When is an insurance company “subject to” premium tax? Recently, the Indiana Tax Court answered this question in United Parcel Service, Inc. v. Indiana Department of Revenue, 49T10-0704-TA-24 (December 29, 2010), concluding that an insurance company is “subject to” premium tax when it is placed under the authority, dominion, control, or influence of the tax, and not simply when it is required to pay the tax. 

In United Parcel Service, the Indiana Department of Revenue had determined that UPS should have included the income of two affiliated foreign reinsurance companies in its Indiana worldwide unitary corporation income tax return. UPS, however, maintained that its affiliated foreign reinsurance companies should be excluded because the Indiana statutes provided that there is no income tax on the adjusted gross income of insurance companies “subject to” the Indiana gross premium tax.

Continue Reading Inclusion of Insurance Company in Unitary Return – When Is an Insurance Company “Subject to” Premium Tax?

Recently, the Connecticut Department of Revenue Services issued an informational publication explaining its position on the application of the Connecticut Corporate Business Tax on real estate investment trusts (REITs) and revised a previously issued publication on the implications of the state’s economic nexus provisions to foreign (non-U.S.) companies.

The Department’s newly issued guidelines treat REITs in a manner that is similar to the Internal Revenue Code, but the Department strays in certain areas. IP 2010(21) (Dec. 1, 2010).

Continue Reading Connecticut “WREITS” Guidance for REITs and Economic Nexus

The Arizona Superior Court denied Home Depot a bad debt deduction related to customer credit card transactions. Home Depot USA Inc. v. Arizona Department of Revenue, TX 2006-000028 (Dec. 10, 2010). The court reviewed three conditions that must be met under Arizona law in order for a bad debt to be deducted: 

  1. The transaction upon which the bad debt deduction is being taken was reported as taxable;
  2. The debt arose from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money; and 
  3. All or a portion of the debt is worthless. Id.

In determining whether Home Depot could claim the deduction associated with its private label credit card transactions, the court relied on a decision of the Arizona Appeals Court and interpreted the first and second conditions as  limited only to those persons who made the sale and originally reported the tax. Id. (DaimlerChrysler Services North America, LLC v. Arizona Dep’t. of Revenue, 210 Ariz. 297, 302 (Ariz. App. 2005)). While Home Depot made the sales and reported the tax, it did not incur the bad debt directly. The finance company paid Home Depot the amount of each transaction, less a negotiated percentage that included the overall cost of bad debt for all transactions.

Continue Reading Retailers, Finance Companies and Sales Tax Refunds on Bad Debt – Heads I Win, Tails You Lose

The Utah State Tax Commission has amended its rules for apportioning financial institution receipts attributable to services from a costs-of-performance sourcing rule to a market-based sourcing rule (Utah Admin. R. R865-6F-32(3)(l)). Effective December 9, 2010, financial institutions must include in the sales factor numerator receipts from services not otherwise specifically addressed in the regulation “if the purchaser of the services receives a greater benefit of the services in Utah than in any other state.” 

The change in sourcing methodology is consistent with Utah’s recently amended general corporation apportionment statute, Utah Code Ann. § 59-7-319, which similarly provides for the market sourcing of services (based on where the purchaser receives a greater benefit of the service). The change to market sourcing for financial institutions is another departure by Utah from the Multistate Tax Commission’s (MTC) model regulations for the apportionment of financial institution income. 

Continue Reading Utah Goes Market for Sourcing of Financial Institution Services

The Washington Court of Appeals has held that a statutory amendment barring the filing of 24 years of business and occupation (B&O) tax refund claims violates a taxpayer’s due process rights and is therefore unconstitutional. Tesoro Refining & Mktg. Co., No. 39417-1-II (Wash. Ct. App. Dec. 21, 2010). Tesoro Refining and Marketing Company (Tesoro), a Delaware corporation, operates an oil refinery in Washington. Tesoro manufactures and sells bunker fuel (a residual fuel oil that remains after gasoline and distillate fuel are extracted from crude oil) primarily to vessels engaged in foreign commerce for consumption outside the territorial waters of the United States. 

Prior to 2009, Washington law permitted a company that manufactured and sold a qualifying fuel (such as bunker fuel) to deduct amounts derived from the sale of the fuel against its manufacturing B&O tax liability. Tesoro did not take the deduction on its originally filed tax returns and later filed a refund claim for B&O taxes paid on bunker fuel manufactured and sold from 1999 to 2004. The Department of Revenue denied the refund claim after finding that the deduction applied only to the wholesaler and retailer B&O tax and not to the manufacturer B&O tax. Tesoro appealed the Department’s determination to the superior court. While the case was pending, in 2009, the Washington legislature amended the B&O tax deduction statute limiting the applicability of the B&O tax deduction to retailers and wholesalers of qualifying fuels prospectively and retroactively. The superior court held that Tesoro was not entitled to the deduction and granted summary judgment to the Department. Tesoro appealed the superior court’s decision.

