By Kathryn Pittman and Timothy Gustafson

The Massachusetts Commissioner of Revenue concluded in a letter ruling that a taxpayer’s sales of subscriptions to use its virtual event platform and planning software were subject to sales tax where the use of the software was the object of the transactions. For a flat fee based on length of access or a defined event period, the taxpayer provided its customers a virtual event platform and licensed software that allowed its customers to create and customize virtual events via the Internet. Customers also could elect custom design or professional services for an added fee. In ruling that the taxpayer’s provision of the service was subject to sales tax, the Commissioner first noted that sales of prewritten computer software, including software hosted by a third party, are taxable regardless of the method of delivery. The Commissioner further noted, however, that where there is no separate charge for the use of software, and the true object of the transaction is acquiring a good or service other than the use of software, such software is generally not taxable. Under this framework, the Commissioner determined that the taxpayer’s sales were subject to tax because the use of the software to create customized virtual events by the customers was the true object of the transactions. Finally, the ruling stated that any personal or professional services (e.g., design services) offered in conjunction with the event planning software would be subject to sales tax if sold in a bundled transaction for one subscription price, but may be exempt from tax if the charges for such services were separately stated. Mass. Ltr. Rul. No. 13-5 (Jun. 4, 2013).

By Saabir Kapoor and Prentiss Willson

Virginia’s Tax Commissioner denied a taxpayer’s request for alternative apportionment because the taxpayer did not demonstrate by clear and cogent evidence that the statutory apportionment methodology led to an unconstitutional and inequitable result. The taxpayer, a limited partnership headquartered outside Virginia, sold real estate located in its home state and sought to allocate income to Virginia based on a separate accounting methodology. Virginia will only grant permission to use an alternative method of apportionment if the taxpayer can show: (1) the statutory method produces an unconstitutional result under the particular facts and circumstances; and (2) the statutory method is inequitable because it results in double taxation, and the inequity is attributable to Virginia’s, rather than another state’s, method of apportionment. The Commissioner relied on the long-standing principle established by the U.S. Supreme Court in Moorman Manufacturing Company v. G.D. Bair, etc., 437 U.S. 267 (1978), that states have wide latitude in the selection of apportionment formulas that will only be disturbed when the taxpayer can demonstrate by clear and cogent evidence that income attributed to the state is out of all appropriate proportion to business transacted in the state or has led to a grossly distorted result. The Commissioner ruled that the taxpayer did not meet its burden of proof because the only evidence offered was the fact that Virginia’s statutory apportionment methodology would “substantially increase” the amount of income subject to tax by Virginia. Rulings of the Tax Commissioner, No. 13-86 (June 10, 2013).

By Madison Barnett and Timothy Gustafson

The Tennessee Department of Revenue announced that the existing opportunity to compromise prior year liabilities related to the disallowance of certain intangible expense deductions will be closing on September 30, 2013. For several years, Tennessee has been issuing wide-scale assessments—using the Department’s discretionary authority—to taxpayers that deducted intangible expenses paid to related parties. The mass compromise program was first announced in November 2011. See Tenn. Important Notice No. 11-17. While not set forth in the notices, the terms of the compromise typically consist of a 25% disallowance of the intangible expense deduction with interest due on any additional tax that may result from the disallowance. A waiver of penalties associated with a failure to disclose the deduction must generally be requested separately. According to the most recent notice, “the Department will not continue to recommend compromises on the same terms if contacted by the taxpayer after September 30, 2013.” Taxpayers with existing assessments or potential exposure related to this issue should consider whether to request participation in the compromise program in advance of the September 30 deadline. Tenn. Important Notice No. 13-06 (June 2013).

The add-back statute has been amended, effective for tax periods ending on or after July 1, 2012, to require pre-approval from the Commissioner before a taxpayer may deduct specified intangible expenses, subject to certain safe harbors that do not require pre-approval. See Tenn. Code Ann. § 67-4-2006(b)(2)(N).

As part of its implementation of mandatory combined reporting, the District of Columbia’s Office of Tax and Revenue issued a taxpayer-friendly proposed regulation that would provide an automatic seven-month extension for calendar and fiscal year taxpayers.


For more details, read our legal alert, “D.C. Proposes to Extend Deadline for Combined Reports“

By Mary Alexander and Prentiss Willson

The Oklahoma Court of Appeals held that retroactive relief applied to a facially unconstitutional capital gains deduction. The court previously held that the capital gains deduction set forth in 68 O.S. §238(d) discriminated on its face against interstate commerce because the holding period for out-of-state companies was longer than the required holding period for Oklahoma companies. On rehearing, the Oklahoma Tax Commission (OTC) argued that the court’s decision should only apply prospectively. However, pursuant to long-standing Oklahoma precedent, the court recognized that “retroactivity is generally applied to constitutional opinions.” Holding that retroactivity applied to the taxpayer, the court also stated that a constitutional pronouncement must be “given full retroactive effect” and went on to apply the “pipeline rule.” Under the “pipeline rule,” a decision applies to all cases still open on direct review and to all events that are not time-barred. The purpose of the rule is to secure equality for all pending claims, or those capable of being litigated, when a new rule is announced. The OTC will likely appeal the decision to the Oklahoma Supreme Court. CDR Sys. Corp. v. Oklahoma Tax Comm’n, Okla. Ct. of App., Case No. 109,886 (filed June 12, 2013).

