INSIDE SALT
INSIDE SALT
In-depth coverage of issues surrounding state and local tax
INSIDE SALT
In-depth coverage of issues surrounding state and local tax
Tax Base
Subscribe to Tax Base's Posts

California Supreme Court Denies BOE Petition for Review in Lucent Technologies

by , and | Jan 26, 2016 | , , , , , ,

Last week, the California Supreme Court denied the State Board of Equalization’s (BOE’s) petition for review in Lucent Technologies, Inc. v. State Bd. of Equalization, No. S230657 (petition for review denied Jan. 20, 2016). This comes just months after the California Court of Appeals held against the BOE and ordered it to pay Lucent’s $25 million sales tax refund. As explained in more detail below, the denial finalizes the favorable precedent of the Court of Appeals in Nortel Networks Inc. v. State Bd. of Equalization, 191 Cal. App. 4th 1259, 119 Cal. Rptr. 3d 905 (2011)—representing a monumental victory for a broad range of taxpayers in California and opening the door for significant refund opportunities. Moreover, the California Supreme Court’s denial affirms the Court of Appeals decision that the BOE’s position was not substantially justified and the taxpayer was entitled to reasonable litigation costs of over $2.6 million.

Background

Lucent and AT&T (collectively Lucent) are and were global suppliers of products and services supporting, among other things, landline and wireless telephone services, the internet, and other public and private data, voice and multimedia communications networks using terrestrial and wireless technologies. Lucent manufactured and sold switching equipment (switches) to their telephone customers, which allowed the customers to provide telephone calling and other services to the end customers. The switches required software, provided on storage media, to operate. Lucent designed the software (both switch-specific and generic) that runs the switches they sell, which was copyrighted because it is an original work of authorship that has been fixed onto tapes. The software also embodies, implements and enables at least one of 18 different patents held by Lucent.

Between January 1, 1995, and September 30, 2000, Lucent entered into contracts with nine different telephone companies to: (1) sell them one or more switches; (2) provide the instructions on how to install and run those switches; (3) develop and produce a copy of the software necessary to operate those switches; and (4) grant the companies the right to copy the software onto their switch’s hard drive and thereafter to use the software (which necessarily results in the software being copied into the switch’s operating memory). Lucent gave the telephone companies the software by sending them magnetic tapes or CDs containing the software. Lucent’s placement of the software onto the tapes or discs, like the addition of any data to such physical media, physically altered those media. The telephone companies paid Lucent over $300 million for a copy of the software and for the licenses to copy and use that software on their switches.

The BOE assessed sales tax on the full amount of the licensing fees paid under the contracts between Lucent and its telephone company customers. Lucent paid the assessment and sued the BOE for a sales tax refund attributable to the software and licenses to copy and use that software at the trial court. The parties filed cross-motions for summary judgment on Lucent’s refund claims, and the Los Angeles [...]

Continue Reading



read more

Michigan Backs Off Cloud Tax, Refund Opportunities Available

by , and | Jan 14, 2016 | , , , , , ,

After refusing to back down on the issue for years, the Michigan Department of Treasury (Department) issued guidance last week to taxpayers announcing a change in its policy on the sales and use taxation of remotely accessed prewritten computer software.  This comes after years of litigating the issue in the Michigan courts, most recently with the precedential taxpayer victory in Auto-Owners Ins. Co. v. Dep’t of Treasury, No. 321505 (Mich. Ct. App. Oct. 27, 2015), in which the Michigan Court of Appeals held that remote access to software did not constitute delivery of tangible personal property.  See our prior coverage here.  The Department has announced it will apply Auto-Owners (and the numerous other favorable decisions) retroactively and thus allow for refunds for all open tax years.  This is a huge victory for taxpayers; however, those that paid the tax (both purchasers and providers alike) must act promptly to coordinate and request a refund prior to the period of limitations expiring.

Implications

In issuing this guidance, the Department specifically adopts the Michigan Court of Appeals interpretation of “delivered by any means” (as required to be considered taxable prewritten computer software).  Going forward, the “mere transfer of information and data that was processed using the software of the third-party businesses does not constitute ‘delivery by any means’” and is not prewritten software subject to sales and use tax.  See Auto-Owners, at 7.  Not only has the Department admitted defeat with respect to the delivery definition, but it also appears to have acquiesced to taxpayers’ arguments with respect to the true object test (or “incidental to services” test in Michigan).  This test was first announced by the Michigan Supreme Court in Catalina Marketing, and provides that a court must objectively analyze the entire transaction using six factors and determine whether the transaction is “principally” the transfer of tangible personal property or the transfer of services with a transfer of tangible personal property that is incidental to the service.[1]  In last week’s guidance, the Department states that if only a portion of a software program is electronically delivered to a customer, the “incidental to service” test will be applied to determine whether the transaction constitutes the rendition of a nontaxable service rather than the sale of tangible personal property.  However, if a software program is electronically downloaded in its entirety, it remains taxable.  This guidance comes in the wake of Department and the taxpayer in Thomson Reuters, Inc. v. Dep’t of Treasury stipulating to the dismissal of a Supreme Court case involving the same issues that had been appealed by the Department.  In light of these developments, it appears that the Department has given up all ongoing litigation over cloud services.

