Posted tagged ‘nexus’

A Federal-Level Attempt to Codify the “Physical Presence” Nexus Standard From Quill

June 15, 2017

By Adam Koelsch

On June 12, 2017, The Honorable James Sensenbrenner (R. WI 5th District) introduced into the U.S. House of Representatives a bill, designated H.R. 2887, which would codify the nexus standard set forth by the U.S. Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

The bill is set against the backdrop of multiple recent attempts by the states to persuade the Supreme Court to take a case that would revisit and overturn Quill.  Quill held that the dormant Commerce Clause of the U.S. Constitution prohibits a state (or local taxing authority) from imposing upon a retailer an obligation to collect and remit sales tax from its sales to customers within that state if the retailer does not have a “physical presence” in that state.

Various state court decisions have interpreted Quill to limit the physical presence standard to sales taxes only.  With respect to other taxes, those courts adopted a more expansive “economic presence” standard, that is, broadly speaking, a standard by which a court attempts to determine whether a person exploited the state’s market, received protection from the state, and/or derived some benefit from the state, thereby subjecting the person to tax.

H.R. 2887, however, would prohibit a state from taxing, or regulating, a person’s activity in interstate commerce unless the person is “physically present in the State during the period in which the tax or regulation is imposed.”  H.R. 2887 § 2(a).  Essentially, the bill would roll-back the state court economic nexus decisions and require application of Quill to all tax types.

The bill defines “physical presence” as:  (A) maintaining a commercial or legal domicile in the state; (B) owning, holding a leasehold interest in, or maintaining real property such as an office, retail store, warehouse, distribution center, manufacturing operation, or assembly facility in the state; (C) leasing or owning tangible personal property (other than computer software) of more than de minimis value; (D) having one or more employees, agents, or independent contractors present in the State who provide on-site design, installation, or repair services on behalf of the remote seller; (E) having one or more employees, exclusive agents or exclusive independent contractors present in the state who engage in activities that substantially assist the person to establish or maintain a market in the State; or (F) regularly employing in the State three or more employees for any purpose.  H.R. 2887 § 2(b)(1).

Owning real property in a state has been traditionally recognized as providing sufficient nexus to subject a person to tax.  In addition, practitioners familiar with nexus issues will recognize elements taken from Supreme Court case law interpreting the Quill standard, such as the affirmation in subsection (D) that the presence of a single employee (Standard Press Steel Company v. State of Washington, 419 U.S. 560 [1975]) or an independent contractor (Scripto Inc. v. Carson, 362 U.S. 207 [1960]) is sufficient to subject a person to tax.

But parts of the physical presence standard set forth by the bill are more novel.  Subsection (C) of the above definition would likely have significant impact upon the debate regarding the taxability of computer software, which some states have considered tangible personal property, even when transmitted entirely over the internet.  Indeed, the manner by which courts interpret the term “tangible personal property” in subsection (C) will bear upon the question of whether states will be permitted to tax items such as streaming videos and music, when the taxpayer has no other presence in the state.  Moreover, Courts might interpret subsection (F) to expand the ability of states to claim that an out-of-state business entity has established nexus in the state by allowing any three of its employees to work from their homes in that state, although the allowance was made solely for the employees’ convenience, and although the business otherwise does not have any operations in the state.

The bill also sets forth a definition of “de minimis physical presence,” which includes: (a) entering into an agreement under which a person, for a commission or other consideration, directly or indirectly refers potential purchasers to a person outside the State, whether by an Internet-based link or platform, Internet Web site or otherwise; (b) any presence in a State for less than 15 days in a taxable year (or a greater number of days if provided by State law); (c) product placement, setup, or other services offered in connection with delivery of products by an interstate or in-State carrier or other service provider; (d) internet advertising services provided by in-State residents which are not exclusively directed towards, or do not solicit exclusively, in-State customers; (e) ownership by a person outside of the State of an interest in a limited liability company or similar entity organized or with a physical presence in the State; (f) the furnishing of information to customers or affiliate in such State, or the coverage of events or other gathering of information in such State by such person, or his representative, which information is used or disseminated from a point outside the State; or (g) business activities directed relating to such person’s potential or actual purchase of goods or services within the State if the final decision to purchase is made outside the State.  H.R. 2887 § 2(b)(2).

