Before entering into agreements with taxing authorities to extend the statute of limitations, taxpayers should consider the legal implications of these agreements, which often are dictated by the states. In this edition of A Pinch of SALT, Sutherland SALT’s Jonathan Feldman, Kathryn Pittman and Maria Todorova explore issues that taxpayers should consider before entering into waiver agreements.

Read “Considerations When Executing Waivers,” reprinted with permission from the March 18, 2013 edition of State Tax Notes.

We hope you enjoy this very special edition of the Sutherland SALT Shaker newsletter. In this issue:

  • Click This!: New York Enacts Über Nexus Statute
  • Compact Litigation Fallout
  • Two States Expected to Join MTC Compact
  • Lesser-Known Tax Council Convenes in South Georgia
  • U.S. Supreme Court Defines De Minimis: “You’ll Know It When You Don’t See It”
  • Sutherland Announces New Column
  • SALT Pet(s) of the Month: Saabir’s Sea Monkeys

Read the April 1, 2013 SALT Shaker newsletter.

As March comes to a close, we invite you to read all of our articles from the past month here on our website, or read each article by clicking on the title. If you prefer, you may also view a printable PDF version.

On March 28, 2013, the New York State Legislature passed budget legislation (S.2609D/A.3009D) that replaces the existing New York State and City related-party royalty add-back requirements with provisions based on the Multistate Tax Commission’s model add-back statute. In addition, the legislation repeals the New York State and City royalty income exclusions, which permitted taxpayers to exclude royalty income from taxable income when the royalty income would have been subject to the related party add-back requirement.

For additional details, read our legal alert, “A Royal Opportunity: Amendments to New York’s Royalty Expense Add-back Statute Leave the Income Exclusion Intact for Prior Years.”

Todd and Cooper.jpgMeet Cooper, the three-year-old Labradoodle of Washington, D.C. SALT Partner Todd Lard and his partner, Brian. Cooper lives in the Capitol Hill neighborhood of D.C., and his biggest claim to fame (and Todd’s greatest life accomplishment to date) was being named “Best Dog” in the annual pet photo contest in his neighborhood paper, The Hill Rag. The contest is a cutthroat competition among Capitol Hill’s numerous doggies; after he received the award, several neighbors jealously pointed out that their dog had seen Cooper’s picture in the paper.Cooper w Ball.jpg

Apart from being a local celebrity, Cooper’s favorite pastime is catching and fetching his green soccer ball. He could fetch the ball all day, and when he knows it’s time to go home, he grabs the ball and prances around to avoid Todd. Cooper also loves the water, especially swimming and fetching floaties in the Potomac River and in the U.S. Capitol building fountains.

On the weekends, Cooper likes to go to nearby Congressional Cemetery and play chase with other dogs. He loves weaving in and around the tombstones and finding mud holes to scope out. While it may seem weird to play in a cemetery, the Congressional Cemetery dog-walking experience is remarkable. Historic Congressional Cemetery houses the graves of many important Washington figures, such as John Philip Sousa, Matthew Brady and J. Edgar Hoover. It became run-down and neglected, but in the 1980s, dog walkers cleaned up the property. Now, the cemetery is a great place to explore local history, and it still has a strong and large dog-walking program in what amounts to a 35-acre, off-leash dog park. 

Cooper was a frequent visitor to the offices of Todd’s former employer, the Council On State Taxation.  Here’s hoping Capitol Hill’s “best dog” can make an appearance at the new Sutherland office as well!

By Sahang-Hee Hahn and Prentiss Willson

The New York State Department of Taxation and Finance ruled in an Advisory Opinion that a Virginia corporation was subject to New York corporation franchise tax because it hired independent contractors to store its consigned inventory and to solicit orders from and deliver products to New York customers. In this case, the taxpayer consigned inventory to approximately 16 independent contractors located in New York, who maintained the taxpayer’s inventory at in-state locations and delivered the products sold to New York customers. The taxpayer neither owned physical sales locations in New York nor paid rent to such independent contractors for storing inventory at their locations. The taxpayer did, however, retain title to its products until they were sold. The Department ruled that the taxpayer was “doing business,” as defined under N.Y. Tax Law § 209(1), because the taxpayer owned the products that it consigned to its independent contractors until sold to New York customers. The Department further determined that the statutory “order fulfillment” exemption under N.Y. Tax Law § 209(2)(f) did not apply because the independent contractors did “more than just accept or just ship orders in New York State.” The Department likewise took the position that P.L. 86-272 did not protect the taxpayer’s activities because the independent contractors both solicited orders from New York customers and delivered the products to them. TSB-A-13(4)C, New York Dept. of Tax. & Fin. (March 4, 2013).

