On April 5, for the CalTax Foundation’s April webinar, Eversheds Sutherland Partner Tim Gustafson will help discuss the OTA’s procedures for designating precedential opinions, closely examine some precedential opinions of interest, and analyze how authoritative these opinions will be for future OTA decisions. For more information and to register, click here.

In addition, on April 6, members of the SALT team will present a state and local tax seminar on a variety of state and local tax topics for the Denver chapter of TEI. Speakers and topics include:

  • The SALT Litigation Landscape: Trends & Developments – Jeff Friedman and Liz Cha
  • 2022 SALT Legislative Outlook – Nikki Dobay and Charlie Kearns
  • The State of New York: A New York Update for Non-New York Based Businesses – Ted Friedman and Michael Hilkin
  • All Things Digital: State Taxation of Digital Goods and Services – Michele Borens and Charlie Kearns
  • Local Taxes: Developments in Increasingly-Aggressive Local Taxation – Nikki Dobay and Tim Gustafson

Finally, Eversheds Sutherland Partner Charlie Kearns will present a webinar during COST’s 2022 Sales Tax/Audit Virtual Sessions webinar on April 7, covering various aspects of the Permanent Internet Tax Freedom Act. For more information and to register, click here.

 

The Southern District of New York denied a plaintiff-relator’s motion to remand a dispute over the defendant’s transfer pricing arrangement brought under the New York’s False Claims Act to New York state court. The plaintiff initiated the suit on behalf of the State of New York in state court alleging that the company did knowingly fail to comply with federal transfer pricing rules with regard to transactions with foreign affiliates, and seeking to recover unpaid New York state and city corporate franchise taxes.  The defendant, a Swiss limited liability company with a U.S. subsidiary headquartered in New York previously removed the action to federal court.

The relator alleges that the defendant kept two sets of books—one for business purposes and one for tax purposes—and the set of books the defendant’s accounting firm used in preparing the defendant’s New York tax returns was incomplete and did not properly reflect the defendant’s income. As part of its allegation, the plaintiff asserted that the defendant’s U.S. entity improperly used deductions that belonged to its foreign affiliates, thus depriving New York of taxable income. A defendant is liable to New York State under the New York False Claims Act if he/she “knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the state or a local government.” Unlike the federal False Claims Act, New York’s False Claims Act allows for relators to initiate qui tam actions regarding alleged New York tax law violations. The New York State Attorney General declined to prosecute or intervene in the plaintiff’s qui tam action.

In denying the plaintiff’s motion to remand to state court, the court concluded that the matter should remain in federal court because the controversy in issue centers on the scope of a corporation’s duty under the federal transfer pricing laws in dispute. The court found that each of the four factors used to determine whether a federal court can exercise jurisdiction over a state-law claim had been met: (1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress. In an additional order, the court invited Treasury, the Department of Justice, the New York State Department of Tax and Finance, and the New York attorney general to submit amicus briefs addressing the questions raised in the matter.

N.Y. ex rel. Am. Advisory Servs., LLC v. Egon Zehnder Int’l Inc., No. 21-CV-6884 (LJL) (S.D.N.Y., Mar. 22, 2022).

The New York State Tax Appeals Tribunal held that a limited liability company was entitled to a refund of sales tax paid on the purchase of a one-half interest in a Pablo Picasso painting because the taxpayer leased its share of the painting on the same day the painting was purchased. On April 20, 2015, an LLC and an individual (lessee) each purchased a one-half interest in the painting and paid sales tax on the total sales price. On the same day, the petitioner registered as a sales tax vendor with Department of Taxation and Finance. The lessee and the LLC also entered into a written one-year lease agreement that set forth that annual rental payment plus applicable sales tax on April 20, 2015. One year later, the LLC filed a refund claim for the sales tax paid on its one-half interest in the painting. The Department denied the refund claim, and the Division of Tax Appeals upheld the refund denial.

