The Direct Marketing Association (DMA) filed a motion for preliminary injunction in the U.S. District Court for the District of Colorado on August 13 in an effort to stop Colorado from enforcing the recently enacted—and highly controversial—sales tax notice and reporting obligations on remote retailers. Arguing that “affected DMA members will suffer irreparable harm to their businesses” without an injunction, the motion seeks to relieve remote retailers of the burdens of Colorado H.B. 1193 until the substantive issues in the lawsuit are resolved. The parties have attempted to narrow and expedite discovery on the Commerce Clause claims and to consolidate the preliminary injunction proceedings with a trial on the merits on those claims. It appears that the parties agree that resolution of these issues prior to enforcement of the end-of-year reporting requirements is beneficial to both the state and taxpayers.
Oregon Court Holds That Internet Access Services Are Not Telecommunications, Are Protected by the Internet Tax Freedom Act
In City of Eugene v. Comcast of Oregon II, Inc., Case No. 16-08-03280, the Oregon Circuit Court reversed its earlier ruling that the City of Eugene’s registration and license fees imposed on cable Internet access services are preempted by the Internet Tax Freedom Act (ITFA), and that the fees violated the Uniformity Clause of the Oregon Constitution.
This case arose when the City of Eugene filed an action to collect a registration fee and license fee imposed under City Ordinance 20083 from a cable Internet access provider. The registration fee requires each entity engaging in telecommunications activities to register and pay a 2% annual fee on gross revenues derived from providing telecommunications services within the City’s public rights of way. The license fee requires each entity using the City’s right-of-way to provide telecommunications services to pay a license fee of 7% of its gross revenues derived from providing telecommunications services in the city. In an earlier ruling, the Court found that cable modem services (Internet access services delivered using a cable modem) were subject to both the registration fee and the license fee. Upon reconsideration, the Court determined cable modem service was not a telecommunications service under the Ordinance.
Oregon Tax Court Strikes Again: Gain on the Sale of Stock Constitutes Business Income
Less than a month after its decision in Crystal Communications, Inc. v. Oregon Dep’t of Revenue, No. TC 4769 (Or. T.C. July 19, 2010), the Oregon Tax Court held that gain from the sale of stock of a subsidiary was business income. Centurytel, Inc. v. Dep’t of Revenue, No. TC 4826 (Or. T.C. August 9, 2010). In Centurytel, the taxpayer, a telecommunications corporation, sold all of the outstanding shares of its wireless subsidiary to an unrelated buyer. The sale resulted in the liquidation of its wireless operations. Both the taxpayer and the purchaser filed elections under I.R.C. § 338(h)(10) to treat the stock transaction as an asset sale. The taxpayer used the proceeds from the sale to finance the acquisition of additional assets and to repay existing debt.
Under Oregon law, gain from the disposition of assets is business income if it meets either the transactional test or the functional test. In Centurytel, the court noted that the taxpayer had conceded that the assets deemed sold in the transaction had been employed in a unitary business operating within and without Oregon. The taxpayer filed an Oregon consolidated income tax return. Relying on the analysis in Crystal Communications, where the Tax Court determined that the gain from the sale of an FCC license was business income under the functional test, the Centurytel Court held that the gain recognized by the taxpayer constituted apportionable business income. The Centurytel Court stated that the two transactions should be analyzed similarly because the § 338 election deemed taxpayer to be selling assets. The Centurytel Court further explained that even if it were to recognize a “liquidation exception” to the functional test under Oregon law, this exception does not apply because the taxpayer continued its wireless business operations and used the proceeds from the liquidating sale to purchase additional wireless assets, expand its operations, and pay down debt.
This case highlights that a § 338(h)(10) election may alter the characterization of income as business or nonbusiness income. Because the court followed the fiction created by the § 338 election as a deemed asset sale, taxpayers should consider the potential consequences of the election.
California FTB to Hold Meeting on Intercompany Transactions, DISA Reporting
The California Franchise Tax Board (FTB) will hold its second interested parties meeting on September 22, 2010, at 1:00 p.m. PDT to discuss revisions to Regulation 25106.5-1, which addresses intercompany transactions. The meeting will address comments and proposed amendments submitted after the first interested parties meeting held in April of this year.
The purpose of the regulation is to provide rules for reporting intercompany transactions in order to clearly reflect the taxable income, apportionment factors, and tax liability for members of a combined reporting group. Generally, gains or losses between combined group members are deferred in order to produce the effect of transactions between divisions of a single corporation. The FTB is considering revisions to three components of the regulation:
- The first issue is to clarify the proper apportionment treatment of intercompany transactions using the simplifying rules of Regulation 25106.5-1(e), which permits taxpayers to elect to be treated as separate entities. The FTB has indicated its intention to clarify that this election does not permit companies to include receipts from intercompany transactions in the sales factor denominator in the year of the election, as such inclusion would double count receipts when the intercompany items are ultimately sold to third parties. The FTB has indicated that this clarification will be applied retroactively.
- Second, the FTB is proposing clarifications with respect to Deferred Intercompany Stock Accounts (DISAs), which are created when non-dividend distributions are made in excess of earnings and profits and stock basis. The proposed amendments will specify that stock redemptions will cause a DISA to be taken into account as income or gain; mergers between members of a combined group will not cause a DISA to be taken into account as income or gain if the majority of stock for each is owned by other members of the combined group; and that when the same distribution is made through various tiers of stock ownership, the DISA that might result from the initial distribution will be treated as earnings and profits for purposes of determining the DISA that might result from the subsequent distribution.
