In an interesting move that will make the New York State Advisory Opinion process more transparent, the New York State Department of Taxation and Finance has established a new process that will allow interested parties to comment on pending Advisory Opinions. When the Department receives a request for an Advisory Opinion, the Department will post on its website a short description of the issue or issues involved in the pending Advisory Opinion. Interested parties who register for the Department’s notification system will be notified of the pending Advisory Opinion and will have a defined period of time in which to submit comments. The Department’s staff will review and consider interested parties’ submissions when drafting Advisory Opinions, which likely will help the Department avoid issuing Advisory Opinions that have unintended tax consequences.

While the Department’s new comment submission process offers some clear benefits, it could have some downside. It is unclear from a procedural standpoint whether a taxpayer who requests an Advisory Opinion will be notified of comment submissions from interested parties. Likewise, it is unclear whether a taxpayer who requests an Advisory Opinion will have an opportunity to respond to adverse comments from interested parties. In any event, it appears that the new comment submission process could increase the amount of time it takes for the Department to issue Advisory Opinions.

For more information, please visit the Department’s website.

In a case that is interesting both substantively and procedurally, the Mississippi Supreme Court held that a consumer lending subsidiary of a national bank was subject to the Mississippi Finance Company Privilege Tax. Miss. Dep’t of Revenue v. Pikco Finance, Inc., 2012 WL 3031281 (Miss. July 26, 2012). In ruling for the state, the court held that:

  1. The National Bank Act does not preempt the imposition of state taxes on national banks, such as the Mississippi tax at issue;
  2. The Mississippi Department of Revenue’s use of a subpoena for the taxpayer’s records was not an exercise of “visitorial” power preempted by the National Bank Act because it related to the state’s taxing authority rather than the state’s regulatory authority; and
  3. The subsidiary at issue was not exempt from tax under a state law exemption for national banks because while it was a subsidiary of a national bank, it was not a national bank itself.

Procedurally, the case is interesting because the Department of Revenue, after discovering that the taxpayer was not filing Mississippi returns, sent the taxpayer a subpoena for records. Rather than providing the records, the taxpayer filed a petition to quash the subpoena in the Hinds County Circuit Court, and the court granted the taxpayer’s petition to quash. The Mississippi Supreme Court reversed on appeal after deciding the merits of the case, as described above. While the taxpayer’s effort to challenge the subpoena was not successful, it did provide an expedited path to get the taxpayer’s substantive position before a court for a decision on the merits (at least in this case).

Precious2.JPGMeet Precious Mackey (a/k/a Ms. P), who weighs in at 14 pounds of pure cattitude! Precious is not so fond of humans, having little use for anyone except her owner, Washington SALT secretary extraordinaire Kerrie Mackey, who is allowed to feed, brush, and occasionally rub Ms. P’s ears. But do not even think about carrying or snuggling with this Pet of the Month – even Kerrie’s husband, Marvin, cannot so much as pet Ms. P most of the time.

Precious is a little fuzzy about her age but thinks she is about five years old. She was rescued from a shelter by the Mackeys’ daughter, who promptly left and went back to England. How she could bear to leave this adorable girl is a mystery, but it worked out well for Kerrie and Marvin – and for Ms. P, who enjoys lounging by the Mackeys’ pool.Precious 1.jpg

While some may think Precious is the most unlovable Pet of the Month, she did not earn the honor because of her charm, but rather for her good looks and skills. A gorgeous Maine Coon, Ms. P has beautiful long hair and the most purrfect fur balls you can imagine (Marvin absolutely loves them). And shhhh (she has a feisty feline reputation to protect, you know), but occasionally Ms. P does let her guard down and shows Kerrie and Marvin how much she cares. After all, every cat needs a good backrub sometimes!

The Indiana Supreme Court issued another taxpayer-averse decision, holding that Miller Brewing Company’s sales to Indiana customers are considered Indiana sales even if they are picked up out of state and delivered into Indiana by common carrier. The Indiana Supreme Court reversed the Indiana Tax Court, which relied on an administrative rule example to exclude such sales from Miller’s Indiana sales factor numerator. The Indiana Supreme Court held that Miller’s interpretation of the rule was improper and that the administrative rule did not carry the force of law anyway. Ind. Dep’t of Revenue v. Miller Brewing Co., No. 49S10-1203-TA-136 (Ind. July 26, 2012).

