The New York State Department of Taxation and Finance (the Department) recently released an advisory opinion analyzing the proper characterization and sourcing of various revenue streams derived from the facilitation of online trading activities. Petition No. C080222A, TSB-A-11(8)C (July 12, 2011).  Relying on our old friends, Deloitte & Touche, LLP, TSB-A-02(3)C (Apr. 18, 2002); Ins. Servs. Offices, Inc., TSB-A-99(16)C (Apr. 7, 1999); and New York Merchantile Exch., TSB-A-00(15)C (Apr. 18, 2002), the opinion represents the Department’s growing trend to expand the category of “other business receipts,” to source receipts on a market rather than on a cost-of-performance basis.

In the opinion, the Parent is a Delaware corporation headquartered in New York. It owns and operates an Internet-based platform (Exchange) that serves as a marketplace for over-the-counter (OTC) global futures markets. Although the Parent is not a registered broker-dealer, the Exchange serves as a marketplace for buyers and sellers of certain commodities contracts, financial contracts, and other derivatives contracts in futures and OTCs to meet and execute trades on a real-time basis. All of the Parent’s property and equipment associated with the Exchange is located outside of New York, and all of the clearing administration for the OTC is performed outside of New York. In addition to the Parent’s activities, its affiliates generate receipts from various transactions, including open outcry trading, digital auction, flat monthly subscriptions, and trades executed with the assistance of interdealer brokers.

Continue Reading The Big Apple Goes to the Market for Online Trading Revenue

For the second time, the Indiana Tax Court has ruled that Miller Brewing’s sales to Indiana customers from Miller Brewing’s Ohio facility were not considered Indiana sales for purposes of inclusion in the sales factor numerator. Miller Brewing Co. v. Indiana Dep’t of State Revenue, No. 49T10-0607-TA-69, 2011 WL 3630147 (Ind. Tax Ct. Aug. 18, 2011) (Miller Brewing II). The Indiana Tax Court previously addressed the identical issue for Miller Brewing’s 1994-1996 tax years and held in favor of Miller Brewing. Miller Brewing Co. v. Ind. Dep’t of State Revenue, 831 N.E.2d 859 (Ind. Tax Ct. 2005) (Miller Brewing I).

Miller Brewing’s Indiana customers picked up its purchased product at Miller Brewing’s facility. The customers’ common carriers took possession of the property in Ohio and title transferred in Ohio. For purposes of Indiana’s gross income tax and supplemental net income tax for tax years 1997 through 1999, Indiana sourced sales of tangible personal property to the state “if the property is delivered or shipped to a purchaser, other than the United States government within this state, regardless of the f.o.b. point or other conditions of the sale.” Ind. Code § 6-3-2-2(b). Additionally, Indiana’s regulations provided that “sales are not ‘in this state’ if the purchaser picks up the goods at an out-of-state location and brings them back into Indiana in his own conveyance.” 45 Ind. Admin. Code § 3.1-1-53(7) (the “sourcing regulation”). 

In Miller Brewing I, the Indiana Tax Court held that, pursuant to the sourcing regulation, Miller Brewing’s sales to Indiana customers were not included in Miller Brewing’s Indiana sales factor numerator. The Department re-strategized after losing Miller Brewing I and argued that its statutory sourcing rule for sales of tangible personal property should be interpreted as an ultimate destination rule. The state argued that other states have interpreted similar statutory language as encompassing an ultimate destination rule. The court rejected these arguments and found that the Department’s sourcing regulation—upon which the court based its holding in Miller Brewing I—controlled the outcome of this case. 

It seems unlikely that the Department will continue to challenge this issue. However, the Department could take steps to modify the sourcing regulation. 

Taxpayers frequently challenge tax laws based on equal protection grounds, but states generally prevail on the rather easily met rational basis test. In a noteworthy Iowa decision, Qwest, an incumbent local exchange telecommunications company (ILEC), successfully argued that the application of two property tax exemptions resulted in unconstitutional discrimination against it in favor of competitive long distance companies (CLDCs) and wireless companies. Qwest Corp. v. Iowa State Bd. of Taxation and Revenue, Docket No. CV008413 (Iowa Dist. Ct. Aug. 17, 2011).

The first subject of Qwest’s challenge was an exemption for personal property acquired by CLDCs after 1995 that was available to “long distance telephone companies,” the definition of which specifically excluded ILECs like Qwest. The second aspect of Qwest’s challenge involved the state’s central assessment property tax scheme. Iowa law exempts all personal property from tax, but for centrally assessed telephone companies like Qwest, the state treats all property as “real property.” All “telephone companies” operating a telecommunications line in the state are subject to central assessment. The state did not classify wireless companies as telephone companies, because the wireless companies use radio wave technology and not a network of cable and wires. Therefore, Qwest paid tax on the value of all of its property, while wireless companies did not pay tax on personal property.

