By Todd Betor

A nonresident corporation requested a ruling from the Virginia Tax Commissioner as to whether the corporation was required to withhold Virginia state income tax and pay Virginia unemployment insurance for an employee who worked and resided in Virginia. The employee’s in-state activities consisted solely of performing legal services on behalf of the corporation from her Virginia home. The Commissioner briskly concluded the corporation was required to withhold Virginia income tax from the employee’s wages and deferred to the Virginia Employment Commission on any liability for unemployment insurance tax. While not requested by the corporation, the Commissioner then examined whether nexus existed for Virginia corporate income tax purposes. The Commissioner concluded that legal services, even if related to the sale of tangible products, are generally considered to be the type of activity that exceeds the protections of P.L. 86-272, unless they are found to be de minimis. Consequently, the Commissioner determined that the employee’s activities appeared to create nexus for Virginia corporate income tax purposes. Va. Pub. Doc. Rul. No. 13-203 (Nov. 1, 2013). This is the third ruling to discuss the nexus effects of a single employee in the state that the Commissioner has issued in the last two years. See Va. Pub. Doc. Rul. No. 12-37 (Mar. 30, 2012) and Va. Pub. Doc. Rul. No. 13-172 (Sept. 19, 2013).

By David Pope and Andrew Appleby

The New Jersey Tax Court denied three summary judgment motions in the ongoing Whirlpool litigation relating to nexus and the “Throwout Rule.” In 2011, the New Jersey Supreme Court held that New Jersey’s Throwout Rule was facially constitutional but narrowed the application of the rule to untaxed receipts from states that lacked jurisdiction to tax the corporation. The taxpayer, an intangibles holding company, subsequently filed a motion for summary judgment in the Tax Court seeking to define the application of the Throwout Rule under the Supreme Court’s decision. The New Jersey Division of Taxation filed a cross-motion for summary judgment asserting that the taxpayer had nexus in New Jersey and was required to remit tax returns before the court could determine the application of the Throwout Rule. In response, the taxpayer filed its own cross-motion for summary judgment arguing a lack of nexus in New Jersey. The court denied all three motions. Both parties’ nexus-related motions were denied because the court found issues of material fact in dispute. In particular, the court stated that whether the taxpayer (1) earned income properly attributable to the state and (2) had a physical presence in the state or exercised control over its parent company’s activities in the state were material facts that remained in dispute relative to the issue of nexus. The court also denied the taxpayer’s original motion seeking to define the application of the Throwout Rule because the issue was premature. The court determined that the nexus issue must be determined as a threshold matter before reaching the Throwout Rule issue. For those watching the Whirlpool litigation, stay tuned, as there should be some interesting developments relating to economic nexus (the Division’s primary nexus argument) and the application of the Throwout Rule as this litigation progresses. Whirlpool Props., Inc. v. Director, Div. of Taxation, Docket No. 000066-2007 (Oct. 22, 2013).

By Kathryn Pittman and Andrew Appleby

The Virginia Tax Commissioner found that a corporation with a single employee in Virginia who conducted work-related activities from a home office had nexus for corporate income tax purposes. The taxpayer, headquartered outside of Virginia, had one employee who conducted training at various facilities outside Virginia, but also developed test methods relating to such training from her home office in Virginia. The Commissioner determined that the employee’s activities from her home office exceeded the protection of P.L. 86-272 because they were related to the taxpayer’s sales of training and consulting services to its customers and were not related to sales of tangible products. The Commissioner noted that the activities would not create nexus if they were de minimis, but the taxpayer did not provide sufficient information to make such a determination. Thus, the Commissioner concluded that the taxpayer had nexus with Virginia for corporate income tax purposes. This is the second ruling discussing the nexus effects of a single employee in the state that the Commissioner has issued in the last two years. See Va. Pub. Doc. Rul. No. 12-37 (Mar. 30, 2012). Other states have also issued their own P.L. 86-272 decisions relating to the presence of a single employee in the state. See, e.g., Colo. Gen. Inf. Ltr. No GIL-13-021 (Aug. 20, 2013) (noting that a wholesaler that had an employee in Colorado would have nexus in Colorado if the employee’s activities were not closely related to the solicitation of sales). Taxpayers should be aware of these developments, particularly in states in which they have employees engaged in telework or other flexible employment arrangements. Va. Pub. Doc. Rul. No. 13-172 (Sept. 19, 2013).

By Madison Barnett and Jonathan Feldman

The Illinois Supreme Court held that Illinois’ local Retailers’ Occupation Tax (ROT) sourcing regulations—which applied a bright-line test to assign sales to the location where the purchase order was accepted—were not supported by the controlling tax imposition statutes and thus were invalid. The taxpayer, like many others in Illinois, established a sales acceptance office in a low- or no-tax Illinois municipality, according to the court, to accept orders “for tax planning purposes.” The court first found that the relevant statutory provisions taxed the entire “business of selling” and that the intent of the legislature was that situsing should be based on a “totality of the circumstances” analysis of all sales-related activities. Under the Illinois Department of Revenue’s longstanding regulations, Illinois sales were sitused to the location where the sales were accepted, regardless of the location of the other selling and solicitation activities. Interpreting its own regulations, the Department contended that a “totality of the circumstances” test should apply, but the court found that the regulations actually adopted the bright-line sourcing test advocated by the taxpayer. Because the regulations impermissibly narrowed the statutes’ legislative intent, the court held that the regulations were invalid. However, the Illinois Taxpayer Bill of Rights absolves taxpayers of liability if they have relied on erroneous written information or advice given by the Department, and the invalid regulations qualified as written advice. Thus, the court abated the taxpayer’s $23 million assessment. While it appears that taxpayers with similar facts may be protected from any past liabilities, one may question the continued viability of sales acceptance office planning in Illinois. Hartney Fuel Oil Co. v. Hamer, 2013 IL 115130 (Ill. Nov. 21, 2013).

