By Madison Barnett and Prenitss Willson

The Mississippi Supreme Court held that a casino operator was entitled to use tax credits—specifically, gambling license fee credits—earned by one combined group member to offset the entire combined group’s liability. Mississippi is generally a separate return state, but taxpayers may elect to file a post-apportionment, nexus-combined return. The Department asserted that the credit could only offset the portion of the combined group’s liability attributable to the individual group member that generated the credit. The court rejected the Department’s argument, reasoning that the credit could be used against the entity’s “income tax liability,” and as the entity is jointly and severally liable for the combined group’s liability, each member’s “liability” is equal to that of the combined group. Miss. Dep’t of Revenue v. Isle of Capri Casinos, Inc., 2012-CA-01419-SCT, 2014 WL 562025 (Miss. Feb. 13, 2014). The court largely relied on a prior case reaching the same result under Mississippi’s now-repealed consolidated return statute, Gen. Motors Corp. v. Miss. State Tax Comm’n, 510 So. 2d 498 (Miss. 1987).

By Christopher Chang and Andrew Appleby

In an action challenging the constitutionality of two New York flat highway taxes, a New York trial court ruled in favor of the taxpayer, denying a motion to dismiss filed by the New York State Department of Taxation and Finance. The taxpayer made clear in its opposition to the Department’s motion that it relies on the U.S. Supreme Court decision in American Trucking Associations, Inc., 483 U.S. 266 (1987) to assert that New York State’s flat vehicle registration and decal charges violate the Commerce Clause. In American Trucking Associations, the U.S. Supreme Court determined that two Pennsylvania flat vehicle taxes violated the Commerce Clause, in part, because the taxes effectively imposed a higher charge per mile on out-of-state vehicles. The New York trial court determined that the U.S. Supreme Court’s Commerce Clause analysis in American Trucking Associations, coupled with the factual allegations in the taxpayer’s complaint, were sufficient to set forth a cognizable Commerce Clause cause of action by the taxpayer. The trial court also denied the Department’s motions to dismiss the plaintiff’s claims for refund, injunctive relief and prospective relief, but did grant the Department’s motion to dismiss the second cause of action in the complaint involving a Due Process challenge. The outcome of this case could impact a number of unapportioned taxes—interested taxpayers should keep an eye on this case as it makes its way through the New York courts. Owner Operator Ind. Drivers Assoc. v. New York State Dep’t of Taxation & Fin., N.Y. Slip Op. 30226 (U) (N.Y. Sup. Ct., Jan. 28, 2014).

By Zachary Atkins and Timothy Gustafson

The Indiana Department of State Revenue issued two letters of findings in which it concluded that a multistate corporation and its subsidiary were not entitled to source their receipts from franchise agreements based on costs of performance (COP) for corporate income tax purposes. The parent corporation entered into franchise agreements with in-state franchisees, which operated and provided hotel accommodations. The parent corporation also granted the franchisees the right to use intellectual property and receive services in Indiana. The subsidiary, which owned real estate outside Indiana that it leased to the parent corporation for use as a reservation call center, also provided Indiana franchisees with services, including corporate management functions, training, and marketing and promotion. The parent and the subsidiary, neither of which had real property or employees in Indiana, asserted that all receipts from licensing intangibles and performing services under the franchise agreements should be sourced outside Indiana because nearly all of the income-producing activity, based on COP, occurred outside Indiana. The Department rejected the taxpayers’ positions, concluding (1) the income from the intellectual property was attributable to Indiana because its value derived from the taxpayers’ ability to exploit the intellectual property in Indiana; and (2) even if the COP statutory provisions applied, the taxpayers’ income-producing activity was deemed performed in Indiana because the franchise agreements had a business situs in Indiana. Indiana State Dep’t of Revenue, Letter of Findings Nos. 02-20130047 & 02-20130048 (Jan. 29, 2014).

