Meet little miss Emmy! Our August Pet of the Month is a rescue pup of Chris Emigholz, Vice President of Government Affairs at the New Jersey Business & Industry Association.

Emmy is three and a half years old, and was welcomed into the Emigholz family several years ago as a Christmas gift to Chris’ kids. They aren’t quite sure of her breed, but they do think she’s a mix of a retriever and some sort of hound!

As inappropriate as it may be, she loves anything sweet, including Twizzlers, gummy bears and marshmallows.

Her affinity for sweet treats is matched by her love for walks with her family, as well as long car rides. She’s very loving, and has no concept of her size, often wanting to jump into your lap or next to you in bed.

When she was a young puppy, she ran out of the front door in front of Chris. A pursuit ensued, and Chris followed her for two hours until he finally was able to lure her with a piece of meat into someone else’s backyard about a mile from home. The police even got involved and laughed at how fast she was.

We’re excited to welcome troublemaking Emmy into the Pet of the Month crew!

 

On July 21, 2022, the Regular Division of the Oregon Tax Court ruled that flights operated by all members of a unitary group are included in a taxpayer’s departure ratio and that receipts for selling tickets on flights operated by third parties do not constitute transportation revenue under the state’s special industry apportionment rules for airlines.

Alaska Airlines entered into capacity purchase agreements with an affiliate airline, Horizon Air Industries, to purchase all of Horizon’s seat capacity. However, Alaska eliminated Horizon’s flight data in calculating its departure ratio (one component used to compute an airline’s sales factor in Oregon) on amended returns for 2012-2014, arguing that each separate airline entity must compute its own departure ratio regardless of whether the entities are part of a single unitary group and apply that ratio to its own transportation revenue. The Department of Revenue rejected Alaska’s amended position at audit and included Horizon’s flight data in the filing group’s departure ratio. Alaska also sold tickets for flights on aircraft operated by other, non-affiliated airlines, excluded the receipts from its transportation revenue, and instead sourced the receipts using the standard cost-of-performance rule. Here the Department disagreed on the ground that all revenue from airline ticket sales is included as transportation revenue, regardless of which airline operates the plane.

On appeal, the Court first held that the “taxpayer” in Oregon’s consolidated reporting regime includes all corporations included in the consolidated state return, such that the departure ratio used in the special airline apportionment rules necessarily includes the aggregate flight data for all airlines filing as part of a single return. The Court then ruled that transportation revenue only includes revenue from operating aircraft that move passengers or freight, such that Alaska’s receipts from tickets for flights operated by other airlines was properly excluded from transportation revenue and sourced based on costs of performance.

State of Oregon v. Alaska Airlines, Inc., TCs 5406, 5407 (Or. Tax Ct., 07/21/2022).

The Oregon Tax Court, Regular Division, held that P.L. 86-272 did not preclude Oregon from imposing its excise (income) tax on an out-of-state manufacturer of cigarettes and other tobacco products based on two activities. First, the court held that the manufacturer’s mandate that the in-state wholesalers accept product returns was not a protected activity. The manufacturer contractually required in-state wholesalers of its products to accept returns of all of the products.  If the products were unsalable, the manufacturer would provide the wholesaler with a credit. Rejecting a common law “agency” analysis, the court found that these activities were performed, under the language of P.L 86-272, “on behalf of” the manufacturer. The court therefore treated the activities as if the manufacturer had performed them itself. As the court explained, “The absence of a right to control might negate an agency relationship, but it does not negate the possibility of action on behalf of another.” Second, the court held that the manufacturer’s “Pre-Book Order” process was not a protected activity. The manufacturer’s employees solicited sales for in-state wholesalers and used the “Pre-Book Order” process to help ensure the retailers completed the sales. Specifically, the court found that “addressing Retailers’ failure to follow through” with orders by implementing the process was something the manufacturer had reason to do apart from soliciting orders and was thus unprotected.

Based on the court’s broad reading of the phrase “on behalf of,” and narrow reading of “solicitation,” taxpayers relying on P.L. 86-272 for Oregon purposes should evaluate their facts in light of the Santa Fe decision.

