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Going Nowhere: Taxpayer Must Show Out-of-State Use of Software Licenses for Use Tax ExemptionBy Mike Kerman and Charlie Kearns
The Indiana Department of Revenue (Department) found that a medical research company that purchased software licenses was entitled to an exemption from use tax for purchases of taxable computer software as long as it could show the licenses were ultimately used outside of Indiana. The Department added that an exemption is not permitted where a company shows that its licenses were not used in Indiana but fails to show that they were used elsewhere (“nowhere licenses”). Indiana provides a use tax exemption for property that is stored in the state temporarily awaiting subsequent use outside of Indiana. The taxpayer purchased software licenses from multiple vendors and, in each case, used only a portion of the licenses. For example, the taxpayer purchased 1,000 licenses from one vendor, but only used 63 of the licenses. Of those 63 licenses, the taxpayer only used two in Indiana and used the other 61 outside of the state. The Department explained that the taxpayer’s 937 “nowhere licenses” were not exempt from use tax based on the temporary storage exemption, because the taxpayer could not show that they were subsequently used out of state. Rather, only the 61 licenses that the taxpayer could show were used outside of Indiana were exempt. For use tax purposes, the “nowhere licenses” were effectively “used” in Indiana because the taxpayer purchased them and accepted delivery in Indiana, even though it did not actually employ the licenses. Ind. Letter of Findings No. 04-20140506, Ind. Dep’t of State Revenue (Aug. 26, 2015).
October 2015SUTHERL 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 6
Come See Us 7
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latest content!
A mere 28 days after oral argument, a three-judge panel of the Michigan Court of Appeals unanimously upheld a Court of Claims decision that sanctioned the Michigan Legislature’s retroactive withdrawal from the Multistate Tax Compact in 2014 PA 282, by ruling for the Michigan Department of Treasury in the consolidated appeal. The court held that the retroactive repeal of the Compact and the three-factor election within did not violate the Contract Clauses of the state or federal constitutions, reasoning that the Compact did not contractually bind Michigan from exercising its full legislative power. Accordingly, the Compact was subject to Michigan law concerning the interpretation of statutes. The court held that the retroactive repeal satisfied the Due Process Clauses of the state and federal constitutions because: (1) taxpayers generally do not have a vested right in the continuing validity of taxing statutes; (2) because the Legislature had a legitimate purpose for giving retroactive treatment to 2014 PA 282; and (3) because the
six-and-one-half year retroactive period was sufficiently modest. The court also struck down the taxpayers’ separation-of-powers argument, asserting that the Legislature has the authority and obligation to amend a statute it believes has been misconstrued by the judiciary and that 2014 PA 282 did not reverse a decision or repeal a final judgment. Finally, the Court held that the retroactive repeal does not discriminate against interstate commerce, violate taxpayers’ First Amendment rights to petition the government, or defy any other Michigan constitutional provision. The court noted that the application of 2014 PA 282 to IBM’s appeal of its 2008 tax year decided by the Michigan Supreme Court was not at issue here. Sutherland will provide additional analysis as this case moves through the appellate process. Gillette Comm Operations N Am & Subsidiaries v. Department of Treasury, No. 325258 (Mich. Ct. App. 2015) (consolidated with 49 other appeals).
That Was Fast: Michigan Court of Appeals Upholds Retroactive Repeal of CompactBy Jonathan Feldman and Stephen Burroughs
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Meet Gracie, the two-year-old Rat Terrier who was recently adopted by Atlanta SALT secretary Rether White.
Rether adopted this sweet girl through an Atlanta-area rescue group about three months ago, and the two are so happy to have found each other.
Gracie has wasted no time making herself right at home. She loves to play fetch and goes crazy over any round object – balls, eggs, a round top to a jar – you name it. She will happily destroy a tennis ball in less than two minutes.
