New York Department of Taxation and Finance
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NYS Tax Appeals Tribunal Provides Guidance Respecting Unitary Business Determinations

The New York State Tax Appeals Tribunal has just provided timely guidance respecting the unitary business rule in New York State.  In SunGard Capital Corp. and Subsidiaries (DTA Nos. 823631, 823632, 823680, 824167, and 824256, May 19, 2015), the Tribunal found that a group of related corporations were conducting a unitary business and that they should be allowed to file combined returns, reversing an administrative law judge determination.

The unitary business rules have assumed increased importance in New York this year because of recently-enacted corporate tax reform legislation.  Effective January 1, 2015, the only requirements for combination in New York State and City are that the corporations must be linked by 50 percent stock ownership and must be engaged in a unitary business.  It is no longer necessary for the party seeking combination (whether the taxpayer or the Department of Taxation and Finance) to show that separate filing would distort the corporations’ New York incomes.

In a related but different context, the Department’s unpublished position with respect to when an acquiring corporation and a recently purchased subsidiary can begin filing combined returns (the so-called “instant unity” issue) generally is that combined returns can be filed from the date of acquisition only if the corporations were engaged in a unitary business before they became linked by common ownership.  In a recent set of questions and answers about the new law, the Department indicated that instant unitary decisions would be done on a facts-and-circumstances basis, but we understand from conversations with the Department that the existence of a unitary business between the corporations before the acquisition will be of great importance.

The SunGard case involved prior law under which distortion was an issue, but the interesting aspects of the case involve the question of whether the corporations were engaged in a unitary business, as the taxpayers contended.  The corporations’ primary business involved providing information technology sales and services information, software solutions and software licensing.  The administrative law judge had concluded that there were similarities among the different business segments but that the different segments operated autonomously.  Although the parent provided general oversight and strategic guidance to the subsidiaries, the judge concluded that centralized management, one of the traditional criteria for a unitary business, was not present because the parent’s involvement was not operational.  The centralization of certain management functions such as human resources and accounting did not involve operational income-producing activities.  The judge held that holding companies, inactive companies, and companies with little or no income or expenses could not be viewed as unitary with the active companies.  The judge noted that there were few cross-selling or intercompany transactions.  Although programs had been developed to encourage cross-selling, they were not initiated until after the taxable years at issue.

The Tribunal reversed the administrative law judge’s decision and engaged in a detailed discussion of the elements of a unitary business that will provide useful guidance to both taxpayers and tax administrators in the future.

Although there were differences among the different segments of [...]

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Currency Conversion Concerns: New York Issues Guidance on Virtual Currencies

On December 5, 2014, the New York Department of Taxation and Finance (Department) released TSB-M-14(5)C, (7)I, (17)S.  This (relatively short) bulletin sets forth the treatment of convertible virtual currency for sales, corporation and personal income tax purposes.  The bulletin follows on a notice released by the Internal Revenue Service (IRS) in March of this year, Notice 2014-21.

The IRS Notice indicates that, for federal tax purposes, the IRS will treat virtual currency as property, and will not treat it as currency for purposes of foreign currency gains or losses.  Taxpayers must convert virtual currency into U.S. dollars when determining whether there has been a gain or loss on transactions involving the currency.  When receiving virtual currency as payment, either for goods and services or as compensation, the virtual currency is converted into U.S. dollars (based on the fair market value of the virtual currency at the time of receipt) to determine the value of the payment.

The IRS Notice only relates to “convertible virtual currency.”  Virtual currency is defined as a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”  Convertible virtual currency is virtual currency that “has an equivalent value in real currency, or that acts as a substitute for real currency.”

The Department’s bulletin also addresses only convertible virtual currency, and uses a definition identical to the IRS definition.  The Department indicates that it will follow the federal treatment of virtual currency for purposes of the corporation tax and personal income tax.

For sales and use tax purposes, the bulletin states that convertible virtual currency is intangible property and therefore not subject to tax.  Thus, the transfer of virtual currency itself is not subject to tax.  However, the exchange of virtual currency for products and services will be treated as a barter transaction, and the amount of tax due is calculated based on the fair market value of the virtual currency at the time of the exchange.