Finally, the bill also provides that “[a] State may not impose or assess a sales, use, or similar tax on a person or impose an obligation to collect or report any information with respect thereto, unless such person is either a purchaser or a seller having a physical presence in the State.”  H.R. 2887 § 2(c).

That provision that would eliminate remote seller sales and use tax reporting requirements recently enacted by a number of states, most notably, in Colorado.  See Colo. Rev. Stat. § 39-21-112 (3.5).

Furthermore — because that provision provides that a sales and use tax may not be imposed upon anyone who is not a “seller,” and because the term “seller” specifically excludes “marketplace providers” and “referrers,” as defined elsewhere in the bill (H.R. 2887 § 4[a][1], [5], [7][A], [B]) — that provision would prohibit state measures such as Minnesota H.F. 1, which was passed on May 30, 2017, that impose sales tax and use tax collection requirements upon marketplace providers, e.g., eBay and Amazon.

Interestingly, the bill provides that the federal courts will now have jurisdiction to hear civil actions filed to enforce the provisions of the bill.  H.R. 2887 § 3.  Currently, lawsuits involving state taxes are largely absent from the federal system as a result of the Tax Injunction Act, which provides that “district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.”  28 U.S.C. § 1341.  H.R. 2887, however, allows any taxpayer challenging a state tax based upon nexus may bring suit in federal court.  Obviously, this new “federal option” would change the dynamic of SALT litigation involving nexus questions.

In short, the bill, if passed, would make dramatic changes to State and Local Tax law and litigation landscape.

2011 Year-End SALT Update

January 6, 2012

 by Jennifer Weidler

ARIZONA

Arizona DOR Finds Nexus for Sales Representatives Providing Customer Support and Training

Of course it had nexus: Arizona DOR rules that corporation has substantial nexus due to presence of sales representatives who provide customer support and training.

(more…)

Weekly SALT Update Nov. 7, 2011

November 7, 2011

 By Paul Masters with contributions by Jennifer Weidler in Chamberlain’s Philadelphia office.

State Regulations and Public Notices

California Board of Equalization issues a proposal to amend the definition of “retailers engaged in business in this state,” in conformance with AB 155. It will take effect either September 15, 2012 or January 2013. The effect of this change would be to expand the requirement for retailers to register with the Board and remit California use taxes, or to be subject to payment of these use taxes on such failure to remit.

Utah State Tax Commission notifies public of proposed rule change implementing three-factor formula for apportionment It also requires services to be “inUtah” if the benefit inUtah exceeds that received in any other state, and sets forth rules for the apportionment of income from intangible property.

Indiana Department of Revenue issues information bulletin on application of sales tax to restaurants, and a dealer must pay sales tax on the value of cars not used by sales staff, services to setup rented property are included as taxable as part of the rental receipts, cleaning agents do not qualify for manufacturing exemption, and no public transportation exemption for company that did not document sale of trucking services for hire – listed wrong on invoice. And in an expanded discussion, the DOR rules a manufacturer must pay use tax on HVAC equipment essential for manufacturing operations.

And then there were seven: Ohio revises its requirement for Ohio car dealers to collect Ohio sales tax on non-resident purchases of cars to be taken out of state, with collection required for seven states.

Colorado DOR revises FYI detailing responsibility of taxpayer to pay sales tax on vending machine receipts. Colorado DOR revises FYI 62 regarding rules on collecting local sales tax to be remitted to the state. (more…)

Weekly SALT News Update

October 31, 2011

 

 By Paul Masters

State DOR Letters and Policy Rulings

Illinois Department of Revenue has issued several rulings, including:

* explains how prescription drugs are taxed, and the Service Occupation Use Tax on tangible personal property transferred incident to sales of service;

* explains taxation of software maintenance agreements and the Service Occupation Tax;

* rules that a chemical manufacturer’s containers used to ship fluid products to customers are not subject to sales or use tax because (i) the customers sell the products in the containers and provide the manufacturer with a resale certificate at the time of purchase, and (ii) title to the containers is transferred to the customers;

* when a construction contractor permanently affixes tangible personal property to real property, the contractor is deemed the end user of that tangible personal property. As the end user, the contractor incurs Use Tax on the cost price of that tangible personal property. See 86 Ill. Adm. Code 130.1940 and 86 Ill. Adm. Code 130.2075.;

* the “gross receipts” portion of the Retailers’ Occupation Tax is explained;

* information or data that is electronically transferred is not considered tangible personal property;

issues a detailed (and excellent) ruling on the application of the Service Occupation and Use taxes in connection with engineering services provided along with the sale of custom bridges;

* rules that integrally connected equipment to agricultural equipment (exempt) may also be exempt;

* a ruling regarding the new exemption for property used to repair aircraft; and

* in a significant ruling on Medicare, the DOR rules that in order for a Medicare payment to be exempt from sales tax, the payment must be made directly to the government. Any payments made to a patient or insurance company that would later be reimbursed by the government are subject to tax. It is all in the planning.

