Posted tagged ‘franchise tax’

Weekly SALT News Update

August 29, 2011

Texas Supreme Court Rules “Pole Tax” Does Not Violate First Amendment

In a unanimous decision Texas Supreme Court rules stripper “pole tax” does not violate First Amendment. The decision reverses a 2-1 Third Court of Appeals decision, which had held the tax violated the First Amendment in upholding the trial court’s ruling. The decision remands the case to the trial court, where three arguments remain, all based on challenges to the tax under the Texas Constitution.

New Jersey Appeals Court Upholds Tax Court Finding No Unitary Nature of Limited Partnership

New Jersey Appellate Division holds limited partner of limited partnership was not subject to Corporation Business Tax because limited partner was not unitary with limited partnership and limited partner had no independent nexus with NJ. The decision upholds the lower court’s decision. The decision is discussed in greater detail at this blog post.

Missouri Denies Sale for Resale Exemption for Guest Houses

Worlds of Fun  (“WOF”) operated cabins and cottages that it rented to guests on a nightly basis. It claimed a sale for resale exemption on tangible personal property that it provided to the guests in the quarters, such as benches, beds and mattresses. The Administrative Hearing Commission denied the exemption on the basis that insufficient control was transferred to the guests. A similar case regarding toiletries is currently pending before the Texas Third Court of Appeals, for which the trial court denied the sale for resale exemption.

California Governor Asks Legislature for Mandatory Single-Factor Formula

The California governor asks the Legislature for a mandatory single-factor formula for state income tax based on sales in California. The hope is that such a change would incentivize business to maintain corporate headquarters in the state.

Pennsylvania Reissues Ruling on Computer “Help” Services

The Pennsylvania Department of Revenue has reissued SUT-6-014, which clarified those “help” services that are subject to sales tax. Where the taxpayer’s employees are not under the control of the customer, the services rendered are not taxable as a “help supply” service.  61 Pa. Code § 60.4.

Arizona Appeals Rules No Need to Exhaust Administrative Remedies

The Arizona Court of Appeals reversed a lower court decision, and ruled that a direct appeal to the tax court is permitted in connection with a tangible personal property valuation.

New Mexico Accepts CPA’s Negligence to Waive Penalty

A taxpayer who had not filed for the New Mexico gross receipts tax was granted a waiver from the payment of penalty based on the representation that such non-filing was the result of advice provided by a CPA.

Allcat Replies to Texas Attorney General in Challenge to Texas Franchise Tax

Allcat has filed its reply to the Texas Attorney General in connection with its challenge that the Texas Franchise Tax (also known as the “margin tax”) is unconstitutional. Allcat argued that limited discovery was appropriate at the Supreme Court level, that the Uniform Declaratory Judgment Act does apply, and requested more time to brief the case.

New York Rules Estimated Audit Proper with Partial Records

The New York Division of Tax Appeals has ruled that due to only partial records being provided in a protracted audit of a taxpayer, that it was appropriate to estimate the sales tax due.

Texas Supreme Court Requests Briefing of Sale for Resale Case 

The Texas Supreme Court has requested briefing in connection with a claim for the sale for resale exemption for prizes sold in “claw” machines.

New York Rules Not Able to Estimate Tax Refund

The New York Division of Tax Appeals has ruled that a taxpayer cannot use estimate to calculate refund or credit amount for sales and use tax.

Indiana Tax Court Rules for Miller Brewing on Apportionment

Miller Brewing avoids income tax on Indiana sales if third party picks up at plant. Court says irrelevant that tax avoided in all states as a result of decision.

Georgia Considers Tax Court

A Georgia legislative subcommittee considered the creation of a tax court on August 24, 2011.

Weekly SALT News Update

August 22, 2011

Tax Foundation Report Opines Texas Margin Tax Not a Model Act

A recent Tax Foundation report concludes that the Texas margin tax – untried when enacted in 2006 – collected less revenue than expected, caused significant confusion and compliance costs, resulted in litigation and controversy, and should not be tried in other states.

Tennessee and New York Opine Electronic Goods Not Subject to Sales Tax

Tennessee provided a written opinion that paper shop drawings would be subject to sales tax, but not a digital (paperless) version of the same. New York authorities similarly concluded that the sale of an electronic PDF would not be subject to sales tax, while a printed version of the PDF would be.

