By Shane Lord and Prentiss Willson

The Missouri Administrative Hearing Commission held that a telephone company’s interest income received from its parent company was passive, non-Missouri source income and thus excludible from apportionable income as nonbusiness income. The interest income at issue was related to a note between the taxpayer and its parent company pursuant to which the taxpayer loaned its parent company excess cash after payment of the taxpayer’s expenses. The Missouri Director of Revenue conceded that the interest income was passive but took the position that such income was Missouri source income. The Director argued that even passive, non-Missouri source income was apportionable income for the taxpayer because the apportionment statute for telephone companies does not include a specific provision allowing for the allocation of passive, non-Missouri source income. The Commission disagreed on both points. First, the Commission held the passive interest income was non-Missouri source income because decisions regarding the use of the loaned funds were made outside Missouri, and the loaned funds were held, used and controlled outside Missouri. The Commission then stated that under the general apportionment statute and Missouri Supreme Court precedent reviewing the statute, income is allocable as nonbusiness income if it is both passive and non-Missouri source income, even though the general statute does not include a specific allocation provision for such income. Consequently, the Commission held that a specific allocation provision is also not necessary to allocate income under the apportionment statute for telephone companies, and thus the taxpayer properly allocated its passive, non-Missouri source income as nonbusiness income. AT&T Communications of the Southwest Inc. v. Director of Revenue, No. 11-1375 RI (Mo. Admin. Hearing Comm’n).

By Sahang-Hee Hahn and Timothy Gustafson 

On July 24, 2013, the Massachusetts Legislature passed the Transportation Finance Bill (H.B. 3535) over Governor Patrick’s veto, implementing three key changes to Massachusetts’ state tax system. To begin, the new legislation requires the use of a market-based sourcing method for sales of intangibles in computing the sales factor of a taxpayer’s apportionment formula for corporate excise tax purposes. The new law also expands Massachusetts’ sales and use tax base to include “computer system design services,” 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.”  Finally, the legislation amends the statutory definition of taxable “services” to include “the modification, integration, enhancement, installation or configuration of standardized software” and to exclude “data access, data processing or information management services.” The legislative changes are effective July 31, 2013. Mass. St. 2013 c. 46; Mass. G.L. c. 63 § 38(f), c. 64H § 1. On July 25, 2013, the Massachusetts Department of Revenue issued a Technical Information Release to provide initial guidance on the application of the sales and use tax to computer system design and software modification services, including applicable sourcing rules and transition rules for existing service contracts. Mass. TIR 13-10, Sales and Use Tax on Computer and Software Services Law Changes Effective July 31, 2013 (July 25, 2013).

Click here to read our July 2013 articles here on our website, or read each article by clicking on the title. If you prefer, you may also read a printable PDF version.

Feature Your Pet as Pet of the Month!
Submit a photo of you with your pet and any fun details you would like to share to SALTTeam@sutherland.com for consideration for future editions of the SALT Pet of the Month.

By Shane Lord and Prentiss Willson

Under the Delaware Infrastructure Emergency Response Act, emergency work related to a declared state of emergency does not constitute legal presence, residency, or doing business in Delaware for purposes of state and local taxes, licensing, and regulatory requirements. This exclusion applies to out-of-state businesses and employees that conduct emergency work relating to “infrastructure” during a defined period of five days prior to and 60 days after a declared state of emergency (unless a longer period is authorized). The term “infrastructure” for the purposes of the exclusion is defined to include property and equipment owned or used directly in connection with the provision of services to multiple customers or citizens, and does not include office buildings or billing or administrative offices. Out-of-state businesses and employees that remain in the state after the emergency period are subject to the normal standards for establishing presence, residency, or doing business in the state. The Multistate Tax Commission has recommended that other states consider enacting comparable legislation. Delaware 147th Gen. Assemb., H.B. 145 (Approved July 16, 2013).

Chase JC.JPGMeet Juan Carlos and Felipe, the furry royalty of Sutherland Tax Partner Robb Chase and his wife, Allie. Juan and Felipe are Abyssinians, which the breeder described as a “regal” breed, so the brothers were named after the king and prince of Spain.   

Juan is not a people person and lets his dislike be known if anyone other than Robb comes too close for comfort. Despite his tough demeanor, one of Juan’s favorite pastimes is eating flowers, particularly when he wants to alert Robb that it is time to be fed. Chase F.JPGAlthough he is not allowed, Juan prefers to drink water from the faucet, and if a glass of water is left unattended, he will quickly claim it.

Unlike Juan, Felipe is prone to dropping on his side and rolling over so that you can scratch his belly. But, do not let these signs of affection fool you. Between Juan and Felipe, Felipe rules the roost and has been known to attack his (larger) brother without warning, to the point that Juan has a healthy respect for Felipe and typically keeps his distance. 

Juan Carlos and Felipe say thank you for featuring them as Pets of the Month!