Immediate Action Required for Refunds

Taxpayers who paid sales or use tax on cloud based services are entitled to receive a refund for all open periods.  In Michigan, the period of limitations for filing a refund [...]

Continue Reading



read more

Connecticut Limits New Tax Haven Law

by , and | Jan 13, 2016 | , ,

In June of 2015, Connecticut passed legislation that implements combined reporting for tax years beginning on, or after January 1, 2016. Part of the new regime, which is codified by Conn. Gen. Stat. P.A. 15-5, § 144 (2015), requires water’s-edge combined groups to include entities incorporated in tax havens in the combined group. Just before the holidays, the Connecticut General Assembly passed legislation that narrowed the definition of a “tax haven” from the originally adopted definition. Under the originally passed combined reporting law, the determination of whether a jurisdiction was a “tax haven” was made using five different definitions. If any one definition was satisfied, the jurisdiction was a “tax haven.” None of the five definitions is entirely clear and each generally required an analysis of facts related to the jurisdiction’s government rather than the activities of a taxpayer in the jurisdiction. The original definition of tax haven was similar, but not identical to the Multistate Tax Commission Proposed Model Statute for Combined Reporting. The new law required the commissioner of revenue to publish a list of jurisdictions determined to be tax havens by September 30, 2016. In December, the Connecticut General Assembly convened a special session and passed Public Act 15-1, which amends the newly enacted tax haven law in section 37. As amended, the Connecticut statute still contains the five different definitions. However, the amended law excludes from the definition of a tax haven “a jurisdiction that has entered into a comprehensive income tax treaty with the United States” and which meets certain other requirements. Additionally, the December legislation also repealed the requirement for the commissioner to publish a list of tax havens. In sum, the limiting amendment to the tax haven law should provide taxpayers with some clarity, although that will be somewhat offset by the lack of a formal list. Connecticut is one of four New England states that considered and/or passed legislation adding tax haven provisions to their combined reporting regimes. Tax haven legislation passed in Rhode Island in 2015, as part of Rhode Island’s adoption of combined reporting effective for tax years beginning on or after January 1, 2015. The Maine and Massachusetts legislatures considered tax haven provisions, but ultimately did not pass such laws in 2015.



read more

McDermott Lawyers Publish Reference Guide on State Taxation of Meal Delivery

by | Jan 12, 2016 | , , , , ,

As the on-demand economy continues to boom, the delivery of everything! now! continues to be the mantra.  In particular, delivery of meals and prepared food is the latest business model to see tremendous growth. Delivery of alcohol is coming not far behind. As restaurants and fast food chains shift from providing their own delivery (or perhaps no delivery at all) to delivering via one of the new service models, they must consider the impact that this decision will have on their sales tax collection obligation. This is especially true in light of the recent increase in predatory lawsuits targeting the overcollection and undercollection of sales tax on delivery charges.

McDermott Will & Emery state and local tax lawyers Steve Kranz, Diann Smith, Cate Battin and Mark Yopp recently published a whitepaper in State Tax Notes on this emerging topic that describes the typical service models that exist and offers a framework for restaurants and other prepared food providers to begin thinking about the often complex sales tax consequences.  Steve Kranz also presented the key issues identified in this whitepaper at the National Conference of State Legislatures Executive Committee Task Force on State and Local Taxation meeting in Salt Lake City, Utah on January 8, 2016. Given policymaker interest in the topic, it is not unlikely that legislators will seek to rationalize the burdens that current sales tax rules place on the blossoming on-demand business models.



read more

Focus on Tax Controversy – December 2015

by | Jan 4, 2016 | , , , , , , , , ,

McDermott Will & Emery has released the December 2015 issue of Focus on Tax Controversy, which provides insight into the complex issues surrounding U.S. federal, international, and state and local tax controversies, including Internal Revenue Service audits and appeals, competent authority matters and trial and appellate litigation.

