Click here to read our February 2014 posts 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.

By Sahang-Hee Hahn and Pilar Mata

The Texas Comptroller has amended its regulation governing the sales tax treatment of cable television services. The revised regulation defines for the first time several terms related to the cable television services industry; adopts a destination-based sourcing rule for intrastate sales of streaming video; and taxes “bundled cable services.” Of particular interest, the Comptroller defines a “cable system” as the “system through which a cable service provider delivers cable television or bundled cable service” and states that it may comprise “any or all of the following: tangible personal property; real property; and other media, such as radio waves, microwaves, or any other means of conveyance now in existence or that may be developed.” Texas’s regulatory definition of “cable system” now exceeds the scope of the term as defined by the FCC. The amended regulation also revised the definition of “cable television service” to encompass all forms of video programming, including streaming video, whether provided via the Internet or other technology. Sutherland submitted comments related to the proposed definition of “cable television service” prior to the adoption of the new regulation, which the Texas Comptroller acknowledged but did not incorporate. The regulatory amendments became effective on February 16, 2014. 34 Texas Admin. Cd § 3.313.

Thumbnail image for Minde 1.jpgMinde 2.jpgMeet Anthony, Dakota and Annabelle, the lovable orange tabbies belonging to Kathy Minde, Director of State and Local Tax at Lennox International. The Minde family is partial to orange tabbies—Kathy’s first cat was an orange tabby, and in addition to these three, Kathy also has two orange tabby “grandcats.” Anthony—known as big cat—is the alpha. Dakota and Annabelle are sisters, which is quite unusual as only 5% of orange tabbies are female. Anthony and Dakota like to cuddle (as pictured), and Annabelle (pictured under the lamp) thinks she is a dog. Minde 3.jpgShe and the family’s Border Collie/Corgi mix, Gabriel, will cuddle, and Annabelle insists on having him lick her. If he doesn’t give her attention, she plops on her side in front of him, rolls on her back, and reaches her paws up to grab his snout. Thank you to Kathy, Anthony, Dakota and Annabelle for answering our call for more feline Pets of the Month!

By Jessica Kerner and Charlie Kearns

The Massachusetts Department of Revenue determined that the sale of access to an online database was not subject to sales and use tax because the “object of the transaction” was nontaxable data processing services rather than taxable prewritten software. The taxpayer sells subscriptions to a website that allows purchasers and suppliers of various goods to access a database containing shipping information. The taxpayer populates the database with information it gathers from several sources, including customer-supplied data and third-party data. In addition to obtaining information about businesses and shipments, the taxpayer’s customers may e-mail suppliers or purchasers through the taxpayer’s website and obtain a customized, analytical report utilizing the database information on the website. To provide these services, the taxpayer must use software that organizes, extracts and manipulates all relevant data elements. While the taxpayer’s customers execute an agreement to access the website, the customers never download any software. Under Massachusetts law, the sale or other transfer of a right to use software on a server hosted by the taxpayer or a third party is subject to sales or use tax. However, where there is no separate charge for the software, and the object of the transaction is acquiring a good or service other than the software, Massachusetts sales or use tax generally does not apply. In this ruling, the Department determined that regardless of whether the charge for the subscription is bundled with a charge for the additional services, the “object of the transaction” is access to the database, not the use of the software that makes that information available. Therefore, the Department concluded that the taxpayer is selling nontaxable database services. Mass. Ltr. Rul. No. 14-1 (February 10, 2014).

By Mary Alexander and Timothy Gustafson

In an administrative order, the Oregon Department of Revenue (1) repealed a rule related to Oregon’s Multistate Tax Compact (MTC) statute, (2) changed the method for utility and telecommunication providers to elect a double-weighted sales factor and (3) provided instructions on the time to adjust a return based on another taxing authority’s correction. Effective October 7, 2013, Oregon repealed ORS 305.655, which included the provisions of the MTC authorizing the use of an evenly-weighted three-factor apportionment formula. The administrative order made conforming changes by repealing the corresponding rule, OAR 150-305.655. The administrative order also amended the method whereby taxpayers engaged in utilities or telecommunications may elect to use a double-weighted sales apportionment factor. Pursuant to OAR 150-314.280(3), a taxpayer may make the election by completing schedule AP and using the double-weighted sales apportionment factor on an original or amended tax return. Finally, OAR 150-314.410(4) now provides that the Department may mail a Notice of Deficiency at any time within two years after the Department receives notice of a change from the IRS, another state’s taxing authority, or a report required to be filed by the taxpayer. The amended rule includes examples of its application. Or. Adm. Order No. REV 11-2013 (eff. Jan. 1, 2014).

By Kathryn Pittman and Andrew Appleby

A Colorado state district court issued a preliminary injunction preventing the Colorado Department of Revenue from enforcing Colorado’s out-of-state seller use tax reporting statutes and related regulations. These rules require out-of-state sellers that do not collect Colorado sales tax to notify their Colorado purchasers—and the Department—of the amount of sales made to facilitate use tax reporting and collection. The court determined there was a reasonable probability that the plaintiff would succeed on the merits of its Commerce Clause challenge before the state court that the reporting requirements are facially discriminatory. This decision falls on the heels of a series of federal decisions involving the same reporting requirements. In 2010 and 2012, a federal district court issued first a preliminary injunction, and then a permanent injunction, respectively, against enforcing Colorado’s reporting requirements. On appeal, the U.S. Court of Appeals for the Tenth Circuit held that the federal district court had no jurisdiction to consider the injunctions because of the Tax Injunction Act. The Tenth Circuit then remanded the case to the federal district court to lift the injunction, which it did in December 2013. Soon after, the plaintiffs filed in state court asserting comparable causes of action. This is an important and groundbreaking case because it addresses the constitutional implications of reporting requirements for sellers without nexus with the taxing jurisdiction. Direct Marketing Assoc. v. Colorado Dep’t of Rev., Case No. 13CV34855 (Denver Dist. Ct. Feb. 18, 2014).

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.

Read the full Legal Alert here.

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).