For more details on the Tax Court decision, please see our previous post.

The California Court of Appeal issued its decision today in Gillette Company v. Franchise Tax Board, No. A130803, confirming that the Multistate Tax Compact is an enforceable multistate compact and that its apportionment election provision is binding on California until the state withdraws from the Compact by enacting a repealing statute. In fact, the California legislature passed Senate Bill 1015 on June 27, 2012, prospectively repealing the Multistate Tax Compact and codifying the “doctrine of elections.” Both sections of Senate Bill 1015 were aimed at limiting the potentially huge revenue fallout that otherwise would have resulted from a taxpayer victory in Gillette.

The impact of the Gillette decision in California remains to be seen. One issue is whether the doctrine of elections applies only to taxpayers that make an election on an original return and then try to revoke it on a subsequently filed amended return. Another issue is whether the doctrine of elections will apply to prohibit taxpayers from making the apportionment election on an amended return altogether. Retroactively prohibiting taxpayers from making the Compact election on amended returns may raise due process concerns.

The reasoning in Gillette regarding the Compact being an enforceable interstate compact may support taxpayers in other Compact states that have modified the Compact apportionment election. If courts in those states were to adopt the reasoning in Gillette, taxpayers potentially could make the election and argue that the state is limited to complete withdrawal from the Compact and cannot unilaterally change or repeal individual provisions.

Stay tuned for Sutherland’s forthcoming Shaker article discussing Gillette in greater detail.

Florida Department of Revenue (DOR) ruled that tuition receipts from online courses are sourced to the location of the student, as opposed to the location where the costs of performance (COP) are incurred. Technical Assistance Advisement, 12C1-006 (May 17, 2012). While the ruling acknowledges that Florida applies COP for sourcing service revenue (by virtue of a regulation promulgated by the Department of Revenue (DOR)) and that receipts from services are to be sourced to the location of the income producing activity (IPA) based on COP, the DOR seems to apply a market-based sourcing method.

The taxpayer suggested, and the DOR agreed, that the taxpayer’s IPA is providing access to the online classes. Since most students access those classes from their homes, the DOR concluded that the taxpayer’s receipts ought to be sourced to the students’ state of residence. The DOR did not require any examination of where the actual COP were incurred.

Florida defines “income producing activity’” as “the transaction and activity directly engaged in by the taxpayer for the ultimate purpose of obtaining gains and profits.” Rule 12C-1.0155(2)(1), F.A.C. A taxpayer may have more than one IPA (e.g., curriculum development, faculty instruction, etc.) and several non-IPAs (e.g., academic administrative support, etc.). It is difficult to believe that the only IPA of an online education service provider is the provision of access to its online education courses. In fact, many providers of education classes may outsource that function to third parties such as website administrators or similar companies. Before an online class is made accessible to students, it must be developed. This process includes substantial direct costs, including costs related to enrollment, curriculum development, faculty instructions, and others. Florida should have examined each of the taxpayer’s activities to determine which ones constitute IPAs. It should have then ascertained the location of the direct costs associated with the performance of each IPA to determine how to source the taxpayer’s receipts.

The ruling is similar to Technical Assistance Advisement, 11C1-008 (Sept. 15, 2011), where Florida similarly applied a market-based sourcing method to a cable programmer’s receipts attributable to subscription and advertising revenue. In that case, Florida stated that “although activities related to the production of income . . . occur outside of Florida (such as the gathering, . . . and processing of all necessary information to develop and produce the advertisements), those activities cannot rightly be called income producing activities.” Wisconsin similarly applied a very narrow view of what constitutes an IPA in Ameritech Publishing Inc. v. Wisconsin Dep’t of Revenue, 327 Wis. 2d 798, 788 N.W.2d 383 (Wis. Ct. App. 2010), when it focused on the last activity of the taxpayer’s provision of directory advertising services which took place in Wisconsin, rather than examining the taxpayer’s other activities/costs, many of which took place outside of Wisconsin.

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