The point at which the evidentiary record is established in a state or local tax case varies significantly among state and local jurisdictions, and the related statutes, regulations, and rules are unclear. In this A Pinch of SALT, Sutherland SALT attorneys Eric Tresh, Zack Atkins, Maria Todorova and Steve Kranz highlight the risks associated with establishing an evidentiary record in a state or local tax dispute as well as the consequences of failing to do so.

 

Read “Setting the Record Straight – Evidentiary Pitfalls in SALT Litigation,” reprinted with permission from the August 1, 2011 issue of State Tax Notes.

On July 28, 2011, the New Jersey Supreme Court denied a taxpayer’s claim that New Jersey’s Throwout Rule (which excludes certain sales from the denominator of the sales apportionment factor) is facially unconstitutional. Whirlpool Props., Inc. v. Div. of Tax’n, Case No. 066595 (N.J. July 28, 2011). However, the court held that the application of the Throwout Rule to sales sourced to a state that has jurisdiction to tax the sales (but chooses not to) leads to an unconstitutional result.

 

Read Sutherland SALT’s Legal Alert, “New Jersey Supreme Court Holds Throwout Rule is Facially Constitutional, But Unconstitutionally Applied,” for more information.

The battle over the ad valorem taxation of intangible property rages on in the western states. On June 3, 2011, 15 counties were dealt a heavy blow when the Utah Supreme Court ruled that accounting goodwill is not subject to property tax. T-Mobile USA, Inc. v. Utah State Tax Comm’n, Nos. 20090298, 20090308 (June 3, 2011). The accounting goodwill at issue was booked by T-Mobile after Deutsche Telekom AG (T-Mobile’s parent company) transferred common stock of another company to T-Mobile. Utah counties argued that this accounting goodwill should be included in T-Mobile’s assessed property value on the theory that it constituted taxable tangible property or, alternatively, that it constituted taxable tangible enhancement value.

The Utah Supreme Court disagreed with the counties’ position. Utah law exempts “intangible property” from property tax, but the court found that the statutory definition of intangible property does not include accounting goodwill because accounting goodwill is not capable of private ownership separate from tangible property. Likewise, FAS 141 provides that accounting goodwill is not an exchangeable asset that is separate from other assets of an entity. The court also considered whether Utah statutory law was consistent with the state constitution. The Utah Constitution provides that the legislature may determine whether to tax or exempt intangible property, but it precludes double taxation; if intangible property is made subject to property tax, the income from the intangible property cannot be taxed. In this case, the legislature chose to tax the income from intangible property, so the Utah Constitution would exempt intangible property from taxation. Relying on definitions found in case law and Black’s Law Dictionary, the court held that accounting goodwill was intangible property under the state constitution and was exempt from property tax.

Because intangible property is often valuable, it is little wonder why states and counties are aggressively pursuing taxing it.

Thomas Jefferson once described jury trials as “the only anchor yet imagined by man by which a government can be held to the principles of its constitution.” Jefferson would likely be disappointed by the California Supreme Court’s recent decision holding that taxpayers have no right to demand a jury trial in California income tax refund actions. Franchise Tax Bd. v. Superior Court, 2011 WL 2177248 (June 6, 2011).

A beneficiary of an estate filed a refund action to recover more than $15 million in California personal income taxes paid by the estate. The beneficiary demanded a jury trial rather than a bench trial. The trial court and California Court of Appeal both held that the Franchise Tax Board’s (FTB) motion to strike the jury trial demand was properly granted. While the state statute authorizing refund suits (Cal. Rev. & Tax Code § 19382) is silent regarding jury trials, the appellate court held that taxpayers have a state constitutional right to a jury trial in tax refund actions because the statutory refund action is of the same nature or class as a historical common law tax refund action.

But the California Supreme Court reversed both lower courts, diving into a lengthy historical evaluation of the nature of a common law tax refund action “as it existed at common law in 1850, when the [California] Constitution was first adopted.” The court ultimately found that no right to a jury trial exists because the present statutory tax refund action is “fundamentally different” from the old cause of action against tax collectors. 

Perhaps the court was persuaded by the FTB’s repeated allegations in its court filings that authorizing jury trials in tax refund actions would “fundamentally alter the practice of law in this field” and that, “encouraged by the prospect of arguing to a jury, taxpayers (especially affluent parties seeking large refunds) may be less likely to agree to any settlement, reducing the flow of revenue from that source.”

Thumbnail image for Mack.jpgMeet Mack, the curly-tailed companion of Sutherland New York Associate Andrew Appleby. Andrew rescued Mack—allegedly an American Bulldog—from a Tennessee shelter. Mack is currently pulling a tour as a guard dog at Andrew’s parents’ house in Taxachusetts (and yes, she’s Thumbnail image for Mack and Andy.jpga huge Red Sox fan like her owner). Mack’s bark is definitely worse than her bite. She stands in the window barking and sporting a mean mohawk (also like her owner). But when someone actually comes in the house, Mack is quick to tuck her curly tail and hide behind the couch.

 

The Indiana Tax Court held that the Indiana Department of Revenue could not require Rent-A-Center East, Inc. (RAC East) to file a combined return with two of its affiliates. Rent-A-Center East, Inc. v. Indiana Dep’t of Rev., 49T10-0612-TA-106 (May 27, 2011). Generally, Indiana requires corporations to file income tax returns on a separate entity basis. Indiana, however, permits the Department of Revenue to require entities to file a combined report if: 

  1. Indiana’s standard apportionment provisions do not fairly reflect a taxpayer’s income derived from sources within Indiana; and 
  2. The Department is unable to effectuate an equitable apportionment of the taxpayer’s gross income by any other method.

