The California State Board of Equalization (BOE) held an interested parties meeting on July 17, 2012, to discuss whether to amend its Regulation 1507 (Technology Transfer Agreements (TTA)) to clarify how the TTA statutes (Cal. Rev. and Tax Code §§ 6011(c)(10) and 6012(c)(10)) should apply to transfers of computer programs on tangible storage media. Under California law, the value of intangible property transferred under a TTA is excluded from the sales or purchase price under the Sales and Use Tax Law.

At the outset of the meeting, the BOE discussed the background of the TTA statutes and identified key issues for discussion. The background and key issues, as well as the comments from interested parties, are summarized below. Written comments will be accepted until August 1, and the BOE Business Taxes Committee will receive an update on the interested parties process at its meeting on August 21-23. A second interested parties meeting currently is scheduled for September 6.

  1. The Legal Department does not read Nortel v. State Bd. of Equalization as exempting all prewritten software. It believes Nortel is limited to its facts. Nortel held that the right to “use a process” subject to a patent, when combined with the transfer of tangible personal property, qualifies as a TTA even when the “process” is prewritten computer software.
  2. The TTA statutes only provide TTA treatment to agreements where the holder of the copyright or patent transfers a patent or copyright interest to third parties. Thus, the holder of the patent or copyright interest must be the transferor. Nonetheless, the BOE indicated that it would be open to considering whether the “holder” requirement has been met through a licensing entity in a group of entities.
  3. The Legal Department believes prewritten and canned computer programs transferred on TPP are TPP. Thus, software development costs should be included within the value of the taxable tangible personal property transferred under a TTA.
  4. The Nortel court did not invalidate the provision of Regulation 1507 that requires patented processes to be external to the tangible personal property, necessarily excluding embedded software from TTA treatment.
  5. If a TTA is created based on the transfer of a copyright interest, the copyright interest must provide the right to make and sell a product subject to the copyright interest for TTA treatment.
  6. The Nortel case did not address the measure of tax related to the TTA because the parties stipulated to the value of the tangible personal property. Thus, there was no guidance on which costs to include in determining the value of the tangible personal property based on the statutory test of 200% of the cost of labor and materials used to produce the tangible personal property.
  7. The BOE does not intend to change its position that software development costs are included in the value of the tangible personal property transferred under a TTA because that would be compromising its position in Lucent, which is at the superior court.

Continue Reading California BOE Holds Interested Parties Meeting on TTA Regulation

New Jersey amended its escheatment laws on June 29, 2012. Some of the notable amendments include:

  1. Extending the period for which no activity is deemed to be considered abandoned from two years to five years;
  2. If a balance of less than $5 remains on a gift card, issuers are required to refund the balance in cash at the card owner’s request;
  3. Funds on stored-value cards sold on or after December 1, 2012 shall not expire;
  4. No fees shall be charged on a stored-value card except for an activation and replacement fees; and
  5. New Jersey’s requirement for issuers to collect customers’ names and addresses is delayed for 49 months.

A copy of the bill is available here.

 

The Massachusetts Appeals Court upheld the Appellate Tax Board’s costs-of-performance decision in the AT&T case. Comm’r of Revenue v. AT&T Corp., Dkt. No. 11-P-1462 (Mass. App. Ct. July 13, 2012).  The Court issued an unpublished decision that granted summary disposition in favor of AT&T. In June 2011, the ATB determined that AT&T had properly sourced its receipts from its interstate and international telecommunication services using the “operational” approach. The Appeals Court agreed that the operational approach was the more appropriate method since AT&T could not have provided the long-distance telephone calls to its customers without the integrated long distance network based in New Jersey and other locations. This decision stands in contrast to the Oregon Tax Court’s decision that required AT&T to use the “transactional” approach.

Florida recently issued an unusual ruling that:

  1. Gross receipts from hedging transactions must be excluded from the sales factor, although
  2. Net receipts from output hedges are included, and
  3. Net receipts from input hedges and proprietary trading are excluded. 

The rule seems to be that all hedging receipts are excluded, unless the hedging activities are connected to making a profit, like the output hedges, in which case the net receipts are included. This is definitely an odd result.