For every cat submitted as a potential SALT Pet of the Month via the Sutherland SALT Shaker app, we will donate $10 to Lost Dog & Cat Rescue Foundation: Helping Animals Find their Way Since 2001. Despite the lack of felines featured in the 2013 SALT Pet of the Year contest, we know there are well-loved SALT cats out there. We need to find them. Here’s how to enter:

1. Download the Sutherland SALT Shaker mobile app on your smartphone.

Available in iTunes App Store.png          Amazon Appstore Logo.jpg          GooglePlay Logo.jpg         

2. Navigate to the Pet of the Month page using the menu button in the top left corner.

3. Click “Submit a Pet” to upload a photo and enter details about your pet.

By Madison Barnett and Timothy Gustafson

The Michigan Court of Appeals held that a provider of event planning and coordination services presented sufficient evidence to support its costs of performance sales factor sourcing method, under which it sourced services receipts to the location where the event occurred. Over the Department’s arguments that the taxpayer failed to prove its costs of performance, the court found the taxpayer’s witness testimony, together with spreadsheets documenting each year’s costs of performance, to be “competent, material, and substantial evidence” sufficient to prove the taxpayer’s claim. The court reversed the lower court’s award of attorney fees to the taxpayer, however. Although it may have been the case, as the lower court found, that the state “failed to follow the clear language of the statute . . . and its own guidance,” the court concluded that the state’s misconduct occurred at the audit level, and no improper documents had actually been filed with the lower court. Schoeneckers, Inc. v. Dep’t of Treasury, Dkt. No. 313311, 2014 WL 308856 (Mich. App. Jan. 28, 2014) (unpublished).

Click here to read our January 2014 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.

We can’t resist man’s best friend, and four handsome hounds caught our eye…Layla, Romeo, Gracie and Rocky.

Pet 1 - Wechman.jpgMeet Layla, also known as Lei-Lei, the 18-month-old companion of Craig Wechman (State Tax Director, Royal Bank of Canada), his wife Trish, and their kids Dylan and Lauren. The family went apple picking in Pennsylvania in October 2012 when they were greeted by a dog with an apple in her mouth. The farm owners said she had been there for three days. The kids were immediately drawn to her, and after the farm agreed to keep her for a month in case anyone was looking for her, the family returned to Pennsylvania in November of 2012 to pick her up. It has been a great match ever since. Layla loves the outdoors and spends many afternoons relaxing by the Mahwah River. She knows the sound of the school bus and comes down to the corner to pick up Lauren on most weekdays. Once the cool fall air comes, Layla puts on her Rutgers jersey and has even sported it at football tailgates. As for her name, Craig and Trish were members of a 60s cover band in the early 90s doing classics such as the Grateful Dead, Hot Tuna, Bob Dylan and Eric Clapton. The kids always laugh at the old video of “Layla,” so that’s how she got her name. The only fight in the evening is who Layla should sleep with, Dylan or Lauren, as she always likes to go to the far end of the bed and sleep late. Either way, she has been a great addition to the family, and the Wechmans can’t wait for puppies.

Pet 2 - Ledesma.jpgMeet Romeo, the granddog of Victor Ledesma (Tax Manager, Kimberly-Clark Corporation) and his wife, Jackie. Although not as seasoned with age as his cousin Anna (2010 December Pet of the Month), his companionship never wanes. Romeo is a constant shadow on a relentless search for a lap to sit on or a car ride to the store. He even puts up with photo shoots if car keys are in view. Romeo is adorable, but we think Victor’s granddaughter is pretty precious, too.

 

 

Pet 3 - Filion.jpgMeet Gracie, part of Kathy Filion’s (Assistant, Tyco International) family and the unsung hero of the Tyco International SALT Team. A true adventure dog, Gracie loves to travel and is happiest running around the rocks on the coast of Maine. It would be wonderful if she could talk and tell us what is actually on her mind, but her smile says it all.

 

 

 

 

Thumbnail image for Pet 4 - Chiftis.jpg

Meet Rocky and his mom Teresa Chiftis (Senior Manager Tax Controversies, Microsoft Corporation). Rocky and Teresa’s picture stole our hearts. We think it says it all.

 

 

 

 

 

SALT people are apparently dog people, as we had no cats submitted in our contest. So, cat people, represent! Send us your adorable feline friends for our February feature.