Continue Reading Washington Court of Appeals Holds Retroactive Application of a Statute Unconstitutional

The South Dakota Supreme Court appears to have added the South Dakota sales tax to the list of fees associated with automated teller machine (ATM) usage. TRM ATM Corporation v. South Dakota Dep’t. of Rev., 2010 SD 90 (December 8, 2010). In TRM, an Oregon company that owned, operated, sold, leased, and serviced ATM machines was assessed South Dakota sales tax on transaction processing and surcharge fees received from sponsor banks and core-data companies (parties that serve as intermediaries in the ATM transaction by contracting with card-holders’ depository banks to make ATM services available to cardholders). 

While TRM conceded the taxability of its transaction processing and surcharge fees under South Dakota’s sales and use tax laws, TRM claimed it was not liable for payment of the South Dakota sales tax. TRM made two arguments.

Continue Reading The Latest ATM Fee, a Sales Tax?

As the year winds down and we reflect on what has occurred in the world of unclaimed property over the last 12 months, we find it has been an unusually action packed year.  Joining the various other countdowns to 2011, here is the 2010 Countdown of the Biggest Unclaimed Property Events of the Year.

Continue Reading Unclaimed Property: The Year in Review

The Multistate Tax Commission (MTC) held its Fall Uniformity Committee Meetings in Atlanta, Georgia on December 7-9. With a significant turnover in state tax commissioners expected as a result of the November elections, it will be interesting to see if any of the decisions made by MTC representatives the last few years are revisited at the Winter Committee Meetings to be held in Kansas City, Missouri, March 1-4, 2011.

Income and Franchise Tax Uniformity Subcommittee:

  • Amending UDITPA. The two issues discussed at this meeting were: (a) implementation of market sourcing for the license or sale of intangible property and (b) revising the definition of “sales” for purposes of determining what to include in the receipts factor. The Subcommittee directed its drafting group to revise the draft UDITPA amendments to:
    • Adopt a distinction between a marketing intangible and a manufacturing (or non-marketing) intangible similar to what Massachusetts has implemented and California has proposed. The result would be that receipts from a marketing intangible would be included in the numerator of the state in which the ultimate consumer is located, while receipts from a manufacturing intangible would be in the numerator of the state in which taxpayer’s customer’s production activity occurs.
    • Provide a rule for determining who is the ultimate customer whose activity determines the sourcing of receipts.
    • Include in the sourcing rule a cascade approach so that if the ultimate customer cannot be determined, alternative sourcing rules are provided, including a default rule to sourcing based on some type of population percentage.
    • Draft both a narrow and a broad version of the definition of “sales” for consideration by the Subcommittee at its next meeting. The narrow definition would include in sales only receipts from the sale of inventory.
    • Offer options to the Subcommittee for sourcing of business income from one-time sales of subsidiaries or business assets, particularly if the narrow definition of sales is ultimately adopted. One suggestion is to source such receipts based on the apportionment formula of the subsidiary sold or the location of the asset sold.
  • Model Withholding Statute. A surprisingly contentious discussion regarding a previously resolved issue erupted at this meeting. Montana representatives continue to insist that employers must report, though not remit, on all employees entering a state to work, regardless of the days spent in the state. This suggestion was voted down at a previous meeting but was brought up again at this meeting – with the same result. At the MTC’s Executive Committee Meeting, Montana Commissioner Dan Buck announced that he had lodged an official complaint that the Subcommittee had not sufficiently considered Montana’s proposal. A separate Executive Committee phone call will be scheduled to consider Montana’s complaint.
  • Amendments to Tax Haven Provision in MTC Model Combined Reporting Statute. The MTC’s Model Statute, as well as the statutes of several states, includes a provision that a water’s edge reporting group will include non-domestic affiliated entities that are doing business in tax haven countries. The definition of a tax haven country is outdated because it relies on an Organization for Economic Co-operation and Development list that is no longer kept up-to-date. The preference of the group seemed to be to allow states to independently determine what a tax haven country is, based on the existing criteria in the model statute. This could clearly create uniformity issues. One member noted that the United States might be a tax haven country based on the criteria used.

Sales and Use Tax Uniformity Subcommittee

  • Model Sales and Use Tax Notice and Reporting Statute. The Subcommittee continued its work on crafting a model statute, a project initially motivated by Colorado’s adoption of such a statute. A significant part of the discussion involved the imposition of penalties and how to calculate penalties. Later, during a full Uniformity Committee State Roundtable discussion, a representative from Kentucky said that his state was specifically interested in adopting such a statute.

