In two separate cases evaluating Massachusetts’ and Oregon’s virtually identical costs-of-performance (COP) rules, the unresolved fundamental difficulties in applying the nearly half-a-century old rules are highlighted in the courts differing conclusions. Under the Uniform Division for Income Tax Purposes Act (UDITPA) (as adopted by both states), receipts from sources “other than sales of tangible personal property” (e.g., services and intangibles) are sourced for income tax apportionment purposes based on a preponderance COP methodology. Specifically, this methodology requires that such receipts be included in the states’ sales factor numerator only if the preponderance of the COP associated with the income producing activity are performed in the state.

The Massachusetts Appellate Tax Board (Board) and Oregon Tax Court (Tax Court) evaluated application of the COP methodology in AT&T Corp. v. Comm’r of Revenue, Mass. ATB Findings of Fact and Reports, 2011-524 and AT&T Corp. v. Dep’t of Revenue, Oregon Tax Court, TC 4814. At issue in both cases was whether AT&T’s receipts from interstate and international voice and data telecommunication services should be included in the states’ sales factor numerator. In providing these services, AT&T utilized its vast network of telecommunications assets, including its Global Network Operations Center in New Jersey. Both states’ Departments of Revenue took the position that AT&T’s income-producing activity consisted of each individual telephone call or data transmission to customers located in the state (referred to as the “Transactional Approach”). AT&T argued that its income-producing activity consisted of its revenue streams from its various services (the “Operational Approach”) rather than the “Transactional Approach.”

Continue Reading Two States, One Similar Costs-of-Performance Rule, Different Results

The Virginia Supreme Court recently issued an interesting decision related to the minimum tax on telecommunications companies. The court held that the State Corporation Commission (“SCC”) did not have authority to exclude the taxpayer’s Internet-related revenues from the gross receipts it certifies to the Department of Taxation (“Department”). Level 3 Comm’ns, LLC v. State Corp. Comm’n, 710 S.E.2d 474 (Va. June 9, 2011).

Level 3, a telecommunications company, provides wholesale Internet services to Internet service providers. It maintains an extensive network in Virginia and is thus subject to Virginia’s minimum tax on telecommunications companies (telecommunications companies are subject to either a corporate income tax or a minimum tax on gross receipts). The minimum tax computation is a two-step process:

  1. The Virginia SCC is required to certify telecommunications companies’ gross receipts to the Department, 
  2. The Department calculates the minimum tax.

Continue Reading Virginia Supreme Court Includes Internet-Related Revenue in Tax Base (Sort of)

Thumbnail image for August Pet of the Month 1.jpgMeet Jackson and Angel, the beer-drinking Puggles (i.e., Pug/Beagle mix) of Washington SALT secretary extraordinaire, Debbie Manders. Jackson and Angel are “half-siblings”—born one day apart to separate moms, following a particularly eventful weekend for Dad.

Jackson is all black—a rare find in the Puggle world—and is in the constant shadow of Debbie’s partner, Stretch. Jackson’s many skills include opening doors with his paws, holding beer bottles, balancing on a Pilates ball, catching popcorn and peanuts thrown his way, and walking around the kitchen on his hind legs to scope out food left on the counter (a talent that scored him half a Thumbnail image for August Pet of the Month 3.jpgThanksgiving turkey, several loaves of bread, and other tasty morsels over the years). But Jackson does not take just food without asking; he will also grab Debbie by the wrist and lead her to the goodie jar as part of his effort to welcome her home in the evenings. His animated jumping has earned him the name “Tigger.”

Angel is the lazier of the two, and loves to snuggle and hide under the covers in the morning. Angel likes to begin her day as most of us do—she has developed a taste for coffee and waits attentively for the last sip that belongs to her at the end of the cup. Perhaps due to her sweet and loving nature, Angel’s feelings are hurt more easily and has been known to hold a grudge. When Debbie and Stretch returned from St. Johns last fall, Angel rode home from the August Pet of the Month 2.jpgboarding kennel with her back toward them, facing the back seat of the car. Upon reaching the house, she checked out every room, piddled on each step down the staircase, and quietly retired to her room for the evening. It was days before she was back to her usual self.

Although Jackson has taken on many Pug-like traits and Angel stays true to her Beagle bloodline, one thing is clear—these two SALT Pets of the Month have a lot of human in their personalities!

