Tim and Tessa.jpgMeet Tessa, the cuddly Shih Tzu of Sutherland SALT’s Tim Gustafson and his wife, Emily. Twelve-year-old Tessa has lived quite an exciting life. After whisking her (and Tim’s wife, to whom Tessa belonged) away from Bakersfield, California, Tim smuggled the pup – ironically – into Amsterdam and transported her to the southernmost part of the Kingdom of the Netherlands where he was stationed with the U.S. Army.  Over the next two years, she marked her territory in the Netherlands, Germany, Tessa.jpgFrance, Belgium and Luxembourg. She even met her doppelganger on the streets of Heidelberg. Tessa is happy to be back in the States, however, far from the insufferable pretentiousness of those European yappers. Now, she enjoys long naps on the couch, chasing squirrels, long naps on her bed, chasing skunks, long naps on Tim’s bed, and scrounging for “people food.” Tessa would thank us for being featured as the May Pet of the Month, but she is no doubt taking a long nap.

By Zachary Atkins and Prentiss Willson

A Texas administrative law judge ruled that a taxpayer was not entitled to make an alternative three-factor apportionment election under Article IV of the Multistate Tax Compact (Compact) for Texas franchise tax purposes. The Texas Tax Code requires taxpayers to use a single gross receipts factor to apportion taxable margin to Texas. The taxpayer filed refund claims in which it asserted its right to use the alternative three-factor apportionment formula set forth in the Compact to determine its franchise tax liability. Despite being a full member of the Multistate Tax Commission established by the Compact, Texas has taken the position that the three-factor apportionment election is not available to taxpayers because the franchise tax is not an income tax. Without addressing that argument, the administrative law judge concluded that Texas law governs and requires taxpayers to use the single gross receipts factor formula, affirming the Comptroller’s denial of the taxpayer’s refund claims. The Comptroller adopted the administrative law judge’s decision as written. Docket Nos. 304-13-1314.13, 304-13-1315.13 (Tex. State Office of Admin. Hearings, Apr. 9, 2013).

By Shane Lord and Andrew Appleby

The California Superior Court ruled that certain special purpose entities (SPEs) owned by Harley-Davidson, Inc. had nexus in California. The taxpayer formed the SPEs as securitization subsidiaries, which the court held were subject to California income taxation because the SPEs: (1) were “financial corporations” under California law; and (2) had substantial nexus with California because the SPEs had agents in the state. The court determined that independent dealerships and the SPEs’ parent and sister corporations were agents of the SPEs. The taxpayer argued that the SPEs were not “financial corporations” because the SPEs were bankruptcy remote subsidiaries of the taxpayer and were not in substantial competition with national banks, as required by Cal. Code Regs. tit. 18, § 23183. The court did not address the implications of the SPEs constituting bankruptcy remote subsidiaries. The court ultimately held that the SPEs were in substantial competition with national banks because the SPEs and national banks conducted the same activities of bundling loans and selling securities backed by those loans. In addition to the above issues, the court sustained a demurrer early in the case, dismissing the taxpayer’s two other causes of actions: (1) the Franchise Tax Board discriminated against the taxpayer by not allowing it to file separate returns; and (2) the taxpayer was entitled to use an equal-weighted three-factor apportionment formula (see Gillette Co. v. Franchise Tax Bd., 147 Cal. Rptr. 3d 603 (Cal. Ct. App. Oct. 2, 2012)). Harley-Davidson, Inc. & Subs. v. Franchise Tax Bd., No. 37-2011-00100846-CU-MC-CTL (San Diego Super. Ct. May 1, 2013).

The Streamlined Sales Tax Governing Board, as well as its State and Local Advisory Council and Business Advisory Council, assembled in Minneapolis this week to discuss a number of policy matters related to Streamlined Sales and Use Tax Agreement. The overarching theme, however, was the continued viability of the Agreement in light of the Marketplace Fairness Act as it moves through Congress. This Legal Alert summarizes the more notable issues addressed in Minneapolis, particularly how the SSTGB plans to hit “refresh” on the Agreement if the Marketplace Fairness Act is signed into law.

Read our legal alert, “SST Governing Board Considers ‘Best Practices’ Matrix and Marketplace Fairness Implementation; SLAC Contemplates Digital Goods Sourcing.”