Ever-dependable California has stepped up to the plate and become the first state to require the submission of a federal Schedule Uncertain Tax Position Statement (Schedule UTP). The Franchise Tax Board (FTB) announced on December 1, 2010 that, for taxable years beginning on or after January 1, 2010, it will require taxpayers that file federal Schedule UTP to attach the same schedule to their Franchise or Corporate Income Tax Return (Form 100/100W). Taxpayers cannot hide from this requirement because they will also be asked to check a box on their California Form 100/100W indicating whether or not they filed a federal Schedule UTP.

For taxable years beginning on or after January 1, 2010, the Internal Revenue Service requires a corporation to file Schedule UTP with its income tax return if: 

  1. The corporation files Form 1120, U.S. Corporation Income Tax Return; Form 1120-F, U.S. Income Tax Return of a Foreign Corporation; Form 1120-L, U.S. Life Insurance Company Income Tax Return; or Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return; 
  2. The corporation has assets that equal or exceed $100 million (there is an IRS announced phase-in that reduces the asset threshold to $50 million for 2012 and 2013 tax years and to $10 million for tax years 2014 and after); 
  3. The corporation or a related party issued audited financial statements reporting all or a portion of the corporation’s operations for all or a portion of the corporation’s tax year; and 
  4. The corporation has one or more tax positions that must be reported on Schedule UTP. Affiliated groups filing federal consolidated returns are required to file federal Schedule UTP for the entire affiliated group.

California’s announcement raises several concerns. There are serious questions about California’s authority to require receipt of confidential information regarding corporations that may not be subject to California’s taxing powers, i.e., non-nexus corporations included in a California combined report or corporations that may not be subject to the California franchise or income tax, such as insurance companies. Because California taxpayers come in all shapes and sizes, there is a high likelihood that simply attaching a federal Schedule UTP will transmit information to California regarding corporations over which it has no jurisdiction to tax. Thus, the question arises as to whether a taxpayer will be deemed compliant with this new FTB edict if, rather than submitting the entire federal Schedule UTP, it instead provides a redacted version that deletes information regarding affiliates outside of California’s taxing authority or the scope of the franchise or income tax.

For now, California has reserved its discussions on devising its own UTP form and is not requiring disclosure of California-specific tax positions.  The FTB plans to include additional details regarding this Schedule UTP attachment requirement in the instructions to Form 100/100W for 2010. Of course, the question remains whether additional states will join in the search under taxpayers’ mattresses by requiring the submission of Schedule UTP or adopting their own state-specific UTP schedules.

On December 10, 2010, the largest bipartisan organization of state representatives – the National Council of State Legislators – voted to support the adoption of a multistate compact that could affect many captive insurance companies. 

The compact provides for the centralized collection and allocation of state premium taxes imposed on property and casualty insurance obtained from companies not licensed in the state of the risk. This development is another in a string of legislative and regulatory actions that may fundamentally alter the tax liability of many companies employing a captive insurance entity. Unfortunately, many affected taxpayers are not fully aware, or aware at all, of the possible increase in their tax liability resulting from the adoption of the compact. 

Included as part of the 2,319-page federal Wall Street Reform and Consumer Protection Act, known as the Dodd-Frank Act, was a relatively obscure provision known as the Nonadmitted and Reinsurance Reform Act of 2010 (NRRA). Aimed primarily at simplifying the states’ taxation and regulation of surplus lines insurance, NRRA provides that no state, except the “Home State” of the insured, may impose a premium tax on nonadmitted insurers. However, the NRRA also provides that states may form a compact and determine by agreement how to allocate among the states in which the risk is located the premium taxes paid to the Home State. Thus, for companies with a captive insurance company in their structure, the issues to watch are:

  1. Will their Home State impose a premium tax on 100% of the premiums paid to the captive, regardless of where the risk is located, and if so, at what rate? 
  2. Will their Home State become a member of the anticipated multistate compact? 
  3. What will such a multistate compact ultimately require? 

The contents and scope of a multistate compact for the collection and allocation of taxes on premiums paid to nonadmitted insurers is currently being fleshed out by trade organizations in the form of two separate and competing drafts. One alternative is the Nonadmitted Insurance Multi-State Agreement (NIMA), drafted by the National Association of Insurance Commissioners.  The other, currently more popular alternative, is the Surplus Lines Insurance Multi-State Compliance Compact – otherwise known as SLIMPACT-Lite (and no, it is not a new diet supplement). SLIMPACT-Lite is supported by numerous groups and associations, including the Council of State Govern-ments and the National Council of Insurance Legislators.

The NRRA was aimed primarily at simplifying the taxation and regulation of surplus lines insurance, and the collateral effect on captive insurance companies will be significant. For companies currently not paying a premium tax on insurance purchased from their captive insurance company, NRRA could significantly increase their liability if their Home State joins the compact or does not join the compact but nevertheless imposes its tax on all risks wherever located. Monitoring the implementation of NRRA is important for those with an existing or contemplated captive insurance company.