In Georgia Letter Ruling SUT-2016-24, the Georgia Department of Revenue ruled that sales of software equipment delivered to a Georgia assembly facility on an out-of-state customer’s behalf were subject to Georgia sales and use tax. In the ruling, the taxpayer sold technology solutions, which were comprised of licenses of software, sales of hardware and the performance of services. The sales agreement between the parties reflected that title did not pass to the customer until payment was received in full by the seller. Nonetheless, prior to the passage of title, the seller would send the equipment to an assembly facility located in Georgia. The Department concluded that the assembly facility was accepting the equipment on the purchaser’s behalf notwithstanding the fact that unencumbered title had not yet passed to the purchaser. Because O.C.G.A. § 48-8-77(b)(1) provides that sales should be sourced to Georgia for sales tax purposes when the purchaser receives the item in Georgia, the sales were Georgia sales even where the customer was located outside the state. Georgia LR SUT-2016-24.
By Madison Barnett and Stephanie Do
Many foreign companies are surprised to learn that US states are not generally bound by income tax treaties entered into by the US with foreign countries. Under these treaties, for US federal income tax purposes, certain non-US corporations and residents of foreign countries may be exempt from tax or taxed at a reduced rate. Most US states, however, also impose income taxes on corporations and individuals, and US tax treaties are generally not binding on states. As a result, the applicability of US tax treaties to state income taxes must be determined on a state-by-state and treaty-by-treaty basis. Some states expressly respect US tax treaties, such as Florida, Massachusetts, South Carolina and Virginia. Other states do not expressly respect treaties, but may implicitly do so by tying the state tax base to the US federal tax base in a manner that effectively conforms to federal treaty protections.
Some states will only apply a treaty to their state income taxes if the treaty specifically limits state taxation. Consequently, foreign taxpayers that are protected from US federal income tax by an income tax treaty may nevertheless have a state income tax filing obligation and potential state tax liability in the US states in which they do business.
On March 13, 2017, the State of Arkansas Department of Finance and Administration (the Department) issued Legal Opinion No. 20170217 addressing the applicability of the US-Canada Income Tax Treaty to Arkansas personal income tax. The Department determined that the treaty applies only to US federal income taxes, such that “income taxes levied by individual states, such as Arkansas, do not fall within the treaty’s jurisdiction.” As a result, “the treaty’s provisions are generally not recognized by this state.”
The Department also determined that the Arkansas credit for personal income taxes paid to another US state does not extend to taxes paid to the Canadian government or a Canadian province. Non-US taxes may be deducted from gross income for Arkansas personal income tax purposes, but not credited.
On April 10, 2017, a Tennessee Chancery Court ordered that the Tennessee Department of Revenue is temporarily prohibited from enforcing a regulation that requires out-of-state retailers making annual sales in excess of $500,000 to collect and remit sales tax. The Order arises out of a dispute between the Plaintiffs and the Department of Revenue regarding the Constitutionality of the regulation. The regulation, which became effective January 1, required out-of-state retailers to register with the Department of Revenue by March 1 and to begin collecting state sales taxes after July 1. The Department of Revenue and Plaintiffs, American Catalog Mailers Association and NetChoice jointly requested the court’s order to limit uncertainty in the marketplace while the case is pending. The Court’s order also provides that retailers who may be subject to the regulation may voluntarily comply with the regulation during the pendency of the litigation. Am. Catalog Mailers Ass’n v. Tenn. Dep’t of Revenue, Tenn. Ch. Ct., No. 17-307-IV (complaint filed Mar. 30, 2017).
The Georgia General Assembly passed significant tax legislation impacting selected industries, but failed to pass a number of broader tax bills:
- Passed legislation impacts telecommunications, film production and music production companies and causes the review of all income and sales and use tax exemptions.
- Stalled legislation included the reduction of the individual income tax rate, remote sales tax collection, taxation of transportation companies, and the treatment of refunds for direct payment permit holders.
Taxpayers should expect any stalled legislation to be re-introduced in the next legislative session.
The Kentucky Court of Appeals held that the Kentucky Department of Revenue must publish final administrative rulings, even when those rulings are not appealed to the Board of Tax Appeals. The Office of Attorney General had previously determined that the Department’s decision not to provide even redacted copies of final rulings in administrative protests was supported by Kentucky law, which prohibits or restricts disclosure of certain taxpayer information. After a trial court held that all rulings should be disclosed, the Department appealed, contending that final rulings not subsequently appealed should not be subject to inspection because they contain private taxpayer information that is not otherwise a matter of public record and that cannot easily be segregated from non-exempt information.
