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.

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