Like most terriers, Gracie is a digger. Unfortunately for Rether, Gracie’s digging sometimes leads to late night baths. Gracie will go outside after midnight, dig a hole and lay in it until Rether traipses through the wet grass to retrieve her. Once inside, it’s bath time – at 1 a.m. Gracie is happy as a clam to spend this quality time with mom during the wee hours of the morning; Rether not so much.
This silly pooch is grateful to be October’s Pet of the Month!
SALT PET OF THE MONTHGracie
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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“Please Hang Up and Try Again”: Walkie-Talkie Services Are Not “Telephony” Subject to New York State’s Telecommunications Excise TaxBy Evan Hamme and Charlie Kearns
A New York State Division of Tax Appeals Administrative Law Judge (ALJ) determined that two-way radio communications services, or walkie-talkie services, are not telephone services subject to New York State’s telecommunications excise tax imposed under Tax Law § 186-e (186-e Tax). The petitioner uses specialized equipment or “repeaters” to strengthen voice signals received from one walkie-talkie and transmit those signals to other walkie-talkies. On audit, the New York State Department of Taxation and Finance (Department) assessed the 186-e Tax on the “repeater category” less amounts from equipment sales. The Department sought to impose the 186-e Tax by arguing a “telecommunications service” includes any transmission of voice signals by radio waves, including walkie-talkie services that use repeaters to strengthen the transmission of the voice signal. However, the petitioner did not establish a connection with the Public Switch Telephone Network (PSTN) (i.e., no dial tone and no ability to call a telephone number), which the petitioner argued is necessary to provide a “telephone service” subject to tax. On administrative appeal, the ALJ agreed with the petitioner, concluding that the legislature intended the 186-e Tax to apply to telephone companies and common carriers, and that the Department’s definition would extend the tax beyond its intended scope. According to the ALJ, the mere “ability to communicate with the holder of the other walkie-talkie” (and no interconnection with the PSTN) did not cause the petitioner’s services to be deemed “telephony” subject to the 186-e Tax. ALJ determinations are non-precedential and may be appealed by the Department. Matter of N.Y. Commc’ns Co., DTA No. 825586 (NYS Div. Tax App. Aug. 13, 2015).
The Oregon Supreme Court held that an out-of-state taxpayer providing voice and data telecommunications services over a global network was required to use a transactional approach to source sales of other than tangible personal property for Oregon sales factor purposes under Oregon’s costs of performance method. Sales are sourced to Oregon if a greater proportion of income-producing activity is performed in Oregon than in any other state, based on costs of performance. The taxpayer’s network, managed from a global operations center in New Jersey, worked together as an integrated whole and was used to provide all of the taxpayer’s services at issue. While the taxpayer provided voice and data service on its own facilities, the “last-mile service” was provided by a local exchange carrier, for which the taxpayer paid the local carrier an access fee. In calculating its Oregon income tax liability under the Department of Revenue’s costs of performance sourcing rule, the taxpayer included business activities
associated with its network operations in determining its income-producing activity. Because the taxpayer’s cost accounting study demonstrated that the costs related to such activities were incurred in New Jersey and exceeded those in Oregon, the taxpayer did not source its sales to Oregon. However, the court concluded that the taxpayer’s study did not identify the correct income-producing activities, noting that Oregon’s rule defining “income producing activity” looks to each particular “item of income” and defers to the Department’s “plausible” interpretation of that term as relating to individual sales (e.g., per minute charges for phone calls or flat-rate monthly subscriptions). Accordingly, the court held that the taxpayer failed to carry its burden to show that greater costs of performance of the transactions and activity to produce each individual sale, excluding the overall network costs, were incurred outside of Oregon. AT&T Corp. v. Dep’t of Revenue, 357 Or. 691 (Or. 2015).
