By Nicole Boutros and Timothy Gustafson

The New York State Department of Taxation and Finance issued an advisory opinion determining that a securities broker may source receipts from “matched principal transactions” based on the “production credit method” provided in New York tax law. The taxpayer was a U.S. entity operating in six states, including New York. Although the taxpayer was not a registered broker-dealer with the Securities and Exchange Commission, it indirectly owned single member limited liability companies (SMLLCs) that were registered broker-dealers. One SMLLC frequently engaged in voice-brokered and electronically traded matched principal transactions, whereby the SMLLC acted as principal, buying securities from a seller and selling those securities to a separate buyer. The Department determined that the taxpayer is allowed to source income derived from matched principal transactions—limited to the spread between the purchase and sale price of the securities, and excluding any related commission—based on production credits awarded to the trading desk associated with each transaction. In so doing, the Department concluded that the SMLLC’s broker-dealer status, like its income, flows through to the taxpayer as the single member. This position represents a broad application by the Department of the production credit sourcing methodology for broker-dealers. N.Y. Advisory Opinion TSB-A-13(11)C (Dec. 20, 2013).

By Kathryn Pittman and Timothy Gustafson

The Virginia Tax Commissioner ruled a taxpayer’s licensing arrangements with a subsidiary intangible holding company (IHC) did not meet the unrelated party exception to Virginia’s intangible expense add-back statute. The taxpayer, a national operator and franchisor of fast food restaurants, created the IHC to hold its intangible property and entered into licensing agreements with the IHC for the use of such property. In turn, the taxpayer paid the IHC a 4% royalty based on each franchisee’s or restaurant’s gross sales. The taxpayer also entered into sublicensing agreements with its various franchisees, under which the franchisees paid the taxpayer a percentage of their receipts in exchange for the use of the intangibles. Virginia law provides for an exception to intangible expense add-back if the related member to whom the expenses are paid derives at least one-third of its gross revenues from the licensing of intangible property to persons who are not related members and the transaction giving rise to the expenses was made at rates and terms comparable to rates and terms in licensing agreements with such unrelated persons. After noting the first requirement can be met by the related member’s direct or indirect revenues, the Tax Commissioner examined the second requirement and found that since the IHC did not have any transactions with unrelated parties, no comparable arrangements existed for purposes of the exception. Furthermore, the Tax Commissioner noted that even if the licensing agreement between the IHC and the taxpayer was an indirect agreement between the IHC and the taxpayer’s franchisees, the arrangements between the IHC and the taxpayer and the arrangements between the taxpayer and its franchisees were substantially different and therefore could not form a basis for comparison for purposes of the add-back exception. Va. Pub. Doc. No. 13-239 (Dec. 19, 2013). This is Virginia’s fourth ruling issued in recent months to address application of its add-back statute. For additional coverage, see our previous post, “Unlike Sandals Resorts, Virginia Add-Back Exception Not All-Inclusive.”

By Todd Betor and Timothy Gustafson

The Virginia Tax Commissioner ruled that the state’s intangible expense add-back exception is not all inclusive and does not apply to the gross amount of royalty payments made to a taxpayer’s affiliate based solely on the gross amount of the payments shown on another state’s tax return. The taxpayer argued that the plain meaning of Va. Code Ann. § 58.1-402(B)(8)(a)(1) entitled it to exclude 100% of royalty payments made to its affiliates from the add-back provisions because the payments were subject to tax based on or measured by net income imposed by other states. The Tax Commissioner, however, ruled that when considering the statute in its entirety, the exception only applies to the portion of a taxpayer’s royalty payments to its affiliate that corresponds to the portion of such affiliate’s taxable income in other states, as evidenced by the actual apportionment percentages shown on such affiliate’s tax returns filed with those other states. The Tax Commissioner also ruled that where a state’s tax is based on gross receipts (i.e., New Jersey), the ratio to determine royalties eligible for the exception also must be based on gross receipts. Va. Pub. Doc. Rul. 13-226 (Dec. 17, 2013). This is one of four recent rulings issued by the Tax Commissioner discussing the application of Virginia’s add-back statute. See also, Va. Pub. Doc. Rul. No. 13-213 (Nov. 18, 2013); Va. Pub. Doc. Rul. No. 13-238 (Dec. 19, 2013); and Va. Pub. Doc. Rul. No. 13-239 (Dec. 19, 2013).

By Scott Booth and Andrew Appleby

The Massachusetts Governor released his proposed fiscal year 2015 budget, which includes a tax provision that is targeted directly at the insurance industry. Currently, income earned by pass-through entities, such as partnerships, owned by licensed life or property and casualty insurers is excluded from Massachusetts income tax because the owners are subject to a premiums tax instead. The proposal would treat pass-through entities owned by insurance companies as corporate entities for Massachusetts tax purposes. A similar proposal had been discussed in the Multistate Tax Commission Financial Institutions Work Group but ultimately did not materialize. The provision would apply when an insurance company owns, directly or indirectly, at least 50% of an entity engaged in a non-insurance trade or business that would otherwise be treated as a partnership or disregarded entity. In that case, the net income that passes through to the insurance company with respect to the non-insurance trade or business would be taxed as if the partnership or disregarded entity were a corporation subject to the state’s corporate excise tax.

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.