By Zachary Atkins and Prentiss Willson

The Alaska Supreme Court held that a petroleum company and its subsidiaries were engaged in a unitary business and upheld the state’s use of an alternative apportionment formula for corporate income tax purposes. The taxpayer, Tesoro Corporation, was a petroleum refiner and marketer with its subsidiaries organized into five distinct business segments. The court analyzed the relationship between the parent and its subsidiaries and concluded that the hallmarks of a unitary business—functional integration, centralization of management and economies of scale—were present. The parent company had almost complete control over the financing of subsidiary operations, had an active board of directors that “ma[d]e all major financial and operational decisions for the subsidiaries,” and provided centralized services to the subsidiaries. After addressing the unitary business issue, the court rejected the taxpayer’s constitutional challenge to the internal consistency of the state’s apportionment scheme. While the taxpayer presented a hypothetical to demonstrate how the apportionment scheme could produce multiple taxation, the court found that the taxpayer failed to prove that it had been harmed in fact by the alleged internal inconsistency in Alaska’s tax scheme and that it therefore lacked standing to bring the challenge. The court also held that the state’s use of an alternative apportionment formula was reasonable, although it specifically declined to decide the all-important question of whether the state was required to prove the reasonableness of its alternative apportionment formula. Tesoro Corp. v. State of Alaska, Dep’t of Revenue, No. S-14326, 2013 WL 5770530 (Alaska Oct. 25, 2013).

Fabris Pet 1.jpgMeet Tink, Lucy, Linus and Puff Daddy, three Shih Tzus and a Bichon Frise, who live the sweet life in Milford, Connecticut, with Matthew Fabris of Nylon Technology and his wife of 30 years, Michelle. The pack rules this pet-loving home, which has always been blessed with the sound of barking dogs. Matthew often works from home, where he coordinates the development mobile apps—including our recently launched Sutherland SALT Shaker mobile app—and other interactive and online technology. So it is not unusual for this cuddly crew to join in a conference call at exactly the wrong moment. Thank goodness for the mute button!

Miss Tink is now 12 years old and has her hands full making sure nobody touches her stuff. To be sure, Puff Daddy who is eight, and Lucy and Linus who are both four, keep a safe distance from her (she may be old and small, but she is tough). When not lounging around the house or chasing the cats, Chloe and Stormy, the pack is constantly on guard. They spend hours looking out of the picture window (aka D-TV) waiting for other canine companions to pass by or, more importantly, keeping an eye out for the postman. The dogs are extremely proud of their record for sending the mail carriers packing, Fabris Pet 2.jpgdespite the fact that not once has a postal employee successfully entered the house to steal their toys. In addition, they get frequent walks along the Connecticut Sound to check for “messages” from their friends.

The highlight of the day is when everyone gathers in the kitchen for the singing of the “Doggie Dinner Song” (yes, there really is such a thing) and the feast that follows. They are all proud to be selected as SALT Pets of the Month and salute pet owners everywhere.

Did you know you can nominate your pet for Pet of the Month through our new mobile app? Click the menu button in the top left corner to view the Pet of the Month section, and then tap the Submit a Pet button to fill out the form.

SALT App Sign.jpgSutherland SALT is shaking things up again in state and local tax. We are excited to announce the launch of the Sutherland SALT Shaker mobile app, which alerts users to important state and local tax (SALT) developments and enables users to easily find specific, relevant and timely tax insights. The Sutherland SALT Shaker app is available for download in the iTunes App Store and on Google Play. Download it today—and be sure to give your phone a shake to see what happens!

Learn more

Click here to read our October 2013 posts on stateandlocaltax.com or read each article by clicking on the title. A printable PDF is also available here.

MorganTimRoo.jpgMeet Raleigh, also known as Roo, the seven-year-old cuddly companion of Morgan Lendino (Time Warner Cable) and her husband, Tim. Raleigh has been by Morgan’s side since college and was an excellent study partner throughout law school. Although he would surely prefer that we not highlight them, Raleigh has many cat-like qualities. In the morning, Morgan has to force him outside, and once back inside, Raleigh is content to sleep all day until Morgan or Tim returns home from work. It is also a requirement that Raleigh have a window perch so he can observe the outside world. RaleighBasket2.jpgDespite his feline tendencies, Raleigh is completely unaware that he is a small dog and enjoys playing with the “big kids” in the neighborhood. His other favorite pastimes include playing with any toy that squeaks, especially farm animals (he is from the Midwest, after all), and watching animal shows, movies and University of Kansas basketball games.He proudly sports his Jayhawks collar during basketball season and has been known to stand up on his hind legs and bark when he sees his favorite shows. With an acute sense of hearing, Raleigh can hear a jar of peanut butter opening from miles away and will be at your feet begging for a treat when he hears his favorite sound.