The Illinois Department of Revenue (Department) issued General Information Letter (GIL) ST 12-0009-GIL (Feb. 28, 2012), which states that retailers that sell “deal-of-the-day” vouchers must collect and remit sales tax on the amount a customer pays for the voucher if the retailer can identify such amount. Otherwise, the retailer must collect and remit the full value of the “deal-of-the-day” item sold. The Department stated that it is in the process of preparing a bulletin to explain the tax treatment of deal-of-the-day websites, but it issued this GIL using guidance provided at a practitioners’ meeting on February 2, 2012.

The taxpayer in ST 12-0009-GIL requested information regarding the taxability of a prospective business venture similar to GroupOn, a popular website that sells vouchers redeemable for items sold by retailers at a discount. The Department provided several examples of how a typical GroupOn-type transaction should be treated for Illinois sales tax purposes when a customer purchases a $25 voucher redeemable for $50 of food at a retailer.

Continue Reading Illinois Buys Into Providing Guidance for Deal-of-the-Day Voucher Transactions

On May 30, 2012, California Assembly Bill (AB) 2323 (Perea) passed the Assembly floor by a vote of 47-19. AB 2323 would require the State Board of Equalization (BOE) to issue written decisions in cases involving amounts in controversy of $500,000 or more, excluding consent items. If enacted, the BOE could decide the type of ruling it publishes—a formal decision, memorandum decision, or summary decision; however, only formal or memorandum decisions would be citable as precedent. Regardless of the type of decision issued, each decision would be required to contain: (1) findings of fact; (2) legal issue presented; (3) applicable law; (4) analysis; (5) disposition; and (6) names of adopting board members. Moreover, the bill authorizes any board member to submit a dissenting or concurring opinion.

In City of Palmdale, et al. v. State Board of Equalization, __Cal. Rptr. 3d__, 2012 WL 1861121 (May 23, 2012), California’s Second District Court of Appeal took to task the State Board of Equalization (BOE) for its adjudicatory process in a sales tax reallocation matter involving the City of Pomona. In 1994, the City of Pomona petitioned for reallocation of sales tax revenues that had been allocated to a countywide pool because a retailer’s Pomona warehouse did not have a resale permit. Both BOE staff and the BOE denied the petition in 2000.

Eight years later, the City of Pomona requested that the BOE reconsider its denial of the 2000 appeal, and the BOE granted a partial reallocation, declining to state a basis for its decision. Several cities petitioned for a writ of mandate in the trial court to overturn the BOE’s decision. The trial court granted the petition, stating that the BOE “‘does not even hint at the reasons for the decision and does nothing more than compute the amount of sales tax revenue to be reallocated.’” Id. The trial court also suggested that the cities’ due process rights may have been violated when they were deprived of revenue that previously had been allocated to them more than eight years earlier. 

The court of appeal viewed the trial court’s ruling as “tantamount to a public reproval and … an embarrassment to an agency charged with functions vital to the financial stability of California and its subdivisions and the finances of state taxpayers.” Id. In denying a motion by the petitioner cities to settle the case and vacate the trial court’s judgment, the court of appeal concluded that the public interest would be adversely impacted. The court stated: “This appeal deserves particular attention because according to the judgment, the Board displayed a repeated lack of concern for the statutory and constitutional procedures that restrict its decision-making authority. If the Board ignores applicable legal principles, an erroneous decision is more likely.” Id.

A Rhode Island Superior Court decision may provide some comfort to retailers concerned about potential class actions for improper collection of sales and use tax. In Long v. Dell Computer Corp., No. PB 03-2636 (R.I. Sup. Ct., Apr. 2, 2012), the court determined that Dell’s improper collection of sales tax on optional service contracts lacked any evidence of “an intent to mislead the consumers” and did not violate Rhode Island’s Deceptive Trade Practices Act (DTPA). The court, in granting Dell’s motion for summary judgment, also rejected a negligence claim by the plaintiffs because Dell’s duty to properly collect sales and use tax was owed to the State of Rhode Island—not to the consumer plaintiffs.

The facts of the case are fairly simple: Dell collected sales tax on the full amount of its computer sales to customers, including amounts charged for optional service contracts and shipping and handling fees. Based on Dell’s interpretation of a 1991 response to its inquiry from the Rhode Island Division of Taxation, Dell collected sales tax on both the service contracts and transportation charges because such items were not separately stated in the sale to the purchaser. After the filing of the lawsuit in 2004, Dell sought and obtained letter rulings in 2005 and 2006 from the Division of Taxation, which again indicated that Rhode Island sales tax should be collected on the charges for service contracts and transportation chargers, which were not separately stated.

The court found that Dell improperly collected sales tax on those charges. However, the court rejected the plaintiffs’ cause of action, claiming that Dell was negligent. The court noted that a seller is liable to the Division of Taxation and subject to penalties when it fails to properly collect and remit sales tax. As a defense to the DTPA claim, Dell also asserted that even if the sales tax was improperly collected, Dell’s action did not rise to an “unfair or deceptive practice” required under the DTPA. The court accepted Dell’s argument that the charge of sales tax on optional service contracts was “a good faith, reasonable interpretation of the tax law and regulations.” Indeed, the court noted Dell’s effort to gain clarity on the taxability of such contracts in its correspondence with the Division of Taxation in 1991. The court concluded that “Dell’s honest misinterpretation of a delicate area of the state tax law cannot be held to be an unfair act” and that the plaintiff failed to present any admissible evidence that Dell acted “in an immoral or unethical manner at all.”

