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).

By Saabir Kapoor and Timothy Gustafson

Texas has clarified the Comptroller’s authority to disregard certain retail business locations in determining the situs of a sale for local sales tax purposes. Current law requires retailers to collect and remit local sales tax based on the ship-from location on all delivery sales of taxable items that are shipped from a “place of business” in Texas when the order is not placed in person by the purchaser or lessee. Texas Senate Bill (S.B.) 1533, which becomes effective on September 1, 2013, allows the Comptroller to disregard a business location only if the location functions or exists to “avoid the tax legally due” or “exists solely to rebate a portion of the tax imposed.” S.B. 1533 also provides that an outlet, office, facility or location will not be disregarded if such location “provides significant business services, beyond processing invoices, to the contracting business, including logistics management, purchasing, inventory control, or other vital business services.” The legislation specifies that the changes do not affect tax liability accruing before September 1, 2013, and that any accrued liability continues in effect as if S.B. 1533 had not been enacted. Tex. S.B. 1533; Tex. Tax Code § 321.002(a)(3), eff. Sept. 1, 2013.

By David Pope and Prentiss Willson

The New Jersey Division of Taxation concluded in a technical bulletin that sales of cloud computing services are not subject to sales and use tax in New Jersey. Although this is not a change to the Division’s position, the bulletin specifically identifies software as a service (SaaS), platform as a service (PaaS), and infrastructure as a service (IaaS) as non-taxable cloud computing services. The Division explained that SaaS retailers provide customers with access to software through remote means; PaaS retailers provide customers with computing platforms through remote means; and IaaS retailers provide customers with equipment and services necessary to support and manage the customer’s content and dataflow through remote means. While New Jersey generally defines taxable tangible personal property to include prewritten software delivered electronically, the Division stated that SaaS, PaaS, and IaaS do not fit within New Jersey’s definition of tangible personal property because the retailer does not transfer any software to its customers. The Division further stated that New Jersey does not enumerate SaaS, PaaS, or IaaS as taxable services. New Jersey Division of Taxation Technical Bulletin TB-72 (July 3, 2013).

By Sahang-Hee Hahn and Andrew Appleby

Effective September 1, 2013, Texas will refund state sales and use taxes paid by providers of cable television, Internet access or telecommunications services on tangible personal property used in their businesses. On June 14, 2013, Governor Rick Perry signed H.B. 1133 into law, authorizing such refunds. Under the new legislation, a provider is entitled to a refund of sales and use taxes paid on the sale, lease, rental, storage or use of tangible personal property if it meets two requirements. First, the provider or one of its subsidiaries must sell, lease, rent, store, consume or otherwise use the tangible personal property on which taxes were paid. Second, the provider or one of its subsidiaries must directly use or consume such property in the provision of cable television, Internet access or telecommunications services. Purchases made for data processing or information services do not qualify for a refund. The legislation includes a $50 million limitation on the amount of the refund. If the total tax paid by all providers and subsidiaries eligible for a refund is not more than $50 million for a calendar year, then the refund amount will be the amount paid by the provider or the subsidiary. If this $50 million threshold is exceeded, then the refund amount will be a pro rata share of $50 million. Tex. Tax Code Ann. § 151.3186 (2013).

During the Multistate Tax Commission’s Annual Conference and Committee Meetings in San Diego on July 22, 2013, the Income and Franchise Tax Uniformity Subcommittee discussed its effort to redesign the financial institution apportionment rules. In addition, the Sales and Use Tax Uniformity Subcommittee will move forward in drafting a model nexus statute. 

View our full Legal Alert for more details.

By Nicole Boutros and Andrew Appleby

In a case of first impression interpreting when substantial intercorporate transactions are present for purposes of New York’s mandatory combined reporting provisions, a New York State Division of Tax Appeals Administrative Law Judge (ALJ) concluded that the taxpayers could not file on a combined basis. In 2007, New York State amended Tax Law section 211[4] to provide that a combined report is required for corporations engaged in a unitary business if substantial corporate transactions exist between the corporations. Knowledge Learning Corporation (KLC) acquired KinderCare and moved all of KinderCare’s employees to KLC. KLC and KinderCare, along with certain other affiliates, filed on a combined reporting basis for their 2007 tax year. Despite all employees being KLC employees and KLC paying all of KinderCare’s expenses, the ALJ failed to find “substantial intercorporate transactions.” The ALJ weighed “heavily” against the taxpayers because of the absence of written intercompany agreements memorializing the claimed intercorporate transactions and disregarded witness testimony specifically supporting the existence of such intercorporate transactions. The ALJ inexplicably declined to analyze the taxpayers’ alternative argument that there was actual distortion even if there were not substantial intercorporate transactions, permitting “forced combination.” Although the “forced combination” provision remains in New York Tax Law, the ALJ summarily concluded in a footnote that the 2007 amendment eliminated the need to entertain a distortion analysis. Matter of Knowledge Learning Corp., DTA Nos. 823962 and 823963 (June 27, 2013).

