AAChester_smaller.jpgFour years ago this month Sutherland SALT Business Manager Andrea Christman, and her husband Andrew, expanded their family with the adoption of Chester—a “talkative” SALT and pepper miniature schnauzer who loves to be the center of attention. Chester spends his days keeping close Chester.jpgwatch over his Herndon, Virginia neighborhood and, while his bark can be fierce, he attacks only with kisses. Chester’s favorite pastimes are reading with Andrew and watching musicals with Andrea, and he is their constant companion—until a football game comes on, at which time he makes a quick exit to avoid the excitement. Chester’s favorite treat is ice cubes, and he has developed supersonic doggie radar that enables him to detect the opening of the freezer door from any room in the house.

Within the last month, Tennessee and North Carolina have replaced the heads of their respective Departments of Revenue. On September 20, Charles Trost was sworn in as the new Tennessee Commissioner of Revenue. Mr. Trost was a partner at a Nashville law firm, and takes over for outgoing Commissioner Reagan Farr. In Tennessee, the Commissioner is appointed by the governor, and there are four months left in the term of the outgoing governor. 

Change is also occurring on the other side of the Appalachian mountains, as Ken Lay (no, not that Ken Lay, the other Ken Lay) is stepping down as North Carolina Secretary of Revenue. Governor Beverly Perdue has appointed outgoing State Senator David Hoyle as the replacement. Mr. Hoyle is the former co-chairman of the North Carolina Senate Finance Committee and has been a significant force in rewriting the tax laws of that state. Governor Perdue’s term will end in 2013. 

These two changes may be the first of many changes for state taxing authorities.  In 2010, 37 states will elect governors. New governors may bring new tax policy. Furthermore, in many states, the governor appoints the head of the state’s taxing authority, so there may be many new Secretaries, Commissioners, and Directors of Revenue. Taxpayers can expect to see some significant changes not only in state law and policy, but also in enforcement and collection practices.

On September 1, the Superior Court of New Jersey, Appellate Division, issued its opinion in Praxair Technology, Inc. v. Dir., Div. of Taxation, Case No. A-6262-06T3 (N.J. Super. Ct. App. Div. 2010), which upheld the Director’s imposition of a penalty on Praxair for failing to file a tax return for the 1994, 1995, and 1996 tax years. Praxair took the position that it was not subject to tax under New Jersey tax law because it did not have physical presence in New Jersey. Although the statute remained unchanged, the New Jersey Division of Taxation made a regulatory change in 1996 to add an example that explained that it was the Division’s position that Praxair was subject to the corporate business tax. In addition, the Appellate Division upheld a post-amnesty penalty against Praxair because it failed to take advantage of the 2002 tax amnesty, even though the New Jersey Supreme Court, in 2006, held that economic presence was put into effect in 1996 with the regulatory change.  Lanco, Inc. v. Dir., Div. of Taxation, 908 A.2d 176 (N.J. 2006).

Continue Reading New Jersey Appellate Division Says Praxair Should Have Read the Tea Leaves on Tax Liabilities

On September 15, 2010, the New York State Tax Commission issued an Advisory Opinion, TSB-A-10(40)S, addressing the taxability of various services offered on a professional networking website. The website enables members to create profiles, search for potential contacts, research business opportunities, and participate in discussion groups, among other things. The Commission held that charges received for premium subscriptions to the website, in-network e-mails, and customer surveys constitute taxable “information service” charges. In contrast, charges collected from employers to post job listings or to participate in online virtual job fairs constitute charges for advertising services that are not subject to sales tax.

Although information services are generally taxable, there is an exception for services that are personal or individual in nature and that may not be substantially incorporated into reports furnished to other persons. The Commission held that the first requirement (personal or individual in nature) was not satisfied because the information came from a source that was not itself confidential. The Commission applied the “common database” test to the second requirement (substantial incorporation) and found that although the data provided to one customer might be slightly different than the data provided to another customer, the information came from the same source and could be used to furnish reports for multiple consumers. Thus, the charges for premium subscriptions, network e-mails, and surveys did not meet the exception.

The Advisory Opinion follows the July 19, 2010, issuance of TSB-M-10(7)S, which provided general guidance regarding services potentially qualifying as information services and the related information services exceptions. 

In a continuing effort to clarify certain Texas Margins Tax issues, the Texas Comptroller of Public Accounts (Comptroller) issued Tax Policy News in July 2010, which provides additional guidance on the Texas Margins Tax costs of goods sold computation; apportionment; and margin tax recovery fees. Texas statutes and regulations do not provide significant guidance on how these provisions should be applied. 

Regarding the costs of goods sold deduction, the Comptroller clarified that this deduction may only be taken by taxpayers that produce “goods,” i.e., real property, tangible personal property, and specifically enumerated services related to video and radio programming. To the extent a taxpayer sells “mixed transactions”—transactions containing elements of both a “good” and a service—the taxpayer may only subtract as costs of goods sold those costs “in relation to” the good. However, a taxpayer may nonetheless deduct as costs of goods sold up to 4% of its back-office (“indirect or administrative overhead”) costs allocable to “the acquisition or production of goods.”