By Christopher Chang and Timothy Gustafson

A prepaid telephone card and long-distance service provider’s attempt to source phone card sales receipts outside of Texas was rebuffed by the Texas Comptroller because the taxpayer failed to carry its burden of proof. After initially sourcing 100% of its gross receipts to Texas and unsuccessfully claiming a cost-of-goods-sold deduction, the taxpayer, a Texas LLC, filed amended returns sourcing its phone card sales to the location of the out-of-state switch used to handle the customers’ calls. Comptroller Staff argued that the taxpayer’s gross receipts should be sourced based on the domicile of the calling card purchaser; however, because the taxpayer had not provided evidence of where the purchasers were domiciled, Staff argued the assessments should not be adjusted. Sidestepping the issue of the proper sourcing methodology for the services involved, the Comptroller held that the taxpayer did not satisfy its burden to show, by a preponderance of the evidence, that the assessments were erroneous. The “gaps” in the taxpayer’s evidence included a failure to explain the nature of various maintenance and connection fees and how such fees should be sourced; a failure to explain or define terms used by the taxpayer on its summary schedules; and a failure to explain the disparity of revenues sourced to Texas across the taxpayer’s various revenue streams. Texas Comptroller Decision No. 105,737 (Dec. 18, 2012).

By Madison Barnett and Jack Trachtenberg

The Michigan Court of Appeals ruled in two consolidated cases that the state’s estimated corporate income tax assessments were invalid because the taxpayers’ sales factors were improperly calculated using an alternative population-based formula rather than the statutory costs of performance (COP) formula. The two taxpayers were out-of-state book publishers that entered into a joint venture to develop, market and sell books in Michigan from locations outside of the state. The court upheld the lower court’s determination that affidavits submitted by the taxpayer sufficiently established the sourcing of all of the developing publisher’s service revenue outside of Michigan under the COP sourcing method. By rejecting the Department’s assertions regarding the sufficiency of the taxpayers’ COP evidence, the case illustrates that taxpayers should be wary of states’ attempts to reject COP sourcing by making it practically impossible for taxpayers to prove the location of every cost for every transaction. The case is also procedurally interesting because the court ruled that, so long as a taxpayer provides its in-state and everywhere sales figures, the Department cannot force a taxpayer to produce a 50-state apportionment summary, a document which is frequently requested by state auditors. JRS Distribution Co. v. Mich. Dep’t of Treas., No. 302441 (Mich. App. Dec. 11, 2012) (unpublished); Publications Int’l, Ltd. v. Dep’t of Treas., No. 307350 (Mich. App. Dec. 11, 2012) (unpublished).

By Zachary Atkins and Andrew Appleby

The Oregon Supreme Court held that a taxpayer’s sale of an FCC license as part of a liquidation generated apportionable business income. The taxpayer, Crystal Communications, Inc., sold all of its assets to AT&T, including an FCC license. The gain on the FCC license was treated by the taxpayer as nonbusiness income allocable outside of Oregon. The Oregon Supreme Court determined that the gain met Oregon’s UDITPA-based definition of business income (a statutory definition) and the Oregon Department of Revenue’s additional definition of business income (a rule-based definition), the latter of which treats income from the sale of property as business income if the property was used in the taxpayer’s trade or business while owned by the taxpayer. The court rejected the taxpayer’s contention that the Department’s second definition of business income impermissibly overreaches because it captures income that is not captured by the UDITPA definition. The court concluded that the definitions could be construed harmoniously—especially if the second definition is interpreted consistently with the California Supreme Court’s opinion in Hoechst Celanese Corp. v. Franchise Tax Board, 25 Cal. 4th 508 (Cal. 2001), cert. den., 534 U.S. 1040. The court found that the Department’s interpretation of the two definitions in this case was reasonable. Although it declined to rule on the taxpayer’s uniformity claim, the court sent strong signals that the alleged differences in the treatment of financial institutions and public utilities and other multistate businesses do not violate the Uniformity Clause of the Oregon Constitution. Crystal Comms., Inc. v. Dep’t of Revenue, SC S059271 (Or. 2013).

By Todd Betor and Pilar Mata

Oregon’s $29 million corporate excise tax claim against the taxpayers’ parent company was held to violate both the Due Process and Commerce Clauses of the U.S. Constitution by the U.S. Bankruptcy Court for the District of Delaware. Oregon claimed that Washington Mutual, Inc. (WMI) was liable for its subsidiaries’ tax because WMI had (as the parent corporation) filed consolidated corporate tax returns on behalf of itself and its subsidiaries and therefore could be held jointly and severally liable for the tax due. WMI maintained that its inclusion in the consolidated group was required and was not a concession that it was doing business in Oregon, and that if WMI was liable for its subsidiaries’ tax under Oregon law, the tax was unconstitutional. The court agreed, finding that the imposition of the tax upon WMI was in violation of the Due Process Clause because WMI and its subsidiaries were separate legal entities; WMI’s sole source of income related to Oregon was dividends received from its related subsidiaries (of which no portion of the $29 million claim was related); and WMI received no income from its subsidiaries’ use of its trademarks within the state. The court further held that WMI could not be liable for the tax based on the Commerce Clause because WMI did not satisfy the “substantial nexus” test set forth in Complete Auto Transit. In reaching this holding, the court declined to apply a physical presence or economic presence standard to Oregon’s corporate excise tax, though it conceded that economic presence was a factor to be considered when determining whether WMI possessed a substantial nexus with Oregon. In re: Washington Mutual, Inc., 485 B.R. 510 (Bankr. D. Del. 2012).