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

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.”