The New Mexico Court of Appeals held that for purposes of imposing the state’s gross receipts tax, Barnes & Noble Booksellers, Inc.’s (Booksellers) in-state activities may be imputed to an out-of-state retailer (Taxpayer) based on the use of common Barnes & Noble trademarks. New Mexico Tax. & Revenue Dep’t v. Barnesandnoble.com LLC, No. 31, 231 (N.M. Ct. App. Apr. 18, 2012). Notably, Booksellers undertook no physical activities on behalf of the Taxpayer that would independently satisfy the physical presence standard established in Quill. However, according to the court, the goodwill generated by Booksellers’ use of the same Barnes & Noble trademarks helped the Taxpayer establish and maintain a market in the state, thereby creating substantial nexus that is the “functional equivalent” of physical presence under Quill.

Continue Reading “Functional Equivalent” Nexus: When Goodwill Goes Bad in New Mexico

Please join Sutherland’s State and Local Tax Team for a webinar to discuss recent developments regarding California’s sales and use tax treatment of sales of intangible property bundled with tangible property and sold subject to the seller’s patent or copyright interest.

California’s special tax provisions, known as technology transfer agreements (TTAs), have widespread application and have been the subject of recent litigation. The California State Board of Equalization intends to hold an interested parties meeting in mid-July to discuss potential amendments to the TTA regulations.

Please join us to discuss the recent developments and how your company may be able to benefit from these provisions. Please note, this program is limited to in-house counsel and in-house tax professionals. Register for the webinar now.

The Louisiana Supreme Court declined to review the Court of Appeal’s holding that an out-of-state corporation’s passive ownership of an interest in a limited partnership is not a sufficient basis, by itself, to subject the foreign limited partner to Louisiana franchise tax. UTELCOM, Inc. v. Bridges, No. 2010-0654, 77 So.3d 39 (La. App. 1st Cir. Sept. 12, 2011), reh’g denied (Nov. 1, 2011), writ denied, No. 2011-C-2632 (La. Mar. 2, 2012). The court’s decision to not accept the case should prompt the Department of Revenue to reverse course on its current position.

In UTELCOM, the Department issued franchise tax assessments against two out-of-state corporations whose only connection with Louisiana was their ownership interests in a limited partnership engaged in the long-distance telecommunications business in Louisiana. The primary basis for the Department’s position was a regulation that provided that owning property in Louisiana through a partnership is sufficient to create franchise tax nexus. The trial court upheld the assessments based on the Department’s regulation.

Continue Reading No Louisiana Nexus Over Out-of-State Corporate Partners

The Illinois Court of Appeals held that a taxpayer that did not participate in an amnesty program because it was under federal and state audits, and did not know its ultimate tax liability, was not liable for the special amnesty penalty. Met. Life Ins. Co. v. Illinois Dep’t of Revenue, 2012 IL App (1st) 110400, at *1 (Ill. App. Ct. 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. In 2000, the Internal Revenue Service began an audit of MetLife for prior tax years and concluded in 2004 that MetLife owed additional federal tax. Additionally, in 2002, the Illinois Department of Revenue (Department) commenced an audit and, after 2004, concluded that MetLife owed additional state income tax for amnesty eligible tax years. Although MetLife had paid the additional tax, the Department notified MetLife in 2008 that the Department was assessing the amnesty double interest penalty.

In finding that the taxpayer did not owe the penalty, the Court of Appeals reasoned that “all taxes due” meant those taxes that a taxpayer knew were due and owed during the amnesty period. The court held that MetLife could not have participated in the protections afforded by the amnesty program to avoid the double interest penalty because MetLife did not know it owed additional taxes during the amnesty period, and the federal and state assessments were not made until after the end of such period. The court also found that the Department’s rules stating that a taxpayer under audit during the amnesty period must make a “good faith estimate” of its tax liability and pay it “irrespective of whether that liability is known to the Department or the taxpayer” exceeded the authority that the legislature conferred to the Department.

Georgia Governor Nathan Deal signed three bills that will enact a wide range of changes to Georgia’s tax structure and procedure (HB 386, HB 100, and HB 846). These changes include a new sales tax exemption for energy used in manufacturing, an affiliate nexus provision, creation of a new Georgia Tax Tribunal, publication of letter rulings, and changes to the taxation of motor vehicles, among others. The bills are the culmination of the comprehensive tax reform effort started in 2010 by the Tax Reform Council. While the bills fall short of the dramatic changes originally proposed by the Council (which included taxation of services and groceries, and communications tax reform), they nevertheless include a number of taxpayer-friendly changes.

Continue Reading Georgia Tax Reform 2.0: Three Bills Signed by Governor