Mark Yopp authored an article entitled “Waiting for Relief from Retroactivity,” which discusses how courts are expanding the ability of state legislatures to retroactively change taxpayer liability going back many years.

View the full issue (PDF).



read more

D.C. Council Holds Hearing on New Tax to Fund Unprecedented Family Leave Benefits

by , and | Dec 3, 2015 | , , ,

Yesterday, the D.C. Council Committee of the Whole held an advocates-only hearing on the Universal Paid Leave Act of 2015 (Act), which was introduced on October 6, 2015 by a majority of councilmembers. As introduced, this bill establishes a paid leave system for all District of Columbia (District) residents and all workers employed in the District. It allows for up to 16 weeks of paid family and medical leave, which would more than double the amount of weeks (and dollar cap) of any U.S. state-sponsored paid-leave program. While other state paid family and medical leave programs are paid by the employees themselves, the benefits for employees of a “covered employer” (i.e., private companies in the District) would be funded by a one percent payroll tax on the employer. There has been talk of setting a minimum threshold of employees (i.e., 15-20 employee minimum) for an employer to be covered by the Act, although such a requirement does not exist in the current draft. Because the District cannot tax the federal government or employers outside its borders, District residents working for one of these entities are required to contribute to the fund individually. This would result in a strange dynamic that taxes District residents differently based on whether they work for a covered employer or not. Self-employed District residents have the ability to opt-out altogether (and not contribute to the fund or receive benefits) under the Act.

The definition of “covered employee” is drafted in such a way that temporary and transitory employees (i.e., “employed during some or all the 52 calendar weeks immediately preceding the qualifying event”) could claim the full 16 weeks of benefits and have no obligation to return to the job. The Act does exclude employees that spend more than 50 percent of their time working in a state other than District; however, this exclusion would not apply to employees that do not spend a majority of their time in any one state.

A qualifying individual is one who becomes unable to perform their job functions because of a serious health condition or to care for a family member with a serious health condition or a new child. Claims are filed with the District Government and the District must notify the employer within five business days of a claim being filed. Beneficiaries will receive 100 percent of their average weekly wages (up to $1,000 per week) plus 50 percent of their average weekly wages in excess, with a weekly cap of $3,000.

Practice Note:

Advocates testifying yesterday expressed concerns that the proposed one percent rate (considered high by many) is unrealistic and would fall significantly short of funding the generous benefits—although no definitive data is available at this time. Aside from highlighting the unprecedented breadth of the benefits, many advocates also noted the significant loopholes in the current draft that could lead to unintended—and potentially unconstitutional—consequences, if passed. At this point, it appears that the Council has [...]

Continue Reading



read more

A Steep Slope — Vermont Supreme Court Finds AIG Not Unitary With a Ski Resort Based On a Clear and Cogent Evidence Burden of Proof

by and | Nov 30, 2015 | , , , , , ,

In the first Vermont Supreme Court decision addressing combined unitary reporting since Vermont’s combined reporting regime became effective in 2006, the court affirmed a lower court’s decision that AIG, the multinational insurance company, was not unitary with a ski resort operated by a subsidiary in Vermont; accordingly, a combined report covering the two businesses was not required. The decision is important because it lays the foundation for future unitary cases in Vermont.

The court agreed with AIG that there were no economies of scale between the operations of AIG and the ski resort. “Because [the entity] is a ski resort and therefore its business type is not similar to AIG’s insurance and financial service business, there is no opportunity for common centralized distribution or sales, and no economy of scale realized by their operations.” On centralization of management, the court noted that although AIG controlled the appointments to the ski resort’s board and management, this did not translate into “actual control” over the ski resort’s operations. Lastly, the Vermont Department of Taxes attempted to argue functional integration based primarily on AIG’s influx of working capital to the ski resort. The court rejected this assertion stating the funding “served an investment rather than operational function. The financing was not part of an AIG operational goal to grow part of its business. Further, there is no operational integration between AIG’s insurance and financial businesses and the ski resort operated by [the resort].”

The case is interesting because it involved whether an instate entity was unitary with its parent. For the year at issue, Vermont had a three factor apportionment formula with a double-weighted sales factor. Presumably, the ski resort had a high Vermont apportionment factor and relatively little income, so including AIG in the combined group increased AIG’s Vermont apportionment factor without significantly  diluting its income.

