On March 30, 2012, the U.S. District Court for the District of Colorado permanently enjoined the enforcement of Colorado’s sales and use tax notice and reporting requirements. Read our full legal alert, “Colorado’s Use Tax Reporting Regime Declared Unconstitutional,” for more details.

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Meet Dolce, the three-year-old female doxie mix of Sutherland SALT partner Carley Roberts. Dolce is one of her mom’s favorites in a large family of five dogs, five cats, five horses and two goats (for full coverage of Carley and husband Jeremy’s clan, check out our April Fool’s 2012 SALT Shaker newsletter).  Carley and Jeremy fostered Dolce at only four weeks old. At the time, Dolce had scabies and an upper respiratory infection with little hope of surviving, and she accompanied Carley everywhere for the next six weeks.

Carley and Dolce’s special bond has endured. Now healthy and happy, Dolce continues to come to the office when Carley is not traveling. (Yes, “dog friendly” was a key factor in Sutherland SALT’s search for Sacramento office space!) When not working on SALT matters, Dolce assists Jeremy in his profession—she is a trained and registered service dog and helps Jeremy, a speech and language service provider, in his work with autistic children.

But more important than Dolce’s impressive work ethic is her sweet and gentle nature. Marking the start of their tradition of naming their dogs after alcohol-related beverages, Carley and Jeremy named Dolce after Far Niente’s “Dolce” dessert wine. The winemakers call the wine “liquid gold,” which reminded Carley of Dolce’s coloring. The fact that “dolce” also means “sweet” in Italian made Dolce the perfect name for this very sweet Pet of the Month.

The California Franchise Tax Board recently released Legal Division Guidance 2012-03-02, concluding that taxpayers may not simultaneously report tax under a single sales factor election and the standard three-factor formula to avoid application of the Large Corporate Understatement Penalty. For full details, read our legal alert, “Single Sales Factor Election May Create Exposure to Large Corporate Understatement Penalty in California.”

A decision by Maryland’s highest court illustrates the complexities taxpayers face in reporting federal income tax audit changes for state income tax purposes. The Maryland Court of Appeals held that an individual must claim a state income tax refund resulting from a “final” federal audit change within one year of the Internal Revenue Service’s issuance of Form 4549A, Income Tax Examination Changes, rather than the date when the taxpayer could no longer appeal the Service’s determination. King v. Comptr. of Treas., 2012 WL 592788 (Md. Feb. 24, 2012), aff’g Md. App. (unreported), rev’g 2009 WL 6767497 (Calvert Cnty Cir. Ct. Nov. 12, 2009), rev’g Md. Tax Ct. (Aug. 28, 2008), aff’g Md. Comptr. Off. Hrg. and App. Section.

The taxpayer, who is the ex-wife of author Tom Clancy, owned a limited partnership interest in the Baltimore Orioles baseball team. A federal income tax audit of the partnership resulted in the IRS adjusting certain partnership items using Form 870-PT, Agreement for Partnership Items and Partnership Level Determinations. The partnership adjustments flowed through to the taxpayer’s personal income tax return and permitted her to utilize additional losses, thereby reducing her federal taxable income. The IRS reported the impact of the partnership’s flow through adjustments to the taxpayer on Form 4549A, after which the taxpayer had a minimum of six months to challenge the IRS’ adjustments.

Continue Reading A Swing and a Miss: No Refund for Baseball Team Owner Following Federal Audit

The Washington Department of Revenue (Department) determined that an out-of-state mail order retailer (Taxpayer) had substantial nexus with the state based on the activities of an in-state affiliate (Affiliate), and therefore, upheld an assessment of business and occupation tax (B&O Tax) and sales tax. Determination No. 10-0057 (released Dec. 20, 2011). The Taxpayer sold tangible personal property via catalog and shipped the goods to Washington customers from out-of-state via a common carrier. Although the Taxpayer did not have a place of business in Washington, the Taxpayer’s Affiliate operated two retail stores in Washington that engaged in activities on the Taxpayer’s behalf.

The Department found that the Affiliate engaged in three activities on the Taxpayer’s behalf that established or maintained a market for the Taxpayer: (1) the Affiliate sold gift cards at its two Washington stores that customers could redeem on the Taxpayer’s website; (2) the Affiliate handed out the Taxpayer’s catalogs free to its customers at its two Washington stores; and (3) the Affiliate assisted the Taxpayer’s customers seeking to return catalog purchases by calling or emailing customer service to request a free shipping label to be sent to the customer. Therefore, the Department attributed the in-state physical presence of the Affiliates to the Taxpayer, causing the Taxpayer to be subject to the B&O Tax and the sales tax.

