The U.S. Supreme Court held in Armour v. City of Indianapolis, 132 S.Ct. 2073 (June 4, 2012), that a city’s refusal to refund sewer taxes prepaid by some homeowners while relieving taxes paid by other homeowners who elected to pay the tax by installment did not violate the Equal Protection Clause. Applying a rational basis standard, the Court upheld the tax forgiveness scheme because it was rationally related to the city’s legitimate interest of avoiding the administrative costs associated with issuing refunds.

The opinion reflects the difficulty of applying the Equal Protection Clause. The Court provided that laws treating similarly situated taxpayers differently are constitutional as long as there is a “plausible policy reason for the classification . . . and the relationship of the classification to its goal is not so attenuated so as to render the distinction arbitrary or irrational.” The Court noted that the only instance where it has found a rational basis lacking in this context is where a state law requiring equal assessment was “dramatically violated” by gross disparity in assessments. Here, the sewer project financing assessments were equally distributed, as required by state law. Whether the tax should be forgiven and how such a tax forgiveness program should be implemented are separate questions which are not addressed by state law.

Continue Reading Administrative Convenience Justifies Inequality in Tax Forgiveness Program

In direct contradiction to the recent MetLife case, a different division of the Illinois Appellate Court held that a taxpayer was subject to the double interest amnesty penalty on its increased state tax liability resulting from federal audit changes. Marriott Intern. Inc. v. Hamer, 2012 IL App (1st) 111406 (Ill. App. Ct., 1st Dist., 3rd Div. Aug. 22, 2012). The MetLife case held that such penalties did not apply under nearly identical facts. Met. Life Ins. Co. v. Illinois Dep’t of Revenue, 2012 IL App (1st) 110400, at *1 (Ill. App. Ct. 1st Dist., 1st Div. 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. Two months after the amnesty period ended, the Internal Revenue Service began an audit of Marriott that ultimately resulted in a 2007 revenue agent report (RAR), increasing Marriott’s federal taxable income. Marriott timely reported the federal RAR changes to Illinois and paid the resulting tax liability.

Continue Reading Illinois Double Whammy on Double Interest Penalty

The West Virginia Supreme Court of Appeals held that an out-of-state licensor of intangible property did not have nexus in West Virginia despite products bearing its intangible property being sold in the state. Griffith v. ConAgra Brands, Inc., Dkt. No. 10-AA-02 (W. Va. May 24, 2012). The decision is an important taxpayer victory, particularly for licensors of intangible property.

ConAgra Foods, Inc., a food products company, established and transferred to a wholly owned subsidiary, ConAgra Brands (CA Brands), numerous trademarks and trade names. CA Brands also acquired intangibles from unrelated third parties. CA Brands licensed the intangibles to related and unrelated parties in return for royalty payments. The licensed food products were manufactured by the licensees outside of West Virginia and were sold or distributed to wholesalers and retailers in several states, including West Virginia. CA Brands had no physical presence in West Virginia, and it did not control how the licensees distributed the products bearing the CA Brands’ intangibles.

Continue Reading Efforts to Expand Economic Nexus Stall in West Virginia

On August 21, the California State Senate passed AB 2323, requiring the State Board of Equalization (BOE) to issue written opinions in cases where the amount in controversy exceeds $500,000. If the Governor signs the legislation as expected, the BOE will be required to publish written, formal memorandum or summary opinions on its website within 120 days of its decision in all cases meeting the $500,000 threshold. Although the BOE is a quasi-judicial body, it published only 10 formal opinions from 2006-2010.

Illinois Senate President John Cullerton introduced a bill on May 9 that would require publicly traded corporations doing business in Illinois, and those that are at least 50% owned by a publicly traded company, to disclose certain income tax liability information for eventual publication on an Internet database. SB 282 would require the information, usually considered confidential, to be disclosed by corporations that are not obligated to file a corporate income tax return. The data would be publicly searchable, although the data would not be disclosed until two years after the relevant tax year. Although the General Assembly adjourned on May 31 without voting on the bill, Senator Cullerton plans to work on the bill over the summer with the intent of holding hearings before the November veto session.

