In what is surely a sign of more good things to come, Colorado repealed its short-lived sales tax on “standardized” (canned) software other than canned software delivered by tangible storage medium. The legislation, House Bill 1293, statutorily reinstates Special Regulation 7 by exempting software delivered or accessed by application service providers (ASP), electronic delivery, and load-and-leave. The bipartisan effort led by House Majority Leader Amy Stephens takes effect July 1, 2012. House Bill 1293 undoes last year’s House Bill 1192, which imposed tax on canned software regardless of delivery method as of March 1, 2010. Part of the so-called “Dirty Dozen” of tax increases proposed in 2010—nine of which were signed into law—House Bill 1293 hopefully represents a turning point for more taxpayer-friendly policies in Colorado. Next stop … the infamous Colorado reporting regime?

With all the drama and suspense of a Hollywood movie, California Governor Jerry Brown signed AB X1 28 on June 29—more than two weeks after the bill originally passed the California legislature. AB X1 28 has been controversial because it significantly expands California’s sales and use tax collection requirements by substantially incorporating all of the provisions of former AB 153 (click-through nexus), AB 155 (affiliate nexus), and SB 234 (constitutional nexus). Together, these changes combine California’s recent efforts to force remote sellers to collect California sales tax. To further complicate matters, AB X1 28 provides that these changes become effective immediately.

AB X1 28 amends California’s definition of “retailer engaged in business” for sales and use tax collection purposes, as set forth in Cal. Rev. & Tax Code § 6203, to include three new groups of “retailers” as follows.

Continue Reading Nexus Explosion: California Governor Signs Bill Expanding California Sales Tax Collection Requirements

Recipients of qualified empire zone enterprise (QEZE) tax benefits beware: New York is reviewing your qualifications to receive a QEZE credit. On April 28, 2011, an administrative law judge upheld the Department of Taxation and Finance (Department) denial of the taxpayer’s QEZE credit claims because the taxpayer did not establish the credit for a valid business purpose. In the Matter of the Petition of Ward Lumber Co., Inc., Dkt. Nos. 823209, 823163 (N.Y. Div. Tax App. Apr. 28, 2011).

The taxpayer, Ward Lumber Co., was incurring substantial losses and appeared destined for bankruptcy. In an effort to prevent Ward Lumber, one of Essex County’s largest employers and businesses, from going under, several local officials recommended that Ward Lumber pursue QEZE credits to ease its financial difficulties. One state official told Ward Lumber that it would have to form a new entity to qualify for the QEZE program. Ward Lumber merged with a Delaware corporation in 2001, kept the original business’s name, and qualified for and received QEZE benefits for 2002 through 2004.

Continue Reading New York Giveth, Taketh Away

California’s Fourth Appellate District ruled that taxpayers must include the value of intangible emissions reduction credits (ERCs) when they determine the fair market value of an independent power plant’s property. Elk Hills Power, LLC v. Bd. of Equalization, No. D056943 (May 10, 2011). Elk Hills sets a disturbing precedent regarding the taxation of intangibles under California’s property tax laws, and could be applied to other industries that use emissions reduction credits. 

California subjects real and tangible personal property to property tax. The value of intangible assets related to a “going concern” value of a business generally do not enhance the value of the business’s taxable property. However, under California Revenue and Taxation Code § 110(e), assessors may assume “the presence of intangible assets or rights necessary to put the taxable property to beneficial or productive use” when assessing and valuing taxable property. The appellate court reasoned that because the ERCs are necessary to operate the power plant and “to make energy and money,” the assessor could include their value in the assessment. Interestingly, the trial court had also held that the ERCs were taxable, albeit on different grounds—the trial court found that under § 110(f), the ERCs were “intangible attributes of real property,” such as “zoning location, and other attributes that relate directly to the real property involved” that must be “reflected in the value of the property.”

Ironically, California intended § 110(d) (enacted in 1995 as SB 657) to clarify the constitutional prohibition against the taxation of intangibles. The Elk Hills decision thus seriously undermines this prohibition and could open the door to taxing energy credits—which are likely to become more common—as property in the future. For example, the California Air Resources Board is in the process of implementing the California Global Warming Solutions Act, which will rely heavily on a program that allows high-polluting industries to purchase and trade emissions offsets in lieu of directly meeting the requirements of strict climate change regulations. Including the value of such offsets in the property tax base will substantially change the manner in which such property is taxed. 

The New York Tax Appeals Tribunal (TAT) affirmed a decision forcing the combination of a banking corporation and its “nontaxpayer” subsidiary. The combination was upheld based upon the existence of an interest deduction—taken by the banking corporation and attributable to assets held by its subsidiary—that created distortion of income. Interaudi Bank F/K/A Bank Audi (USA), DTA No. 821659 (Apr. 14,  2011).

Interaudi Bank (Interaudi), a commercial banking corporation organized and chartered in New York, formed and transferred its investment portfolio to an investment holding subsidiary, BA (USA) Investments Inc., (BA Investments) domiciled in Delaware. BA Investments limited its activities to the management and maintenance of marketable securities. During the 1997-1999 period, Interaudi filed a New York Article 32 (Bank Tax) combined return that included all of its subsidiaries, except BA Investments—which did not file a New York tax return. Interaudi then claimed interest expense deductions paid to BA Investments.