Sorry, Wrong Number: Oregon Supreme Court Adopts Transactional Approach for Costs of Performance SourcingBy Charles Capouet and Timothy Gustafson
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Don’t Retaliate: Tennessee Retaliatory Tax Improperly Included Pennsylvania Workers’ Compensation AssessmentsBy Mike Kerman and Andrew Appleby
The Tennessee Supreme Court held that the Tennessee Department of Commerce and Insurance (Department) improperly imposed retaliatory taxes on Pennsylvania-domiciled insurance companies doing business in Tennessee, because Pennsylvania workers’ compensation assessments were not imposed on Tennessee insurance companies, but rather on the insurance companies’ policyholders. Tennessee Code § 56-4-218 authorizes the state to impose a retaliatory tax when another state imposes taxes or obligations on Tennessee insurance companies doing business in that state that exceed the taxes or obligations Tennessee imposes on that state’s insurance companies doing business in Tennessee. Here, Pennsylvania imposed assessments to support three workers’ compensation funds. The statutes authorizing these assessments state that they are imposed on insurers. However, a more recent statute states that the assessments “shall no longer be imposed on insurers,” and instead requires insurers to merely collect the assessments from policyholders. The court determined that this later statute implicitly repealed the original
statutes and that the assessments are therefore not imposed on insurance companies directly. Because the assessments are imposed on policyholders rather than insurance companies, Tennessee is not authorized to impose a retaliatory tax on Pennsylvania insurance companies. The court also rejected the Department’s argument that a related regulation, which provides that insurance companies remain responsible for collecting and remitting the total assessment amounts even if policyholders fail to pay, imposes a direct burden on insurance companies. The regulation imposes only a responsibility to “collect and timely remit” payments and does not impose any penalties or fines on insurance companies when policyholders fail to pay, the court concluded. Several New York-domiciled insurance companies filed similar tax refund claims, which the Tennessee Court of Appeals also denied. The Tennessee Supreme Court denied review of the New York cases, stating that the New York statutes differed significantly from the Pennsylvania statutes. Chartis Cas. Co. et al. v. State, No. M2013-00885-SC-R11-CV (Tenn. Oct. 2, 2015).
Use Your Illusion, Too: Oregon Tax Court Finds Multistate Compact Is an Illusory ContractBy Zack Atkins and Timothy Gustafson
The Oregon Tax Court held that the Multistate Tax Compact (Compact), which allows for an equally weighted, three-factor apportionment formula, was an illusory contract and its terms had been effectively disabled by the Oregon Legislature. The statute in question, ORS 314.606, provides that in case of conflict the provisions of ORS 314.605 to 314.675, which codified the Uniform Division of Income for Tax Purposes Act, trump the provisions of ORS 305.655, which codified the Compact. The taxpayer argued that ORS 314.606 violated, among other things, the Contract Clause of the Oregon Constitution and the Contract and Compact Clauses of the U.S. Constitution. The court concluded, as a threshold matter, that ORS 314.606 was intended to disable the Compact election rather than provide taxpayers with an alternative means of apportioning their income. The court also held that the state’s codification of the Compact did not create a statutory contract because, under Oregon law, any promises the state purportedly made when it adopted the Compact lacked consideration.
The terms of the Compact gave member states the unconditional right to withdraw at any time without having to satisfy any conditions precedent, and it contained no reciprocal promises. The court also observed that member states had modified or disabled provisions of the Compact for years without any objection from other member states, which was evidence that the member states regarded the Compact as non-binding. Based on the foregoing, the court held that ORS 314.606 did not impair any contractual obligations in violation of the Oregon Contract Clause or the federal Contract Clause. The court noted that even if a statutory contract had been created, the federal Contract Clause would not have barred the state from disabling the Compact election (and thus modifying its financial obligations) because doing so was reasonable and necessary to serve two important public purposes: protecting the fisc and ensuring that all businesses are on equal footing. Health Net, Inc. v. Dep’t of Revenue, No. 5127, 2015 WL 5249431 (Or. Tax Ct. Sept. 9, 2015).