RAC East filed its 2003 Indiana income tax return on a separate entity basis and owed no income tax based on this filing methodology. RAC East paid royalties on an arm’s-length basis to RAC West, the entity that owned the trademarks and trade names associated with the Rent-A-Center brand, and paid management fees to RAC Texas. The Indiana Department determined that RAC East was required to file on a combined basis with RAC West and RAC Texas, assessing $513,273, including interest and penalties.

The Indiana Tax Court determined that the Department failed to provide any facts substantiating that the application of combined reporting was appropriate. An Indiana regulation specifically provides that the Department may not require a combined report “unless the department is unable to fairly reflect the taxpayer’s adjusted gross income through use of” alternative apportionment or an adjustment of income between related entities. The Department stated that it considered disallowing RAC East’s expense deductions to RAC West and RAC Texas, but that computation would nearly double RAC East’s tax liability. The Indiana Tax Court held that the Department’s argument was nothing more than a hypothetical and not a valid attempt to adjust the taxpayer’s income without the use of a combined report.

The Texas Supreme Court held that receipts from licensing data to customers were properly characterized as the sale of an intangible asset and were sourced to the customer’s legal domicile under Texas’s location of the payor sourcing rule. TGS-NOPEC Geophysical Co. v. Combs, 2011 WL 2112763 (May 27, 2011).

TGS collects and stores seismic and geophysical data on subsurface terrains around the world and then, pursuant to a license agreement, licenses the data to its customers. TGS delivers the data to customers in tangible mediums—tapes, printed materials, or film. The Texas Comptroller argued that TGS’s receipts from licensing this data to customers in Texas were “licenses used in Texas” as set forth in Tex. Tax Code § 171.103(a)(4) because the revenue was derived from license agreements, and therefore, the receipts should be sourced to Texas (where the licenses were used). While the lower courts agreed with the Comptroller and upheld her assessment against TGS, the Texas Supreme Court reversed and held that TGS had correctly characterized its receipts as those from the sale of an intangible asset and sourced them to the licensee’s legal domicile. The Texas Supreme Court determined that TSG sold, not licensed, its data despite the fact that TSG termed its customer agreements “license agreements.”

After nearly 60 years of experimentation with value added and gross receipts taxes, Michigan has now joined the rank-and-file corporate income tax states through its repeal of the Michigan Business Tax (MBT). Governor Snyder signed the tax package (H.B. 4361, H.B. 4362) into law on May 25, 2011. According to the Council on State Taxation, the legislation takes the state from 30th to 16th in the nation in terms of lowest state and local business tax burden.

The new 6% corporate income tax, effective January 1, 2012, retains many of the same features as the Business Income Tax component of the former MBT, including unitary combined reporting, single sales factor apportionment with market sourcing, a Finnigan apportionment rule, and the same tax rate. The MBT factor presence nexus standard is also retained, under which nexus is established if an out-of-state company has physical presence in Michigan for more than one day or actively solicits sales in the state and has Michigan gross receipts of $350,000 or more. The new tax also incorporates the same tax regimes for insurance companies and financial institutions that existed under the MBT. Insurance companies continue to be subject to the greater of a 1.25% tax on gross direct Michigan premiums or the retaliatory tax, and financial institutions will still be subject to tax based on 0.29% of net capital.

Continue Reading Michigan’s Tax Roulette Lands on a Corporate Income Tax

The District of Columbia passed—subject to congressional oversight—tax legislation that ultimately may affect sales and use tax nexus standards throughout the United States. The District of Columbia’s Main Street Tax Fairness Act, which is part of its fiscal 2012 budget, authorizes the District to enforce sales tax on non-physically present sellers under certain circumstances. In this A Pinch of SALT, Sutherland SALT attorneys Steve Kranz, Jeff Friedman, Michele Borens and Charlie Kearns discuss the Act’s requirements and explore the implications of the Act on the nationwide debate over sales and use tax collection.

 

Read “D.C.’s Attempt to Force Remote Sellers to Collect Sales Tax,” reprinted with permission from the July 11, 2011 issue of State Tax Notes.

Sutherland SALT’s Andrew Appleby was quoted in the The New York Times and appeared on Bloomberg TV’s InBusiness with Margaret Brennan and WABC talk radio on July 12, addressing the potential tax implications for the fan who caught Derek Jeter’s 3,000th hit. In exchange for returning the ball to Jeter, the Yankees gave the fan season tickets and signed merchandise. In the Times article, Andy opined, “There’s different ways the I.R.S. could try to characterize a ball caught by a fan in the stands…But when the Yankees give him all those things, it’s much more clear-cut that he owes taxes on what they give him.” Andy’s colleagues, some of whom are Yankees fans, are suspicious that Andy’s love of the Boston Red Sox may have colored his thinking…

Read the full article, “Returning Jeter’s Big Hit: No Good Deed Goes Untaxed (Perhaps),” from The New York Times.

Andy has been writing about the tax implications of record-setting baseballs since 2008. He published the award-winning law review article, “Ball Busters: How the IRS Should Tax Record-Setting Baseballs and Other Found Property under the Treasure Trove Regulation,” in the Fall 2008 Vermont Law Review.