Continue Reading Texas Margins Tax Roundup: Comptroller Provides Additional Margins Tax Guidance

The U.S. District Court (E.D. Pa.) remanded a case to Pennsylvania’s state courts in a suit challenging a local improvement district’s assessment scheme on the grounds that the federal courts lacked jurisdiction over the action based upon the Tax Injunction Act (TIA). Nigro v. City of Philadelphia, No. 10-987 (E.D. Pa. Aug. 25, 2010). The TIA generally prohibits federal courts from entertaining cases regarding state and local “taxes” if the parties have a “plain, speedy and efficient remedy” available in state court. Taxing jurisdictions frequently raise the TIA as a basis for dismissing cases filed by taxpayers in federal court. However, in this case, after the taxpayer filed suit in state court, the City removed it to federal court and the taxpayer was seeking to have the case remanded back to state court pursuant to the TIA.

Continue Reading City of Philadelphia Loses TIA Challenge

When the going gets tough, the tax collector gets creative—or so it would seem, given two recent developments that border on the bizarre.

Amateur bloggers are suddenly discovering that, unbeknownst to them, they have been running a business—and the City of Philadelphia wants its cut. The City has informed a number of bloggers that they owe $300 for business privilege licenses, as well as wage tax, business privilege tax, and of course taxes on any profits their sites bring in. The concept seems logical when applied to high-trafficked, well-known blogs, but the application of the business license tax—due to the provision that a license is required whether or not the business actually makes a profit—has angered some people who blog for fun, not profit, and earn only negligible amounts of cash in the process. One Philadelphian was required to purchase a license and pay tax on a blog that had made $11 in two years, another for a blog that made $50 in three. The City’s argument is that selling advertising space in hopes of profit qualifies a blog as a business, regardless of whether it succeeds and even if the author views the blog as merely a hobby. But one can reasonably question the propriety of forcing bloggers to pay the City $300 for the privilege of earning $11.

Similarly, New York State is using its imagination to help ease Albany’s financial pain. The State has recently begun to enforce an obscure provision that levies the State sales tax on “sliced or prepared bagels (with cream cheese or other toppings).” The tax also applies to any bagel eaten in a store, even if the bagel maintains its bodily integrity and stays topping-free. The tax does not, however, apply to unprepared bagels purchased to go. Thus far, only Bruegger’s Bagels (a national chain that operates in upstate New York) has received an audit, but there may be more to come. Meanwhile, franchise owners and customers alike are a little baffled. That the tax applies to sliced bagels but not to other sliced bread products is perplexing. To help mitigate this problem, at least one franchise owner has posted signs in his stores explaining that the new tax is a result of a government mandate, not a decision by Bruegger’s to charge for slicing services. The sign also hints at the owner’s frustration with Albany, informing customers that the stores “apologize for this change and share in your frustration on this additional tax.”

So to slice, or not to slice? Whether it is worth incurring the additional charge is up to the New York consumer; just don’t blog about it in Philly.

On September 1, Kansas kicked off its third tax amnesty program since 1984. Kansas enacted the amnesty program as part of Senate Bill 572, which the Kansas legislature passed on May 27, 2010. The program will run from September 1, 2010, to October 15, 2010. Unlike some other states’ amnesty programs, Kansas’s amnesty program allows eligible, participating taxpayers to receive abatement of both penalties and interest. However, in return, taxpayers must give up all refund claims related to amounts paid under the program. For taxpayers that have accrued significant penalties or interest on past due claims, but may have reasonable positions with respect to such unpaid claims, participating in the Kansas program may not be advisable.

Continue Reading Filling the Coffers: Kansas Is Yet Another State to Enact an Amnesty Program With a Few Twists

Illinois recently enacted a tax amnesty program that provides a carrot—but carries a big stick. Taxpayers who participate in the program are able to eliminate interest and double penalties for any eligible tax liabilities. However, taxpayers that do not participate in the program will be subject to double interest and penalties on any eligible liability. Ouch! Taxpayers must analyze the pros and cons of the amnesty program and decide quickly because it will run for only a very brief time—from October 1 through November 8, 2010.

Continue Reading Illinois Amnesty: Double Interest, Double Penalties and a Double Edged-Sword

On August 27, 2010, the SEC charged two former Dell executives with fraud for their alleged misconduct relating to the use of the company’s excess tax reserves. SEC v. Davis, Docket No. 1:10-cv-01464 (D.D.C.); SEC v. Imhoff, Docket No. 1:10-cv-01465 (D.D.C.). The SEC’s complaint alleges that Dell improperly used “cookie jar” reserves to meet consensus earnings targets, which caused it to materially misstate its operating income, operating expenses, and certain other financial metrics.

The complaint alleges that Dell improperly used $17 million in an excess Japanese consumption tax reserve that it had decided was unnecessary. Under Generally Accepted Accounting Principles (GAAP), the SEC argues, Dell should have released the entire reserve by the end of the 2003 fiscal year. Instead, Dell allegedly released only $5 million of the reserve to its income statement at the end of the fiscal year 2003 and transferred the remaining $12 million to another account. The SEC alleges that Dell then released $7.1 million of the $12 million to soften the 2004 fiscal year earnings impact of an unrelated $9.3 million litigation settlement for which Dell had not created a reserve. In addition, it is alleged that Dell released the remaining $5 million to its income statement to prop up its fiscal year 2004 operating figures.

The SEC’s complaint is particularly troubling given the relatively small amounts at issue. While many companies extensively document the establishment of tax reserves, the SEC’s complaint may spur companies to enhance their documentation surrounding the release and maintenance of financial statement tax reserves.