Thumbnail image for Felice and B 1.jpgMeet Mrs. Beasley (“B” for short)—often called the luckiest dog in the world. Sutherland Chief Client Service Officer Thumbnail image for Bea wet.jpgFelice Wagner found Mrs. Beasley 15 years ago on U.S. Route 1 in downtown Miami. Since then, Mrs. Beasley has traveled the world, including taking a swim in all of the Great Lakes. Her favorite pastime is chasing critters, although these days her hunting is limited to scaring the birds away with a bark. She currently splits her time between her city Bea on boat.jpgapartment and her lake house alongside her younger brother Jack (another great rescue story), who is very jealous that Mrs. Beasley has been chosen as a SALT Pet of the Month.

California’s unique political system can be a mystery to those unfamiliar with its idiosyncrasies. However, a basic understanding of some important California political tenets can pay huge dividends. There are two key tools for protecting important policy interests in California: (1) the initiative measure; and (2) the referendum.

An initiative measure is a policy proposal that is placed on the ballot for public vote. An initiative measure is generally used when there are political barriers to legislation, but broad public support exists for the proposed policy. Initiatives have few legal restrictions, but generally they must only pertain to a single subject and comport with the United States Constitution.

A referendum measure is used to give voters an opportunity to approve or reject a recently enacted law. Proponents of a referendum are generally seeking repeal of recently enacted legislation. Thus, for a referendum to succeed, the statute being referred must have broad public opposition.

Continue Reading The Tools of the Trade for Challenging California “Tax” Increases

The Seventh Circuit Court of Appeals recently confirmed that a state or local government’s intent to discriminate against railroad carriers is a relevant consideration in analyzing allegations of discriminatory taxation in violation of the federal Railroad Revitalization and Regulatory Reform Act (“4-R Act”). 49 U.S.C. § 11501. The court further clarified the relationship between the 4-R Act and the Tax Injunction Act (“TIA”). 28 U.S.C. § 1341; Kansas City S. Ry. Co. and Norfolk S. Ry. Co. v. Koeller, No. 10-2333 (7th Cir. July 27, 2011). The residual clause of the 4-R Act prohibits states and their subdivisions from imposing discriminatory taxes against railroads.

At issue was a shift in 2009 by the Sny Island Levee Drainage District (an Illinois political subdivision), from its longstanding and uniform, per-acre annual maintenance assessment on all property to an assessment based on differentiating between land owned by railroads, pipelines, and utilities (“RPU”), and non-RPU land. Under the new regime, non-RPU land would continue to be assessed on a per-acre basis while RPU land would be assessed according to the value of the benefit conferred on RPU lands by the District’s levee system. The result: 4,800% and 8,300% increases in assessments for Kansas City Southern and Norfolk Southern railroads, respectively, in the span of one year. At the same time, the District chose to exempt land situated within municipalities, which, according to the District’s commissioners, included all non-RPU commercial and industrial properties. To make matters worse, the District never notified RPU landowners of the change in assessment methodologies, as it was required to do under Illinois law.

Continue Reading All Aboard! Seventh Circuit Rails Local Government for Discriminating Against Railroads

Companies that provide financing to customers in Texas to purchase and lease equipment may be shocked to learn that their interest expense may not be deductible as a cost of goods sold (“COGS”). In Texas, a “lending institution” that offers loans to the public is authorized to subtract an amount equal to their interest expense as COGS. Tex. Tax Code Ann. § 171.1012(k) . However, it is unclear what the phrase “loans to the public” means.

A recently released Policy Letter Ruling did little to clarify this, and only muddied the waters further regarding what “loans to the public” means when a multi-state financial services company provides loans for the purchase or lease of a related affiliate’s equipment. The ruling denied the deduction of interest expense as a COGS to a wholly-owned finance subsidiary that qualified as a “lending institution” and was engaged in the business of financing heavy construction equipment sold or leased by its parent company to unrelated third-party customers. Tex. Pol. Ltr. Rul. No. 201101133L (Jan. 6, 2011) (released July 2011). A qualifying “lending institution” includes an entity that makes loans and is regulated by a federal regulatory authority, the Texas Department of Banking, Office of Consumer Credit, Credit Union Department, Department of Savings and Mortgage Lending. Tex. Tax Code Ann. § 171.0001(10).