 

State Regulations and Public Notices

Ohio releases updated taxability matrix for Streamlined Sales and Use Tax Agreement.

 

State Legislative Affairs

Ted Poe is a conservative representative from Texas. Jackie Speier is a liberal representative from California. And they agree on one thing: states should be able to require Internet retailers to collect sales and use tax absent traditional nexus. H.R. 3179 has been introduced, and it has the support of representatives from both parties in several states, including Arkansas, California, Florida, New York, Tennessee, and Texas. It is known as the Marketplace Equity Act of 2011, and is the first bill that has a real chance of passage.


Judicial and Administrative Decisions

Michigan Tax Tribunal details factors to rely on in determining the proper valuation of commercial property. The case included a traditional battle of the experts (three against one), with the one prevailing because of a more careful study, ample explanation as to the reasoning employed, and better comparables.

 

Other Documents

None noted.

Weekly SALT News Update

October 18, 2011

State DOR Letters and Administrative Rulings

Illinois Office of Administrative Hearings respects the entity, and rules Department of Revenue cannot go after owner of corporation for use tax liability on vessel use in Illinois. Use tax is not a trust tax. It also rules that the foreign corporate owner of a vessel used in Illinois for 30 days/year has sufficient nexus to allow Illinois to impose use tax on value of vessel. Taxpayer allowed credit for tax paid outside the state. Correct tax base for assessment of use tax is the purchase price reduced by depreciation prior to first use in Illinois.

Virginia Tax Commissioner rules that a taxpayer cannot include a foreign corporation that did not have nexus with Virginia into its combined Virginia corporate income tax return. Further, the taxpayer failed to follow proper procedure to claim a valid business purpose to exclude factoring fees required to be added back. In another ruling, it finds that a corporate officer who had no responsibility for financial reporting matters was not personally liable for unpaid use tax pursuant to Va. Code § 58.1-1813. The occasional sale exemption applies for a school that engages in sales of surplus items once per year (or every other year). In fact, as long as no more than three such sales occur each year, the sales are exempt. A manufacturer who leases a vending machine used to dispense exempt safety equipment used in the manufacturing process are subject to sales tax. The dispensing of exempt safety equipment is not an exempt activity, and the activity is not used directly in the manufacturing process.

 

State Regulations and Public Notices

The California Franchise Tax Board issues Cal. Admin. Code tit. 18, § 25128.5 that clarifies the single sales factor filing election now available to multistate taxpayers that must apportion their business income derived from sources in California. It applies to tax years beginning on or after January 1, 2011. It issues a 15-day notice for comment for proposed § 25136 relating to sales of other than tangible personal property. It arguably broadens the scope, but is offered as an attempt to capture the original intent of the original regulation. It further defines the meaning of “mixed intangible,” looks to the location of the benefit of the service for approximating sales.

Indiana Department of Revenue revises Directive No. 5 as to the proper tax treatment for income paid to entertainers in the state. It classifies the treatment based on (i) employees of a promoter, (ii) independent contractors, and (iii) employees of a production company. It also revised Information Bulletin No. 88 regarding the tax treatment of non-resident professional athletes playing in Indiana. It revises Information Bulletin No. 39 to reflect the new single-factor sales apportionment for non-resident individuals. And Information Bulletin No. 11 for sales tax is revised to further lay out the proper taxation of purchases (and exemption for consumables), as well as clarifying when an exemption certificate for the purchase of food from a restaurant is proper.

Utah State Tax Commission issues rule effective October 1, 2011 regarding proper allocation of gross receipts attributable to Utah. If the corporation does not have an office in Utah from which the sales are negotiated or effected, then the receipts allocable to Utah are (i) those resulting from performance of services with greater benefit in Utah than any other state, and (ii) sale of goods for delivery in state regardless of title terms. Utah State Tax Commission has promulgated final rule 884-24P-033 that modifies guidance on the assessment of personal property tax for business property and motor vehicles.