By Jessica Kerner and Timothy Gustafson

The Indiana Department of Revenue determined that the storage of advertising catalogs in Indiana, for a taxpayer’s out-of-state clients, did not create sales tax nexus for such clients. The taxpayer stored the catalogs at its facilities in Indiana prior to distributing the catalogs to recipients throughout the United States. The Department determined the Commerce Clause of the U.S. Constitution, as interpreted by Quill Corp v. North Dakota, 504 U.S. 298 (1992) and subsequent cases, prevented the state from compelling the clients to collect and remit the sales tax. Specifically, the Department found that the substantial nexus prong of the four-part test for sustaining a tax against a Commerce Clause challenge established in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), was not met. The Department explained that in order for there to be substantial nexus with a state, there must be “some kind of physical presence” in that state. The Department then concluded, without any further analysis, that having the advertising catalogs in the state alone was not the required physical presence contemplated by Quill and its progeny. Indiana Revenue Ruling No. ST 13-08 (Dec. 3, 2013). The Department drafted Revenue Ruling No. IT 13-03 on the same facts for corporate income tax nexus purposes, similarly concluding that the taxpayer’s out-of-state clients did not have corporate income tax nexus.

By Sahang-Hee Hahn and Andrew Appleby

The California Franchise Tax Board amended its regulation governing the sourcing of sales of tangible personal property to reflect California’s statutory shift in 2009 to the Finnigan rule, effective for tax years beginning on or after January 1, 2011. As amended, the regulation assigns receipts from sales of tangible personal property delivered or shipped to a purchaser in California to a taxpayer’s California sales factor numerator if the seller, or any member of the seller’s combined reporting group, is taxable in California. In addition, all receipts from sales of tangible personal property delivered to a state other than California are not assigned (thrown back) to the seller’s California sales factor numerator if any member of the seller’s combined reporting group is taxable in the destination state. Prior to California’s 2009 legislative change, California followed the Joyce rule to source the California-destination receipts of an out-of-state taxpayer. Under the Joyce rule, California-destination receipts from sales of goods by a seller that was part of a unitary business were included in the combined filing group’s California sales factor only if the seller was taxable in the state. Title 18, Cal. Code Regs. 25106.5, effective January 1, 2014; Cal. Rev. & Tax. Code § 25135.

By Maria Todorova and Prentiss Willson

On January 14, 2014, the U.S. Supreme Court reversed the Ninth Circuit and held that due process prevents a state court from exercising general personal jurisdiction over a foreign corporation based solely on the business activities performed in the forum state by a U.S. subsidiary on behalf of the foreign parent. Residents of Argentina sued DaimlerChrysler, a German company, in California alleging that DaimlerChrysler’s Argentine subsidiary had collaborated with state security forces to commit certain acts. Plaintiffs alleged that California had jurisdiction over the lawsuit because of the California business activities by DaimlerChrysler’s U.S. corporate subsidiary that was incorporated in Delaware with its principal place of business in New Jersey. The Ninth Circuit imputed the U.S. subsidiary’s California contacts to DaimlerChrysler and held that the subsidiary was the parent’s agent for jurisdictional purposes, thereby providing California with general jurisdiction over DaimlerChrysler. The U.S. Supreme Court rejected the Ninth Circuit’s “agency” test for general personal jurisdiction. Moreover, the Court concluded that even if the subsidiary’s California contacts were imputable to its parent, “there still would be no basis to subject DaimlerChrysler to general jurisdiction in California, for DaimlerChrysler’s slim contacts with the State hardly render it at home there.”  The Court explained that a corporation’s “home” is typically its place of incorporation and principal place of business. Neither DaimlerChrysler nor its subsidiary was incorporated in California, and neither had its principal place of business there. Accordingly, California could not be DaimlerChrysler’s “home” for jurisdictional purposes. Although there are no direct state tax implications in this case, the decision, along with the Court’s recent opinions in Goodyear Dunlop Tires Operations S.A. v. Brown, 131 S. Ct. 2846 (2011), and J. McIntyre Machinery LTD v. Nicastro, 131 S. Ct. 2780 (2011), and the state court holdings in Griffith v. ConAgra Brands Inc., 728 S.E.2d 74 (W.Va. 2012), and Scioto Insurance Co. v. Okla. Tax Comm’n, 279 P.3d 782 (Okla. 2012), might be the start of a trend to revitalize the Due Process Clause as a limitation on state taxing jurisdiction over multistate businesses. Daimler AG v. Bauman, No. 11-965, 2014 U.S. LEXIS 644 (2014).