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The Texas Comptroller determined that a taxpayer was required to include in its sales factor numerator its receipts from sales of bunker fuel oil to foreign ships in Texas ports. The taxpayer argued that the sales were not from “business done” in Texas even though the oil was delivered to ships in Texas ports. The Comptroller rejected this argument, citing a regulation that provides that receipts from transactions occurring in Texas waters are considered Texas receipts. The taxpayer further argued that this regulation is unconstitutional, but the Comptroller declined to address the argument due to its lack of authority to rule on constitutional matters. (Hearing No. 114,750).

A New York State Administrative Law Judge ruled that the retroactive application of amendments to the state’s Empire Zones statute—disqualifying a taxpayer from the tax reduction credits—did not violate the taxpayer’s constitutional due process rights. Acknowledging that the stated public purposes of curtailing perceived abuses and raising revenue were better accomplished in prospective legislation, the Division nevertheless found that the application of statutory amendments to the tax year in which the amendments were enacted was an “extremely short period of retroactivity” that outweighs the lack of a public purpose. (In the Matter of the Petition of NRG Energy, Inc., Dkt. No. 826921 (N.Y. Div. Tax App. 11/08/2018)).

The Louisiana Court of Appeal, First Circuit held that a taxpayer was not entitled to a refund of franchise tax under an interpretation of the franchise tax law by the Department of Revenue that was struck down in Utelcom, Inc. v. Bridges, 2010-0654 (La. App. 1 Cir. 9/12/2011); 77 So. 3d 39. In Bannister, the court relied on La. R.S. 47:1621(F) finding that such section precluded the Department from issuing a refund because the tax was paid as a result of a “mistake of law arising from the misinterpretation by the secretary of the provisions of any law or of the rules and regulations promulgated thereunder.” Instead, the taxpayer could only seek to recover franchise tax paid under a mistaken interpretation of law by the Department by (1) paying the tax under protest (and filing a petition to recover the payment under protest), or (2) seeking recovery from the Louisiana Legislature under the claim against the state procedure. (Bannister Properties, Inc. v. State of Louisiana, Dkt. No. 2018-0030 (La. App. 1 Cir. 11/02/2018)).

On November 2, 2018, the Chief Counsel of the California Franchise Tax Board issued Chief Counsel Ruling No. 2018-01, determining: (1) that a taxpayer servicing mortgages was not a financial corporation for purposes of the corporation franchise tax; and (2) gains from interest rate hedging contracts are general income, not money or moneyed capital. Although the taxpayer earned origination income, interest income and net gains from sales of mortgages, its primary revenue was from servicing the mortgage loans.

Among other differences, California taxes financial corporations at a higher corporation franchise tax rate than general corporations.

First, the Chief Counsel determined that the taxpayer was not a financial corporation because it derives more than 50% of its total gross income from servicing mortgages. A financial corporation is a corporation that predominantly deals in money or moneyed capital in substantial competition with the business of national banks. While originating and selling mortgage loans constitutes dealing in moneyed capital, servicing loans does not. Rather, servicing loans generates income from a service activity. Because the taxpayer predominantly engaged in service activities instead of dealing in money or moneyed capital, it was not a financial corporation.

Second, the Chief Counsel determined that gains from interest rate hedging contracts are general income, not money or moneyed capital. The hedging contracts are not specifically listed as money or moneyed capital, nor are they similar to the listed examples. Thus, the hedging contracts would not qualify the taxpayer as a financial corporation.

Chief Counsel Ruling No. 2018-01, California Franchise Tax Board (Nov. 2, 2018).

The Texas Comptroller of Public Accounts recently ruled that the physical presence nexus standard continues to apply for the Texas Franchise Tax, even after South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018). As a result, a California company whose only contacts with Texas were sales of digital products, software and e-commerce transaction processing and subscription management services to third parties did not have franchise tax nexus with the state. In the Comptroller’s view, retaining ongoing rights in software used in Texas, by itself, is not sufficient to create physical presence in the state. The Comptroller observed that although Texas has not yet moved away from the physical presence requirement, the agency will give “ample notice through various means” of any change to the current requirement.

