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Tax Base

Tax Reform in New York: Implications for Corporate America

by Arthur R. Rosen | Jul 17, 2014 | Allocation/Apportionment, Constitutional Issues, Income Tax, New York, Nexus, Tax Base

The corporate tax reform portion of the New York State 2014–15 Budget Bill resulted in major changes for virtually all corporations—even many that are not currently New York taxpayers. In this video (produced by SmartPros), McDermott partners Arthur Rosen, Maria Eberle, Lindsay LaCava and Leah Robinson will discuss the implications of New York State’s sweeping corporate tax reform, including changes to the Article 9-A traditional nexus standards, the combined reporting provisions, the composition of the tax bases and computation of tax, the apportionment provisions and the net operating loss calculation.

For more information on these issues, please click here for our Special Report, “Inside the New York Budget Bill: Corporate Tax Reform Enacted.”

Louisiana Taxpayers Beware Non-Uniform Sales Tax Treatment

by Stephen P. Kranz | Jun 25, 2014 | Local Tax, Sales Tax, Tax Base

On June 11, 2014, the Louisiana 24th Judicial District Court held in Normand v. Cox Communications Louisiana, LLC that video-on-demand and pay-per-view programming were not subject to Jefferson Parish sales tax because they were not tangible personal property, but non-taxable services.

Prior to this case, the taxability of pay-per-view and video-on-demand programming within the local jurisdictions of Louisiana was uncertain. While the State has taken the position that this programming is not subject to sales tax, Jefferson Parish has imposed local sales tax on these transactions.

Louisiana Revised Statutes § 47:301(16)(a) defines tangible personal property to “mean[] and include[] personal property which may be seen, weighed, measured, felt or touched or is in any other manner perceptible to the senses. Louisiana Administrative Code title 61, § I.4301 includes as tangible personal property “digital or electronic products such as … ‘on demand’ audio and video downloads.”

In Revenue Information Bulletin No. 10-015, the Louisiana Department of Revenue ruled that pay-per-view and video-on-demand movies were tangible personal property subject to Louisiana sales and use tax because they were perceptible to the senses and because, while the customers do not take title to the programs, they have control over paying fees to watch the programs. However, following pushback from the Louisiana business community, Louisiana Revenue Information Bulletin No. 10-028 temporarily suspended and No. 11-009 permanently repealed the implementation of No. 10-015 with regard to “Pay-Per-View and Video-on-Demand movies purchased for viewing by customers of cable television and satellite television providers.” The Louisiana Department of Revenue now takes the position that Pay-Per-View and Video-on-Demand programming is not subject to Louisiana sales and use tax.

Though the Jefferson Parish Code of Ordinances incorporates Louisiana’s definition of “tangible personal property,” Jefferson Parish disregarded the State’s position and instead pushed for the taxation of pay-per-view and video-on-demand programming as the lease of tangible personal property. Jefferson Parish Code of Ordinances § 35-17. Other parishes appear to be following Jefferson Parish’s lead to impose tax even though the state has said such services are exempt – and the lack of uniformity in approach to the local tax base will continue to cause problems for taxpayers.

The judge did not provide reasons for his decision, and it is unlikely that written reasons will be published unless one of the parties requests them. It is anticipated that the case will be appealed by the parish.

Normand v. Cox Commc’ns La., L.L.C., Jefferson Parish 24th Judicial District Court, Case No. 706-766 (2014).

Alenia Decision May Benefit D.C. Corporate Taxpayers

by Diann Smith and Stephen P. Kranz | May 13, 2014 | Allocation/Apportionment, Constitutional Issues, District of Columbia, Income Tax, Tax Base

The recent decision in Alenia N. America, Inc. v. District of Columbia Office of Tax and Revenue in the District of Columbia Office of Administrative Hearings (OAH) could present opportunities for District taxpayers to receive corporate franchise tax refunds by including their joint ventures’ apportionment factors in the taxpayers’ District apportionment percentage calculation. Alenia N. America v. District of Columbia Office of Tax and Revenue, Dkt. 2012-OTR-00015 (D.C. O.A.H. Mar. 11, 2014).