By Stephen Burroughs and Timothy Gustafson

The Texas Comptroller determined that receipts received for the delivery of satellite programming to Texas subscribers should be sourced to the site of the subscriber’s set-top box for apportionment purposes. The taxpayer provides direct broadcast satellite television programming to subscribers in Texas and across the United States. For the years in dispute, the taxpayer did not include programming receipts in its Texas receipts factor numerator because the equipment used to receive, amplify and transmit programming signals was located outside of Texas, and therefore the taxpayer concluded the service was being performed outside of Texas. However, the Comptroller determined that “the act that produces the receipts at issue…is the act performed by the [set top box]” in Texas. The set-top box descrambled incoming satellite signals into viewable television programming and therefore, according to the Comptroller, provided the “end-product acts for which the customer contracts and pays to receive.” Texas’s place-of-performance sourcing statute resembles a market-based sourcing mechanism for satellite television providers. Tex. Comp. Dec. 104,224 (May 17, 2013).

By Shane Lord

The Commonwealth Court of Pennsylvania held that gross receipts received by Verizon in connection with nonrecurring service charges—including telephone line installation, moves of or changes to telephone lines and service, and repairs of telephone lines—were not taxable under the Commonwealth’s gross receipts tax on telephone companies. The court distinguished these nonrecurring services from Verizon’s provision of private telephone lines and directory assistance services, which the court held were taxable. Gross receipts from private telephone lines were held to be taxable because such services were provided for the sole purpose of transmitting telephone messages, while gross receipts from directory assistance services were held to be taxable because such services allowed Verizon to transmit telephone messages more effectively and satisfactorily and therefore were also services provided for the sole purpose of transmitting telephone messages. In contrast, the court determined that gross receipts from Verizon’s nonrecurring services were not taxable because the services: (1) did not include a transmission of telephone messages; (2) were separately billed to customers; and (3) where inside wiring was required, the work did not have to be done by Verizon (i.e., it could be completed by the customer or through a third party). In holding for Verizon on the nonrecurring service charge issue, the court emphasized that, as a tax imposition statute, the law had to be strictly construed with any ambiguity resolved in favor of the taxpayer. Verizon Pennsylvania, Inc. v. Commonwealth, No. 266 F.R. 2008 (Pa. Commw. Ct. July 5, 2013).

TEI Dinner.JPG

Sutherland SALT’s Eric Tresh (center) is joined by Timothy McCormally (KPMG, former Executive Director for TEI), Lia Dorsey (Sutherland), Melissa Rubin (CorpTax), Christina Thompson (Coca-Cola), Janet Ingle (Ingram Industries), Rusty Ingle, John Lechko (Duke Energy), Gina Howren, Robert Howren (BlueLinx), and Marcus Shore (Duke Energy) during the TEI Region VII conference, which was held in Hilton Head, South Carolina, at the end of June. Eric was a roundtable leader on state tax planning and techniques during the conference.

By Christopher Chang

A New York State trial court has denied a motion filed by Sprint Nextel Corporation and its subsidiaries (Sprint) to dismiss a claim brought under the New York False Claims Act (FCA) alleging the company knowingly filed false tax returns and underpaid New York State sales taxes on fixed-rate monthly wireless telephone plans sold to New York customers. The court rejected Sprint’s argument that it reasonably interpreted the law when it determined that section 1105(b) of the New York Tax Law allowed it to exclude from sales tax the portion of its fixed monthly charges attributable to interstate voice services. Focusing solely on section 1105(b)(2) of the Tax Law, which imposes tax on sales of mobile telecommunication services, the court held that sections 1105(b)(1) and (3) of the Tax Law were not relevant to the analysis, even though those provisions specifically exempt interstate telecommunications from tax and despite statutory language suggesting that the provisions must be read together. The court also rejected Sprint’s arguments under federal law and the U.S. Constitution. Specifically, the court held: (1) the federal Mobile Telecommunications Sourcing Act (MTSA) does not require that Sprint be allowed to unbundle its charges because the MTSA applies only to states that—unlike New York—do not subject aggregated telecommunications services to taxation; and (2) the Ex Post Facto Clause of the U.S. Constitution does not prohibit retroactive application of the FCA because the penalties imposed under the FCA are not intended as a punishment. Plaintiffs’ causes of action brought under the Executive Law and Tax Law were partially dismissed as time-barred for periods prior to March 31, 2008. Plaintiffs’ cause of action alleging that Sprint conspired to violate New York law was dismissed in its entirety. People ex rel. Empire State Ventures, LLC, v. Sprint Nextel Corp., Sprint Spectrum L.P., Nextel of New York, Inc., and Nextel Partners of Upstate New York, Inc., Index No. 103917/2011 (N.Y. Sup. Ct., July 1, 2013).