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.

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.