Where do we go from here? Capital University Law School will host a symposium on March 6 to address the tax issues arising from increased remote work. Eversheds Sutherland Partner Charlie Kearns will help address the challenges from withholding for hybrid workforces and the revenue impact as individuals now routinely work outside the office.

Register here.

The Washington Court of Appeals upheld the constitutionality of a county document recording surcharge that financed affordable housing, eviction prevention, and housing stability services. A trade association of homebuilders challenged the surcharge as a property tax that violates the uniformity requirement of the Washington Constitution. The court held that the surcharge was a tax because its primary purpose was to raise revenue for a desired public benefit. However, the surcharge was not subject to the uniformity requirement because it was an excise tax, not a property tax. The document recording surcharge was not a property tax because it is not levied on property ownership, but rather on “the exercise of rights in and to property or the exercise of a privilege.”

Bldg. Indus. Ass’n of Washington v. State of Washington, No. 57502-7-II, (Wash. Ct. App. 2024).

On February 15, 2024, a New York state administrative law judge concluded that a winery “used” its property and qualified as a New York manufacturer under the state’s Qualified New York Manufacturer (QNYM) provisions, even though it had no employees at the winery and outsourced its land management operations to an independent land management contractor. 

The New York State Department of Taxation and Finance issued an assessment to the winery, asserting that it did not qualify as a QNYM. The QNYM program provides multiple benefits to corporate taxpayers in New York, including a 0% corporate franchise tax rate.  In order to qualify, taxpayers must satisfy at least one of two tests. The first test – at issue in this case – requires that taxpayers (1) be “principally engaged” in the production of goods by manufacturing, viticulture, etc., (2) owned at least $1,000,000 of qualifying property in New York, and (3) principally used the property in the production of goods by manufacturing, viticulture, etc. 

The Department argued that the winery was not entitled to the QNYM benefits on the basis that it did not principally use its qualifying property in the production of goods. But the ALJ rejected the Department’s argument that the taxpayer’s use of the third-party contractor was impermissible because nothing in the QNYM provisions suggested that property is not “used by” its owner if the owner contracts with a third-party to perform labor on or related to the property. The ALJ also rejected the Department’s argument that the property was not used in late December 2016 (and that the benefits were thus unavailable for that year). While the grapes were in a dormancy period at that time, it is still a “crucial part of the annual growth cycle for grapes.” 

In the Matter of the Petition of E. & J. Gallo Winery, DTA Nos. 830277, 850146 (N.Y. Div. Tax App. Feb. 15, 2024).

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: A Chancery Court in which state recently held that software licenses are intangible property, therefore the gross receipts from the sale of software licenses are not subject to tax under the state’s Business Tax Act?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!

On February 14, 2024, the California Office of Tax Appeals (OTA) denied the California Franchise Tax Board’s (FTB) request for rehearing in the Appeal of Microsoft Corporation and Subsidiaries (OTA Case No. 21037336). Microsoft is allowed to include 100 percent of its foreign dividend income in its sales factor denominator. This is a huge opportunity for similarly situated California water’s-edge taxpayers. 

Read the full Legal Alert here.

On January 25, 2024, the New York State Supreme Court Appellate Division ruled against the taxpayer, finding that the taxpayer’s equipment did not qualify for exclusion from real property tax. Taxpayer, SLIC Network Solutions, provides internet, telephone and cable television services via fiber-optic cables to customers throughout New York State. Under the State’s real property tax law, this type of equipment is taxed as “local public utility mass real property” “when owned by other than a telephone company.” Taxpayer argued that its fiber-optic cables are excluded from the definition of public utility mass real property because the cables are used in the “transmission of . . . cable television signals.” The Hearing Officer rejected this argument and the Supreme Court upheld the determination.

Real property equipment “used in the transmission of news or entertainment radio, television or cable television signals” is excluded from the definition of local public utility mass real property, however courts have interpreted the exclusion as applying to fiber-optic installations only if they are “primarily or exclusively used” for one of the excluded purposes. Accordingly, the taxpayer argued that the primary use of the fiber-optic cables was to provide cable television services and that its provision of internet and telephone services did not undermine that primacy. To support its argument, the taxpayer produced testimony and affidavits asserting the taxpayer’s extensive use of the cables for transmitting television signals as well as the significant company costs attributable to the television business. The Appellate Division agreed with the trial court that the taxpayer had not demonstrated its entitlement to the exclusion, since the taxpayer had not provided evidence showing the “ancillary nature” of the internet and phone services, or comparing the use of fiber-optic cables for cable television signals to the level of usage of the same lines for internet and telephone services.

Matter of SLIC Network Sols., Inc. v. N.Y. State Dep’t of Taxation & Fin., 2024 NY Slip Op 00342, (App. Div.).

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: Which state’s House recently proposed a bill that would limit property taxes on machinery used to manufacture critical materials?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!

On February 7, 2024, the South Dakota Supreme Court held that South Dakota’s use tax, as applied to the taxpayer, did not violate the Commerce or Due Process Clauses of the Fourteenth Amendment, despite some of the taxed equipment being used in South Dakota for only one day.

The taxpayer, a Minnesota-based company that specializes in installing drain tile for farming and government applications throughout the United States, completed drain tile projects in South Dakota using equipment that had been purchased in other states and on which the taxpayer had not paid sales tax in those states. The South Dakota Department of Revenue imposed a use tax on this equipment, including equipment used in South Dakota for as little as one day.

The taxpayer argued that the application of use tax was unconstitutional because the tax imposed was not fairly related to benefits the taxpayer received and was disproportionate to taxpayer’s activity in South Dakota. Specifically, the taxpayer contended that its use of equipment in South Dakota was “limited,” therefore the taxpayer did not receive benefits commensurate with the tax it paid. Additionally, the taxpayer argued that the tax was disproportionate in light of the fact that 90% of the taxpayer’s activities occurred outside of South Dakota.

Applying the four-part standard described in Complete Auto Transit, Inc. v. Brady, the South Dakota Supreme Court held the Department’s application of use tax to the taxpayer satisfied the Commerce Clause. The court held that the tax was fairly related to the benefits provided to the taxpayer because it enjoyed the same benefits as any other business present in the state and was free to use the equipment in state as often as it wanted. Moreover, the court found that the use tax statute was externally consistent and did not require that the equipment be “at rest” to be subject to the tax. Rather, the taxed activity was “simply an in-state use of equipment that was purchased outside the state without ever having paid sales taxes on the property.”

Ellingson Drainage, Inc. v. S.D. Dep’t of Revenue, 3 N.W.3d 417 (S.D. 2024).

A California appellate court held that Proposition 39, which mandated single-sales factor apportionment, did not violate the single-subject rule. In 2012, California voters enacted Proposition 39, which established a program to promote the creation of clean energy jobs. It funded the program by eliminating the option for taxpayers to apportion its California tax based on a three-factor apportionment formula, requiring instead single-sales factor apportionment. A Texas-based provider of credit score and credit reporting services paid tax to California pursuant to the single sales-factor method and filed a complaint for refund on the basis that Proposition 39 was invalid under the single-subject rule for ballot initiatives. The court held that Proposition 39 did not violate the rule because its purpose was to fund a clean energy job creation program by raising taxes on some multistate businesses. The proposition’s provisions were “reasonably germane” to this purpose because “they provided the mechanisms to raise tax revenues and direct them to clean energy job creation.” Plus, the provisions were “functionally related” because the apportionment formula change funded the clean energy jobs program.

One Technologies LLC v. Franchise Tax Board, 314 Cal.Rptr.3d 718 (Cal. Ct. App. 2023).