Continue Reading Show Me the Money: Florida Issues TAA on Inclusion of Hedging Receipts in Sales Factor

In a taxpayer-friendly decision, a Washington State administrative law judge ruled that an out-of-state food products company did not have nexus with the state. The case, however, involved unique circumstances: a sales manager made two visits over a five-year period to an international wholesale buyer in Washington to promote sales of a product, and the product was shipped from out-of-state through the buyer’s location outside Washington to overseas locations. The administrative law judge applied the state’s nexus regulation, which turns on whether “the activity carried on by a seller in Washington is significantly associated with the seller’s ability to establish or maintain a market for its products in Washington.” The administrative law judge concluded that the company did not have nexus with the state because its visits to Washington were for the purpose of making out-of-state sales and not for the purpose of making sales in Washington. You can read the full decision here.

This case appears to follow a recent taxpayer-friendly trend in Washington. While it related to a different type of tax (utility tax on gross income), the recent case CMS v. City of Lakewood also limited the scope of nexus in the State of Washington by noting that the taxpayer was not selling, brokering, or furnishing natural gas “in the City” of Lakewood, despite occasional visits (less than three per year) to the city.

The California Supreme Court reversed the appellate court’s decision regarding the Franchise Tax Board’s (FTB) authority to conduct an audit to determine whether a taxpayer is entitled to an enterprise zone hiring credit. DiCon Fiberoptics, Inc. v. Franchise Tax Bd., Case No. S173860 (Apr. 26, 2012).

California’s Enterprise Zone Act (the Act) permits a taxpayer that employs a “qualified employee” in an enterprise zone to claim a tax credit for five years. To be a “qualified employee,” at least 90% of the employee’s services must “directly relate[ ] to the conduct of the taxpayer’s trade or business located in an enterprise zone,” and the employee must perform at least 50% of his or her services in the enterprise zone. Cal. Rev. & Tax. Code § 23622.7(b)(4)(A). In addition, the employee must fall within one of several categories that demonstrate the employee is disadvantaged or endures some form of employment barrier. Cal. Rev. & Tax. Code § 23622.7(b)(4)(A)(iv). To claim the credit, taxpayers are required under the Act to: (1) obtain from the local zone government authority a certification (or “voucher”) that provides the qualified employee meets the eligibility requirements; and (2) retain a copy of the certification and provide it upon request to the FTB. Cal. Rev. & Tax. Code § 23622.7(c).

Continue Reading Franchise Tax Board’s Broad Audit Authority to Review Returns and Ascertain Correct Amount of Tax Underscored in Enterprise Zone Hiring Credit Decision by California Supreme Court

In an unusual case, the Oregon Department of Revenue tried to argue that a taxpayer’s receipt of an assessment from two other states held open the statute of limitations for Oregon income tax purposes. The Oregon Tax Court disagreed, holding that the assessment from another state would have to impact the taxpayer’s Oregon income tax liability. Read the full decision in Department of Revenue v. Washington Federal, Inc. here. 

We would love to know your opinion: would the Oregon DOR have recognized a consistent position if it was a refund position? Stay tuned for Sutherland’s analysis of this case.

On March 22, 2012, Utah Governor Gary Herbert signed House Bill 384 (2012) into law, expanding the types of companies that are required to collect and remit Utah sales and use tax. HB 384 requires sellers that hold “substantial ownership interests” in certain “related sellers” to collect and remit Utah sales and use tax. Today, the Utah State Tax Commission released guidance on how to determine whether a business entity’s activities trigger the state’s new affiliate nexus law. The new nexus regulations go into effect on July 1, 2012.

The new affiliate nexus law, Utah Code Ann. § 59-12-107(2)(b), treats a seller as if it is selling tangible personal property, a service, or a product transferred electronically for use in Utah and will be required to collect and remit sales and use taxes if:

Continue Reading Utah Quietly Expands Affiliate Nexus Statute

On cross motions for summary judgment, the Minnesota Tax Court held the activities of an out-of-state watch and jewelry distributor (Taxpayer) went beyond mere solicitation of orders for tangible goods in the state of Minnesota and established sufficient nexus to impose Minnesota’s corporate franchise tax. Skagen Designs Ltd. v. Comm’r of Revenue, Minn. Tax. Ct., No. 8168-R (Apr. 23, 2012). The Taxpayer employed two types of employees in Minnesota, sales representatives and merchandisers (Merchandisers). The application of Public Law 86-272 to the Merchandisers’ activities, including completing weekly reports, maintaining product floor maps, holding product training sessions and inspecting display cases, were at issue before the court.

Continue Reading Time to Pay Up: Public Law 86-272 Does Not Protect Watch Distributor’s Merchandising Activities