SUTHERLAND April 2016 SALT SHAKER › portalresource › lookup › poid › … · Inc. v. Mich. Dep’t of Treasury, No. 324062 (Mich. Ct. App. Mar. 31, 2016). SUTHERLAND April

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Alabama Tax Tribunal Determines Out-of-State Bookseller Has Nexus, Joins “Club”By Zack Atkins and Eric Coffill

The Alabama Tax Tribunal concluded that an out-of-state retailer was required to collect and remit use tax on the sales of books and educational materials to in-state teachers and students, and that neither the Due Process Clause nor the Commerce Clause impeded the Alabama Department of Revenue’s authority to assess the seller for uncollected tax. The retailer relied on in-state teachers to collect orders and money from students and others and then distribute the purchased items to the appropriate people. The tribunal found that the retailer had a physical presence in Alabama, and thus Commerce Clause nexus with the state, by virtue of the in-state presence and activities of the teachers. The retailer, Scholastic Book Clubs, Inc., has litigated the same issue in a number of jurisdictions, and the tribunal’s decision puts Alabama in line with Connecticut, California, Kansas and Tennessee, and at odds with Michigan, Arkansas and Ohio. Scholastic Book Clubs, Inc. v. Ala. Dep’t of Revenue, No. 14-374 (Ala. Tax Trib. Mar. 25, 2016).

It’s Plain (and Ordinary) to See: Michigan Court of Appeals Holds Unitary Business Group Does Not ExistBy Ted Friedman and Leah Robinson

The Michigan Court of Appeals reversed a trial court ruling and held that three companies did not constitute a statutorily defined “unitary business group” for Michigan Business Tax (MBT) purposes. It was undisputed that there was insufficient “direct” ownership among the companies to give rise to a “unitary business group,” so the court examined whether there was sufficient “indirect” ownership, as that term is used in the MBT’s definition of “unitary business group.” The court determined that the trial court erred in using the federal income tax definition of “constructive” ownership when defining the “indirect” ownership requirement. The court reasoned that at the point where the trial court acknowledged that the federal tax laws do not address a “comparable context,” under Michigan law it should have used the ordinary rules of statutory construction. The court concluded that the plain and ordinary meaning of “indirect” ownership is “ownership through an intermediary,” and ultimately held that, when applying the definition of “unitary business group” to the facts, no unitary business group existed because none of the involved companies owned, through an intermediary or otherwise, more than 50% of any other company. LaBelle Mgmt., Inc. v. Mich. Dep’t of Treasury, No. 324062 (Mich. Ct. App. Mar. 31, 2016).

April 2016SUTHERL AND

SALT SHAKER®

Shaking things up in state and local tax.

In This Issue

Current Developments 1

SALT Pet of the Month 2

Recently Seen and Heard 5

Come See Us 5

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latest content!

Damages Award Limited in Nevada Case Involving Tortious Conduct by California Franchise Tax BoardBy Charles Capouet and Jeff Friedman

In a 4-4 decision, the U.S. Supreme Court affirmed the Nevada courts’ exercise of jurisdiction over the California Franchise Tax Board (FTB), but held, by a majority of the justices, that the taxpayer could only receive the damages Nevada provides for suits by private citizens against Nevada agencies. The taxpayer, Gilbert Hyatt, sued the FTB in Nevada for abusive audit and investigation practices. The Nevada Supreme Court rejected the FTB’s claims that the U.S. Constitution’s Full Faith and Credit Clause required Nevada to apply California’s sovereign immunity law, holding that Nevada courts, as a matter of comity, would immunize California where Nevada law would similarly immunize its own agencies and officials. The Nevada Supreme Court,

however, set aside much of the nearly $500 million in damages awarded by the jury after trial and only affirmed $1 million of the award. Nevada statutes would impose a $50,000 limit in a similar suit against its own officials. The Court held that the Full Faith and Credit Clause does not permit Nevada to award damages against California agencies under Nevada law that are greater than it could award against Nevada agencies in similar circumstances. As a result, the Court held that the taxpayer’s award for damages could not exceed Nevada’s $50,000 limit. Franchise Tax Bd. of California v. Hyatt, No. 14-1175 (U.S. Apr. 19, 2016).

