nor did it constitute “doing business” in Indiana. The Department concluded that the taxpayer’s out-of-state clients did not have any Indiana income tax filing requirement based solely on the presence of advertising catalogs. Indiana Revenue Ruling No. IT 13-03 (Dec. 3, 2013). The Department drafted Revenue Ruling No. ST 13-08 on the same facts for sales and use tax nexus purposes, similarly concluding that the taxpayer’s out-of-state clients did not have sales and use tax nexus.

By Madison Barnett and Jonathan Feldman

A Texas trial court denied a taxpayer’s claim that it was entitled to use the Multistate Tax Compact’s three-factor formula election for the Texas Margin Tax. The court’s order did not specifically address either the availability of the election or whether the tax meets the MTC’s definition of an “income tax.” The ruling is the first judicial decision in Texas on the issue and adds to the growing body of conflicting case law on the MTC election. The taxpayer’s remaining claims—an as-applied constitutional challenge to the single factor sales apportionment formula and tax rate structure and a challenge to the imposition of penalties and interest—remain pending. Graphic Packaging Corp. v. Combs, No. D-1-GN-12-003038 (353rd Jud. Distr. Ct., Travis Cnty., Tex., Jan. 15, 2014) (Byrne, J.).

By Madison Barnett and Timothy Gustafson

In the first appellate decision arising from a Texas Margin Tax audit, the Texas Court of Appeals ruled in favor of the taxpayer, holding that a combined group’s eligibility for the cost of goods sold (COGS) deduction is determined on a group-wide rather than a separate-entity basis. The Comptroller denied the portion of the combined group’s COGS deduction attributable to a subsidiary that injected and removed “drilling mud” as part of the combined group’s oil and gas well drilling services. In the Comptroller’s view, the subsidiary was a service provider and thus was ineligible for the COGS deduction. The court rejected this view and held that “each member’s [COGS] deduction must be determined by considering the member’s expenses in the context of the combined group’s overall business.” The court further held that the subsidiary’s waste disposal labor costs were properly included in the COGS deduction because they constituted labor furnished to a project for the construction or improvement of real property, i.e., to the drilling of oil and gas wells. Combs v. Newpark Resources, Inc., No. 03-12-00515-CV (Tex. App. Dec. 31, 2013).

By Zachary Atkins and Andrew Appleby

The Pennsylvania Supreme Court held that treating a merger between two in-state banks differently than a merger between an in-state bank and an out-of-state bank did not violate the Uniformity Clause of the Pennsylvania Constitution. If two in-state banks merged, Pennsylvania law formerly required the combination of the banks’ book values and deductions for purposes of calculating a six-year moving average used to determine the tax base for Bank Shares Tax purposes. For calendar years prior to January 1, 2014, this “combination” provision applied only to mergers between in-state banks. First Union Nat’l Bank v. Commonwealth, 867 A.2d 711, 716 (Pa. Commw. Ct.), exceptions dismissed, 885 A.2d 112 (Pa. Commw. Ct. 2005), aff’d, 901 A.2d 981 (Pa. 2006). The taxpayer, an in-state bank that merged with another in-state bank, claimed that the combination provision violated the Uniformity Clause by favoring mergers with out-of-state banks over mergers with in-state banks. Since the combination provision did not apply to mergers with out-of-state banks, the pre-merger book values and deductions of an out-of-state bank would not be combined with pre-merger book values and deductions of the surviving in-state bank. Thus, all else being equal, the six-year average share value of an in-state bank that merged with an out-of-state bank was lower than the six-year average share value of an in-state bank that merged with another in-state bank. The Pennsylvania Supreme Court held that this differential tax treatment did not violate the Uniformity Clause. The court reasoned that a merger between an in-state bank and an out-of-state bank brings previously untaxed assets into the Commonwealth’s taxing jurisdiction for the first time and “enriches the public coffers,” whereas a merger between two in-state banks does not. This distinction was sufficient for the court to conclude that the two scenarios were materially different and that the differential tax treatment did not violate the Pennsylvania Constitution. A law change effective January 1, 2014, made significant changes to the Bank Shares Tax, including adopting a reporting and payment standard based on whether a bank is “doing business” in the state and replacing the six-year moving average calculation with a one-year valuation formula. Lebanon Valley Farmers Bank v. Commonwealth, No. 78 MAP 2011, 2013 WL 6823061 (Pa. Dec. 27, 2013).

By Derek Takehara and Andrew Appleby

The Oklahoma Tax Commission issued three Letter Rulings addressing the digital economy. First, the Commission ruled that receipts from sales of digital photos, videos and designs delivered via the Internet are not subject to sales tax when no tangible item is conveyed. The Commission also ruled that charges for Internet web designs are nontaxable. These determinations reiterate Oklahoma’s existing regulation on the taxability of internet-related services and transactions. Ok. LR-13-013 (July 11, 2013). Second, the Commission determined that receipts derived from the renewal of annual software maintenance contracts are not subject to sales tax when no physical media is supplied and software updates are available for download via the Internet. By statute, Oklahoma law exempts from sales tax prewritten software delivered to a customer electronically. Oklahoma’s regulations provide that this exemption includes optional software maintenance contracts under which prewritten upgrades are delivered to customers by means other than tangible storage media. Ok. LR-13-034 (Sept. 23, 2013). Third, the Commission ruled that receipts from sales of video game console points cards, video game console online membership cards and online points cards are not subject to sales tax. The Commission resolved the issue under Oklahoma’s gift certificate regulation, which exempts sales of gift certificates from sales tax. However, the Commission clarified that sales tax must be collected to the extent that the certificates are later redeemed for tangible personal property. Ok. LR-13-033 (Sept. 16, 2013).

Click here to read our December 2013 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.

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