Posted tagged ‘limited partnership’

Weekly SALT News Update

September 21, 2011

State DOR Letters and Rulings

Florida ruled that when a cleaning service provider uses cleaning supplies to perform the cleaning services, sales and use tax is due on those supplies. However, to the extent those supplies are not used, but sold to a customer for their use, the transaction is exempt as a sale for resale.

The Texas Comptroller ruled that a series LLC would be treated as a single entity for Texas franchise tax purposes. The entity cannot be broken up into separate parts, but must file as one.

Alabama ruled that winter park provided amusement services subject to sales tax. The amusement services included hay rides, Christmas plays, and Christmas displays.

The Illinois Department of Revenue published a letter on the sales tax treatment of software maintenance agreements. It is a fairly aggressive position, with any transfer of “patch” code constituting a taxable transfer.


State Regulations and Public Notices

Both Georgia and West Virginia filed updated Section 328 taxability matrices for their respective states. Under the Streamlined Sales and Use Tax Agreement (SSUTA), each state must maintain a taxability matrix that defines the manner in which that state treats all defined items. It must make them available to the public.

New Jersey released guidance on sales tax imposed for investigation and security services that are sourced to that state. It opined that the taxable base is quite expansive, and should include the actual costs to perform the service, any materials or labor used, including interest, taxes paid, and any other expense. Reimbursable expenses such as meals and mileage must also be included.

Rhode Island issued a public notice of the revised regulation for the taxation of software, whether in electronic form or on physical media. A source at the Division of Taxation has advised that the proposed regulation has received little comment, and is not expected to change. The effective date for the taxation of prewritten software delivered electronically by download or other electronic means is effective October 1, 2011. The regulation also addresses the taxation of maintenance for prewritten software.

Indiana issued guidance on the taxation of drop shipments. It opined that generally the drop shipment, if properly followed, would not be subject to sales tax based on the sale for resale exemption. The purchaser requesting the drop shipment must present the prescribed Form ST-105.


State Legislative Affairs

Maryland’s legislative services staff presented the argument that a gross receipts tax would benefit the state and increase tax revenues. It used a Power Point presentation to make the sale.

At the federal level in an issue directly impacting the several states, unions are applying political pressure for legislators to vote “no” on HR 1439. HR 1439, known as the “Business Activity Tax Simplification Act,” would regulate the state taxation of interstate commerce and deal with the nexus issues being raised at the state level, employing the Joyce approach as opposed to the Finnigan approach. As an aside, Texas uses the Joyce approach for its franchise tax. The Congressional Budget Office has estimated that the act would “cost” the states $2 billion. The Multistate Tax Commission echos the concern of the cost to the states, and passage seems highly unlikely.

Judicial and Administrative Decisions

The Louisiana Court of Appeals for the First Circuit has ruled in favor of the taxpayers, Utelcom Inc. and UCOM, Inc., and reversed the trial court’s decision. The taxpayers owned limited partnership interests in three Delaware limited partnerships that were Sprint affiliates. They had not commercial domicile in Louisiana, and but for these limited partnership interests they had no connection with Louisiana. The taxpayers argued that Louisiana’s assessment of franchise tax against them violated the privileges, immunities, and protections afforded them by the Commerce Clause of the United States Constitution and the Due Process and Equal Protection Clauses of the United States and Louisiana Constitutions. Louisiana argued that “unity of purpose” caused the actions of related Sprint entities to create nexus with taxpayers. The Court found that there was no statutory basis for this proposed incident of taxation, that the entities were all separate juridical entities, and there was no “Louisiana codal, statutory, or jurisprudential authority” to attribute the actions of one Sprint entity against the other.

Louisiana also argued that the actions of the general partner of US Telecom acting as the general partner for Sprint Communications LP should be attributed to the taxpayers as some form of agent for the taxpayers. The Court found that the general partner has the authority to bind Sprint Communications LP, but it lacks the authority to act as the agent for the taxpayers.

Louisiana pointed to a regulation that allows taxation where a person conducts business in Louisiana through a partnership, joint venture, or otherwise. However, the Court pointed to the fact that the statute limits this to corporations, and that the Department of Revenues attempt to expand the taxing statute beyond the scope set by the legislature must fail. Though determining that the franchise tax would not extend to the taxpayers by statute, the Court, nonetheless, addressed the argument in Secretary, Dep’t of Revenue, State of La. v. Gap (Apparel), Inc., 886 So.2d 459 (La.App. 2004) (finding that a company’s receipt of royalties from the use of its intangible property in Louisiana). Because the property being used was not owned by the taxpayers, Gap did not apply.

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.