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Meet Whiskey, a two-and-a-half-year-old Cavalier King Charles Spaniel belonging to Teresa Chiftis, Group Manager-Tax Controversies at Microsoft Corporation, and her husband, Jeff.During his time as a show dog, this handsome guy used the moniker “Covington Virginia’s Gentleman,” a riff on a type of bourbon whiskey. Keeping with the theme, Teresa and Jeff renamed him “Whiskey” when they adopted him about eight months ago. Other names this sweet boy answers to include Peanut, Whiskey Woo, Woo Woo, and Little Man.Whiskey enjoys visiting the park and hiking on nearby trails, though during his first hike, he had no idea what to do when he came upon a fallen log blocking the path. His hiking skills have improved tremendously since then, and he now bounds over such obstacles without hesitation.Whiskey is not a finicky eater and loves all food. He can be a bit skittish but will warm up to just about anyone if treats are involved!At the end of the day, Whiskey retires to Teresa and Jeff’s bed and almost always manages to position himself so that he and Teresa are touching heads.He loves his furry brother Rocky and his new parents immensely. Whiskey is a very-deserving Pet of the Month!

SALT PET OF THE MONTH“Whiskey”

SALT Pet of the Month: It’s Your Turn!!In response to many requests, the Sutherland SALT practice invites you to submit your pet (or pets) as candidates for SALT Pet of the Month. Please send us a short description of why your pet is worthy of such an honor, along with a picture or two. Submissions should be directed to Stephanie Fulps at [email protected].

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New Jersey Tax Court Rules on Inclusion of Mortgage-Related Receipts in Receipts Factor NumeratorBy Charles Capouet and Todd Lard

The New Jersey Tax Court ruled on the sourcing of mortgage-related receipts received by a bank and also held that the Division of Taxation could not throw out receipts from the bank’s denominator. The taxpayer originated loans for its New Jersey borrowers through its New Jersey lending office employees and also acquired loans made by third-party New Jersey brokers to New Jersey borrowers. The taxpayer performed loan-related functions, such as underwriting, outside of New Jersey, and pooled the loans for sale to certain government-sponsored entities in exchange for mortgage-backed securities that it simultaneously sold to broker-dealers. The tax court held that the taxpayer was required to include, in its New Jersey receipts factor numerator, interest income, origination fee income and gross proceeds of sales attributed to loans to New Jersey borrowers. However, loan service fee income and income on sales of loan servicing rights were not includible in the New Jersey factor. Finally, the tax court followed the Superior Court of New Jersey, Appellate Division’s decision in Lorillard Licensing Company LLC v. Director, Division of Taxation, holding that the Division could not exclude receipts from the taxpayer’s denominator because the taxpayer had nexus with other states under New Jersey nexus standards. Flagstar Bank, FSB v. Dir., Div. of Taxation, Dkt. No. 019335-2010 (N.J. Tax Ct. Mar. 22, 2016).

Bills, Bills, Bills: Texas Court of Appeals Scrubs Bill Pay Service Provider Free of Sales TaxesBy Elizabeth Cha and Charlie Kearns

In Hegar v. CheckFree Serv. Corp., a Texas Court of Appeals affirmed the trial court’s decision and held that the taxpayer’s online bill pay service was not a taxable data processing service for Texas sales tax purposes. Based on the trial court’s uncontested factual findings, the taxpayer provided “a professional service— facilitated by the use of computers and an electronic commerce system—that required the oversight and management of thousands of certified specialists to achieve the goal of paying the [customer’s bills].” The court of appeals noted that any activities the Comptroller labeled as data processing services were incidental to the professional services provided by the taxpayer. Thus, the court of appeals determined that the “essence of the transaction” was the sale of professional services, not data processing services. Hegar v. CheckFree Serv. Corp., No. 14-15-00027-CV (Tex. App. 14th Dist., April 19, 2016).

Texas Comptroller Issues “Strong” Decision, Companies’ Single Shared Administrator Not Sufficient to Require Unitary Combined FilingBy Evan Hamme and Marc Simonetti

The Texas Comptroller upheld a taxpayer’s separate Franchise Tax return filing position, rejecting an Administrative Law Judge’s finding that the taxpayer and its affiliate shared a strong centralized management structure that required a unitary combined report. Although the companies were commonly owned and shared an administrator, the Comptroller found that, even if the companies shared some centralized management, the companies did not meet the statutory threshold of “strong” centralized management necessary to require a combined return because: (1) the companies operated in completely separate lines of business (the taxpayer ran a cleaning business and its affiliate ran a marketing consulting business); (2) the owner did not participate in the day-to-day management of either company; (3) the companies shared no other employees besides the administrator; and (4) the companies had only one common client. Tex. Cmptl’r Dec. No. 111,557 (Oct. 22, 2015) (released April 2016).

