Many states offer special tax rules for manufacturers. In this edition of A Pinch of SALT, Sutherland SALT’s Suzanne Palms, David Pope and Maria Todorova explore the state tax treatment of manufacturers, including the various state definitions and special rules.

Read “State Tax Treatment of a “Manufacturer,”” reprinted from the January 21, 2013 issue of State Tax Notes.

The Tennessee Department of Revenue issued an interesting ruling addressing the taxability of two types of Internet-based services. The Department determined that the first type (facilitating remote access to the user’s computer) was a non-taxable service and the downloaded Java applet was software but not the true object of the transaction. The Department determined that the second type, which facilitated online meetings/webinars, was a service “ancillary” to a telecommunications service, and was thus subject to sales tax.

The Tennessee Department of Revenue released two taxpayer-favorable rulings related to the intangible expense addback statute and economic nexus on January 8, 2013. In Letter Ruling No. 12-32 (Dec. 19, 2012), the Department ruled that the discount incurred in the course of factoring trade receivables using an affiliated factoring company did not constitute an “intangible expense” subject to Tennessee’s related member addback statute. The ruling confirms that Tennessee’s addback statute is properly interpreted to generally exclude expenses unrelated to intangible property, such as factoring discounts and interest expenses on debt unrelated to intangible property.

In Letter Ruling 12-27 (Nov. 14, 2012), the Department ruled that an intangible holding company did not have nexus in the state where it licensed patents to an affiliated company that used the patents to manufacture products outside of Tennessee and then distribute and sell the products to customers located in Tennessee. The ruling found that the intangible holding company’s contacts with Tennessee under the facts were “too remote and indirect so as to be characterized as an activity ‘purposefully engaged in’ within the state with the object of gain, benefit, or advantage.” Citing a 2009 New Jersey Supreme Court case, Praxair Tech., Inc. v. Dir., Div. of Taxation, 988 A.2d 92, however, the ruling notes that the holding company “could be” subject to tax in Tennessee if the affiliate to which the patents were licensed used the patents to manufacture products within Tennessee.

On January 8, 2013, the Sutherland State and Local Tax (SALT) Team appeared before the Oregon Supreme Court in an important case concerning the scope of Oregon’s central assessment method of property taxation. Comcast Corporation v. Department of Revenue, Case No. S059764. The issue in the case concerns whether cable television and Internet access services are within the scope of “data transmission services” for ad valorem tax purposes. This case is being followed closely by participants in the Digital Economy (e.g., sellers of Internet access, digital goods and services, and cloud computing providers) and taxing jurisdictions throughout the country.

Continue Reading Sutherland SALT Argues Digital Economy Central Assessment Case

We are pleased to announce the launch of the new Sutherland SALT Digital Economy Forum, which provides resources, legislative monitoring and advocacy, and strategic counsel on the state taxation of the Digital Economy. To access free resources on the taxation of the Digital Economy, click on the Digital Economy Forum link at the top of the page.

The Digital Economy includes cloud computing, digital goods and services, electronic payments, and other goods and services delivered or transferred electronically. The state tax ramifications of Digital Economy transactions are incomplete and evolving. A recent survey by Sutherland SALT of leading cloud computing providers illustrates the confusion. Approximately one-third of the respondents sourced sales tax transactions using customers’ billing addresses. And, nearly three-fourths of the respondents do not apportion sales of cloud computing services for sales tax purposes when the benefit of the service is received at more than one customer location. Click here to see a summary of the survey results.

Sutherland SALT will be monitoring and commenting on the digital economy and various SALT consequences, including income taxes, sales taxes, telecommunications taxes and fees, employment tax and information reporting, and property taxes. If you would like to join the Sutherland SALT Digital Economy Forum and benefit from proprietary research, analysis and commentary, please contact one of us.

The Nebraska Department of Revenue (Department) recently declared, by way of an article in a third-party newsletter, that it has the authority to “examine all aspects of a return, including federal items.” George Kilpatrick, Nebraska Revenue Department’s Audit and Examination Powers Discussed, THE NEBRASKA CPA (Oct. 2012). While the article is aimed at personal income taxpayers, corporate taxpayers have good reason to be concerned because the statutory language relied on by the Department is applicable also to the corporate income tax.

Continue Reading Nebraska’s Below-the-Belt Decision to Audit “Above the Line”

The deliberative process privilege is used by state tax authorities to prevent the disclosure of information or documentation that may compromise the authorities’ legal position. In this edition of A Pinch of SALT, Sutherland SALT’s Marc Simonetti and Zachary Atkins explore the requirements state tax authorities must meet to assert the deliberative process privilege, the extent to which authorities may invoke the privilege, and ways taxpayers may overcome the privilege to obtain information or documentation needed to analyze audit adjustments.

Read “The Deliberative Process Privilege In State Controversy Matters,” reprinted with permission from the December 10, 2012, issue of State Tax Notes.

On December 18, 2012, the California Court of Appeal ruled that receipts from the right to replicate software are sourced as sales “other than tangible personal property.” In reversing the trial court, the Court of Appeal upheld the taxpayer’s use of costs of performance sourcing. Microsoft Corporation v. Franchise Tax Board, Case No. A131964, Cal Ct. App. (1st App. Dist.). Sutherland SALT represented Microsoft in the appeal.

For full details on the ruling, read our Legal Alert, “California Court Finds in Favor of Microsoft, Upholds Costs of Performance.”

The New York State Department of Taxation and Finance (Department) issued a pair of advisory opinions regarding the sales taxability of consulting services and software. New York’s Tax Law generally imposes sales and use tax on receipts for furnishing information services. N.Y. Tax Law § 1105(c)(1). However, in both advisory opinions, the primary transactions were not subject to New York sales tax because they were within the exception for personalized information services and information services provided orally. See 20 NYCRR § 527.3(b)(2) & (3).

Continue Reading Software in Conjunction with Information Services: What’s Your Function?

In two decisions by the Texas Office of Administrative Hearings, the Comptroller affirmed its position that the evenly weighted three-factor apportionment formula contained in an election provided by the Multistate Tax Compact (MTC Election) does not apply to the Texas Margins Tax. See Tex. Compt. Dec. No. 106,503 (Aug. 10, 2012); Tex. Compt. Dec. No. 106,508 (Jul. 13, 2012). Rather, taxpayers must apportion via the statutory single receipts factor.

Taxpayers have filed Texas returns claiming that the MTC Election allows taxpayers to apply an evenly weighted apportionment formula comprised of property, payroll and sales factors similar to successful attempts by California taxpayers to make the MTC election. The Gillette Company et. al v. Franchise Tax Board, 207 Cal. App.4th 1369 (Op. on Rehearing, Oct. 2, 2012). However, the Comptroller determined, without explanation, that the single-factor formula was required by Tex. Tax. Code Ann. § 171.106 and that the taxpayers were not allowed to elect the MTC three-factor formula.

A Texas taxpayer, Graphic Packing Corporation, recently filed a suit in Travis County District Court on September 27, 2012, challenging the Comptroller’s position on the availability of the MTC Election. See Graphic Pkg. Corp v. Combs, No. D-1-GN-12-003038, Plaintiff’s Original Petition (Trav. Cty. Dist. Ct. 2012). Texas will present an especially interesting environment for this challenge because the Comptroller is likely to contend that the Texas Margins Tax is not an income tax and thus the MTC Election is inapplicable.