Ruling against the Department, the Court of Appeals concluded that the Department had “taken an unreasonably and overly broad view of” the state’s privacy laws. The court explained that final rulings by the Department must contain a general statement of the issues in controversy and the Department’s position with respect to those issues; “[c]onsequently, the substantive portions of final rulings contain a wealth of information relative to the implementation of [Kentucky’s] tax laws.” Because redacting the rulings would sufficiently protect the privacy of the taxpayers involved in the rulings, the Open Records Act requires their publication. Finance and Administration Cabinet v. Sommer, No. 2015-CA-001128-MR (1/13/2017).
The Florida Department of Revenue determined that a reinsurer did not have nexus with Florida for corporate income tax purposes. The Department first asserted that an insurer or reinsurer would have nexus with Florida if it was authorized to transact business in the state. The Department also stated that nexus would exist if an approved reinsurer reinsured policies from an insurer domiciled in Florida. In this case, the reinsurer did not have nexus with Florida because: (1) it was not an approved reinsurer and was not registered with the Florida Office of Insurance Regulation; and (2) the ceding companies were not domiciled in Florida. The Department also addressed an insurance company’s apportionment factor, which depends on whether the ceding insurance companies are resident, or have a regional home office, in Florida. Fla. Technical Assistance Advisement No. 17C1-001, Fla. Dep’t of Rev., Jan. 13, 2017.
The Alabama Tax Tribunal held that a taxpayer banking corporation properly deducted dividends received from an affiliated real estate investment trust (REIT) for financial institution excise tax purposes because the REIT qualified as a “corporation.” The Tribunal rejected the Department of Revenue’s assertion that the REIT was not a corporation based on its tax treatment as a REIT, explaining that the deduction applies more broadly to dividends received from payor entities that are corporations organized and existing under Alabama law. The Tribunal further disagreed with the Department of Revenue’s assertion that the REIT was a financial institution and therefore was not a “corporation,” finding that the REIT did not meet the requirements to qualify as a bank. Ameris Bank v. Ala. Dep’t of Revenue, Docket No. BIT. 16-255 (Ala. Tax Trib. Feb. 9, 2017).
The Georgia Tax Tribunal, in its first published decisions in more than a year, held that:
- Scholastic Book Clubs has nexus in Georgia and must collect sales tax as a result of its relationship with teachers in the state; and
- In a case affording significant deference to the Department’s regulations, a taxpayer that elects to claim one tax credit for creating jobs cannot change its election in later tax years and instead claim an alternative credit.
The West Virginia Supreme Court held that a credit for taxes paid to other states on purchases of motor fuel is constitutional only if interpreted to include taxes paid to subdivisions of other states. The court determined that a credit that applies only to taxes paid to other states, and not localities, would violate both the fair apportionment and discrimination prongs of the U.S. Supreme Court’s Complete Auto test. If the court did not interpret the credit to include local taxes, a taxpayer who purchased motor fuel in a state without a local tax, or a taxpayer who purchased motor fuel in-state, would have a lower overall tax burden than a taxpayer who purchased motor fuel subject to a state and local tax. This would create a total tax burden on interstate commerce that is higher than an intrastate transaction, and therefore discriminate against interstate commerce. Although the statute’s terms apply only to allow a credit for taxes paid to other states, the court interpreted it to apply to local taxes as well, to avoid an unconstitutional application. No. 15-0935.
By Jessica Allen and Jeff Friedman
The Tennessee Department of Revenue (Department) released a letter ruling stating that a taxpayer’s charges for use of its web-based interface are subject to sales and use tax as the sale of ancillary services. The taxpayer’s proprietary software allows users to communicate through text and other messages on a single centralized web-based interface. The Department explained that the state imposes tax on the sale of telecommunications services and ancillary services. Telecommunication services are defined to include the transmission of data. Ancillary services include services associated with telecommunication services. Because the taxpayer’s web-based interface was “associated with, or incidental to, the provision of telecommunication services,” the interface qualifies as the sale of taxable ancillary services and therefore is subject to sales and use tax. Tenn. Letter Ruling 16-09, Tenn. Dep’t of Revenue (issued Nov. 10, 2016).