However, the Tribunal reversed the Division of Tax Appeals’ determination, holding that the petitioner established that it purchased the painting “for one and only one purpose: resale.” The Tribunal explained that liability for sales tax occurs at the time of the transaction and that the LLC established that at the time of purchase it intended to lease its one-half interest in the painting. The Tribunal was unpersuaded that the LLC could at some point divert the painting to its own collection was evidence of the petitioner’s intent at the time of purchase.

In the Matter of the Petition of Objet LLC, DTA No. 828673 (N.Y. Tax App. Trib. Feb. 28, 2022).

In this episode of the SALT Shaker Podcast, host and Eversheds Sutherland Associate Jeremy Gove welcomes fellow podcast emcee and Eversheds Sutherland Partner Nikki Dobay for a discussion of local taxes (aka the meat of the SALT sandwich). They dive into the impact of the Wayfair decision and how that decision has seemingly impacted local taxes, despite the Court not having directly ruled on the issue of local tax nexus. In addition, they discuss the proliferation of new taxes at the local level and a group of localities that has been formed to brainstorm about “new” ways to shore up revenue, including taxing NFTs— raising questions regarding the constitutionality and administration ability of these new ideas.

They conclude their discussion with Jeremy’s favorite question – overrated/underrated? This week, it’s about album re-releases. Are they worth it?

You can read more about local taxes in part 1 of Nikki’s column in Tax Notes State.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

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Join us in welcoming two very good boys to the SALT Pet of the Month family – Huck and Jax!

Huck and Jax belong to Jeff Newgard, Principal and Owner of Peak Policy. You may also recognize his voice from our SALT Shaker Podcasts, as he’s a regular guest. You can listen to his most recent episode here!

Huck and Jax are four-year-old Australian Shepherds, and worked their way in to the Newgard family’s hearts from a breeder in Scio, OR. Jeff originally wanted a German Shepherd, but he “compromised” with his wife and settled for choosing the two pups’ names. Huck is named after a relatively obscure character in The West Wing, and Jax is named after character Jax Teller in Sons of Anarchy. Both are excellent choices for any TV buff out there!

When they aren’t traveling on adventures, they love to eat ice cubes of any kind – from the refrigerator down to whiskey cubes. They also have a habit of barking at anything outside the window, like delivery drivers, people walking on the sidewalk, or, sometimes, even the wind blowing – which makes all of Jeff’s video calls extra special.

Jeff’s five-month-old daughter also benefits from their vocal cords, as they make sure their owners are aware of their baby sister’s every need.

We’re happy to have Huck and Jax in the SALT Pet of the Month crew!

The New Jersey Division of Taxation recently updated Technical Advice Memorandum 2015-1(R), first issued in 2015, regarding the tax treatment of transactions involving convertible virtual currency, such as Bitcoin. The updated TAM states that the state conforms to the federal treatment of convertible virtual currency for Corporation Income Tax and Gross Income Tax purposes. Since virtual currencies are treated as intangible property, the nexus safe harbor provided by PL 86-272 does not apply to a company selling virtual currency to New Jersey customers. Thus, an out-of-state company selling virtual currencies in New Jersey is doing business in the state for corporation business tax purposes. For wages paid in virtual currencies to New Jersey residents, the payor is responsible for income tax withholding, and contractors paid in virtual currency must determine their tax liability based on the fair market value of the virtual currency on the date of payment.

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: The Ohio Supreme Court recently held a specific test must be used when determining whether a taxpayer-bank (that purchased computerized services, allowing the bank to run transactions on a daily basis and maintain all of the bank’s accounting and financial records) purchased nontaxable custom software or taxable services. Which test was it?

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 Indiana Department of Revenue found that a holding company was properly excluded as a member of its affiliates’ financial institutions tax (FIT) combined group return because the company failed to establish nexus with the state.  The Department also decided that for purposes of the FIT, there is no distinction between business and nonbusiness income.

Under Indiana’s FIT combined group return rules, taxpayers that do not have nexus with the state are excluded from a combined group return. The holding company contended that it had nexus with Indiana through its membership interest in a wholly owned limited liability company that engages in broker/dealer services and is a disregarded entity from the holder company for income tax purposes.