Santa Fe Natural Tobacco Co. v. Dep’t of Revenue, TC 5372 (Or. Tax Court, Rev. Div., Aug. 23, 2022).

In this episode of the SALT Shaker Podcast, Eversheds Sutherland Associate Jeremy Gove welcomes Partner Jeff Friedman for a special edition of the podcast, filled with Jeremy’s favorite concept – is something overrated, or underrated? This time, all of his questions deal with state and local tax, from P.L. 86-272 to digital advertising taxes. Plus, Jeff drops a special challenge for our listeners!

Jeremy doesn’t sway too far from the norm, and ends this episode with a non-tax overrated or underrated question – how do you feel about food expiration dates?

Questions or comments? Email SALTonline@eversheds-sutherland.com. You can also subscribe to receive our regular updates hosted on the SALT Shaker blog.

 

 

 

 

 

Listen now:

Subscribe for more:

   

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 recently introduced a video game tax credit?

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. Answers will be posted on Saturdays in our SALT Shaker Weekly Digest. Be sure to check back then!

The Alaska Supreme Court found that Alaska’s combined reporting statute requiring taxpayers to include certain foreign affiliates in its income tax return was constitutional. The court rejected the taxpayer’s arguments that Alaska’s tax haven corporation reporting statute was (i) void for vagueness as it violated the Due Process Clause, (ii) discriminated against interstate commerce in violation of the Commerce Clause, and (iii) was arbitrary and irrational under the Due Process Clause.

The statute in question, AS 43.20.145(a)(5), requires Alaska taxpayers to include in their combined return:

  • (5) a corporation that is incorporated in or does business in a country that does not impose an income tax, or that imposes an income tax at a rate lower than 90 percent of the United States income tax rate on the income tax base of the corporation in the United States, if
    • (A) 50 percent or more of the sales, purchases, or payments of income or expenses, exclusive of payments for intangible property, of the corporation are made directly or indirectly to one or more members of a group of corporations filing under the water’s edge combined reporting method;
    • (B) the corporation does not conduct significant economic activity.

Subpart A and Subpart B are only separated by a semicolon – but neither “and” nor “or”, as is common –  giving rise to the dispute that this provision was unconstitutionally void for vagueness as the statute did not provide notice as to what affiliates are required to be included in the return.

The Alaska Supreme Court rejected the taxpayer’s vagueness argument, finding that when evaluating whether a statute is void for vagueness, a court is tasked with looking beyond the terms in the statute to its history, case law, and other provisions that can assist in establishing a reasonably clear meaning. The court also noted that because the statute in question is a civil statute, and not a criminal one, a more lenient vagueness standard applies. Given these interpretive tools, and the more lenient vagueness standard, the court determined that the law was not unconstitutionally vague, and using the disjunctive “or” between Subparts A and B was appropriate.

The court also rejected the taxpayer’s Commerce Clause challenge, finding that the law was not facially discriminatory because filing a return was not a discriminatory burden, and the law had no discriminatory effect on interstate commerce—which depends on the apportionment formula, which was not challenged.  Finally, the court found that the law was not arbitrary and irrational under the Due Process Clause, noting that the law was based on the reporting threshold used by the IRS, and simply because a law is characterized as numerically arbitrary does not make it constitutionally arbitrary.

Department of Revenue v. Nabors International Finance Inc. & Subsidiaries, No. S-17883/17903 (Alaska, Aug. 5, 2022).

 

TEI has designed a unique seminar for those who manage state tax audits. This in-person program includes sessions on best practices to manage audits, a panel of current and retired state tax court judges, a panel of state DOR audit directors, and a session led by an expert on written advocacy.

Eversheds Sutherland is proud to sponsor the 2022 State and Local Tax Controversy Program, an essential day and a half event for in-house tax professionals, and part of TEI’s 3-day Audits and Appeals Annual Seminar, covering US federal and SALT controversy matters.