Through an unwritten, internal policy, the District of Columbia Office of Tax and Revenue (OTR) prohibited separate filers from including the apportionment factors of joint ventures in which a taxpayer was a member/partner in the apportionment percentage calculation while permitting consolidated filers to do so. Alenia N. America challenged this interpretation of the District’s apportionment formula, filing a protest in OAH. Alenia is a separate filer C Corporation headquartered in the District. A portion of Alenia’s 2010 tax year income resulted from its 51 percent ownership in a Mississippi LLC, Global Military Aircraft Systems (GMAS). Because OTR required Alenia to include the income resulting from ownership of GMAS in its apportionable tax base but exclude the apportionment factors of GMAS, Alenia’s District apportionment percentage increased from 55.1899 percent to 86.1993 percent. OTR effectively asserted the power of taxation over income derived from sources outside of the District.

OAH granted a summary decision in favor of Alenia, holding that GMAS’ apportionment factors could be included by Alenia because Alenia and GMAS were unitary and the District’s apportionment statute was designed with the purpose to create uniformity; most states applying formulaic apportionment allow for the inclusion of the apportionment factors (see Homart Development Co. v. Norberg, 529 A.2d 115 (R.I. 1987); Malpass v. Dep’t of Treasury, 494 Mich. 237, 833 N.W.2d 272 (2013)); and factor inclusion was necessary to reflect the source of the GMAS income. Reading the District’s apportionment statute, D.C. Code § 47-1810.02, “consistently with its constitutional underpinnings and its general purpose to promote uniformity” overcame the silence as to whether the inclusion of factors applied to separate filers. OTR’s misinterpretation of District law was “in conflict with the statute.” Alenia, Dkt. 2012-OTR-00015 at *26.

In light of the holding in Alenia allowing for the inclusion of the apportionment factors of joint ventures, taxpayers should consider whether District refunds are now available to them. Further, an argument can be made that the holding in Alenia continues to apply despite the District’s switch to a combined reporting regime because of the court’s insistence that factor inclusion is necessary to reflect the source of the taxpayer’s income.

For a copy of the decision, contact one of the authors.

Revise Your Tax Matrix: Remote Access of Software Exempt in Michigan and Idaho

by Diann Smith and Stephen P. Kranz | May 6, 2014 | Idaho, Michigan, Nationwide Importance, Sales Tax, Tax Base, Transaction Taxes

A trend is developing in response to aggressive Department of Revenue/Treasury policymaking regarding cloud computing. The courts and legislatures are addressing the issue and concluding that the remote access to software should not be taxed. Here are two recent developments that illustrate the trend:

Michigan – Auto-Owners Insurance Company v. Department of Treasury

On March 20, 2014, the Michigan Court of Claims held in Auto-Owners Insurance Company v. Department of Treasury that certain cloud transactions were not subject to use tax because the transactions were nontaxable services. The State has appealed this decision.

Auto-Owners engaged in transactions with numerous vendors to provide services and products that Auto-Owners used to conduct its business. The court grouped Auto-Owners’ transactions into transactions with six categories of providers: (1) Insurance industry providers; (2) Marketing and advertising providers; (3) Technology and communications providers; (4) Information providers; (5) Payment remittance and processing support providers; and (6) Technology providers. The transactions all involved, on some level, Auto-Owners accessing software through the Internet. No software was downloaded by Auto-Owners.

The Michigan use tax is imposed on the privilege of using tangible personal property in the state. Tangible personal property includes prewritten, non-custom, software that is “delivered by any means.” Mich. Comp. Laws § 205.92b(o). The court held that the transactions were not subject to use tax under the plain language of Michigan’s statute.

First, the court held that use tax did not apply because the court interpreted the “delivered by any means” language from Michigan’s statute to apply to the electronic and physical delivery of software, not the remote access of a third-party provider’s technology infrastructure. Second, the court held that the software was not “used” by Auto-Owners. Auto-Owners did not have control over the software as it only had the “ability to control outcomes by inputting certain data to be analyzed.” Third, the court held that even if prewritten computer software was delivered and used, the use was “merely incidental to the services rendered by the third-party providers and would not subject the overall transactions to use tax.” Michigan case law provides that if a transaction includes the transfer of tangible personal property and non-taxable services, the transaction is not taxable if the transfer of property is incidental to the services.