Texas Private Letter Ruling No. No. 201809005L (09/07/2018).

This is the eleventh edition of the Eversheds Sutherland SALT Scoreboard, and the third edition of 2018. Each quarter, we tally the results of what we deem to be significant taxpayer wins and losses and analyze those results. This edition of the SALT Scoreboard includes a discussion of California combined reporting, insights regarding the Washington bad debt deduction, and a spotlight on apportionment cases.

View our Eversheds Sutherland SALT Scoreboard results from the third quarter of 2018!

The California Court of Appeals affirmed a trial court’s holding that the California Franchise Tax Board can require interstate unitary businesses to use combined reporting, even though combined reporting is optional for intrastate unitary businesses. The taxpayer, a motorcycle retailer, argued that the differential treatment of interstate and intrastate business gave a direct commercial advantage to intrastate unitary companies and therefore discriminated against interstate commerce in violation of the Commerce Clause of the United States Constitution. The appellate court rejected the taxpayer’s argument and held that the legitimate state interest to accurately measure and tax all income attributable to California outweighed any possible discriminatory effect.

Harley-Davidson, Inc. v. California Franchise Tax Bd., Dkt. No. D071669 (Cal. Ct. App. Aug. 22, 2018).

The New Mexico Court of Appeals upheld the imposition of gross receipts tax on certain trademark-related royalty fees received by an out-of-state corporation pursuant to its franchise agreements with New Mexico businesses. The court examined whether, following statutory amendments in 2007, the royalty fees flowing from a limited trademark license provision contained within the franchise agreements “should be treated as being received from the grant of a franchise” and, thus, subject to the gross receipts tax, “or from the licensing of a trademark” and, therefore, not subject to the gross receipts tax. The court concluded that the trademark licensing provision was “central to the overall franchise and should be treated as part of the franchise,” and not as a standalone trademark licensing agreement, even though the provision was separately stated and itemized in the agreements.

A&W Rests., Inc. v. Taxation & Revenue Dep’t of New Mexico, No. A-1-CA-35999 (N.M. Ct. App. Aug. 22, 2018).

The Texas Comptroller ruled that, for Texas apportionment purposes, the sale for resale of mobile voice and data services, purchased from third-party mobile telecommunications carriers and sold to an out-of-state third-party retailer using the carrier’s network infrastructure, is characterized as the sale of telecommunications services and internet access services, respectively, not the sale of an intangible right to access a service. Accordingly, unlike receipts from the sale of an intangible asset which are sourced to the purchaser’s location, the taxpayer’s service receipts were sourced to the state to the extent that the Internet was accessed in Texas or the mobile voice services were provided in Texas. Private Letter Ruling No. 201711016L (Nov. 27, 2017).

By Charles Capouet and Charlie Kearns
 
On November 6, 2017, the Minnesota Department of Revenue issued a Revenue Notice advising taxpayers that it acquiesces to the Minnesota Tax Court’s decision in Sinclair Broadcast Group, Inc. v. Commissioner of Revenue. As a result, the Department now takes the position that Minnesota’s version of the I.R.C. § 382 net operating loss limitation is “calculated in the same manner as the federal section 382 limitation, and is not apportioned for franchise tax purposes.” For the years at issue in Sinclair, I.R.C. § 382 imposed an annual limitation on an acquiring corporation’s use of the net operating losses of an acquired corporation in the amount of approximately 5% of the acquired corporation’s stock value. The Minnesota Tax Court rejected the Commissioner’s position that Minnesota’s version of the limitation must be applied twice, both on a pre-apportioned and, subsequently, a post-apportioned, basis. Revenue Notice No. 17-09: Corporate Franchise Tax – Net Operating Loss Carryforwards – Sinclair Broad. Grp., Inc. v. Comm’r of Revenue, No. 8919-R, 2017 (Minn. Tax Ct. Aug. 11, 2017), Minn. Dep’t of Revenue (Nov. 6, 2017).