By Zachary Atkins and Andrew Appleby

The Arizona Court of Appeals held that Cable One, Inc. was subject to central assessment as a telecommunications company because of its Voice over Internet Protocol (VoIP) service offering. The court found that Cable One, which provided cable television, Internet access and VoIP services, met the statutory definition of a “telecommunications company” because it owned communications transmission facilities and provided “telecommunications exchange and inter-exchange access.” The latter finding marked a significant departure from the lower court’s decision, which held that Cable One did not provide “telecommunications exchange and inter-exchange access” because it did not connect its VoIP subscribers to an exchange. The appellate court, in contrast, reviewed the legislative history and determined that “telecommunications exchange and inter-exchange access” mean local telephone service and long-distance telephone service, respectively. Since Cable One’s VoIP service permits subscribers to make and receive local and long-distance telephone calls, the appellate court concluded that Cable One provided “telecommunications exchange and inter-exchange access.” Cable One, Inc. v. Ariz. Dep’t of Revenue, Cause No. 1 CA-TX 12-0006 (Ariz. Ct. App. June 11, 2013).

On June 6, 2013, the Michigan Court of Claims became the second court in the country to hold that the Multistate Tax Compact (the Compact) is a binding multistate compact that cannot be repealed by a separate, subsequent statute. The taxpayer was thus entitled to apportion its income under the former Business Income Tax component of the Michigan Business Tax using the Compact’s equally-weighted three factor formula rather than the statutory single sales factor formula. 

For more details, read our legal alert, “Michigan Court Allows Multistate Tax Compact Election.”

By Christopher Chang and Jack Trachtenberg

New York’s highest court has ruled that the state violated the Constitution when it retroactively denied tax credits to businesses under the 2009 amendments to the state’s Empire Zone Program. The Empire Zone Program is designed to stimulate private investment and job creation in designated areas throughout the state by requiring that businesses show actual job creation (as opposed to reincorporating or transferring employees between related entities) and actual economic return to New York in excess of the tax benefits granted. The amendments altered the eligibility requirements and specifically allowed the state to decertify businesses as Empire Zone eligible on a retroactive basis beginning January 1, 2008. The Court of Appeals held that the state’s retroactive decertification of the plaintiffs in the lawsuit violated the Due Process Clause of the Fifth Amendment because: (a) the plaintiffs had no warning or opportunity to alter their behavior in 2008 to meet the criteria of the amendments; (b) the retroactive period was long enough that the plaintiffs had a reasonable expectation of security in the tax credits taken; and (c) there was no valid public purpose for the retroactive application of the law. Notably, the court held that the government’s need to raise money could not—absent an unexpected loss of revenue—justify retroactivity since other factors present in the case weighed in favor of the plaintiffs. James Square Associates, L.P., v. Mullen, No. 87-91, 2013 N.Y. Slip Op 03935 (Ct. of App., June 4, 2013).

By Jessica Kerner and Timothy Gustafson

The Texas Comptroller determined that a taxpayer’s email advertisement services were telecommunications services subject to the state’s sales tax. The taxpayer, a producer of real estate television shows for homebuilders, maintained a website through which it offered Internet-based services. The two services at issue were the taxpayer’s “Hot Sheet” and “Broadcast E-mail” services. The Hot Sheet was a weekly email advertisement that was sent to retailers and customers who had registered on the taxpayer’s website. A builder that purchased the Hot Sheet service paid a separate fee to be advertised in the Hot Sheet. The Broadcast E-mail service sent emails regarding upcoming events organized by homebuilders to realtors who had agreed to receive the homebuilder’s emails and who could respond to the event invitation using an RSVP button contained in the email. The Comptroller explained that the “taxability of sales of e-mail transmissions is separate from the taxability of sales to place advertisements in those electronic transmissions.” The Comptroller determined that the sale of the Hot Sheets was a taxable telecommunications service because the taxpayer was merely transmitting a compilation of its customers’ advertisements. The Comptroller also determined that the Broadcast E-mail service was a taxable telecommunications service because there was not sufficient evidence in the record to conclude that the taxpayer was engaged in anything other than electronically transmitting customer-provided advertisements by email. The fact that the customer in both instances was paying to transmit its own information was a key factor in the determination that these particular services were taxable telecommunications services rather than nontaxable, Internet-based advertising services. Tex. Comp. Dec. 105,515 (April 5, 2013).

We invite you to read all of our articles from May 2013 here on our website, or read each article by clicking on the title. If you prefer, you may also view a printable PDF version.