Texas Attorney General Files Response to Franchise Tax Challenge; Supreme Court Orders Oral Argument for Late October, But Signals Dismissal of Two of Three Claims by Allcat?

August 22, 2011

  By Paul Masters and William Grimsinger

The Solicitor General of the Texas Attorney General has taken the lead and on August 18, 2011 filed a short response to Allcat’s petition to declare the new Texas franchise tax unconstitutional. In summary, Texas argues that (i) a tax on the income of an entity does not constitute a tax on a person’s share of that entity’s income, (ii) that the Texas Supreme Court’s ruling should be narrowed to a natural person with an interest in a limited partnership (as opposed to striking down the franchise tax in toto), and (iii) that the last two issues raised by Allcat are not properly before the Texas Supreme Court.

Tax on an Entity’s Income Is Not a Tax on a Natural Person

Texas argues that the franchise tax does not run afoul of the Bullock amendment, which prohibits a tax on the net income of a “natural person,” including a person’s share of partnership income, because the franchise tax is imposed at the entity level, not the individual level. In other words, it is a tax that reduces the partnership’s income itself, which is then divided up and allocated to the individual partners who may include natural persons.

The Solicitor General also points out that were Allcat to be correct, that then any tax that reduces a partnership’s income would constitute an unconstitutional tax, including the sales tax, which was already in place at the time the Bullock amendment became law. Why would this be true? Because any tax that reduces the income of a partnership will inevitably reduce a partner’s share of the income. In other words, remove the sales tax and the “net income” of a partner from his partnership interest would be more than with the imposition of the sales tax. Thus Allcat’s argument fails as being overly expansive and ignoring the plain language of the Texas Constitution.

Limit the Decision to Natural Persons Who Are Partners of Limited Partnerships

Finally, the Solicitor General argues that if Allcat is correct, such that the franchise tax is unconstitutional as applied to income of natural persons from partnerships, that such a ruling should be limited to only those cases. Thus the franchise tax would continue to be constitutionally imposed upon partnerships without natural persons, corporations, and other such entities.

Dismiss the Allcat’s Last Two Claims

The Solicitor General asks the Texas Supreme Court to dismiss Allcat’s claim for attorney fees, as no statutory authority exists for such and the claim via the Uniform Declaratory Judgment Act is not permitted via the statutory jurisdiction that Allcat used to petition the Texas Supreme Court.

Supreme Court Order

On August 22, 2011, the Supreme Court set the case for oral argument the week of October 24, and ordered the parties to address the following arguments in their briefs:

1. Whether the grant of original jurisdiction in section 24 of House Bill 3 (2006) is valid under Article V, Section 3 of the Texas Constitution.

2. The merits of Claim 1 (Bullock Amendment).

3. Whether Claim 2 (Equal and Uniform Taxation Clause) and Claim 3 (Attorney’s Fees) are beyond the scope of the jurisdictional grant in section 24 of House Bill 3.

This action seems to indicate that the Texas Supreme Court has taken a narrow view of two of Allcat’s claims: (i) that the Texas Comptroller treated Allcat differently than other contractors (a disparate treatment claim), and (ii) that Allcat is entitled to attorney fees based on the Uniform Declaratory Judgments Act (the “UDJA”).

As to the former, the Attorney General argues that the basis on which Allcat relied to acquire original jurisdiction by the Texas Supreme Court merely goes to the constitutionality of the franchise tax based on a violation of the Bullock Amendment. The jurisdictional provision of Section 24 to HB 3 does not provide for such a challenge. As to the latter, the Attorney General points to the general principle of law in Texas that, unless authorized by statute or contract, attorney fees are unavailable to a party. While Allcat argues that this is a UDJA claim, which provides for attorney fees, the Attorney General points to the limited jurisdiction upon which Allcat relied, via HB 3, and as no attorney fees were provided and HB 3 does not construe a constitutional challenge as a UDJA claim, then the request for attorney fees must be denied.

Using the UDJA to Get Attorney Fees

Historically, taxpayers in Texas have sought to characterize actions against the Texas Comptroller as a form of a UDJA claim, which argument has always been vigorously contested. See  Strayhorn v. Raytheon E-Systems, Inc., 101 S.W.3d 558, 572 (Tex.App.-Austin 2003, pet. denied) (“A UDJA claim brought merely to receive attorney’s fees will not lie.”). On rare occasion, the courts have agreed to treat such a claim as a valid UDJA claim for which attorney fees can be granted. The Texas Supreme Court may use the Allcat decision to further clarify the availability of UDJA actions, especially in the context in which the Texas Comptroller is a party, but the expectation is that the Texas Supreme Court will limit argument to the more narrow question of whether the newly-enacted Texas franchise tax violates the Bullock Amendment of the Texas Constitution.