The Oregon Supreme Court recently held that an out-of-state tobacco manufacturer’s acceptance of prebook orders precluded it from availing itself of Public Law 86-272 protection against the imposition of the state’s corporate excise tax. In 1959, the U.S. Congress passed P.L. 86-272, which prohibits states from imposing a net income tax when the business’s only activity in the state is the solicitation of orders of tangible personal property. The orders must then be sent outside the state for approval and rejection, and, if approved, filled or delivered from a point outside of the state. 

The taxpayer argued that it was not subject to the Oregon tax because it had no physical presence in Oregon and only solicited sales of tangible personal property in the state. However, the court held that the acceptance of prebook orders took the company out of the safe harbor of PL 86-272. During the prebook order process, the taxpayer’s in-state sales representatives persuaded Oregon retailers to order the taxpayer’s products from wholesalers. The taxpayer’s representatives then delivered the signed orders to wholesalers who had already agreed, in advance, to “accept and process” orders transmitted by the taxpayer’s employees. Pursuant to incentive agreements, if a wholesaler failed to accept and process the prebook orders, it would lose future incentive agreement payments and be required to repay any payments already received. Because the wholesalers were contractually required to accept and process the prebook orders, the court viewed the actions of the sales representatives as more akin to making direct sales in the state, rather than the protected solicitation of orders that were subject to approval from outside of the state.

Santa Fe Nat. Tobacco Co. v. Or. Dep’t of Revenue, 372 Or. 509 (2024) (en banc).

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This week’s question: Illinois recently enacted an omnibus tax package that includes, among other things, tax incentives for what high tech industry?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!

The New York Tax Appeals Tribunal held that a company’s fees related to sales of its labor procurement system were taxable sales of pre-written software.

Taxpayer, Beeline.com Inc., provides services to assist customers in gathering, organizing, managing and assembling their contingent labor force. As part of its service contracts, taxpayer grants its customers license to use its web-based application that automates many processes associated with labor management. The Department assessed the company under the theory that it was selling licenses to use pre-written software, which is taxed as a sale of tangible personal property.

In its analysis, the Tribunal first found that the taxpayer’s system constituted pre-written software. The Tribunal made such determination despite claims by petitioner that the platform could be customized for each particular customer’s needs and preferences, finding that in most circumstances there was limited or no customization. Further, the Tribunal found that, because the taxpayer’s customer agreements provided for licenses to use the software, the consideration paid to the taxpayer was for sales of software.

The Tribunal acknowledged that the primary function test should be applied when determining the taxability of services consisting of both taxable and non-taxable components. But, based on its determination that the transactions in question involved sales of pre-written software, the Tribunal declined to apply the true object test noting that it has “declined to apply a primary function analysis when considering the taxability of mixed bundles of tangible personal property and services.” In drawing this distinction, the Tribunal relied on the fact that retail sales of services are taxable only if enumerated, but sales of tangible personal property are taxable unless exempt.

Ultimately, the Tribunal found that vendor management software technology was the core element of the taxpayer’s business, and was neither ancillary nor incidental to the taxpayer’s services. And, as a result, the taxpayer was engaged in sales of taxable tangible personal property that is subject to sales tax.

Matter of Beeline.com Inc. (No. 829516) (05.02.24)

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

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This week’s question: What state’s high court recently held that “pre-book orders” that resulted in the “facilitation of sales” within the state did not qualify as “solicitation of orders” and thus exceeded the protections of P.L. 86-272?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!

In the latest episode of the SALT Shaker Podcast, Eversheds Sutherland attorneys Jeff Friedman and Jeremy Gove welcome UConn School of Law Professor Rick Pomp to discuss Jeff and Professor Pomp’s US Supreme Court cert petition in Ellingson Drainage, Inc. v. South Dakota Department of Revenue.

Jeff, Jeremy and Professor Pomp delve into the case’s background and its various implications, particularly focusing on the application of use tax. They also provide historical context on the relationship between sales and use taxes and explore how Ellingson may violate the external consistency doctrine. Additionally, they discuss the potential consequences of the South Dakota Supreme Court’s decision if left undisturbed by the US Supreme Court.

Their discussion ends with an overrated/underrated question: Are birthday parties overrated or underrated?

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The Third Circuit Court of Appeals upheld a District Court’s dismissal of a taxpayer’s challenge to New Jersey’s partnership filing fee under the tax comity doctrine. The partnership filing fee was enacted by New Jersey in 2002 to offset the costs of reviewing and auditing partnership tax returns. The fee is a flat fee computed based on the total number of partners in the partnership, $150 per partner up to a $250,000 maximum. The taxpayer sought to enjoin the fee alleging that the fee unfairly burdens companies with significant out-of-state operations in violation of the Commerce Clause.

New Jersey sought dismissal for two reasons: the Tax Injunction Act (TIA) and the doctrine of tax comity. The parties disputed whether the TIA applied, with New Jersey arguing that the fee was a “tax” for TIA purposes and the taxpayer arguing that the fee was a “fee” for TIA purposes and therefore outside the scope of the TIA. The District Court and the Third Circuit declined to resolve that question, ruling instead that the suit should be dismissed as a matter of comity under the Supreme Court’s decision in Levin v. Comm. Energy, Inc., 560 U.S. 413 (2010), because the fee was embodied in a “revenue affecting statute” involving matters of “state tax administration” and did not involve any fundamental right or classification that attracts heightened judicial scrutiny and because state courts were “better positioned” to craft a remedy in the event the fee were found to be unconstitutional. 

Energy Transfer LP v. John Ficara et al., No. 22-3347 (3rd Cir. Not Reported 2024).

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

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This week’s question: The Supreme Court recently issued its opinion in Moore v. United States, No. 22-800. By which vote did the Court uphold the constitutionality of the section 965 transition tax?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!

Sometimes states intentionally favor domestic commerce, and sometimes they unintentionally discriminate against foreign commerce. In Kraft General Foods Inc. v. Iowa Department of Revenue and Finance, the US Supreme Court made clear that both are illegal. Because most states’ corporate income taxes conform to the Internal Revenue Code (IRC) to some degree, recent federal tax changes set the stage for unintentional (and unconstitutional) discrimination.

In this installment of “A Pinch of SALT” in Tax Notes State, Eversheds Sutherland attorneys Jeff Friedman, Jeremy Gove and Chelsea Marmor analyze the IRC’s disparate capitalization requirements for domestic and foreign research and experimental (R&E) expenditures for tax years beginning in 2022. While the federal government is free to treat foreign commerce differently from domestic commerce, states and localities do not enjoy that same freedom. Thus, when states conform to the IRC and incorporate the federal tax system’s differing treatment of domestic and foreign R&E expenses, that conformity may violate the foreign commerce clause.

Read the full article here.