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).

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!