In two procedural cases, appellate courts in Oregon and Wisconsin dismissed taxpayer appeals for using improper service methods, despite the fact that the Department of Revenue in each case actually received the notice of appeal.

The Oregon Supreme Court dismissed an appeal from the Tax Court, finding that the taxpayer failed to properly serve the notice of appeal even though the taxpayer e-filed the notice of appeal and emailed a courtesy copy to opposing counsel (which they admitted receiving). Ann Sacks Tile and Stone, Inc. v. Dep’t of Revenue, Case No. SC S060039 (Or. 2012).  The court held, based on the procedural rules, that service via the e-filing system is invalid for “initiating” documents, such as a notice of appeal, and that the email service was invalid because the rules required a prior written agreement among the parties allowing email service. 

The Wisconsin Court of Appeals dismissed an appeal by a pro se taxpayer from the Tax Appeals Commission, finding that the taxpayer failed to properly serve the notice of appeal because he only served the Department of Revenue by regular mail instead of certified mail. Lee v. Wisconsin Dep’t of Revenue, Case No. 2011AP2086 (Wis. Ct. App. 2012). The taxpayer had properly served the Tax Appeals Commission via certified mail, but the rules required service by certified mail on both the Commission and the Department of Revenue.

The U.S. Court of Appeals for the Third Circuit took a bite out of a bagel store’s bankruptcy petition by holding that sales taxes are non-dischargeable “trust fund” taxes rather than excise taxes. In Re: Michael Calabrese, Jr., No. 11-3793 (3d. Cir. July 20, 2012). After not having enough dough to pay their debts, Don’s What a Bagel, Inc. and its individual owner both filed for bankruptcy protection.

The court boiled the issue down to whether sales taxes owed by the owner were considered “trust fund” or “excise” taxes under the Bankruptcy Code. Under the Bankruptcy Code, trust fund taxes are always non-dischargeable, while excise taxes are non-dischargeable only if they are less than three years old. The court found that third-party sales taxes more closely resemble trust fund taxes. These third-party sales taxes are paid by the debtor’s customer and are held by the debtor, rather than paid by the debtor.

The Third Circuit now follows the holdings of the Second Circuit, Seventh Circuit, and Ninth Circuits on this issue. To avoid being toasted, corporate officers should take these decisions into consideration prior to a bankruptcy filing.

The Oregon Tax Court issued its opinion in Powerex v. Dep’t of Revenue, TC 4800 (Or. Tax Ct., Sept. 17, 2012), holding that sales of electricity are sales of other than tangible personal property for Oregon apportionment purposes. The taxpayer sold both electricity and natural gas at wholesale with contractual points of delivery in Oregon. The primary issue in the case was whether, for apportionment purposes and calculating the numerator of the sales factor, the taxpayer’s sales of electricity were sales of tangible personal property or sales of intangible personal property sourced to the location of the majority of the income-producing activity based on costs of performance.

The parties’ expert witnesses, both physicists, appeared to agree that electricity is a phenomenon wherein virtual photons transmit force rather than matter. Based on principles of statutory construction and the apparent agreement of the parties’ expert witnesses as to the nature of electricity, the court held that force transmitters do not come within the legislative understanding of tangible personal property and that the taxpayer’s sales of electricity were sales of other than tangible personal property.

The court ruled in the taxpayer’s favor on the issue of sourcing sales of natural gas by adopting an ultimate destination rule, rather than the contractual point of delivery rule advocated by the Department of Revenue. The ultimate destination rule, the court explained, is more in line with the underlying purpose of the sales factor and is the rule applied in a majority of UDITPA states.

Virginia released a ruling discussing the right to apportion and how to source sales when the ultimate destination of the sale is outside of Virginia. The Taxpayer was a manufacturer whose headquarters and only production facility were located in Virginia. However, the Taxpayer’s business was largely comprised of sales of its products to the U.S. Government, which in turn exported the products from the Taxpayer’s Virginia facility to various foreign countries. The Taxpayer would then send employees to the product locations for set up and installation.

First, the Tax Commissioner discussed whether the Taxpayer had the right to apportion its income for Virginia income tax purposes. Noting that in Virginia a corporation has the right to apportion its income if it is subject to a tax on net income in another jurisdiction, the Commissioner determined that it needed further information about the Taxpayer’s activities in other jurisdictions to determine if the Taxpayer had a right to apportion.

Continue Reading Virginia Ruling Appears to Reach Right Outcome on “Right to Apportion” and Sourcing of Sales…But Perhaps for the Wrong Reason

We previously reported on a significant taxpayer victory in which the Oregon Tax Court held that changes or corrections made by other states’ taxing authorities will not hold open the Oregon statute of limitations. Dep’t of Revenue v. Washington Federal, Inc., TC 5010 (Or. Tax Ct., June 29, 2012). As promised, following is our analysis of the case.