By Douglas Mo

The California Court of Appeal ruled that the County of Los Angeles illegally assessed the possessory interest of the lessee of a building owned by the California State Teachers’ Retirement System. The possessory interest was valued pursuant to a special statute that only applied to property owned by a state public retirement system, which allowed the inclusion of the value of the tax-exempt reversion in the value of the possessory interest. In reversing the trial court’s decision, the Court of Appeal stated that the Los Angeles County Assessor should have declined the value of the possessory interest with each successive assessment to recognize the declining remaining term of the possessory interest. This is a significant and beneficial point to taxpayers owning possessory interests in California, because a declining term causes the value of the possessory interest to decrease as a function of time. Further, the Court of Appeal cited language in the California State Board of Equalization Handbook (AH 510) to support its decision. This decision is the second in the last four months (the other being Sky River LLC v. Kern County, 214 Cal.App. 4th 720 (2013)) to give judicial credence to the Assessors’ Handbooks. When there is helpful language in Assessors’ Handbooks to support taxpayer positions, Assessors can be inclined to ignore the guidance contained in these Handbooks. California State Teachers’ Retirement System v. County of Los Angeles, B225245, Court of Appeal, Second Appellate District (May 7, 2013).

By Sahang-Hee Hahn and Pilar Mata

The California Supreme Court held that taxpayers may file a class action lawsuit to claim a refund of local telephone user taxes (TUT) paid to the City of Long Beach. The taxpayer class alleged that the City unlawfully collected the TUT on services that were determined to be nontaxable under the Federal Excise Tax (and therefore were not subject to the TUT), and that the City had not properly obtained voter approval to amend its TUT ordinance as required by Proposition 218. The City filed a demurrer to dismiss the taxpayers’ complaint, arguing primarily that Long Beach’s municipal code expressly disallows class claims for refund. The City appealed the Court of Appeals’ denial of the demurrer, arguing that this case was distinguishable from the California Supreme Court’s recent decision in Ardon v. City of Los Angeles, 52 Cal.4th 241 (2011). Ardon held that the Government Claims Act permits class action claims for refund against a local government entity “in the absence of a specific tax refund procedure set forth in an applicable governing claims statute.” The City argued that the Long Beach municipal code constituted a “statute” for this purpose. The California Supreme Court rejected this argument, ruling the taxpayers could file a class action suit against the City, even though the local ordinance directly prohibits such claims. McWilliams v. City of Long Beach, Case No. S202037 (Ca. 2013). 

City Year Greater Philidelphia Photo 1

Sutherland SALT was proud to be a sponsor of the City Year Greater Philadelphia’s 2013 Idealist of the Year Tribute Dinner. As tutors and mentors, City Year Greater Philadelphia corps members provide critically needed services to some of Philadelphia’s most underserved children and youth.

 

City Year Greater Philidelphia Photo 3

Sutherland client Comcast is a National Partner to City Year. Sutherland SALT attorney Scott Booth (2nd from right) was joined at the event by (from left to right) Denise Dauchess, Jen Galbreath, Kristin Norman, Jane Lee, Jason Ruschak and Sarah Wellings from Comcast, as well as a current City Year corps member.

By David Pope and Jack Trachtenberg

The New York State Department of Taxation and Finance has determined that a financial services firm is not subject to the New York State sales and use tax because the product being sold by the taxpayer constitutes a single, integrated, nontaxable service.  The taxpayer provides its clients with investment management and risk management services and sells a product that consists of a comprehensive enterprise portfolio management support service for financial institutions and investment managers.  The product includes numerous components, including a customized platform to manage information, customized investment analysis services, data control and operations services, customized trade management workflow services, compliance evaluation and reporting services, daily support, and a desktop analytical calculator.  In determining the taxability of the product, the Department considered whether it represents a transaction that bundles taxable and nontaxable components for a single price or a “single integrated product.”  The Department noted that, when considered separately, some components of the taxpayer’s product seem to qualify as taxable (e.g., the web interface for the product is built on taxable prewritten software).  Ultimately, however, the Department determined that the product was a single integrated product—specifically a nontaxable operations and management contract service for portfolio investment managers—because: (i) the product does not come in multiple variants; (ii) customers may use different components of the product in different proportions without incurring extra charges; and (iii) the different components of the product are highly synergistic.  Although nuanced, the Department’s opinion follows prior guidance and case law that distinguishes between bundled transactions and single integrated products.  The opinion also provides a good analysis of the factors that taxpayers may want to consider in determining whether a particular transaction is subject to sales and use tax.  N.Y. Advisory Opinion TSB-A-13(12)S (Apr. 23, 2013).

We invite you to read all of our articles from April 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.