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
Sutherland SALT’s Eric Tresh and Cox Enterprises, Inc.’s George Markley “brave” the August heat in Atlanta to see the Braves take on the San Francisco Giants.
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.
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.
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.