Continue Reading “Loan” Star Mishap: Texas Muddies Water on Interest Expense Deduction for “Loans to the Public”

The California Supreme Court held that taxpayers may file a class action claim against a municipal government entity for the refund of the telephone users tax (TUT). Ardon v. City of Los Angeles, Case No. S174507 (Cal. July 25, 2011).

The City of Los Angeles imposes the TUT on customers who use telephone communications services in Los Angeles. However, many taxpayers are of the view that prior to March 2008, TUT did not apply to telecommunications services that were not also subject to the federal excise tax (FET) imposed under 26 U.S.C. 4251 (1967). (The FET only applied to telecommunications services which varied based on time and distance. Prior to March, 2008, the TUT imposition statute specifically defined its tax base by reference to the FET.) In 2006, the IRS issued Notice 2006-50 conceding that the FET did not apply to long-distance service billed based upon the duration of a call, but not the distance of the call. However, the City of Los Angeles continued to apply the TUT to virtually all communications services and directed telecommunications service providers to continue to collect the TUT from their customers and remit the tax to the City.

In October 2006, Ardon, a resident of Los Angeles, filed a class action lawsuit under Government Code section 910, challenging the City’s TUT and seeking refund of taxes he had paid from 2006-2008. The City of Los Angeles argued that Ardon lacked standing to present a tax refund claim on behalf of a class. The Supreme Court disagreed and held that according to City of San Jose v. Superior Court, 525 P.2d 701 (1974), class claims for tax refunds against local governmental entities are permissible under Government Code section 910 absent any specific tax refund procedure set forth in a governing claims statute.

This case has important implications for taxpayers who have filed TUT refund claims in Los Angeles and other California cities. Many of these refund claims (and tax assessments against telecommunications service providers that did not collect the tax) have been held in abeyance pending a decision in the Ardon case. Now that Ardon’s standing issue has been decided, the lower court can turn to the merits of the taxpayer’s refund claim.

On June 20, 2011, the U.S. Court of Appeals for the Fourth Circuit ruled that the federal district court had jurisdiction to adjudicate a case involving the constitutionality and validity of a levy imposed on a single entity. GenOn Mid-Atlantic, LLC v. Montgomery Cty., No. 10-1882 (4th Cir. June 20, 2011). In response to the Fourth Circuit’s decision, Montgomery County enacted legislation repealing the levy and providing a full refund—with interest—to the fee payer.

The GenOn case involved legislation that Montgomery County enacted in 2010, which imposed a $5 per ton levy on “major emitters” of carbon dioxide emissions. Montgomery County set the emissions threshold for a “major emitter” to include only those entities emitting more than one million tons of carbon dioxide during the year. The County also structured the levy such that once major emitters exceeded one million tons of carbon dioxide emissions, they were required to pay the levy retroactively on each ton of emissions, going back to the first ton emitted. As a result, GenOn was the only entity subject to the levy and was subject to the levy on every ton of carbon dioxide emitted.

Continue Reading Fourth Circuit Emits Good News! Federal Court Retains Jurisdiction over Levy Imposed on a Single Entity

Most separate reporting states give the department of revenue discretionary authority to require affiliated companies to file a combined return under certain conditions. This authority can be a valuable when applied fairly and appropriately but can cause significant problems when abused. In this A Pinch of SALT, Sutherland SALT attorneys Jonathan Feldman and Madison Barnett use the recent “trials” and tribulations in North Carolina as a case study to illustrate the manner in which a state’s authority should be exercised.

 

Read “Using the Force to Combine in Separate Return States,” reprinted with permission from the September 5, 2011 issue of State Tax Notes.

Maryland is known for crabcakes, a beautiful capital city, a mediocre baseball team, a great law school (Jeff Friedman snuck this edit in), and, now, unconstitutional tax laws. A taxpayer won a constitutional challenge to the Maryland personal income tax, which prohibited a credit against the local income tax for taxes paid to other jurisdictions. Brian Wynne v. Md. State Comptroller, Case No. 13-C-10-80987 (June 20, 2011).

Maryland, like most states, permits resident taxpayers a credit for taxes paid to other jurisdictions to offset the state’s personal income tax. Md. Code Ann. § 10-703(a). The Maryland statute, however, only provided a credit against the state income tax and did not provide a credit against county income taxes. The Howard County Circuit Court, reversing the Maryland Tax Court, held that a Maryland statute violated the Commerce Clause because it did not permit the taxpayer to take a credit against the Baltimore portion of the personal income tax for taxes paid to other jurisdictions.

Continue Reading A Wynne-Win Situation in Maryland