But the Department of Revenue rejected this argument, explaining that although the broker/dealer had one employee located within Indiana, the broker/dealer had no offices in Indiana (its employee worked from other affiliate offices) and, during the tax years at issue, it earned no Indiana receipts. Further, the Department found that inclusion of the holding company in the FIT combined group return would not fairly represent the combined group’s income attributable to Indiana. The Department found that the broker/dealer’s activities within Indiana were de minimis, but that inclusion of the holding company in the FIT combined group return would have an outsized impact on the combined group’s adjusted gross income.

The Department then rejected taxpayer’s contention that income from its subsidiary’s sale of stock in another company was improperly included in the FIT tax base. Citing the business/nonbusiness income distinction under Indiana’s Adjusted Gross Income Tax, the taxpayer argued that income from such sale should have been allocated to the state of the subsidiary’s domicile. The Department disagreed, and concluded that there is no business/nonbusiness distinction under Indiana’s FIT. The Department noted that, under the FIT, adjusted gross income is determined by reference to the federal definition of taxable income under Internal Revenue Code § 63 and does not incorporate the business/nonbusiness income provisions found in Indiana’s gross income tax provision.

Letter of Findings 18-20210085, Indiana Department of State Revenue (Nov. 18, 2021).

On March 15, 2022, the Ohio Supreme Court determined that the Ohio Board of Tax Appeals (BTA) must apply the true object test when determining whether a bank purchased nontaxable custom software or taxable services. The taxpayer was a bank that purchased computerized services which allowed the bank to run transactions on a daily basis and maintain all of the bank’s accounting and financial records. The BTA found that while the software was somewhat customized, it was not fully customized and was thus taxable. In reaching that conclusion, the BTA said that the taxpayer had the burden to prove that the software was exempt custom software. The Supreme Court rejected the BTA’s interpretation that the taxpayer had the burden of proving the exemption here, stating that a transaction is taxable only when the true object is to obtain the work performed by the computer system, but not where the true object is obtaining personal and professional services that are coupled with work that the computer system performs. Thus, the Supreme Court remanded the case to BTA to apply a true object test to determine whether the software is taxable in Ohio.

On March 25, 2022, the California Franchise Tax Board (FTB) issued Legal Ruling 2022-01, on the subject “Numerator Assignment of Gross Receipts from Sales of Services to Business Entities.” The ruling sets forth the FTB’s position regarding the “relevant considerations and proper analysis” for sourcing sales of services under California’s current market-based sourcing rules.  It also poses four questions as “guidelines” to assist in the sourcing analysis:

  • Who is the customer?
  • What is the service provided?
  • What is the benefit being received?
  • Where is the benefit of the service received by the customer?

Using these four questions, the ruling walks through three different scenarios and applies the rules found in FTB’s market-sourcing regulation, 18 California Code of Regulations section 25136 (FTB Regulation 25136), to determine where the benefit of the service described in each scenario is received.

Notably, the benefit is determined to be received at the location of the taxpayer’s customer’s customer in two of the scenarios. Previously, the FTB had issued two Chief Counsel Rulings (“CCR”), CCR 2015-03 and CCR 2017-01, which interpreted FTB Regulation 25136 in situations where the benefit of a service potentially was received at the location of the taxpayer’s customer’s customer. These two rulings provided support for sourcing certain sales to the location of the business operations of a taxpayer’s direct customer. Legal Ruling 2022-01 revokes both CCRs.

Also of note is the timing of this particular ruling. The FTB has been in the process of amending FTB Regulation 25136 for over five years, with the project moving to formal proceedings in late 2021. See our discussion of California’s current market-sourcing provisions along with an overview of the regulation project here. How the position laid out in Legal Ruling 2022-01 will apply under an amended regulation remains to be seen. We will continue to follow the regulation process and provide updates on the status of the proposed amendments.