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Rage Against the Machine: Virginia Court Declares Cable Set-Top Boxes Not Subject to County Property TaxBy Stephen Burroughs and Michele Borens

The Circuit Court of Henrico County, Virginia, recently affirmed a ruling by the Commissioner of the Virginia Department of Taxation (Commissioner) that determined a cable provider’s set-top boxes are not “machines” for local property tax purposes and therefore not subject to Henrico County property tax. Virginia statute classifies property used in a cable television business, though tangible in fact, as intangible property not subject to local property tax. However, the statute excludes machines, tools, office furniture and other specific items from this general rule to permit their local assessment. Henrico County argued that the cable provider’s set-top boxes were taxable as “machines” under the statute. The court first determined that the statute in question was ambiguous because multiple definitions of the word “machine” could reasonably be used to alter the statute’s scope, then (1) recognized that ambiguous tax statutes are construed against taxation, and (2) afforded great weight to the Commissioner’s interpretation of the statute in the original ruling. The Commissioner relied on legislative history and its own contemporaneous fiscal impact statements to conclude that in 1984, the General Assembly specifically intended to exclude cable set-top boxes from local property tax when it removed “tuners” and “converters” from the statute, thus permitting taxation of specific types of cable property. The court also found persuasive several other Virginia circuit court decisions that found cable set-top boxes to be intangible property and therefore excluded from local property tax. Ultimately, Henrico County did not carry its burden of proving that the Commissioner erred in ruling for the taxpayer. Dir. of Finance of Henrico Cnty. v. Verizon Online, LLC, No. CL 13-3050 (Henrico Cnty. Cir. Ct., Mar. 2, 2016).

The Home Stretch: Virginia Tax Commissioner Rules that Single Employee Working From Home Creates NexusBy Mike Kerman and Open Weaver Banks

The Virginia Tax Commissioner ruled that an out-of-state corporation had nexus with Virginia because an employee performed accounting, human resources, payroll and customer support functions from a home office in Virginia. The Commissioner explained that out-of-state corporations are subject to Virginia corporate income tax if they have sufficient in-state business activity, unless their in-state activities are protected by P.L. 86-272 or are de minimis. The Commissioner ruled that the employee’s activities exceeded the protection of P.L. 86-272 because they were accounting and administrative services rather than solicitation, and because her activities caused the corporation to have a Virginia payroll factor. The Commissioner concluded that there was insufficient evidence to determine whether the employee’s activities were de minimis in relation to the taxpayer’s overall business. Va. Pub. Doc. No. 16-15 (Mar. 3, 2016).

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RECENTLY SEEN AND HEARDApril 19, 2016Atlanta Bar Association: Georgia Society of CPAs Joint LuncheonAtlanta, GAScott Wright and Madison Barnett on Georgia Tax Credits & Incentives

April 19-22, 2016COST Income Tax ConferenceAtlanta, GAEric Tresh on The Next Chapter in Transfer PricingMarc Simonetti on State Conformity to Federal Consolidated Return Regulations

April 20, 2016ACC Legal Quick Hit: Energy CommitteeEric Tresh and Leah Robinson on Attack from the Flanks: When Third Parties Sue on Behalf of the State

April 26, 20162016 ACC Value ChallengeAtlanta, GAEric Tresh on The Unusual Suspects: When Third Parties Sue on Behalf of the State

April 27, 2016TEI Philadelphia ChapterPhiladelphia, PAEric Coffill on Current State Tax Developments in California and Other Western States

April 29, 2016TEI Carolinas ChapterRaleigh, NCAndrew Appleby and Charlie Kearns on Best Practices for Managing State Tax Controversy

May 3, 2016TEI Tri-Chapter MeetingRochester, NYAndrew Appleby on Practical Tax Audit Management

May 5, 2016Tulsa State Chapter State Tax ConferenceTulsa, OKTodd Lard and Daniel Nicholas on The State of Debt Under the Proposed Section 385 Regulations

May 7, 2016ABA May MeetingWashington, DCLeah Robinson moderates the State & Local Taxes Practitioner’s Roundtable

May 11, 2016TEI SALT DayDenver, COJeff Friedman on RetroactivityJeff Friedman and Michele Borens on Notice Reporting, Nexus & MFARobb Chase and Andrew Appleby on The State of Debt Under the Proposed Section 385 RegulationsEric Coffill and Carley Roberts on California and Western States Update

May 13, 2016TEI New Jersey Chapter: All-Day Spring SeminarRandolph, NJMarc Simonetti and Andrew Appleby on The Most Important State and Local Tax Litigation

May 16-18, 2016Telestrategies Communications Taxations Conference 2016Washington, DCEric Tresh on A Look Ahead – Forecasting Trends in State Tax Litigation for Communications Companies

