We hope you will join us on November 13-14 at the Bloomberg BNA Tax Policy and Practice Summit in Washington, D.C. Sutherland is pleased to sponsor the Summit and to offer our clients and friends a $200 discount off the Summit registration fee.

The Summit is perfectly timed to provide insights into the tax implications of the election results, as well as discussions of pressing tax issues. Sutherland SALT’s Michele Borens and Eric Tresh will lead a discussion of state tax issues associated with cloud computing – including some never before released analyses of industry trends. Other Summit presenters include Thomas Barthold, Chief of Staff for the Joint Committee on Taxation, and William Wilkins, Chief Counsel of the IRS.

To receive the Sutherland discount, please use this link to register. Please register by October 31 in order to receive the discount.

For any questions, please contact Katie O’Brien or your favorite Sutherland SALT attorney. We look forward to seeing you in Washington, D.C.

The Texas Supreme Court upheld the imposition of the franchise tax (often referred to as the Texas Margins Tax) under both the Texas and United States Constitutions. In Re Nestle USA, Inc., No. 12-0518 (Tex. 2012) (opinion delivered Oct. 19, 2012).

Nestle argued that the imposition of the franchise tax was unconstitutional, both facially and as applied.  In Texas, the franchise tax rate is 1%, except for those taxpayers “primarily engaged in a wholesale or retail trade,” for whom the rate is 0.5%. Nestle was engaged only in wholesale and retailing activities in Texas, but because it was engaged in manufacturing outside of Texas, it was subject to the 1% franchise tax rate rather than the lower wholesale/retail rate. Specifically, Nestle argued that the differential rate based on the wholesale/retail classification was unconstitutional under the Equal and Uniform Clause of the Texas Constitution and the Equal Protection, Due Process, and Commerce Clauses of the United States Constitution because the tax lacked a reasonable relationship with actual business in Texas and because of the fact that the tax is higher for those with a manufacturing business outside of Texas.

Continue Reading That’s the Way the Cookie Crumbles: Nestle Loses Its Battle on the Constitutionality of the Texas Franchise Tax

In the latest edition of A Pinch of SALT, Carley Roberts, Jack Trachtenberg and Tim Gustafson discuss the significant increase in third-party enforcement actions, including consumer class actions and qui tam actions involving state tax questions, which is forcing corporate taxpayers to assess unfamiliar and possibly conflicting risks in connection with their compliance obligations.

Read “Between a Rock and a Hard Place: Third-Party Enforcement Actions,” reprinted with permission from the October 1, 2012 issue of State Tax Notes.

As we previously noted, on October 2, 2012, the California Court of Appeal issued an opinion on rehearing in The Gillette Company et al. v. Franchise Tax Board, reversing in full the trial court’s decision in favor of the Franchise Tax Board (FTB). 207 Cal.App.4th 1369 (Op. on Rehearing, Oct. 2, 2012). Read our legal alert, “A Close Shave: California Court of Appeal Rules on Multistate Compact Election,” for our analysis of the opinion.

The three-judge panel of the California Court of Appeal has reissued its opinion in The Gillette Company et al. v. Franchise Tax Board, finding on the same grounds as in the court’s initial opinion that California was bound by the UDITPA election in the Multistate Tax Compact. 207 Cal.App.4th 1369 (Op. on Rehearing, Oct. 2, 2012). The court held that taxpayers, in calculating their California franchise tax, were entitled to make the Article III election to use UDITPA rather than the California-specific provisions. The only change in the Opinion on Rehearing from the initial opinion is that the court notes that subsequent to the years at issue, the California governor signed a bill stating that the code section adopting the Multistate Tax Compact is repealed. Importantly, the court notes that any issue regarding the effect or validity of this repeal was not before the court. Stay tuned for our analysis of the reissued opinion.

Dom & Carley.jpgMeet Dom, the newest rescue pet of Sacramento partner Carley Roberts and her husband, Jeremy. You may remember the Roberts’ other pets, which were featured as Pet of the Month in March and in our April Fool’s edition of the SALT Shaker. 

Carley recently was heading home from work late in the evening, and as she entered the freeway, she came upon a large, Pit Bull-ish looking dog running at top speed in the lanes of traffic. Cars were whizzing by him without a care, so Carley rolled down her window, pulled to the side of him, and began talking to the clearly scared pup, hoping he might slow his stride. As the dog, who is now known as Dom, began slowing down, Carley swerved to protect him as another car impatiently tried to cut around her. She then drove ahead of Dom, continuing to swerve back and forth until all traffic was at a standstill. Once at a stop in the road, Carley opened her doors and encouraged Dom to hop in. As he approached, he stopped about 10 feet in front of her, lowered his head, and stared, showing no trace of emotion. Now eye-to-eye with what was clearly a 100-plus pound Pit Bull, for a split second Carley questioned the wisdom of her judgment, but knew she was doing the right thing and continued to sweetly encourage Dom to jump in her car. Thankfully he did, hopping into the driver’s seat and then into the backseat. 

Continue Reading SALT Pet of the Month: Dom

The Colorado Court of Appeals issued an opinion interpreting the City of Boulder’s software definition very broadly to impose use tax on downloaded software and, even more problematically, access to an online data service. Ball Aerospace & Techs. Corp. v. City of Boulder, Docket No. 2012 COA 153 (Colo. Ct. App. Sept. 13, 2012).

The court interpreted the language “contained on other machine readable form” to encompass software that the customer downloaded via the internet. Although this interpretation may be impermissibly broad, the court’s more curious holding was that access to an online data service constituted the transfer of software. The court reasoned that by paying to access the online data service, the company purchased the right to remotely use the computer software contained on the service providers’ servers—and acquired requisite control over the software.

This case appears to fundamentally alter the jurisdiction’s sales and use tax law. Such significant change is better handled by the legislature or formal rulemaking process, where taxpayers are afforded input and notice.    

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.