Continue Reading Iowa Court Upholds Equal Protection Challenge

The California State Board of Equalization will hold its annual meeting with assessors in which they will discuss a split roll property tax and taxation of embedded software (click here to view the full agenda). The meeting will be webcast from the Board of Equalization’s website, www.boe.ca.gov, on Wednesday, October 19 at 10:00 a.m. PDT. A good time should be had by all (but maybe not California businesses)!

Governor Cuomo’s negotiations with the labor unions for New York State’s public employees will have a significant impact on the New York State Department of Taxation and Finance (the Department). The Department is slated to suffer 301 of the 3,496 layoffs set for October 19 related to the Public Employee Federation’s (PEF) failure to come to an agreement on a new contract with the Governor. The Department’s Office of Counsel will be disproportionally affected, losing 37 of 42 lawyers. No, that is not a typo.

The layoffs could not come at a worse time for taxpayers, who have been demanding more from the Office of Counsel. Taxpayers have been requesting more guidance to obtain certainty (e.g., whether a service constitutes an “information service”), which takes on an even greater importance in the sales tax context when companies are collecting and remitting tax for the Department.

While there is still hope that the PEF and the Governor can come to an agreement, October 19 is approaching rapidly. Check out the Times Union (a New York Capital District news outlet) for the most recent news on the negotiations.

Alabama ALJ Bill Thompson voided a local sales tax assessment asserted against an electronics retailer because the retailer did not have a physical presence in the taxing jurisdictions. Although the retailer sent repairmen into the local taxing jurisdictions, the retailer did not have a physical store or sales representatives in the localities, and therefore lacked a sufficient nexus. Cohen Elec. and Appliances, Inc. v. Alabama Dep’t of Revenue, Dkt. No. S10-989 (Admin. Law Div. July 12, 2011).

The ALJ applied the law established by Yelverton’s, Inc. v. Jefferson Cnty, 742 So.2d 1216 (1997). The court in Yelverton’s held that local taxing jurisdictions are subject only to constitutional due process restraints on intrastate sales, rather than Commerce Clause restraints, because interstate commerce is not implicated. The Yelverton court, however, interpreted a Department of Revenue regulation, Ala. Admin. Code r. 810-6-3-.51(2), as requiring a retailer without a physical store to collect tax only if it has a salesforce soliciting sales in the local jurisdiction. The taxpayer in Cohen Electronics sent repairmen, but not salespeople, into the taxing jurisdictions, and therefore was not required to collect tax.

Judge Thompson suggested that the Department could amend its regulation to conform to current due process standards and even suggested adopting a factor presence standard as an option. Notwithstanding the Judge’s comments, taxpayers with intrastate sales in Alabama should be aware of this unusual regulation.

While the power to issue a jeopardy assessment has been referred to as part of a state’s “power of the purse, not its power of the sword,” state and local taxing authorities have shown a propensity to impose jeopardy assessments. Indiana Dep’t of State Revenue v. Adams, 762 N.E.2d 728, 732-33 (Ind. 2002). Luckily, state courts increasingly are willing to look behind jeopardy assessments to determine whether the statutory requirements for their issuance have been met. In Garwood v. Indiana Dep’t of State Revenue, No. 82T10-0906-TA-29 (Ind. Tax Ct. Aug.19, 2011), the Indiana Tax Court invalidated 16 jeopardy assessments issued by the Indiana Department of Revenue as a result of the Department’s abuse of its jeopardy assessment authority.

The Garwoods supplemented their dairy farm income by breeding and selling dogs.  Prompted by a series of consumer complaints, the Indiana Attorney General investigated the Garwoods. Undercover Attorney General agents purchased dogs and found that the Garwoods had failed to pay Indiana income tax and to collect and remit sales tax. In addition, the Garwoods did not register as retail merchants or file sales tax returns. The Department served jeopardy assessments on the Garwoods at their home and demanded immediate payment of the tax, interest, and penalties alleged to be owed. When the Garwoods informed a Department official that they could not pay immediately, the Department served them with jeopardy tax warrants and, on that same morning, state officials, police, and 60 volunteers from various humane societies raided the farm and seized all 240 of the Garwoods’ dogs, including their house pets and farm dogs. Later that day, the seizures were made public in a television press conference and newspaper interview (which the court described as a “media circus”). A day later, state officials sold all of the Garwoods’ dogs for a total of $300.

Continue Reading Indiana Jeopardy Assessments (and Taxpayer) Turn Out to be a Dog

 

 

 

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