Sutherland SALT’s Michele Borens and Eric Tresh stop for a photo op with Comcast’s Tom Donnelly and Jen Galbreath in front of the legendary Jim & Milt’s Bar-B-Q in Tallahassee, Florida.
“Loan” Star Mishap: Texas Muddies Water on Interest Expense Deduction for “Loans to the Public”
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).
California Supreme Court Allows Telecom Tax Class Action Lawsuit
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.
Fourth Circuit Emits Good News! Federal Court Retains Jurisdiction over Levy Imposed on a Single Entity
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.
Take Me Out to the Ballgame: Minnesota Twins September Edition
Sutherland SALT’s Jeff Friedman and General Mills’ Denise Helmken pose with Minnesota Twins mascot T.C. Bear at last night’s game against the White Sox.
A Pinch of SALT: Using the Force to Combine in Separate Return States
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.
A Wynne-Win Situation in Maryland
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.
Two States, One Similar Costs-of-Performance Rule, Different Results
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
Virginia Supreme Court Includes Internet-Related Revenue in Tax Base (Sort of)
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:
- The Virginia SCC is required to certify telecommunications companies’ gross receipts to the Department,
- The Department calculates the minimum tax.
Continue Reading Virginia Supreme Court Includes Internet-Related Revenue in Tax Base (Sort of)
SALT Pet(s) of the Month: Jackson and Angel
Meet 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 
Thanksgiving 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 
boarding 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!