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.

 

By Sahang-Hee Hahn and Timothy Gustafson 

Less than two months after Massachusetts enacted a tax on computer design and software services (Tech Tax), the legislation was repealed with the passage of House Bill (HB) 3662 (for Sutherland’s previous coverage of this development, click here). The Tech Tax expanded Massachusetts’s sales and use tax base to include “computer system design services,” which the law defined as “the planning, consulting, or designing of computer systems that integrate computer hardware, software, or communication technologies and are provided by a vendor or a third party.” The Tech Tax also amended the statutory definition of taxable “[s]ervices” to include “the modification, integration, enhancement, installation or configuration of standardized software;” it also excluded “data access, data processing or information management services” from this definition. Mass. St. 2013 c. 46; Mass. G.L. c. 63 § 38(f), c. 64H § 1. HB 3662 undoes both of these legislative amendments. Under HB 3662, a taxpayer who collected and remitted the Tech Tax to the Department of Revenue may claim a refund for the full amount paid to the Department by filing an application for abatement by December 31, 2013. A taxpayer must refund all relevant amounts to its customers within 30 days of receiving an abatement. A taxpayer who previously collected but did not remit such funds to the Department must make “reasonable efforts” to refund such amounts to its customers. Finally, a taxpayer who neither previously collected nor paid the Tech Tax on or after July 31, 2013 is not subject to any fines, penalties or fees for having failed to do so. Mass. St. 2013 c. 95 (approved Sept. 27, 2013).

By Maria Todorova and Prentiss Willson

The Minnesota Tax Court held that computer software consulting and implementation services were not subject to sales tax in Minnesota. The taxpayer, SAP Retail, Inc., licensed enterprise resource planning software. It also provided consultation and implementation services to configure the software to a customer’s particular business activities. The court recognized that consulting and implementation services were not specifically enumerated as taxable services under Minnesota law. It determined that the taxpayer’s services did not constitute taxable fabrication services because the consumers of the services did not furnish materials used to create the software. Further, the Tax Court found that the services were not part of the taxable software license fee because (1) they were provided pursuant to a separate agreement and, even if sold as a package, were separately itemized, and (2) the services were not necessary to complete the sale of a software license that could be purchased without the services and vice versa. SAP Retail, Inc. v. Comm’r of Revenue, No. 8345-R (Minn. Tax Ct. Sept. 19, 2013).

By Todd Betor and Andrew Appleby

The Illinois Department of Revenue granted a taxpayer’s request to use an alternative apportionment method, determining that application of the standard single sales factor formula did not fairly represent the market for the taxpayer’s goods, services or other sources of income. The taxpayer’s only sale during the year in issue was the sale of a building located in Illinois. Under a mistaken application of Illinois’s standard single sales factor apportionment formula, the taxpayer believed 100% of its income from the sale of the building would be apportioned to Illinois. Based on this mistaken application, the taxpayer argued that application of the standard formula produced a “grossly” distortive result and proposed two alternative apportionment methods based on its historical Illinois income apportionment. The Department determined that the single sale of the building located in Illinois must be treated as an incidental or occasional sale and thus be excluded from the taxpayer’s sales factor. Because the taxpayer’s only income for the year in issue resulted from the sale of the building located in Illinois, exclusion of the proceeds from the sales factor would have resulted in 0% of the taxpayer’s income being apportioned to Illinois. The Department determined that application of the standard apportionment formula—which led to 0% apportionment and not 100% apportionment as originally represented by the taxpayer—led to a distortive result. The Department granted the taxpayer’s alternative apportionment request and allowed the taxpayer to use an apportionment formula that looked to its historic apportionment average from the prior nine taxable years. Illinois Private Letter Ruling No. IT-13-0003-PLR (Sept. 18, 2013).