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Who’s the Boss? Utah Includes Leased Employees’ Compensation in Taxpayer’s Payroll FactorBy Michael Penza and Timothy Gustafson
The Utah State Tax Commission ruled that a Utah-based manufacturing and marketing company’s payroll factor must include compensation paid to a third-party “professional employer organization” (PEO) pursuant to a lease agreement for employees working at the taxpayer’s Utah facilities. The employees signed employment agreements with the PEO, and the PEO paid the employees’ salaries and withheld taxes for purposes of the Federal Insurance Contribution Act. The taxpayer, however, supervised and disciplined the employees; made all hiring and firing decisions; controlled the employees’ work schedules and working conditions; and provided the employees with new-hire orientation, on-the-job training and an employee handbook. Nevertheless, the taxpayer reported a zero Utah payroll factor, excluding all compensation it paid the PEO for the
leased employees’ services while reporting deductions for salaries and wages on its federal tax returns. Rejecting the taxpayer’s position, the Tax Commission found that: (1) the taxpayer’s extensive control over the leased employees created an employer-employee relationship at common law; and (2) the taxpayer’s exclusion of the leased employees’ compensation from its payroll factor did not fairly reflect its Utah business activities. Accordingly, the compensation paid to the PEO for the “hundreds of people working in Utah” for the taxpayer was properly includable in the taxpayer’s payroll factor. Utah State Tax Commission, Appeal Nos. 05-0594; 05-1764 (decided Nov. 15, 2011; released Oct. 13, 2015).
If It Doesn’t Fit, You Can’t Tax It: Wisconsin Rejects Market-Based Sourcing Approach for Skechers’ IP Holding Company Royalty IncomeBy Nick Kump and Timothy Gustafson
The Wisconsin Tax Appeals Commission overturned a $2.4 million assessment against an intellectual property (IP) holding company, ruling that the company’s income-producing activities for Wisconsin sales factor purposes – IP licensing and related activities – occurred entirely outside of the state. The taxpayer, a wholly owned subsidiary of the California-based shoe company Skechers USA, Inc. (Skechers), owned all of Skechers’ domestic IP and licensed that IP to Skechers and to unaffiliated third parties across the United States in exchange for a royalty. The taxpayer also engaged in the design, development and marketing of “Skechers” brand footwear from outside of Wisconsin. Despite the taxpayer’s lack of employees, representatives, and real or tangible personal property in the state, the Department of Revenue issued an assessment against the taxpayer
based on its parent company’s wholesale sales of shoes bearing and incorporating the “Skechers” IP in the state. The Commission did not address whether the taxpayer had taxable nexus in Wisconsin and rejected the Department’s market-based approach for sourcing the taxpayer’s royalty income, finding that the sale of shoes was Skechers’ income-producing activity, not the taxpayer’s. Given that the taxpayer’s licensing activities occurred entirely outside of the state, the Commission concluded that its Wisconsin sales factor was zero. As a consequence of the ruling, several other cases held in abeyance will now move forward to determine whether the Department properly denied Skechers’ deductions for the royalty payments made to its subsidiary. Skechers USA, Inc. II v. Wisconsin Department of Revenue, No. 10-I-173 WI (July 31, 2015).
Missed Connections: Wyoming Board Rules that Temporary Storage Does Not Trigger Use TaxBy Olga Goldberg and Amy Nogid
The Wyoming State Board of Equalization held that telecommunications equipment shipped to and temporarily stored in Wyoming by a purchaser before being transported by the purchaser for installation in Montana by the manufacturer was not subject to the state’s use tax. Range Telephone Cooperative, Inc. (Range), a Wyoming-based telephone service cooperative, contracted with an equipment manufacturer, Cyan, Inc. (Cyan), to deliver and install an Ethernet network throughout its system, including in Montana. Cyan shipped the equipment to Range’s headquarters in Wyoming, where it was sorted by Range employees and then stored for three days
at a coop member’s Wyoming facility before being transported to Montana by Range’s representatives. The Board’s ruling relied on the parties’ contract under which Cyan retained ownership of and responsibility for the equipment from shipment until the installation project was completed in Montana. The Board rejected the Department of Revenue’s argument that a “continuous shipping stream” would be required to avoid use tax and that the stream was interrupted because Range, rather than a common carrier, took temporary possession of the equipment in Wyoming. In re Appeal of Range Telephone Coop., Inc., Dkt. No. 2014-14 (Wyo. State Bd. of Equalization, Sept. 23, 2015).