Interestingly, the court addressed AIG’s burden of proof on the unitary issue. The taxpayer argued that a preponderance of the evidence standard should apply. The Vermont Supreme Court disagreed. Looking to the United States Supreme Court’s decision in Container Corp. as well as to decisions of other states, the taxpayer has the burden of proving by “clear and cogent” evidence that its operations are not unitary.  Interestingly, the court suggested that one California court decision that applied a preponderance of the evidence standard to a unitary question was distinguishable because that case involved a taxpayer claiming that unity existed — and AIG was claiming that unity did not exist. This disparate burden depending on the direction of the unitary argument may prove important to taxpayers seeking to bring entities or operations into a combined report in Vermont.

State tax professionals may react to this decision in a manner similar to the way many reacted when the Court of Appeals of Arizona decided Talley Industries and Woolworth. Those decisions engendered substantial hope that courts — and, ultimately, state revenue agencies — would analyze unitariness not on the basis of a “checklist” or as a knee-jerk reaction to [...]

Continue Reading



read more

Inside the New York Budget Bill: Department Issues Guidance Regarding Investment Capital Identification Procedures

by | Jul 10, 2015 | , , ,

On July 7, 2015, the New York Department of Taxation and Finance issued guidance (TSB-M-15(4)C, (5)I, Investment Capital Identification Requirements for Article 9-A Taxpayers) on the identification procedures for investment capital for purposes of the New York State Article 9-A tax and New York City Corporate Tax of 2015. Income from investment capital is generally not subject to tax in New York. For New York State and New York City corporate income tax purposes, investment capital is investments in stocks that meet the following five criteria:

  1. Satisfy the definition of a “capital asset” under section 1221 of the Internal Revenue Code (IRC) at all times the taxpayer owned the stock during the taxable year;
  2. Are held for investment for more than one year;
  3. The dispositions of which are, or would be, treated by the taxpayer as generating long-term capital gains or losses under the IRC;
  4. For stocks acquired on or after January 1, 2015, have never been held for sale to customers in the regular course of business at any time after the close of the day on which they are acquired; and
  5. Before the close of the day on which the stock was acquired, are clearly identified in the taxpayer’s books and records as stock held for investment in the same manner as required under IRC section 1236(a)(1) for the stock of a dealer in securities to be eligible for capital gain treatment (for stock acquired prior to October 1, 2015, that was not subject to IRC section 1236(a),such identification must occur before October 1, 2015).

Criterion five, regarding identification procedures, has been an area of concern for many New York taxpayers. While identification has been a concern of securities dealers for federal income tax purposes for many years, the New York identification requirement applies to all taxpayers that seek to have stock qualify as investment capital. Thus, all New York taxpayers, many in uncharted waters, must develop appropriate procedures to comply with this new identification requirement. Unfortunately, the Department’s guidance is somewhat sparse and does not address some important issues that could arise and that have been raised with the Department. The guidance also adopts a troubling position with respect to investments made by partnerships.

Securities Dealers

For taxpayers that are dealers subject to IRC section 1236, stock must be identified before the close of the day on which the stock was acquired (with the exception of floor specialists as defined in IRC section 1236(d) that have stock subject to the seven-day identification period in IRC section 1236(d)(1)(A)) as held for investment under IRC section 1236(a)(1) to satisfy the New York investment capital identification requirement. The presence or absence of a federal identification under IRC section 1236(a)(1) will be determinative, and a separate New York identification will not be allowed. A federal identification under IRC section 475 (relating to marked to market rules) is insufficient.

As a practical matter, many securities dealers that are taxed as corporations for federal income tax purposes do not comply with [...]

Continue Reading



read more

Tax Amnesty Hits the Midwest (and Beyond)

by , and | Jun 12, 2015 | , , , , , , , , , , , , ,

With many state legislatures wrapping up session within the past month or so, there has been a flurry of last-minute tax amnesty legislation passed. Nearly a half-dozen states have authorized upcoming tax amnesty periods. These tax amnesties include a waiver of interest and, in some circumstances, allow taxpayers currently under audit or with an appeal pending to participate. This blog entry highlights the various enactments that have occurred since the authors last covered the upcoming Maryland amnesty program.

Missouri

On April 27, 2015, Governor Jay Nixon signed a bill (HB 384) that creates the first Missouri tax amnesty since 2002. The bill creates a 90-day tax amnesty period scheduled to run from September 1, 2015, to November 30, 2015. The amnesty is limited in scope and applies only to income, sales and use, and corporation franchise taxes. The amnesty allows taxpayers with liabilities accrued before December 31, 2014, to pay in full between September 1, 2015, and November 30, 2015, and be relieved of all penalties and interest associated with the delinquent obligation. Before electing to participate in the amnesty program, taxpayers should be aware that participation will disqualify them from participating in any future Missouri amnesty for the same type of tax. In addition, if a taxpayer fails to comply with Missouri tax law at any time during the eight years following the agreement, the penalties and interest waived under the amnesty will be revoked and become due immediately. Finally, taxpayers who are the subject of civil or criminal state-tax-related investigations, or are currently involved in litigation over the obligation, are not eligible for the amnesty.