Continue Reading Distortion Reigns in New York Article 32 Forced Combination Case

On April 27, 2011, the California Supreme Court denied the State Board of Equalization’s (SBE) petition for review of Nortel Networks v. State Board of Equalization, 191 Cal.App.4th 1259 (2d. Dist. 2011), paving the way for refund claims based on the Court of Appeal’s decision (for a full discussion of Nortel, click here). 

Taxpayers may be entitled to refunds if they paid sales tax on intangible property transferred with tangible personal property, so long as they satisfied the requirements of a technology transfer agreement (TTA). To be eligible for a sales tax exemption under a TTA, taxpayers must prove that:

  1. Intangible property was transferred with tangible personal property; 
  2. The intangible property transferred was subject to a patent or copyright interest; 
  3. The intangible property transferred enabled the licensee to make and sell products subject to the patent or copyright interest; and 
  4. The TTA separately stated a reasonable price for the tangible personal property.

In Nortel, the Court of Appeal partially invalidated the regulation that had excluded agreements involving prewritten software from the definition of a TTA, holding that the statute contained no such limitation.

Taxpayers who transferred a patent or copyright interest pursuant to a TTA and who paid tax on the value of the intangible property transferred should consider filing refund claims under Nortel.

In the tax world, we are frequently reminded that procedure is important. The Alabama Supreme Court drove this point home in its decision dismissing a $1 million local use tax assessment because the final assessment was signature stamped rather than being signed by hand. City of Huntsville v. Colsa Corp., No. 1091797, 2011 WL 1334397 (Ala. Apr. 8, 2011). 

Following a two-year-long audit, the City of Huntsville issued a use tax assessment covering a number of the taxpayer’s purchases. The assessment was stamped with the City Finance Director’s signature stamp, which he had applied himself. The taxpayer argued that the assessment was invalid under the Alabama Taxpayer Bill of Rights, codified at Ala. Code § 40-2A-1, et seq., and the Department of Revenue’s regulations, Ala. Admin. Code r. 810-14-1-.15(4) (adopted by the City), which require that a final assessment be entered “by signing” the document or a “facsimile signature” “if a summary record which includes the information on the final assessment has been signed.” Despite the fact that the appropriate City official had physically applied his own signature stamp, the Alabama Supreme Court held that the City had not properly entered a final assessment because, without an original signature, “the notice was effectively unexecuted and, therefore, invalid.” 

Similarly, the Louisiana Court of Appeals recently held that a statute of limitations waiver could not bind a corporate taxpayer where the employee signing the waiver did not have express authority to bind the corporation. Bridges v. Hertz Equip. Rental Corp., 47 So.3d 519 (La. App. 2010), rehearing denied Sept. 16, 2010, writ granted, 51 So.3d 28 (La. Dec. 17, 2010). Although the corporation’s employee was a Director of Tax Audits, was the only taxpayer representative communicating with the Department of Revenue about the audit, and signed in a space for “Taxpayer’s Authorized Representative,” the court held that the waivers were not binding on the corporation and dismissed the assessments as barred by the statute of limitations.

These cases provide harsh reminders, for both states and taxpayers, that courts often strictly enforce procedural rules.

May 2011 Pet of the Month.jpgNo, that’s not a pony, it’s a dog. Meet Kodi, a 100+ pound Great Pyrenees who recently arrived in Seattle. Too big to be shipped or flown, Kodi made the cross-country drive from North Carolina with his owner, Sarah Mohr, a tax manager at Amazon.

Unlike many other SALT Pets of the Month, Kodi spends his day at the office. For Kodi, a hard day’s work in Amazon’s pet-friendly Tax Department entails naps, going on walks, and wondering why all of the other dogs in the office are so small. While he does miss the open spaces May 2011 Pet of the Month 2.jpgof North Carolina, Kodi has quickly adapted to the climate and setting of Seattle, because what dog wouldn’t love going into work with their owner? On his days off, Kodi eagerly awaits Sarah’s return so he can stroll through the streets of Seattle as the great white urban pony. 

The U.S. District Court for the Western District of Tennessee recently upheld a class action lawsuit against an out-of-state law firm that the city of Memphis, Tennessee, hired to collect past-due property taxes. Wright v. Linebarger Goggan Blair & Sampson, 2011 WL 1100462 (W.D. Tenn. Mar. 22, 2011). A class of Memphis taxpayers filed suit against a Texas-based law firm, Linebarger Goggan Blair & Sampson, LLP (Linebarger), that the city hired to collect overdue property taxes. The suit filed in federal court alleged that Linebarger’s bills included a line item listed as “other charges,” which included 20% attorneys’ fees that the city paid to Linebarger in violation of the statutory 10% cap.  

One of Linebarger’s many motions filed with the Court was a motion to dismiss based on lack of federal court jurisdiction. Linebarger argued that the Tax Injunction Act (TIA) precluded federal court jurisdiction because the action would impede the City’s ability to collect taxes and that a plain, speedy, and efficient remedy existed in state court. However, after noting that Linebarger was unable to point to any authority holding that the TIA applied to private parties, the Court held that the TIA does not deprive federal courts of jurisdiction in actions against private parties engaged in the tax collection process. 

Interestingly, the taxpayers’ complaint alleges that Linebarger received over $16.5 million in attorneys’ fees, up to half of which Linebarger may have received in violation of Tennessee law. Taxpayers should consider payment and other types of limitations when confronted with a third-party audit firm.