By Zachary Atkins and Prentiss Willson

The Colorado Supreme Court held that the Colorado Division of Property Taxation did not violate a public utility’s equal protection and uniformity rights by valuing and taxing its property differently than cable companies’ property. The public utility, Qwest Corporation, is a telecommunications service provider that competes with cable companies for telephone service customers in Colorado. Unlike Qwest, which is subject to central assessment, cable companies are not treated as public utilities and, therefore, are subject to local assessment. The key difference is that public utilities are not entitled to the intangible property exemption or cost cap valuation method afforded by statute to locally assessed taxpayers. Qwest argued that the Division’s failure to apply the exemption and the valuation method to its property violated the federal Equal Protection Clause and its counterpart in the Colorado Constitution, as well as the Colorado Uniform Taxation Clause. Rather than seeking to invalidate the exemption and valuation method statutes, Qwest sought to have both applied to its property. The court affirmed the dismissal of Qwest’s complaint, concluding that the differential tax treatment has a rational basis for equal protection purposes and is not the type of differential taxation that the Colorado Uniform Taxation Clause prohibits. Qwest Corp. v. Col. Div. of Property Taxation, Case No. 11SC669 (Col. June 24, 2013).

We invite you to read our articles from June 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.

Prentiss Pets 1.jpgMeet Mulligan (Mulli) and Sassy, the adorable Miniature Schnauzers of Sutherland SALT’s Prentiss Willson and his wife, Janice. Janice rescued the dogs, now ages 13 and 11, about six years ago, and they became part of the Willson family after Prentiss and Janice married last year (you can read more about their incredible love story here). Sassy is a sweet girl who is motivated only by food and is quick to remind them when it is time for her next meal (or at least when she thinks it is time). Mulli is a bit skittish after being attacked by another dog earlier in his life, but he is slowly warming up to the steady flow of visitors in the new house.

Since becoming Willsons, the dogs have had to adjust to a new discipline regime. Having finally learned thatPrentissPets.JPG he is not supposed to bark, Mulli faces a moral dilemma every time someone walks by the house (which happens frequently in the friendly vineyard town of Yountville, California). In order to resist the temptation to “warn” Prentiss and Janice about passersby, Mulli now runs and hides in a closet until the coast is clear. It is not all work and no play for the pups, though, as Prentiss and Janice enjoy taking the dogs to a nearby park each day. The dogs enjoy being able to run off-leash in the park, where Prentiss and Janice stand at opposite ends and take turns calling the dogs, who race for treats. Speedy Mulli enjoys lapping slow Sassy, whose fastest run is at best a brisk walk.

Mulli and Sassy are honored to be the June Pets of the Month and promise to sit quietly for a treat to celebrate!

By Sahang-Hee Hahn and Jack Trachtenberg

The Missouri Department of Revenue determined that an out-of-state provider of mail systems products had nexus for sales and use tax purposes due to the selling activities of dealers in the state. The taxpayer sold products that enabled customers to centralize the distribution and collection of their mail and packages. The Department’s nexus determination was based in large part on a finding that the taxpayer engaged in business activities within Missouri through four dealers who sold its products in-state and on the fact that it advertised its product line through an internet catalog, informing potential customers that it could provide a quote and install products in Missouri. Despite the fact that the taxpayer had less than $500,000 of in-state annual sales and did not have a place of business in Missouri, the Department nonetheless concluded that the taxpayer was a “vendor” for sales and use tax purposes because the dealers were considered the taxpayer’s “selling agents” in the state within the meaning of RSMo section 144.605(14).  Mo. Ltr. Rul. No. 7271 (May 23, 2013).

By Stephen Burroughs and Andrew Appleby

The Mississippi Supreme Court held that the taxpayer bears the burden to prove that an alternative apportionment method imposed by the State is arbitrary and unreasonable. Rejecting the taxpayer’s original cost-of-performance filing position, the Department of Revenue applied an alternative apportionment method utilizing market-based sourcing. On appeal, the Chancery Court found the Department’s “application of equitable apportionment and the market-based sourcing method to be somewhat troubling,” but upheld the alternative apportionment method because it did not “rise to the level of arbitrary or unreasonable.” The Court of Appeals reversed and held that the party invoking alternative apportionment bears the burden of showing that: (1) the standard apportionment method does not fairly represent the extent of the taxpayer’s business activity in the state; and (2) the alternative method is reasonable. See Microsoft Corp. v. Franchise Tax Bd., 39 Cal.4th 750 (Cal. 2006). Unfortunately, the Mississippi Supreme Court reversed the well-reasoned Court of Appeals decision, ignoring substantial case law interpreting the burden related to an alternative apportionment adjustment. It instead relied on Mississippi’s Administrative Procedures Act, which places the burden of proof on taxpayers seeking refunds in Chancery Court. Therefore, Mississippi taxpayers now shoulder the burden to prove that the Department’s alternative apportionment method is improper. Equifax, Inc. v. Mississippi Dep’t of Revenue, — So.3d — (Miss. June 20, 2013).

By David Pope and Pilar Mata

The Texas Comptroller of Public Accounts determined that a taxpayer was not permitted to elect the Multistate Tax Compact’s (Compact) three-factor apportionment formula. This treatment is consistent with prior Texas Comptroller decisions holding that Texas law requires a single-factor apportionment methodology (see Sutherland SALT’s previous articles on this topic here and here). However, unlike those prior decisions, the taxpayer in this matter argued that California’s Gillette decision (permitting California taxpayers to make a Compact election for three-factor apportionment) supported the Texas taxpayer’s position. The Comptroller determined that no weight should be afforded to the Gillette decision because the decision was depublished pending the California Supreme Court’s grant of review, and therefore has no precedential value. The Comptroller further stated that it would be “premature” to consider the Gillette decision on its merits, thus abdicating any responsibility to analyze the implications of the Compact on Texas law. Texas Comptroller’s Accession No. 201305712H (May 2, 2013).

By Jessica Kerner and Jack Trachtenberg

The Missouri Department of Revenue determined that a company’s telecommunications services provided to customers on its cloud computer network are subject to sales tax. The company’s cloud network is hosted on servers located outside of the state, and customers access the network through public telecommunications lines and through the customers’ internal network. Customers separately purchase the necessary hardware and internet connection. The services provided to customers through the cloud network include voice, video, messaging and conferencing. The Department determined that the company is providing taxable “telecommunication services” because it transmits information through its services that direct and control its customers’ hardware and because it stores messages on its server, which are taxable events in Missouri. The Department also noted that customers would not be able to use their equipment without the company’s software and hosting unless the customer was willing to engage another telecommunications company or built its own in-house system. This ruling suggests the Department believes that the provision of software that provides switching or routing functions constitutes the provision of telecommunications for sales tax purposes. Taxability of Telecommunications Services, L.R. 7248, Mo. Dept. of Rev. (May 24, 2013).

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).