OCTOBER 2015 SUTHERLAND SALT SHAKER® PAGE 6
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RECENTLY SEEN AND HEARDOctober 18-21, 2015TEI Annual ConferenceDallas, TXMichele Borens on Transfer Pricing for State TaxMarc Simonetti on What You Need to Know in SALT: A Legislative, Regulatory and Judicial UpdateCharlie Kearns on Indirect Tax Trends in the Digital World
October 19, 2015NYC Department of Finance TaxRAPPNew York, NYLeah Robinson on How, When and Where to Challenge a New York City Business or Excise Tax AssessmentAmy Nogid on Case Studies: The Application and Impact of Recent Court Decisions
October 20-23, 2015COST Annual Conference Chicago, ILJeff Friedman on Wynne – Is It Important to Corporate America?Carley Roberts on the MTC ALAS Project on Transfer PricingMadison Barnett on Nebulous Nexus and Phantom Factors (or, perhaps, “Open Borders”)
October 27, 2015TEI Minneapolis MeetingMinneapolis, MNJonathan Feldman and Todd Betor on Class Dismissed! Consumer Class Action Refund Suits
October 27-29, 2015Paul J. Hartman SALT ForumNashville, TNJeff Friedman on 86-272 in a Digital Economy (Software, Economic Nexus)Prentiss Willson on Unitary Groups – Who’s In and Who’s Out Todd Lard on How will the Little Piggy Ever Know Where the Market Is?
October 29, 2015Strafford WebinarCharlie Kearns on Sales & Use Tax for Cloud Computing, Software, Apps, and Other Digital Products and Services
OCTOBER 2015 SUTHERLAND SALT SHAKER® PAGE 7
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November 1-4, 2015IPT Income Tax ConferenceAustin, TXPrentiss Willson on My State is Better than Your State
November 3-6, 2015IPT Credits and Incentives SymposiumAustin, TXMadison Barnett on a Regional Update – Southeast: New Developments from the Old South
November 4, 2015MACPA/MSBA Advanced Tax InstituteBaltimore, MDJeff Friedman on National Developments
November 4-7, 2015California Tax Policy Conference La Jolla, CAAndrew Appleby on Exploring the Facts and Circumstances of “Nonbusiness” IncomeScott Wright on the Blue Light Special, Finding the Market in California’s New Market-based Sourcing RulesLeah Robinson on 2015 SALT Litigation: Cliff ’s NotesMaria Todorova on I Swear It Wasn’t Willful Neglect! Making the Case for Penalty Abatement in California
November 5, 2015ABA Tax Section Philadelphia Tax ConferencePhiladelphia, PAJeff Friedman on State and Local Tax Litigation Issues and Strategies
November 10, 2015Interstate Tax Advanced CourseStamford, CTAmy Nogid on Jurisdiction and Nexus for State Income Tax Purposes
November 17, 2015COST Silicon Valley ChapterFoster City, CASutherland SALT will present
November 18, 2015Wall Street Tax Educational CorpNew York, NYJeff Friedman on New York State and City, New England Address Mid-Atlantic States Multi-State Financial Institution Issues
November 19, 2015TEI Baltimore-Washington ChapterBethesda, MDSutherland SALT will present
December 1, 2015TEI New York ChapterNew York, NYSutherland SALT will present
December 3-4, 2015NJSCPAEdison, NJJeff Friedman on a Multistate Update
December 17-18, 2015NYU Institute in State and Local TaxationNew York, NYTodd Lard on Apportionment IssuesJeff Friedman on a Review and Preview of Federal Constitutional IssuesPrentiss Willson on a Proactive Unitary Review: Avoiding the Assessment
December 21, 2015Strafford WebinarTim Gustafson and Andrew Appleby on Coordinating Multistate Tax Litigation
January 21, 2016NYSSCPANew York, NYJeff Friedman will present
COME SEE US
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