Practice Note: This decision is encouraging in that the court said that the Department was ignoring the plain meaning of the statute and overreaching, and determined that the legislature must provide specific language extending the sales and use tax for such transactions to be taxable. It is important to note that the Michigan statute uses the phrase “delivered by any means,” and the court focused on the definition of deliver in reaching its decision. This decision will likely have implications for other streamlined sales tax (SST) member states. Auto-Owners Ins. Co. v. Dep’t of Treas., No. 12-000082-MT (Mich. Ct. Cl. Mar. 20, 2014).

Idaho – H.B. 598

On April 4, 2014, Governor Butch Otter signed into law Idaho [...]

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Oklahoma Supreme Court KOs the Constitution

by McDermott Will & Emery, Diann Smith and Stephen P. Kranz | May 5, 2014 | Constitutional Issues, Incentives, Income Tax, Nationwide Importance, Oklahoma, Tax Base

On April 22, the Supreme Court of Oklahoma released its opinion in CDR Systems Corp. v. Oklahoma Tax Commission. Case No. 109,886; 2014 OK 31. The Oklahoma Supreme Court, overturning the decision of the Court of Civil Appeals, held that an Oklahoma statute, which grants a deduction for income from gains that result from the sale of all or substantially all of the assets of an “Oklahoma company,” is constitutional under the Commerce Clause. “Oklahoma company” is defined as an entity that has had its primary headquarters in Oklahoma for at least three uninterrupted years prior to the date of the taxable transaction.

In a 5-4 decision, the Oklahoma Supreme Court determined that there was no discrimination against out-of-state commerce. Even if there was discrimination, the Oklahoma Supreme Court held that the statute does not facially discriminate against interstate commerce, does not have a discriminatory purpose and has no discriminatory effect on interstate commerce. The Oklahoma Supreme Court’s reasoning was based in part on the conclusion that the statute treated all taxpayers the same.

In his dissent, Justice Combs reached the opposite conclusion and wrote that the deduction is unconstitutional because the primary headquarters requirement is based upon the level of business a company conducts in Oklahoma, and therefore it discriminates against out-of-state taxpayers. The dissent concluded that the statute effectively creates a tax on taxpayers with an out-of-state headquarters.

Although the majority ably walked through the existing case precedent on these issues, it misunderstood the practical effect of the statute. First, the majority concluded that the statute did not discriminate against any particular market because all markets are treated the same. This conclusion ignores the fact that under the statute, in-state markets are treated differently than out-of-state markets. The majority stated that “[w]ithout any actual or prospective competition in a single market, there is no negative impact on interstate commerce that results from the application of this deduction and no discrimination against interstate commerce . . . .” (Majority Opinion, p. 14). However, there is competition between in-state companies and out-of-state companies, not just in a single market but in all markets.

In reaching this conclusion, the majority relied upon Gen. Motors Corp. v. Tracy, 519 U.S. 278 (1997), which upheld the constitutionality of a tax that discriminated across markets (in other words, the statute benefited an in-state entity not because the entity was in-state but because it was in a different market and sold different products than an out-of-state entity). The dissent specifically took exception to the majority’s reliance on Gen. Motors, for good reason. The Tracy case does not appear to be applicable here, because the in-state and out-of-state entities are competing in the same markets under the Oklahoma statute.

Second, the majority concluded that the statute did not facially discriminate against interstate commerce because “[t]he degree to which the entity generating the gains participated in out-of-state activity, i.e. interstate commerce, is not relevant to whether the entity qualifies for the deduction” (Majority Opinion, p. 17). The [...]

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Inside the New York Budget Bill – Corporate Tax Reform Enacted

by Emily Townsend | Apr 3, 2014 | Allocation/Apportionment, New York, Nexus, Tax Base

Governor Andrew Cuomo has signed into law a budget bill containing major corporate tax reform. This new law results in significant changes for many corporate taxpayers, including a complete repeal of Article 32 and changes to the Article 9-A traditional nexus standards, combined reporting provisions, composition of tax bases and computation of tax, apportionment provisions, net operating loss calculation and certain tax credits. Most of the provisions discussed in this Special Report will take effect for tax years beginning on or after January 1, 2015. Corporations should note that this New York State law does not automatically change New York City’s regime, resulting in additional differences between New York State and New York City tax filings.

Read the Special Report here.