- Lastly, the FTB is proposing to amend Regulation 25106.5-1(a)(2) to bring it into conformity with the most recently enacted provisions of Treasury Regulation 1.1502-13.
Fair or Unfair? Main Street Fairness Act Faces Opposition
The goal of the recently introduced Main Street Fairness Act (H.R. 5660) is to establish fairness by treating similar sales transactions equally for purposes of sales and use tax. Opponents of the Bill, however, believe that if it becomes law, the result will be far from fair. The Bill authorizes “member states” of the Streamlined Sales and Use Tax Agreement to impose a use tax collection obligation on remote sellers even though they have not established a physical presence. Those opposing the Bill contend that it will result in extremely burdensome and costly compliance requirements on small, online retailers.
Continue Reading Fair or Unfair? Main Street Fairness Act Faces Opposition
The CAT Takes a Swat at Quill
On August 10, the Ohio Department of Taxation issued a decision upholding the Commercial Activities Tax’s (CAT) statutory “bright-line presence” nexus test and concluded that L.L. Bean had substantial nexus with the state solely based upon the volume of its sales to Ohio customers. This is the first known ruling addressing a taxpayer’s challenge to the constitutionality of Ohio’s statutory bright-line imposition.
The CAT’s bright-line test is similar to the model rule adopted by the Multistate Tax Commission and provides that taxpayers are subject to the CAT if they meet any one of the following thresholds:
- At least $50,000 of property in the state
- At least $50,000 of payroll in the state
- At least $500,000 of sales to customers in the state
- 25% or more of its total property, payroll and receipts in the state
- The taxpayer is domiciled in the state
SALT Pet(s) of the Month: Killer and Stanley
Brothers Killer and Stanley have been the companions of Sutherland SALT administrative assistant Melissa Bragg since she moved to Atlanta 12 years ago. New to town, Melissa and her friend set out to find a four-legged companion or two at the Atlanta Humane Society. They got lost and wound up at Marietta Humane Society, and there awaited Killer and Stanley for her rescue!
Melissa has good reason to “Bragg” about her kitties. Killer has a gregarious personality and is Melissa’s constant companion, accompanying her while doing laundry, the dishes, or cooking. His bed-time rituals are particularly interesting as he helps Melissa put her daughter to bed and then trots down the hall on his own as soon as he hears “it’s time for bed.” Killer loves to eat and is quite the potato chip connoisseur. When he’s excited, he runs and climbs walls sideways.
Stanley is more reserved and is happiest when someone pets him, always welcoming a little TLC. He’s a bit skittish at times and tends to disappear if the doorbell rings, but he holds his own when it comes to chasing flies and flashlight beams.
SALT Pet(s) of the Month: Dylan and Skittles
Dylan and Skittles were rescued by Sutherland SALT Admin Extraordinaire, Becca Menso, in her college days—Dylan from an irresponsible roommate and Skittles from an irresponsible neighbor. All three being suburban Maryland natives (and Maryland Terrapin fans!), they recently made their big move to the Logan Circle neighborhood in the District of Columbia and are loving city life.
Dylan, lean and sleek, is the more curious of the two. His favorite activities include investigating strangers, hunting spiders, and drinking 
from the toilet on hot summer days. Dylan is content to watch television with Mom on the couch and is loyal beyond belief. Skittles, chubby and hungry, is less active (not that Dylan is working hard…). He is excited that his new apartment does not have stairs. “Fat falls fast!” is his slogan. He enjoys hiding from guests and meowing loudly after a long day of sitting and staring out of the window.
Skittles is also a sports fan and loves the Kitty Half-Time Show during the Puppy Bowl and is an expert at Ultimate Daydreaming.
SALT Pet of the Month: Mikka’s “Shakes” the Clown
Shakes is a shy and gentle pit bull mix, who is quite the multistate pup. He was rescued by Sutherland summer associate (and aspiring SALT team member) Mikka Gee Conway (University of Minnesota Law School, 2011) and her husband, Mike, in 2004, after being abandoned near a dumpster in North Hollywood, California. Currently living comfortably in Minneapolis, Minnesota, where green grass, trails, squirrels, and rabbits are plentiful, Shakes eagerly awaits his move to Washington D.C. where he hopes to jump into the political scene with all four paws.
This handsome fellow is aptly named for the title character in “Shakes the Clown,” the 1991 cult classic starring Bobcat Goldthwait (critically acclaimed as “the Citizen Kane of alcoholic clown movies”). In keeping with clown custom, Shakes has a large repertoire of tricks including shaking hands, sitting up, high-fiving, rolling over and playing dead. His funniest trick is howling along with the answering machine, or whenever he hears Mikka say, “Please leave a message after the beep.” With such a personality, Shakes will be in good company with the other Sutherland SALT pets.
SALT Pet of the Month: Michele’s “Joe”
Joe Borens (aka Joe Joe and Chunky Chicken) is a special four-year-old English bulldog and loyal member of the Borens family. He is particularly loved for some of his unique characteristics, including his ability to sleep 23 hours a day, his wall-shaking snoring and his unwillingness to go outside (even for the most basic of reasons). Most importantly he loves to eat (rocks too!). 
While the facial characteristics of English Bulldogs can appear intimidating, Joe adores everyone, including small children, and is excited to see strangers. He is a great companion to Michele’s 9- and 10-year-old daughters who commented, “he snuggles very well.” He has attempted (accidentally) on occasion to take a swim with Michele’s daughters, but instead of doggy paddling, Joe just sinks. With spring passing by all too quickly, Joe is gearing up for a long, sleepy summer. He hates the heat, but maybe that will be incentive enough to take swimming lessons!