The information that Illinois would require to be disclosed in an annual statement filed with the Secretary of State includes, among other items: (1) name and address of the corporation; (2) name and address of any corporation that owns 50% or more of the voting stock; (3) modified taxable income; (4) business and nonbusiness income; (5) apportioned income; (6) Illinois apportionment factor; (7) Illinois credits claimed; and (8) Illinois tax liability before and after credits.

Continue Reading Illinois Senate President Wants Corporate Tax Liabilities on Internet

The Indiana Tax Court held that a retailer was permitted to seek sales and use tax refunds of tax collected from its customers before refunding the tax to its customers. In Fresenius USA Marketing, Inc. v. Indiana Dep’t of State Revenue, No. 49T10-1008-TA45 (Ind. Tax Ct. 2012), a retailer sold dialysis equipment to customers and collected and remitted sales tax to the Indiana Department of Revenue (the Department). The retailer filed refund claims alleging that the equipment was exempt durable medical equipment but did not refund the tax to its customers. The Department denied the refund claim and the retailer appealed to the Indiana Tax Court.

The refund statute at issue provided that “a retail merchant is not entitled to a refund of state gross retail or use tax unless the retail merchant refunds those taxes to the person from whom they were collected.” Ind. Code 6-2.5-6-14.1 (emphasis added). The Department argued that the statute required that the merchant refund the claimed over-collected tax to its customers prior to seeking a refund. The court disagreed and found that the statute does not limit the merchant’s ability to seek a refund; it only limits the merchant’s ability to receive the refunded tax (if it is determined that the merchant is entitled to the refund). Therefore, the statute limiting the merchant’s ability to receive the money (if the merchant is entitled to the money), does not limit a merchant’s ability to seek a refund. 

This morning, the North Carolina Court of Appeals released its decision in Delhaize America, Inc. v. Lay, No. COA11-868 (N.C. Ct. App. 2012). Delhaize, formerly known as Food Lion, formed an intangible holding company as part of a restructuring in the late 1990s. The Secretary of the North Carolina Department of Revenue sought to combine Delhaize with its intangible holding company on the ground that combination was necessary to reflect Delhaize’s “true earnings,” which is a North Carolina statutory standard used to justify the application of forced combination. The Department assessed Delhaize approximately $20.6 million in tax, interest, and penalty, which Delhaize challenged primarily on procedural due process grounds.

The definition and application of “true earnings” has been a controversial issue. In Wal-Mart Stores East, Inc. v. Hinton, 676 S.E.2d 634 (N.C. Ct. App. 2009), the North Carolina Court of Appeals held that the Secretary of Revenue has discretionary authority to apply forced combination, and the court will not disturb the Secretary’s findings absent an abuse of discretion. Moreover, the Wal-Mart court defined “true earnings” to include income up to the limit found in the U.S. Constitution.

Continue Reading Delhaized and Confused: North Carolina Court of Appeals Finds Forced Combination, Penalty

For the first time in 50 years, the California Supreme Court is revisiting the issue of the proper application of the property tax to intangible assets. In Elk Hills Power, LLC v. California State Board of Equalization, Case No. S194121, the court will address whether the California State Board of Equalization (the Board) may assess Elk Hills’ intangible Emission Reduction Credits (ERCs). In Elk Hills, the Board treated the ERCs as “necessary” to put a power plant to “beneficial or productive use” and thus taxable for property tax purposes. Because many businesses use intangible assets that are “necessary” to the conduct of their businesses (e.g., trademarks, trade names, franchises, licenses, customer relationships, patents, and copyrights), the case has attracted attention across a broad spectrum of the California business community.

Continue Reading California Supreme Court Considers Case to Allow Property Tax on Intangible Assets

Sutherland SALT’s Jack Trachtenberg recently sat down with Bloomberg Law’s Spencer Mazyck to discuss the application of the False Claims Act in state taxation and the growing number of state-tax related whistleblower lawsuits. You can view the full interview here:

 

In the latest edition of A Pinch of SALT, Sutherland SALT’s Carley Roberts, Prentiss Willson and Maria Todorova discuss the California Franchise Tax Board’s recent chief counsel ruling stating that California’s alternative apportionment provisions do not apply to the combined group’s intrastate apportionment results.

Read “Intrastate Apportionment: Ripe for Equitable Relief?” reprinted with permission from the August 6, 2012 issue of State Tax Notes.