The taxpayer, a multistate federal savings and loan corporation, timely filed its Oregon corporate excise tax returns for tax years 1999 through 2002. Arizona and Idaho state taxing authorities assessed the taxpayer in 2003 and 2006, respectively. In 2008, after the expiration of the standard Oregon statute of limitations for assessment (generally three years from the date the return was filed), the Oregon Department of Revenue (the Department) issued assessments for the tax years 1999 through 2002. The issue before the court was whether the Department’s assessments were timely.

Continue Reading Oregon DOR Out of Luck on SOL: Our Analysis

In a non-precedential, summary decision released May 3, 2012, the California State Board of Equalization (the Board) held that a foreign corporation with only one employee in California was “doing business” in the state and thus was subject to California’s corporation franchise tax. Appeal of Warwick McKinley, Inc., Cal. Bd. of Equal., Jan. 11, 2012 (released May 3, 2012). While California recently expanded its statutory definition of “doing business” in California Revenue and Taxation Code (CRTC) section 23101(b) to include a factor presence nexus test, the Board in Appeal of Warwick McKinley, Inc. focused on CRTC section 23101(a), which defines “doing business” to mean “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.”

Continue Reading California Nexus: Not in My House!

More than a decade into the case, AT&T’s challenge to the constitutionality of Mississippi’s dividends received deduction is over. On September 6, the Mississippi Supreme Court invalidated on procedural grounds the trial court’s 2006 decision finding that the dividends received deduction was unconstitutional. Mississippi’s dividends received deduction is limited to dividends paid from subsidiaries doing business in Mississippi, which AT&T challenged as facially discriminatory against out-of-state companies. AT&T filed its first protest in this case in 1999.

The state supreme court ruled that the trial court never had subject matter jurisdiction over the case (and thus its ruling was null and void), because AT&T paid the challenged tax to the State Tax Commission before filing suit, rather than posting a double-tax bond with the court at the time of filing. The state did not even argue this procedural point and conceded that jurisdiction was proper early on in the case. Nonetheless, the state supreme court took it upon itself to dispense with the case on procedural grounds and was able to avoid the substantive issue entirely.

AT&T’s loss effectively means that another taxpayer will have to litigate the issue of whether Mississippi’s dividends received deduction discriminates against out-of-state companies in violation of the Commerce Clause of the U.S. Constitution.

In our latest A Pinch of SALT column, Sutherland SALT’s Michele Borens and Scott Booth consider how the recent string of taxpayer-favorable nexus decisions will entice the U.S. Supreme Court to accept a nexus case.

Read “The Supreme Court Should Accept a Nexus Case – Part II,” reprinted with permission from the September 3, 2012 issue of State Tax Notes.

The U.S. Supreme Court held in Armour v. City of Indianapolis, 132 S.Ct. 2073 (June 4, 2012), that a city’s refusal to refund sewer taxes prepaid by some homeowners while relieving taxes paid by other homeowners who elected to pay the tax by installment did not violate the Equal Protection Clause. Applying a rational basis standard, the Court upheld the tax forgiveness scheme because it was rationally related to the city’s legitimate interest of avoiding the administrative costs associated with issuing refunds.

The opinion reflects the difficulty of applying the Equal Protection Clause. The Court provided that laws treating similarly situated taxpayers differently are constitutional as long as there is a “plausible policy reason for the classification . . . and the relationship of the classification to its goal is not so attenuated so as to render the distinction arbitrary or irrational.” The Court noted that the only instance where it has found a rational basis lacking in this context is where a state law requiring equal assessment was “dramatically violated” by gross disparity in assessments. Here, the sewer project financing assessments were equally distributed, as required by state law. Whether the tax should be forgiven and how such a tax forgiveness program should be implemented are separate questions which are not addressed by state law.

Continue Reading Administrative Convenience Justifies Inequality in Tax Forgiveness Program

In direct contradiction to the recent MetLife case, a different division of the Illinois Appellate Court held that a taxpayer was subject to the double interest amnesty penalty on its increased state tax liability resulting from federal audit changes. Marriott Intern. Inc. v. Hamer, 2012 IL App (1st) 111406 (Ill. App. Ct., 1st Dist., 3rd Div. Aug. 22, 2012). The MetLife case held that such penalties did not apply under nearly identical facts. Met. Life Ins. Co. v. Illinois Dep’t of Revenue, 2012 IL App (1st) 110400, at *1 (Ill. App. Ct. 1st Dist., 1st Div. Mar. 5, 2012).

A 2003 Illinois amnesty program provided amnesty to taxpayers who paid “all taxes due” for eligible tax years by November 2003. A double interest penalty applied for those taxpayers that had a tax liability eligible for amnesty but failed to pay it. Two months after the amnesty period ended, the Internal Revenue Service began an audit of Marriott that ultimately resulted in a 2007 revenue agent report (RAR), increasing Marriott’s federal taxable income. Marriott timely reported the federal RAR changes to Illinois and paid the resulting tax liability.

Continue Reading Illinois Double Whammy on Double Interest Penalty