May 16-18, 2016COST Intermediate/Advanced State Sales Tax SchoolAtlanta, GAJonathan Feldman on Manufacturing/Construction Sales & Use Tax Issues

May 16-18, 2016COST Intermediate/Advanced Income Tax SchoolAtlanta, GAMadison Barnett and Michele Borens on Determining the Corporate Income Tax Base

May 18, 2016TEI New York Chapter Program: The Changing State and Local Tax Landscape – Counsel’s PerspectiveNew York, NY

COME SEE US

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COME SEE US (CONT’D)

Michele Borens and Amy Nogid on State Income Tax Litigation You Need to Know AboutTodd Lard and Andrew Appleby on SALT Legislative and Regulatory TrendsMarc Simonetti and Open Weaver Banks on Top 10 Sales & Use Tax CasesJeff Friedman on U.S. Supreme Court Developments Impacting State and Local TaxLeah Robinson and Nicole Boutros on New York Tax Reform – Controversial Issues in Implementing the New Regime

May 20, 2016Financial Executives International Committee on TaxationWashington, DCMarc Simonetti on SCOTUS Cases: A SALT Update

May 24, 2016TEI Region IX/X ConferencePortland, ORJeff Friedman and Michele Borens on State Audits

May 31-June2STARTUP Spring 2016 ConferenceRapid City, SDMaria Todorova and Eric Tresh on Transfer Pricing

June 8, 2016Interstate Tax Planning ProgramNew York, NYAmy Nogid on Jurisdiction & Nexus

June 9, 2016The Business Council Annual Conference on State TaxationAlbany, NYMarc Simonetti on An Update on New York

June 13-15, 2016TEI Audits & Appeals Seminar: Meeting the Tax Controversy Needs of In-House State Tax ProfessionalsBoston, MAJune 15: Sutherland SALT sponsors and leads a full day dedicated to state and local tax controversies covering: • Understanding the State Tax Controversy Lifecycle• Best Practices for Preparing and Managing State Tax Audits• Best Practices for Protests and Litigation• A Luncheon Panel Comprised of Distinguished State Tax

Court Judges• Coordinating Federal, State and Multistate Tax Audits

and Controversies• Industry Perspective of Managing Audits and Litigation

June 12-14, 2016IPT Annual ConferenceTraverse City, MILeah Robinson on Resolving Audits with LitigationMarc Simonetti on The Risk of Over Collecting and Under Collecting TaxCarley Roberts on The Year in Review – Top CasesZack Atkins on A Grand Compromise: The Latest North American Property Tax Developments in Sixty Minutes

June 12-15, 2016FTA Annual ConferenceAnnapolis, MDJeff Friedman on What’s New with Transfer PricingMadison Barnett on Exploring the New Partnership Audit Regime

June 16, 2016UC Davis School of Law Summer Tax InstituteDavis, CAEric Coffill on Income Tax Track

June 26, 2016EEI State Tax SessionSan Diego, CAMaria Todorova on State Audit Issues & Litigation Trends

June 27, 2016 TEI Region VIIIHilton Head Island, SCJeff Friedman and Eric Tresh on State Tax Controversy Updates

July 17-29, 2016NYU Summer Institute in TaxationNew York, NYAmy Nogid on Preparing for ProtestLeah Robinson moderates the Senior Audit Management and General Counsel RoundtableTodd Lard on State Taxation of Foreign IncomeCharlie Kearns on The Continuing Evolution of E-Commerce IssuesTodd Betor on Mergers, Acquisitions and Dispositions

July 26, 2016Wichita State University Appraisal for Ad Valorem Taxation ProgramWichita, KSZack Atkins on Net Neutrality

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The Sutherland SALT Team

Michele [email protected]

Jonathan A. [email protected]

Jeffrey A. [email protected]

Todd A. [email protected]

Carley A. [email protected]

Leah [email protected]

Marc A. [email protected]

Maria M. [email protected]

Eric S. [email protected]

W. Scott [email protected]

Douglas [email protected]

Eric J. [email protected]

Andrew D. [email protected]

Open Weaver [email protected]

Madison J. [email protected]

Timothy A. [email protected]

Charles C. [email protected]

Amy F. [email protected]

Zachary T. [email protected]

Todd G. [email protected]

Nicole D. [email protected]

Stephen A. [email protected]

Charles C. [email protected]

Elizabeth S. [email protected]

Stephanie T. [email protected]

Jessica A. [email protected]

Ted W. [email protected]

Evan M. [email protected]

Michael J. [email protected]

Nicholas J. [email protected]

Christopher M. [email protected]

Robert P. Merten [email protected]

Hanish S. Patel [email protected]

Samantha K. [email protected]