We hope you can join us! Register today: https://bit.ly/3NTWanS

The District of Columbia Office of Administrative Hearings held that the two financial institution subsidiaries of Petitioner, a credit and charge card issuer company, should have included in their payroll factor denominator only the payroll attributable to the financial institution entities. In other words, when calculating their payroll factor, Petitioner’s financial institution subsidiaries should have excluded any payroll generated by Petitioner’s non-financial institutions, in spite of filing as part of a combined group that included both types of entities. Petitioner filed corporation franchise tax returns in the District of Columbia on a combined basis with its 22 members (two of which were financial institutions). While the general D.C. apportionment formula is single sales factor, the apportionment formula for financial institutions also includes a payroll factor.

Petitioner and the Office of Tax and Revenue disagreed on the payroll factor denominator’s calculation. Petitioner contended that the payroll factor denominator for the two financial institution should include all of the entities in the combined group, relying on regulations in place before the apportionment formula was changed.  The OTR assessed the taxpayer, limiting the denominator to only the financial institutions’ payroll (i.e., only the entities with a payroll factor). The OTR relied on administrative guidance it had previously issued when D.C. switched from a four-factor apportionment formula—which included a payroll factor—to the single sales factor formula. Ultimately, the Office of Administrative Hearings held for the OTR, deferring to agency interpretation and concluding that Petitioner did not show that the tax was disproportionate to the amount of business it transacted in the District.

Order on Summary Adjudication, In the Matter of American Express Companies and Subsidiaries, D.C. Admin. Hearings Office, Case Nos. 2020-OTR-00029; 2020-OTR-00030 (April 19, 2022), motion for reconsideration den’d, (Jun. 15, 2022).

On August 10, 2022, the New York State Department of Economic Development issued emergency regulations to implement the state’s Digital Gaming Media Production Tax Credit Program. The legislature enacted the program to encourage, attract, and grow the digital game development industry in New York State. The purpose of the tax incentive, which was included in New York’s 2022 budget as an economic development incentive, is to offset some of the production costs associated with developing video games in New York State, including wages for technology and design job and leasing costs.

The credit is currently capped at $25 million, and will run from January 1, 2023 to December 31, 2027. Each year $5 million will become available to applicants. Specifically, certain digital gaming media production entities are allowed a 25% tax credit on qualified expenses for taxable years beginning on or after January 1, 2023 and before January 1, 2028. Taxpayers may be entitled to an additional 10% credit for costs incurred and paid outside of the metropolitan commuter transportation district (e.g., outside of New York City, Rockland, Nassau, Suffolk, Orange, Putnam, Westchester, and Dutchess Counties). Single taxpayers are limited to $1.5 million in tax credits per year.

The emergency regulations address the application process, which is split into initial and final application phases. In particular, taxpayers should be aware that they must submit an initial application prior to paying or incurring relevant costs, but no sooner than 90 days before the start date of their qualified digital gaming media production.

The notice published in the New York State Register serves as both a notice of emergency adoption and a notice of proposed rule making. The emergency rule is set to expire on October 22, 2022. The Department will accept public comments until 60 days after the notice’s publication. We will publish further updates as they are made, and members of our team are available to help answer any questions you might have about this credit.

NY Reg, Aug. 10, 2022, at 9-10.

In this episode of the SALT Shaker Podcast policy series, Eversheds Sutherland Associate Jeremy Gove takes a turn in the policy hot seat, and interviews Partner Nikki Dobay about her recent article in Tax Notes State, which analyzes two recently enacted measures – Idaho H.B. 677 and New Hampshire H.B. 1097.

Nikki and Jeremy explore the background of each new law, discuss the text of each, and review the impact each of these laws may have.

Jeremy’s turn at the surprise nontax question this week is inspired by his recent visit to the International Tennis Hall of Fame. If you had to choose, what’s the best Hall of Fame?

The Eversheds Sutherland SALT team has been engaged in state tax policy work for years, tracking tax legislation, helping clients gauge the impact of various proposals, drafting talking points and rewriting legislation. This series, which is focused on SALT policy issues, is hosted by Partner Nikki Dobay, who has an extensive background in tax policy.

Questions or comments? Email SALTonline@eversheds-sutherland.com. You can also subscribe to receive our regular updates hosted on the SALT Shaker blog.

Listen now:

Subscribe for more: