developments in state tax litigation and legislation · • p.l. 86-272 – skagen ... •...
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Developments in State Tax Litigation and Legislation FTA Annual Conference 2011-2012
• ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. ��� ���You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials.������The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
notice
presenters
• MARILYN WETHEKAM – Horwood Marcus & Berk
• ANN HOLLEY – KPMG
• JIM EADS – Ryan
• HELEN HECHT – Federation of Tax Administrators
overview
• Constitutional issues • Federal law and jurisdiction • Sales tax • Corporate income tax • Other state sup. ct. cases • Referenda – initiative – repeal – etc. • Big trends in state tax law
constitutional issues
• EQUAL PROTECTION – Armour v. City of Indianapolis
• abatement of outstanding taxes – no refunds for taxes paid
• NEXUS – KFC Corp. (Iowa - cert. denied)
• franchisor has nexus for state income tax • see also In the Matter of Jack Daniels Properties, Inc.
(Iowa) and Lamtec Corp. (Washington – cert. denied)
– Telebright (New Jersey) • telecommuting employee created nexus for income tax • see also Appeal of Warick McKinley, Inc. (California)
constitutional issues
• NEXUS (CONT’D) – Direct Marketing Assoc. v. Huber (Colorado)
• information reporting requirements violate Commerce Clause – undue burdens and discrimination
– Performance Marketing Assoc. v. Hamer (Illinois) • “Amazon” law violates Commerce Clause
– Barnesandnoble.com (New Mexico) • bricks-n-clicks – Internet seller has nexus on account of
affiliated instate retailer
– Scholastic Book Clubs (Tennessee and Connecticut) • nexus on account of teacher activities on behalf of seller
constitutional issues
• NEXUS (CONT’D) – Gordon v. Holder and Red Earth LLC v. U.S.
• injunction against PACT Act - due process
– ConAgra (WV Sup. Ct.) • third party licensees, sub-licenses and licensor has
limited control
– Scioto (OK Sup. Ct.) • sub-licenses (Wendy’s) – no nexus
• OTHER – American Express Travel Related Services (New
Jersey) • law reducing escheat period from 15 to 3 years is
constitutional
– Frey v. Comptroller (Maryland – cert. denied) • special nonresident tax upheld against constitutional
challenges • see also Comptroller v. Wynne (MD App. Ct. pending)
– Texas Entertainment Assoc. (Texas – cert. denied) • First Amendment
constitutional issues
federal law and jurisdiction
• P.L. 86-272 – Skagen Designs, Ltd. (Minnesota)
• merchandising (Wrigley)
– Ann Sacks Tile and Stone, Inc. (Oregon) • warranty work
• 4-R ACT – Midwest Railcar Repair, Inc. (North Dakota)
• non-railroad cannot challenge tax
– Housatonic Railroad Company, Inc. (Connecticut) • railroad cannot claim refunds of tax imposed on supplier
– Kansas City Southern Railway Co. v. Koeller (Illinois) • local assessment violated the Act
federal law and jurisdiction
• OTHER – Oakland County v. Federal Housing Finance
Agency (Michigan) • federal law preempting “all taxation” does not preempt
transfer taxes on property transferred by Fannie Mae and Freddie Mac
• JURISDICTION – Coors Brewing Co. v. Mendez-Torres (Puerto
Rico) • Puerto Rico did not waive right to assert comity after
Commerce Energy • see also Union Pacific Railroad Company v. Louisiana
Public Service Commission
federal law and jurisdiction
• JURISDICTION (CONT’D) – In re Indianapolis Downs LLC (Indiana)
• Bankruptcy court decided it had jurisdiction over a state tax issue
– Appleseed Intermediate Holdings, LLC (Ohio) • Bankruptcy court’s jurisdiction being challenged on
comity grounds
• SOFTWARE – DIGITAL PRODUCTS – Nortel Networks, Inc. v. State Board of
Equalization (California) • canned versus custom software
• MIXED TRANSACTIONS – Val-Pak East Valley, Inc. v. Arizona Department of
Revenue • advertising mailers
– Treece, Alfrey, Musat & Bosworth v. Dep’t of Finance (Denver) • whether medical records are tangible property
sales tax
• “MANUFACTURING & PRODUCING” – In the Matter of the Petition of The Brooklyn
Union Gas Company (New York) • no exemption for distribution assets
– Aquila Foreign Qualifications Corporation (Missouri) • no exemption for electricity used in convenience store
food service
– In the Matter of the Appeals of Edmiston Oil Company, Inc., et al. (Kansas) • no exemption for oil well equipment • see also Southwest Royalties, Inc. v. Combs (Texas)
sales tax
• “MANUFACTURING & PRODUCING” (CONT’D) – Public Service Co. of Colorado v. Dep't of
Revenue • generating electricity is the manufacturing of tangible
personal property
– Buffets, Inc. v. California Franchise Tax Board • restaurant business should have been allowed a
manufacturing incentive
• OTHER – Indiana Department of State Revenue v. AOL, LLC
• use tax
sales tax
• COMPOSITION OF UNITARY GROUP – Comcast (California SBE) – US West and Qwest (Oregon Tax Court) – AE Outfitter (Indiana Tax Court) – Rent-A-Center (Indiana Sup. Ct.) – Apple (California App. Ct.) – Reynolds Metals Company, LLC (Michigan App.