Recently, the Washington Legislature amended state law to provide that an economic presence created sufficient contact or nexus with the state to require Taxpayers to be subject to the B&O Tax. The economic nexus rule, enacted in 2010, requires those taxpayers organized or commercially domiciled outside of Washington to register for and remit the B&O Tax if they have: (1) more than $50,000 of property in the state; (2) more than $50,000 of payroll in the state; (3) more than $250,000 of receipts from the state; or (4) at least 25% of their total property, total payroll, or total receipts in the state. Wash. Rev. Code Ann. § 82.04.067(1)(c). While Washington modified the nexus standard for the B&O Tax, the physical presence standard remains unmodified for sales tax purposes. Finally, the new nexus law may be inconsistent with the U.S. Supreme Court’s analysis of B&O Tax nexus in Tyler Pipe Indus., Inc. v. Washington Dep’t of Revenue, 438 U.S. 232 (1987).

Estimated state tax assessments are based on assumptions that typically favor state tax authorities. In this A Pinch of SALT, Sutherland SALT’s Eric Tresh and Madison Barnett examine the potential impact and recommended course of action for taxpayers facing estimated assessments.

Read “State Audit Guessing Games: When Can States Issue Estimated Assessments?” reprinted with permission from the March 5, 2012 issue of State Tax Notes.

We are pleased to announce that Jack Trachtenberg, the former New York State Department of Taxation and Finance Deputy Commissioner and Taxpayer Rights Advocate, has joined our State and Local Tax (SALT) Practice as Counsel in New York. Jack has more than 10 years of experience advising clients and taxpayers on New York State, New York City and multistate tax matters. Prior to serving as the Taxpayer Rights Advocate, Jack practiced at a New York law firm, counseling clients on all aspects of state and local taxation. Jack has litigated cases before the New York State Division of Tax Appeals, the New York State Tax Appeals Tribunal and the New York State Supreme Court. He is also an adjunct professor at Albany Law School, where he teaches a course on state and local tax.

Jack’s arrival comes just weeks after we announced that Carley Roberts and Prentiss Willson, nationally recognized leaders in California and multistate tax matters, joined Sutherland SALT in Sacramento.

Read full details on our latest addition to Sutherland SALT in our press release, “Sutherland Expands National State and Local Tax Practice in New York.”

Thumbnail image for Biscuit2.JPGMeet Biscuit, the seven-year-old ruby nose beagle (also known as a lemon beagle) of GenOn Energy Tax Manager Lucy Lunt. Although you might not believe it from the looks of her photos, Biscuit loves going for walks and tracking rabbits—although Biscuit1.JPGshe would have no idea what to do with a rabbit if she ever actually caught one. A true couch potato at heart, Biscuit loves her dog treats and believes that nothing is better than lazing around with a book or magazine. However, the Internal Revenue Code is her least favorite book. She thinks there are far too many regulations in the tax world, and reading it—or being used as Lucy’s desk under the heavy weight of all those rules—makes her very grumpy!

The California State Board of Equalization (BOE) has provided guidance regarding the application of sales and use tax to purchases of tangible property from retailers using certificates such as Groupon or LivingSocial coupons. Special Notice L-297, California State Board of Equalization (Nov. 2011). In particular, the BOE addressed transactions in which retailers contract with Internet-based third parties to issue to retail customers “deal-of-the-day instruments” (DDI) that are redeemable to purchase tangible property at a discount from those retailers.

The BOE advised in a special notice that the sale of a DDI is not a taxable transaction because the DDI is treated as evidence of an intangible right to receive tangible personal property at a later date. However, when a customer subsequently purchases tangible property from the retailer and pays in whole or part with a third party certificate, the sales tax applies to the amount the customer paid for the DDI plus any other consideration paid to the retailer at the time of purchasing the tangible property.

By applying sales tax only to the sum of the consideration paid for the DDI and the tangible property, the BOE has, in fact, opted to treat these certificates as reducing the tangible property’s purchase price. In other words, the coupons are deemed to be the equivalent of “cash discounts” issued by the retailers themselves. California’s position is significantly different from other states where the DDI is not treated as a reduction of the property’s sale price, and the coupon’s price discount is disregarded for sales tax purposes. See, e.g., Massachusetts’s Working Draft Directive 11-XX: Application of Sales Tax to Sales and Redemption of Third Party Coupons (Sept. 16, 2011) (providing that sales and use tax is applied on the coupon’s entire face value plus any additional consideration paid to the retailer).