By Zachary Atkins and Douglas Mo

A California appellate court held that an ice cream maker’s property tax appeal involving an alleged failure to make an external obsolescence adjustment was subject to the “substantial evidence” standard of review. The taxpayer asserted that certain production equipment used in its novelty product lines was underutilized as a result of low market demand for those novelty products. The primary issue before the court was whether the failure to include an adjustment for external obsolescence was an error in the valuation method and thus a question of law to be reviewed de novo, or whether it was simply a matter of appraisal judgment and thus an issue of fact subject to the substantial evidence standard. The court concluded that the substantial evidence standard applied because the question was whether the assessment appeals board could conclude, based on the evidence presented, that the taxpayer failed to meet its burden of proving its entitlement to an external obsolescence adjustment based on underutilization. In affirming the judgment of the superior court upholding the assessment, the appellate court found that the taxpayer did not establish that it met the requirements for an underutilization adjustment because it did not show that the claimed underutilization was beyond the control of a prudent operator that was recognized in the market. Dreyer’s Grand Ice Cream, Inc. v. Cnty. of Kern, Case No. F064154 (Cal. Ct. App. July 22, 2013) (unpublished).

By Todd Betor and Pilar Mata

On July 3, 2013, the Michigan Supreme Court granted International Business Machines Corporation’s (IBM) motion for leave to appeal the Court of Appeals’ November 20, 2012, judgment in favor of Michigan in International Business Machines v. Department of Treasury, Michigan Supreme Ct., Case No. 146440. Consequently, the highest courts in Michigan and California are now both poised to decide whether taxpayers in those states have the right to elect to apportion their business income using the Multistate Tax Compact’s (Compact) apportionment formula. The California Supreme Court is reviewing the California Court of Appeal’s decision in Gillette Co. v. Franchise Tax Board, Cal. Supreme Ct., Case No. S206587, with briefing already under way.

The Michigan Supreme Court’s order granting IBM’s appeal provided that the parties shall brief whether:

  1. IBM could elect to use the Compact’s apportionment formula in calculating its 2008 tax liability to Michigan, or whether IBM was required to use the Michigan Business Tax (MBT) Act’s single-sales factor apportionment formula;
  2. The MBT repealed, by implication, the Compact’s apportionment formula;
  3. The Compact is a contract that cannot be unilaterally altered or amended by a member state; and
  4. The MBT’s modified gross receipts tax component constitutes an income tax under the Compact, thus subjecting it to the Compact’s election and apportionment provisions.

By Kathryn Pittman and Andrew Appleby

The Arizona Department of Revenue determined that a taxpayer providing online backup and restoration services was subject to Arizona’s transaction privilege tax (TPT) after concluding that the receipts from such services were taxable as rentals of prewritten software. The taxpayer provided services that automatically backed up and restored files. As a conduit for the backup service, the taxpayer provided a software “agent” that customers installed on their computers to facilitate backups. The service agreement included a software license for the “agent.” Based on the foregoing facts, the Department determined that the taxpayer’s services included receipts for software. Software is considered tangible personal property for purposes of the TPT, and thus receipts therefrom are subject to the TPT. The Department further determined that the transactions fell within the personal property rental classification, as opposed to the retail classification, because customers had limited duration of access to the software. The Department did not undertake a “true object” analysis to examine whether or not the software conduit was de minimis compared to the overall backup service. Ariz. Priv. Ltr. Rul. No. LR 13-002 (Mar. 25, 2013).

By Mary Alexander and Prentiss Willson

The Arizona Department of Revenue determined in a private letter ruling that gross receipts from “renting” prewritten software available online are subject to Arizona’s transaction privilege tax (TPT). The definition of tangible personal property for purposes of the TPT includes the electronic delivery of software. Thus, according to the Department, a business is subject to the TPT if the customer has “the defined and exclusive right of use of the software for a specified period….” The Department concluded that the requesting company’s customers had “the requisite amount of use and possession” to constitute a rental, because they could use the company’s employment application software to “add, delete, and modify job descriptions” and had the “ability to search and sort information in the reports produced by [the company].” Further, the Department noted that a customer’s access to the company’s software terminated when its contract expired. Thus, the Department determined the company’s gross receipts from customers using the software at locations in Arizona were subject to the TPT under the personal property rental classification. Ariz. Private Taxpayer Ruling LR13-005 (Apr. 29, 2013).

By Suzanne Palms and Andrew Appleby

The Arizona Department of Revenue determined that shipping and handling fees were subject to Arizona’s transaction privilege tax (TPT). The company sold tangible personal property via the Internet. The company’s affiliates fulfilled the orders, which included activities such as labeling, packaging and shipping the items via common carrier. The company billed its customers a separately stated shipping and handling fee (S&H fee), which included: (1) selecting, packaging and fulfilling the order, and (2) shipping the order to the customer via common carrier. The Department explained that delivery charges are typically deductible for purposes of the TPT as a “[s]ervice rendered in addition to selling tangible personal property at retail.” The term “delivery” is not defined by statute, but the Department interpreted it to mean a retailer’s actual costs to ship or deliver merchandise to a customer. The Department reasoned that since the S&H fee included a handling component for selecting, packaging and fulfilling a customer’s order, a portion of the S&H fee was attributable to activities that occurred before the merchandise was shipped. Because the S&H fee included both components, the Department concluded that the entire S&H fee was subject to the TPT. Ariz. Priv. Ltr. Rul. LR13-003 (May 13, 2013).