New Jersey Issues Apportionment Guidance

In the wake of the new apportionment guidelines set forth by the New Jersey Legislature, New Jersey authorities have outlined the manner for the phase-in of the single factor formula in replacement of the three-factor allocation formula for the Corporation Business Tax. For privilege periods beginning on or after January 1, 2012 but before January 1, 2013, the sales fraction will account for 70% of the allocation, and the property and payroll fractions will each account for 15% of the allocation. The following year will be 90% sales, and the next will be 100% sales fraction.

Louisiana Appeals Court Finds Sale of BP Refinery in Normal Course of Business

BP prevailed in its motion for partial summary judgment, arguing that its sale of a refinery in Louisiana should be classified as apportionable income, taxed proportionate to all the states in which BP does business, as opposed to allocable income and thus taxed only by Louisiana. Because BP was able to show that it regularly sold refineries, the Louisiana appeals court found that such sale was deemed to be part of its regular course of business, and thus the income to be taxed proportionate to its income in all states in which it does business.

Virginia Opines In-state Employees Do Not Constitute Nexus If No In-state Projects

Virginia tax authorities have opined that because the only link between an out-of-state company and Virginia was the presence of two employees who lived in Virginia but did not work on any in-state projects, there was not a sufficient contact to constitute nexus for income tax purposes.

Texas Comptroller Rules Any Filed Method Can Be Used for New Group

Previously, when a Texas Comptroller auditor determined that separate companies needed to amend their filings to report as one consolidated group, the auditor would insist that the only proper methodology would be that methodology used by the reporting entity. The Texas Comptroller has reversed this practice, and opined that the resulting entity can file using any methodology that had been previously filed by the combined entities.

Texas Comptroller Reverses on Software License As Tangible Personal Property

Previously, the Texas Comptroller had issued audits in which it would not treat a license of software as a sale of tangible personal property. As a result, taxpayers who licensed software could not receive the full benefit of the cost of goods sold methodology. This decision has been reversed, and the Texas Comptroller now agrees with taxpayers that the license of software does constitute a sale of tangible personal property for franchise tax purposes.

Whirlpool Secures Partial Victory in New Jersey Supreme Court Case: “Throw-Out” Rule Unconstitutional When Applied to Sales in States without Income Tax

August 4, 2011

 By Paul Masters

The long-contested constitutional issue concerning the New Jersey throw-out rule has finally culminated in a New Jersey Supreme Court decision recognizing the general constitutionality of the rule, but for its application to sales receipts attributable to states that choose not to impose an income tax. But first, we summarize what this decision did not do. The decision did not address in any significant way the current challenges to nexus that the states confront. Rather, the decision reaffirmed existing federal law, 15 U.S.C.A. §§ 381-84 (commonly referred to as “P.L. 86-272”), and looked to well-grounded constitutional law by the United States Supreme Court. Cases regarding nexus continue to move forward, with KFC reaching an unfavorable decision at the Iowa Supreme Court, on petition for a writ of certiorari at the United States Supreme Court, and Texas also in that mix with the current Taco Bell litigation (examining whether Taco Bell has nexus with Texas by sending a third-party to inspect its Texas franchisees). However, the decision does push back against state attempts to expand its tax base, by placing a firm limit on expansion where a state is able to claim and tax revenue from another state because such state, such as Nevada, has elected not to impose an income tax on activities in which the constitutional nexus standard has been reached.

The throw-our rule that was challenged excluded certain income from the sales fraction’s denominator of the modified three-factor formula used by New Jersey, as provided for in New Jersey’s statutory scheme. N.J. Laws, L. 2002, c. 40, § 8.  The modified three-factor formula employed by this legislation weighed a taxpayer’s property, payroll and sales in the numerator, while the denominator was the taxpayer’s total taxed sales, as opposed to the general provision for taxpayers to use total sales. The non-taxed sales are thus “thrown out,” hence the name for the rule. The New Jersey legislature subsequently amended the statute to eliminate the throw-out rule, but only after the date of the operative facts in these cases. N.J. Laws, L. 2008, c. 120.