According to the fiscal note provided in conjunction with the bill, the state estimates that 340,000 taxpayers will be eligible for the amnesty and that the program will raise $25 million.

Oklahoma

On May 20, 2015, Governor Mary Fallin signed a bill (HB 2236) creating a two-month amnesty period from September 14, 2015, to November 13, 2015. The bill allows taxpayers that pay delinquent taxes (i.e., taxes due for any tax period ending before January 1, 2015) during the amnesty period to receive a waiver of any associated interest, penalties, fines or collection costs.

Taxes eligible for the amnesty include individual and corporate income taxes, withholding taxes, sales and use taxes, gasoline and diesel taxes, gross production and petroleum excise taxes, banking privilege taxes and mixed beverage taxes. Notably, franchise taxes are not included in this year’s amnesty (they were included in the 2008 Oklahoma amnesty).

Indiana

In May, Governor Mike Pence signed a biennial budget bill (HB 1001) that included a provision authorizing the Department of Revenue (Department) to implement an eight-week tax amnesty program before 2017. While the Department must promulgate emergency regulations that will specify exact dates and procedures, several sources have indicated that the amnesty is expected to occur sometime this fall. The upcoming amnesty will mark the second-ever amnesty offered by Indiana (the first occurred in 2005). Taxpayers that participated in the 2005 program [...]

Continue Reading



read more

Arizona ALJ: Remote Provider of Subscription Research Service is the Lessor of Tangible Personal Property

by , and | May 15, 2015 | , , , , , ,

In a curious decision out of Arizona, an Administrative Law Judge (ALJ) found an out-of-state provider of online research services was properly assessed transaction privilege tax (TPT, Arizona’s substitute for a sales tax) based on the logic that the provider was renting tangible personal property to in-state customers.  The Office of Administrative Hearings (OAH) decision, No. 14C-201400197S-REV, available here, should be unsettling for all remote providers of subscription-based services with customers in Arizona.  This decision offers an example of the continued push by states to administratively expand the tax base to include nontaxable digital services.  Many states, like Arizona, do so by considering remote access to digital goods and services to be tangible personal property, as defined by statutes that are decades old.

Facts

The taxpayer was an out-of-state IT research firm offering internally-produced proprietary research and data compilation content remotely.  The taxpayer’s headquarters, offices, servers and platform were all located outside Arizona.  Customers accessed the research material via usernames and passwords received as part of a subscription.  The Arizona Department of Revenue (the Department) determined that the subscription income was subject to the TPT because it was income from the leasing of tangible personal property.  The taxpayer filed a protest with the Department, arguing that the online research services provided make it a service provider—not a lessor of tangible personal property.  The taxpayer noted “at most, [they are] providing clients with a simultaneous license to use.”

Department’s Argument

The Department argued that the taxpayer was leasing tangible personal property (research and data content) through the subscriptions they provide to customers.  Because they had exclusive access and use to the digital content (via username and password), the customers were able to perceive tangible personal property through their sense of sight. Therefore, the taxpayer’s receipts from subscriptions to its research and data content are taxable rental activities subject to the personal property rental classification.

Holding

The ALJ held the taxpayer did not meet its burden of proof of showing the Department misapplied the tax laws.  The decision dismissed all of the taxpayer’s arguments that it is not engaged in leasing tangible personal property.  At the outset, the ALJ found that the inability to control or modify the digital content was not enough to consider the customers to be lacking “exclusive control.”  This is important because the Arizona Supreme Court has made it clear that the scope and application of the personal property rental classification (and its predecessor) hinges on the degree of control over the property in question that is ceded to its putative “lessee” or “renter.” In sum, because the access and use of the proprietary research and data content was offered for a periodic subscription (consideration), such activity is the leasing of tangible personal property, and the assessment by the Department was appropriate.

Analysis

As a threshold matter, it is unclear whether the Department has authority to consider remote access to digital content to be tangible property merely because the content may be viewed on [...]

Continue Reading



read more

BLOG EDITORS

Stephen P. Kranz

Mary Kay McCalla Martire

Richard C. Call

STAY CONNECTED

Subscribe

TOPICS

ARCHIVES

jd supra readers choice top firm 2023 badge