By Zachary Atkins and Timothy Gustafson

The Iowa Supreme Court passed on an opportunity to breathe life into equal protection jurisprudence and, instead, rejected Qwest Corporation’s challenge under the Iowa Constitution to a property tax regime that taxes the personal property of incumbent local exchange carriers (ILECs) but not competitive long distance telephone companies (CLDTCs)

Fees masquerading as taxes have become increasingly common. And, as illustrated by the Iowa Supreme Court’s recent decision in Kragnes v. City of Des Moines, Docket No. 09-1473 (Mar. 2, 2012), in some cases all or part of a fee may constitute an illegal exaction to the extent it is deemed to be a tax. In Kragnes, the Iowa Supreme Court affirmed the district court’s holding that municipal franchise fees imposed on gas and electric services for almost 10 years exceeded the city’s reasonable costs of regulating the gas and electric franchises and, thus, the difference between the tax collected by the city and the city’s reasonable costs constituted an illegal tax.

Continue Reading City of Des Moines and Residents in ROW over Franchise Fees

Iowa and Kansas recently issued rulings regarding the taxability of cloud-based software applications and online training services. While the conclusions reached by both states—that the services are not taxable—are generally the same, the reasoning relied upon by each department of revenue illustrates the ongoing uncertainty of applying state sales and use tax laws to cloud computing services.

The Iowa Department of Revenue (IDOR) looked to the state’s statutory authority and acknowledged that the taxability of “cloud computing has not been expressly addressed by the Iowa Code.” Nonetheless, the IDOR determined that the sale of hosted software is not taxable because the Iowa Code provides that a “taxable ‘sale’ of tangible personal property does not occur if the substance of the transaction is delivered to the purchaser digitally, electronically, or by utilizing cable, radio waves, microwaves, satellites, or fiber optics.” I.C. § 423.3(67). Likewise, the IDOR considered web-based training to be nontaxable because “software training” is not an enumerated service under the Iowa Code.

Continue Reading Iowa and Kansas: Remote Access to Software is Not Taxable . . . Or Is It?

In shocking similarity to the once-popular Amy Winehouse song “Rehab,” the U.S. Supreme Court denied certiorari in two nexus cases: KFC Corp. v. Iowa, 792 N.W.2d 308 (Iowa Dec. 30, 2010) and Lamtec Corp. v. Wash. Dep’t of Revenue, Docket No. 83579-9, en banc (Wash. Jan. 20, 2011) but left open the possibility to hear DIRECTV, Inc. v. Levin, 128 Ohio St.3d 68 (Ohio Dec. 27, 2010).

KFC is an economic nexus case involving the license of intangibles. KFC did not have any employees or property within Iowa; KFC licensed the use of trademarks and other intangibles to independent franchisees in the state in exchange for royalties. The Iowa Supreme Court held that KFC’s license of the intangibles was the “functional equivalent” of physical presence under Quill and that, in the alternative, physical presence was not required to find substantial nexus for corporate income tax purposes.

The Court also denied certiorari in Lamtec, where the taxpayer’s sole presence in the state was irregular employee visits to customers. The Washington Supreme Court determined that Lamtec had nexus with Washington for Business and Occupation (B&O) tax purposes and raised additional questions regarding how Washington views the physical presence test relating to the B&O tax, stating: “We conclude that to the extent there is a physical presence requirement, it can be satisfied by the presence of activities within the state.” (emphasis added).

Continue Reading These Cases Tried to Go to the U.S. Supreme Court, But the Court said “No…No…Oh?”

Taxpayers frequently challenge tax laws based on equal protection grounds, but states generally prevail on the rather easily met rational basis test. In a noteworthy Iowa decision, Qwest, an incumbent local exchange telecommunications company (ILEC), successfully argued that the application of two property tax exemptions resulted in unconstitutional discrimination against it in favor of competitive long distance companies (CLDCs) and wireless companies. Qwest Corp. v. Iowa State Bd. of Taxation and Revenue, Docket No. CV008413 (Iowa Dist. Ct. Aug. 17, 2011).

The first subject of Qwest’s challenge was an exemption for personal property acquired by CLDCs after 1995 that was available to “long distance telephone companies,” the definition of which specifically excluded ILECs like Qwest. The second aspect of Qwest’s challenge involved the state’s central assessment property tax scheme. Iowa law exempts all personal property from tax, but for centrally assessed telephone companies like Qwest, the state treats all property as “real property.” All “telephone companies” operating a telecommunications line in the state are subject to central assessment. The state did not classify wireless companies as telephone companies, because the wireless companies use radio wave technology and not a network of cable and wires. Therefore, Qwest paid tax on the value of all of its property, while wireless companies did not pay tax on personal property.

Continue Reading Iowa Court Upholds Equal Protection Challenge

The Iowa Supreme Court and Iowa Department of Revenue issued interesting opinions that continue to expand corporate income tax nexus arguably beyond the limitations of the Commerce Clause of the U.S. Constitution.

The Iowa Supreme Court held that physical presence is not a required ingredient of the secret recipe for substantial nexus in the corporate income tax context. KFC Corp. v. Iowa Dep’t of Revenue, No. 09-1032 (Iowa Dec. 30, 2010). The Department issued a corporate income tax assessment to KFC Corp., which had no employees or property in Iowa. KFC’s only connection with Iowa was that it licensed the KFC intangible property to independent franchisees operating or conducting business in Iowa. The Iowa Supreme Court held that, despite this tenuous connection and no physical presence, KFC had substantial nexus in Iowa.

Continue Reading Iowa Supreme Court Deep-Fries Commerce Clause