On July 29, 2011, a petition was filed with the Texas Supreme Court seeking a declaratory judgment that the Texas margins tax (TMT) is unconstitutional. Regardless of whether the Texas Supreme Court will strike down the TMT in its entirety, the court’s decision could have significant implications for many corporate taxpayers. 

 

Read Sutherland SALT’s Legal Alert, “Be Ready to Pounce on a Texas Margins Tax Challenge,” for a summary of the legal issues and ramifications of the challenge.

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

The Michigan Supreme Court recently reversed an odd Michigan Court of Appeals decision, which held that an out-of-state securities broker-dealer had nexus sufficient to subject it to the Single Business Tax (SBT) by virtue of the activities of in-state, independent registered representatives who contracted with the broker-dealer to facilitate trades for the representatives’ customers on out-of-state security exchanges. Vestax Sec. Corp. v. Dep’t of Treasury, 2011 Mich. LEXIS 945 (June 1, 2011), rev’g, 2010 Mich. App. LEXIS 2093 (Oct. 28, 2010).   

Vestax Securities Corporation, an out-of-state securities broker-dealer company, had contractual relationships with independent registered representatives who used Vestax to facilitate securities transactions. These independent representatives had in-state customers who would request a securities trade from the representative, and the representative, in turn, would rely on Vestax to execute the transaction on a national securities exchange outside of Michigan.

Continue Reading Broker-Dealer Dodges Michigan Nexus

A Tennessee taxpayer got a rude awakening when a state court ruled it was liable for ad valorem tax on its leasehold interest in tax exempt property despite having an agreement with local governments to make a payment in lieu of taxes. Creative Label, Inc. v. Tuck, 2011 Tenn. App. LEXIS 238 (May 11, 2011). The taxpayer, Creative Label, operated a manufacturing and warehousing facility that it leased from a local industrial development board. The lease called for annual payments of $1 for a term of 99 years. The taxpayer entered into  payment in lieu of taxes (PILOT) agreements with the county and city in which the facility is located. The court addressed whether PILOTs discharge a lessee’s total liability for ad valorem taxes on its leasehold interest or whether PILOTs only reduce the lessee’s total tax liability by an amount equal to the PILOT amounts.

The court examined the legislative history of the operative Tennessee statutes and noted that the law during the years at issue, 1993 to 1998, was ambiguous with respect to whether PILOTs completely relieve holders of leasehold interests from ad valorem taxation. Finding no clear legislative intent to provide a blanket ad valorem tax exemption for leasehold interests in property owned by industrial development corporations, and relying on the premise that courts are not to imply tax exemptions, the court held that PILOTs reduce the taxable value of a leasehold interest in tax-exempt property but do not discharge a taxpayer’s total ad valorem tax liability.

Thus, before entering into PILOT agreements, taxpayers with leasehold interests in tax-exempt property should be careful to review all relevant ad valorem tax laws and consider whether PILOTs will actually relieve all of their ad valorem tax liability.

The Tennessee Attorney General recently opined that the General Assembly may allow counties to impose a tax on liquor barrels. The proposed privilege tax on the use of liquor barrels would be imposed on any manufacturer of intoxicating liquor that operated before 1950. Tenn. Att’y Gen. Op. No. 11-49 (May 31, 2011).  If this proposed tax sounds strange, that is because it is—only one company began distilling whiskey in Tennessee prior to 1950: Jack Daniel’s. Old No. 7 may be to Tennessee what apple pie is to America, but Moore County, the home of the Jack Daniel’s distillery, is expected to generate approximately $5 million per year from the tax.

Despite concluding that a proposed barrel tax would be valid, the Attorney General acknowledged that restricting this tax to particular counties could raise constitutional concerns.  Classifications drawn with respect to the barrel tax will not violate the equal protection clause of the Tennessee Constitution if they are drawn for purposes having a reasonable relationship to a legitimate interest, a level of scrutiny similar to rational basis review under the United States Constitution.  The Attorney General found a rational basis for restricting the tax to counties that approved liquor manufacturing before 1950 because they are more likely to be the site of large manufacturers that place a heavy burden on local government services. However, the Attorney General did not address the constitutionality of imposing the tax on a single taxpayer, Jack Daniel’s, and not other Tennessee liquor manufacturers. Despite the Attorney General’s approval, ultimately it will be up to the citizens of Moore County to decide whether Jack Daniel’s is a hand they want to bite.