This decision is a partial affirmation of prior decisions by both the New Jersey Tax Court and the Appellate Division of the New Jersey Superior Court. In these prior decisions, both courts upheld the constitutionality of the throw-out rule. The courts looked to the constitutional standard provided in United States v. Salerno, 481 U.S. 739, 107 S. Ct. 2095, 95 L. Ed. 2d 697 (1987). Tax Court found three general circumstances where the throw-out rule operates constitutionally: (i) the income excluded from the denominator relates in whole or in part by activities in New Jersey, (ii) the application of the throw-out rule has no material effect on the sales fraction because the income in the non-taxing state is insignificant to the total income of the taxpayer, and (iii) the property and payroll fractions significantly temper the impact of the disputed sales fraction.

The Appellate Division agreed with the application of the Salerno standard, pointed to the lack of any case law in which an allocation formula was struck down as facially unconstitutional, and observed that it is unlikely that any person can actually demonstrate that “a given formula will yield allocations for most out-of-state taxpayers that are unconstitutionally disproportionate.” Because Whirlpool did not contest that it had nexus with New Jersey, and that sales to non-taxing states were not part of that business, the Appellate Division concluded the constitutional conditions were satisfied for application of the throw-out rule by New Jersey. The Appellate Division summarized that the throw-out rule does not result in double taxation, does not pressure taxpayers to increase their business activities in New Jersey at the expense of other states, and is thus facially constitutional.

The Supreme Court disagreed, in part. In doing so, the focus turned to four-prong approach used in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S. Ct. 1076, 1079, 51 L. Ed. 2d 326, 331 (1977). This four-prong approach will sustain a state’s formula apportionment methodology for income tax when the tax: (i) is applied to an activity with a substantial nexus with the taxing state, (ii) is fairly apportioned, (iii) does not discriminate against interstate commerce, and (iv) is fairly related to the services provided by the state. Complete Auto, 430 U.S. at 279, 97 S. Ct. at 1079, 51 L. Ed. 2d at 331. The Whirlpool court focused on the second prong: fair apportionment.

Fair apportionment has two requirements: (i) internal consistency and (ii) external consistency. Internal consistency is where an application of the formula by every state would result in no more than all the taxpayer’s business income being taxed. Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 169, 103 S. Ct. 2933, 2942, 77 L. Ed. 2d 545, 556 (1983).  It is a hypothetical analysis of what the world would be like if every state had New Jersey’s throw-out rule. The second requirement is an actual analysis of whether the state’s reach goes beyond that portion of revenue that is fairly attributable to economic activity within the taxing state. Okla. Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 185, 115 S. Ct. 1331, 1338, 131 L. Ed. 2d 261, 271-72 (1995). In other words, whether New Jersey’s throw-out rule reasonably reflects the activity within its jurisdiction.

Whirlpool argued that by including out-of-state receipts in New Jersey’s tax base, New Jersey taxed more than its “fair share.” The New Jersey Supreme Court divided these receipts into two parts: (i) receipts from states that could not impose an income tax due the lack of nexus in that state, and (ii) receipts from states that chose not to impose an income tax. As to the first, the Court ruled that the throw-out rule was constitutional, but as to the latter, the answer is “no.”

The reasoning as to the former is that another state’s decision tax, or not tax, its income would cause a change in New Jersey’s share of the income it is entitled to tax. Thus it is not externally consistent. The change is not reflected on the taxpayer’s activities (the economic activity in within the taxing state), but merely a reflection of another state’s legislature to impose tax. But as to the second, regardless of the other state’s choice regarding income tax, the amount that New Jersey would be able to tax via the throw-out rule remains the same. The only way the result would change is if the taxpayer alters its contacts with the other state.

Franchisor Subject to Iowa Income Tax Absent Physical Presence

January 5, 2011

By Paul Masters

In an opinion filed December 30, 2010, the Supreme Court of Iowa has upheld a lower court decision imposing income tax on a franchisor (KFC), a Delaware corporation with its principal place of business in Louisville, Kentucky.  KFC had no physical presence within the state of Iowa, but licensed its system to related entities and independent franchisees.  KFC owned no restaurant properties in Iowa and had no employees in Iowa.

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