The U.S. Supreme Court reversed a U.S. Court of Appeals in holding that a railroad may bring suit to challenge the validity of a discriminatory Alabama sales tax exemption. CSX Transp., Inc. v. Ala. Dep’t of Revenue, No. 09-520, 2011 WL 588790 (U.S. Feb. 22, 2011). Alabama imposes its sales and use tax on the use of diesel fuel for off-road use, including fuel used by railroads, but provides exemptions for fuel used by railroads’ direct competitors, commercial truckers and interstate water carriers. CSX sued to challenge the discriminatory scheme under the Railroad Revitalization and Regulatory Reform Act of 1976 (4-R Act).
Unclaimed Property…Nevada is Betting on a Sure Thing
Sin City, Lost Wages, Glitter Gulch, or just plain old Las Vegas. What immediately comes to mind? Probably not unclaimed property. But the state of Nevada has finally discovered a way to add insult to injury by requiring unclaimed property holders (e.g., casinos) to remit uncashed “wagering instruments.”
On March 1, 2011, the Nevada Legislature introduced Assembly Bill No. 219. This bill, if passed, would add the following property type and dormancy period to the state’s unclaimed property law reporting and remittance requirements: Any wagering instrument, one year after the wager is placed, unless the Nevada Gaming Commission specifies by regulation a different period in which the wagering instrument must be redeemed is presumed abandoned.
Continue Reading Unclaimed Property…Nevada is Betting on a Sure Thing
California Court of Appeal Switcheroo: Software Constitutes Technology Transfer Agreement
The California Court of Appeal held that receipts from Nortel’s license of computer programs used to operate a telephone company’s switch hardware were not subject to sales tax. Nortel Networks, Inc. v. State Board of Equalization, Case No. B213415 (2d App. Dist. Jan. 18, 2011). The court also partially invalidated Regulation 1507 on the grounds that the State Board of Equalization (SBE) had exceeded its authority when it enacted the regulation.
The Court of Appeal’s decision provides guidance regarding the scope of exempt Technology Transfer Agreements (TTA), which are defined as “any agreement under which a person who holds a patent or copyright interest assigns or licenses to another person the right to make and sell a product or to use a process that is subject to the patent or copyright.” Cal. Rev. & Tax. Code § 6011(c)(10)(D); 6012(c)(10)(D).
SEC Fines Company for Failure to Collect and Remit State Sales Tax
The Securities and Exchange Commission (SEC) has demonstrated an increased scrutiny of tax accounting by issuing two fines in the last seven months. Most recently, the SEC fined a taxpayer $200,000 for failure to have the proper controls in place to ensure accurate accounting related to compliance with states’ sales and use tax laws. As previously reported in the September 2010 issue of the SALT Shaker, the SEC fined a taxpayer for alleged improper accounting related to tax reserve manipulation.
Continue Reading SEC Fines Company for Failure to Collect and Remit State Sales Tax
SALT Pet of the Month: Audrey
Audrey is the delightful miniature Yorkshire Terrier of Atlanta associate Miranda Davis. Audrey joined Miranda’s family when she was barely two months old, and her family cannot believe she will be 10 this year! Despite her years (and size—only 6 pounds), Audrey loves a good wrestling match and to play with her toys. But apparently not all squeaky toys are created equal—Audrey will only play with toys she is in the mood to play with, and frequently turns her nose up at toys Miranda selects for her. 
Audrey’s other favorite activity is napping in the sun.
As you might have guessed, Audrey is not your typical lap dog. She will sit on someone’s lap, but only if it is her idea. And although she is stubborn, she is even more precious—it is hard to resist her sweet face and big brown eyes. Watch out—she loves to give kisses when you aren’t looking!
Kimberly-Clark Gets No “Huggies” from Massachusetts Appellate Tax Board
Taxpayers have just begun to struggle with the application of states’ related party addback provisions. On January 31, 2011, the Massachusetts Appellate Tax Board (ATB) issued its decision in the first Massachusetts case that addressed the application of the related party addback provision to an intercompany interest and royalty expense. Kimberly-Clark Corp. et al. v. Comm’r of Revenue, Mass. App. Tax Bd., Dkt. No. C282754 (Jan. 31, 2011). In Kimberly-Clark, the ATB addressed the deductibility of interest expense related to the company’s cash management system and royalties related to intellectual property.
The Massachusetts Department of Revenue (Department) assessed the taxpayer based on a denial of the interest expense deduction for pre-addback and addback tax years. The ATB upheld the Department’s denial of the expense deduction because it determined that, based on the preponderance of the evidence, the taxpayer’s cash management system loans did not constitute bona fide debt. The ATB determined that the loans were not debt because the taxpayer had no expectation that the cash advances would be repaid, and there were no security, default, or collateral provisions.
Continue Reading Kimberly-Clark Gets No “Huggies” from Massachusetts Appellate Tax Board
New Jersey Tax Court Finds “User Error” in Treatment of Extraterritorial Income
The New Jersey Tax Court sent a strong message to the New Jersey Division of Taxation that the Legislature—and not the Division—sets the bounds of state taxation. IBM Corp. v. Dir., Div. of Taxation, No. 011630-2008 (N.J. Tax Ct. Jan. 26, 2011). The Division issued Notices of Assessment associated with the add back of extraterritorial income deducted in the computation of federal taxable income pursuant to I.R.C. § 114(e).
The Division issued Notices of Assessment to IBM Corp. (IBM) and Crestron Electronics, Inc. (Crestron) that adjusted their income to include extraterritorial income in New Jersey taxable income. IBM and Crestron argued that New Jersey taxable income was directly linked to federal taxable income as reported on line 28 of the federal tax return—which did not include the extraterritorial income. Further, while New Jersey makes certain adjustments to the federal taxable income amount, none of the adjustments relate to the inclusion of extraterritorial income. The Tax Court held that the Division’s erroneous reading of the state’s taxable income definition and the Division’s expansive reading of its own regulation, did not justify the Division’s position.
As state tax authorities are becoming increasingly creative in their quest to find more revenue, the decision is a welcome reminder of the limits on statutory authority. Although it is unclear whether the Division of Taxation will appeal, and I.R.C. § 114 has since been repealed, those who included extraterritorial income in their New Jersey tax returns should consider filing refund claims.
CCH IntelliConnect
Rise of the Tax “Snitch”: How Amendments to New York’s False Claims Act May Ensnare Taxpayers and Practitioners Alike
New York amended its False Claims Act (FCA) to allow whistleblowers to bring qui tam actions against taxpayers for false claims under New York tax law. If subject to the FCA, a taxpayer could be subject to civil penalties, treble damages, and reimbursement of the plaintiff’s costs including attorney fees. N.Y. STATE FIN. LAW § 189(1)(g), (3).
While the FCA has been in existence in New York since 2007, the recent amendment repeals a statutory preclusion for actions related to the tax law. Under the amendment, a taxpayer is subject to the FCA if it has at least $1 million in income or sales in a tax year and the whistleblower pleads damages in excess of $350,000. Id. § 189(4)(a). This dramatic change occurred quietly because the FCA is in the Finance Law rather than the Tax Law. Interestingly, Eric Schneiderman, New York’s Attorney General, was a chief proponent of the amendment while a member of the New York Senate, and he now has enhanced authority to investigate and commence civil actions under the amended FCA. Id. § 190(1).