The Department should be applauded for issuing guidance on virtual currency.  It appears that these types of currencies will be used more and more in the future, and may present difficult tax issues.

However, the Department’s guidance is incomplete.  There are a couple of unanswered questions that taxpayers will still need to ponder.

First, the definition of convertible virtual currency is somewhat broad and unclear.  The Department and the IRS define “convertible” virtual currency as currency that has an “equivalent” value in real currency, but equivalent is not defined in either the IRS Notice or the bulletin.  Many digital products and services use virtual currency or points that cannot be legally exchanged for currency to reward users, and the IRS and the Department should be clearer about the tax treatment of those currencies.

Second, although the Department will follow the federal treatment for characterization and income recognition purposes, the bulletin does not discuss apportionment.  This is likely a very small issue at this point in time, but the Department will, [...]

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Division of Tax Appeals Rules Patent License Fees Not Subject to Sales Tax in New York

New York State Division of Tax Appeals administrative law judge (ALJ) recently ruled in Matter of AMO USA, Inc. on the question of whether patent license fees are properly subject to sales tax as part of the sale of tangible personal property. The ALJ determined that the patent license fees were not taxable because they were received in exchange for the right to use the taxpayer’s patents, which was a valuable, intangible right that could be sold separately from any tangible personal property.

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Division of Tax Appeals Rules Patent License Fees not Taxable in New York

A New York State Division of Tax Appeals administrative law judge (ALJ) recently ruled in favor of a medical device and technology company represented by McDermott Will & Emery on the question of whether patent license fees that the company charged to its customers were subject to New York sales tax. In Matter of AMO USA, Inc., DTA No. 824550 (N.Y. Div. Tax App. June 19, 2014), the ALJ determined that the patent license fees were not taxable because they were received in exchange for the right to use the company’s patents, which was a valuable intangible right that could be sold separately from any tangible personal property.

AMO USA, Inc., (AMO) was engaged in the development, manufacture and distribution of surgical procedures and technologies involved in laser assisted corrective eye surgery, and obtained patents covering many of the methods and apparatuses used to perform the surgery.  Under United States patent law, the patents issued to AMO created an enforceable right against the unauthorized use of the patented methods and apparatuses for a limited period of time.  When AMO sold a laser directly to a physician or hospital that would operate the laser in surgical procedures, AMO also granted its consent to perform the surgical procedures covered by its patents by entering into written patent license agreements with the purchasers.  The fee that the customer paid for the right to perform AMO’s patented surgical procedures was separately stated from the charge for the equipment on the customer’s invoice; while AMO collected sales tax on the latter, it claimed that the separate fee for the patent license was exempt from sales tax.

New York imposes its sales tax on retail sales of tangible personal property but not (as a general rule) on transfers of intangible property.   Further, under New York law, the primary purpose of the transaction controls the taxability of the entire transaction, even if some parts of the transaction would be taxable and other parts would not be if they were purchased separately.  If a person makes a taxable sale of tangible personal property, the entire amount of the receipt, including any expenses incurred by the seller that are passed on to the purchaser, is subject to sales tax.

The Division of Taxation (Division) asserted that the patent license fees were not independent of the charges for tangible personal property and thus the entire transaction should have been subject to sales tax.  AMO, however, explained that the patents themselves were valuable intangible rights that could be sold separately from any tangible personal property.  The ALJ agreed with AMO, remarking that the “essential and considerable value of a patent is the intangible right vested in its owner to have exclusive authority and control over the procedure, process or apparatus for a term of years[.]”

In reaching his decision, the ALJ distinguished AMO’s case from an Advisory Opinion, TSB-A-11(32)S (Dec. 7, 2011) in which the Division had ruled that certain patent license fees paid in connection with laser eye procedures were [...]

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New York Issues First New Combined Reporting Law Determination—and It’s Not Pretty

Even though New York amended its combination statute for years beginning in 2007, we are just now beginning to see litigation related to those amendments.  At the end of June 2013, an administrative law judge in New York’s Division of Tax Appeals issued the first determination analyzing the new law.  The analysis in Matter of Knowledge Learning Corporation was notably quite restrictive, resulting in a taxpayer loss.

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