Ct.) – D.C. rules
corporate income tax
• ADD-BACK STATUTES – Beneficial New Jersey Inc. (New Jersey) – New Jersey Division of Taxation TAM
• BUSINESS PURPOSE/ECONOMIC SUBSTANCE – W. L. Gore (Maryland -Baltimore Circuit Ct.) – Sysco Corp (Massachusetts App. Tax Bd.) – Kimberly-Clark Corp. (Massachusetts) – Getty Images (Washington App. Ct.) – NIHC (Maryland -Baltimore Circuit Ct)
corporate income tax
• BUSINESS INCOME – Pacific Bell (California SBE) – Ensign-Bickford (Missouri AHC) – Emerson Electric (South Carolina S Ct) – North Carolina Final Agency Decision – B. P. Products (Louisiana Ct of App) – Oracle Corp “X 2” (Oregon Tax Ct )
corporate income tax
• Sales Factor: – Cost of Performance
• AT&T (IL, MA, OR) • VA PD 12-36
– Market Based • IL PLR “X 2”
– Special Rules • Panhandle (IL Cir Ct)
– Throwout/Throwback • Whirlpool Properties (NJ S Ct)
corporate income tax
• Alternative Apportionment Issues – UDITPA Section 18 – Use of Combined Reporting Method
• Media General Communications SC S.Ct. (2010) • Carmax Auto Superstores West Coast SC App. Ct. (2012)
– Equifax (MS Ct App)
• Definition of Gross Receipts – General Mills CA App. Ct. 2009 – In re Buffet Holdings U.S. Bankruptcy Ct. (DE
2011)
corporate income tax
• STATE CONSTITUTIONAL ISSUES – In Re Allcat Claims Service, L.P. (Texas)
• franchise (margin) tax is not an unconstitutional income tax
– Huber v. Colorado Mining Ass’n • indexed tax rate provision predating TABOR does not
violate TABOR
– Manzara v. Missouri • no taxpayer standing to challenge transferrable tax credits
other misc.
• Indiana and Ohio’s phase-out of the inheritance tax (see also Tennessee HB 3760)
• Kansas group’s push to repeal the income tax – leading to rate reductions
• Missouri group’s push to repeal the income tax – directing legislature to replace revenue from the
sales tax – constitutional problems
• North Dakota’s property tax repeal measure • Oklahoma proposal to phase out the income
tax
referenda – initiative – repeal -‐ ect.
• Montana – Leg. Referendum 123 – MEA-MFT v. McCullouch
• Washington – initiative to require supermajority vote invalid – League of Educational Voters v. Gregoire
• Maine – LD 849 – would use surpluses to reduce income tax rates
• Colorado – challenge to TABOR – Kerr v. Colorado – the “guarantee clause”
referenda – initiative – repeal -‐ ect.
• Georgia’s experience • California tax proposals • Oklahoma tax proposals • Kansas tax reform • Illinois • etc.
“reform”
• NCSL reports that in 2011, for the first time in 10 years, states cut taxes more than raised them – due to expiration of temporary tax increases – CA, NYS, NC, allowed temp. income tax increases
to expire – other states lowered rates or provided incentives
– MI, DE, ND, IN, FL, AZ, ME, NJ, NH reduced corporate or business taxes – other states increased tax credits for businesses
– CA and NC let temp. sales tax rate increases expire and other states expanded exemptions – but other states, including CT, HI and NV increased the tax.
big trends in state tax law
• Incentives are still important – Studies of effectiveness
• Massachusetts, Oklahoma and Minnesota – engaging in detailed studies
• Maryland will review certain incentives
– States still focused on jobs/business incentives • Hiring incentives • Targeted incentives (e.g. film, high-tech, etc)
big trends in state tax laws
• Mobile Workforce HR 1864 – Passed the House – no Senate bill
• BATSA HR 1439 – Pending in the House – no Senate bill
• Marketplace and Streamlined bills – Pending in House and Senate Committees
• Digital Goods – Pending in House and Senate Committees
federal legislation