Wisconsin Department of Revenue revised Tax Publication 207, which provide guidance for contractors as to the payment of sales tax. Notable changes are relating to equipment being provided by an operator, and conformity with Chula Vista case.

Ohio Department of Revenue has began a push to let the public know about a new use tax amnesty program that began in October. This is a key opportunity for businesses to come into compliance in connection with use tax in Ohio.

New York State Department of Taxation and Finance releases a summary of 2011 legislative changes to the sales tax.

 

State Legislative Affairs

California modifies existing law to require not only the reimbursement of sales tax paid by a manufacturer to replace a vehicle under the state’s “Lemon Law,” but to also reimburse any payment of use tax by the manufacturer. AB 1069 has extended the California film tax credit, an amount based on a percentage of expenditures for the production of a qualified motion picture in California, or, where the qualified motion picture has relocated to California or is an independent film, to July 1, 2015. AB 291 extended the additional $0.006 per gallon tax for storage of petroleum in underground tanks through January 1, 2014.

Tennessee’s governor announced an agreement with Amazon to bring in more jobs and $350 million in capital investment as Amazon agrees to begin collecting Tennessee sales tax effective January 1, 2014 unless a national “solution” first arises. The Legislature would have to approve the agreement, with a bill to be introduced in January.

Reps. Womack (R) and Speier (D) announced that they are cosponsoring Amazon legislation in the U.S. House. It would empower states to require online retailers to collect sales and use tax even if the retailer lacks a physical presence. The bill will be known as the Marketplace Equity Act.

 

Judicial and Administrative Decisions

New Jersey Superior Court Appellate Division affirms the decision of the Tax Court, published at 25 N.J. Tax 398 (Tax 2010), granting the Director,

Division of Taxation, summary judgment dismissing the Estate’s complaint with prejudice and denying an inheritance tax refund.  The court rules that the three-year limitation on requesting inheritance tax overpayment refunds, set by N.J.S.A. 54:35-10, is enforceable; and the Square Corners Doctrine does not apply to the facts of this case so as to preclude application of N.J.S.A. 54:35-10.

The Kentucky Court of Appeals, in Department of Revenue v. St. Joseph Health Sys., Inc., et al, reversed a decision in which the lower court found that a gas broker was not a utility, and thus not subject to the utility gross receipts tax. KRS 160.613(1). The hospital had argued as an exempt entity it was not subject to the tax. This was a matter of statutory interpretation by the court, and the court undertook the review to interpret the statute “liberally.” Bob Hook Chevrolet Isuzu, Inc. v. Commonwealth Transportation Cabinet, 983 S.W.2d 488, 490 (Ky. 1998).  (Note: Texas narrowly construes tax statutes against the taxing authority – so quite possibly a different result in Texas.) Because the statute did not state the tax is imposed on a “public utility,” but instead it is imposed on “utility services,” it found that the gas broker was liable.

A three-member panel of the Vermont Supreme Court (not precedential) holds that a comparable provided by taxpayer to dispute assessed value sufficient to rebut presumption of validity of tax appraisal. The government appraiser must provide some evidence to support valuation.

The Washington Board of Tax Appeals rules that a prescription provider whose customers were enrollees of Washington’s Uniform Medical Plan did not qualify for the lower business and occupation tax rate for persons engaged in warehousing and reselling drugs for human use. The BDA focused on the definition requiring drugs to be resold to hospitals and health care providers. UMP is in the insurance business, and insurance companies are not included.

Illinois Department of Revenue Office of Administrative Hearings rules that food given away is subject to use tax.

Michigan Tax Tribunal rules that estimated audit was flawed because of auditor went to purchases to determine sales, as opposed to relying on Z tapes. Auditor’s judgment of inherent unreliability of Z tapes is not sufficient to disregard those records. Taxpayer’s documented close supervision of all sales, understanding of how to transact sales in conformance with tax code by the employees, as well as reconciliation of Z tapes to cash and credit card receipts. Internal controls are sufficient to ensure tax is property collected and reported. Michigan Tax Tribunal rules that former shareholder who sold interest in corporation and continued as president and employee was not a responsible corporate officer under MCL 205.27a(5).

New York Supreme Court rules in New York Mills Redevelopment Co. LLC, et al. v. Town of Whitestown et al. that a taxpayer must have actual notice of withdrawal of exemption, and that upon such date of actual notice the statute of limitations beings to run.

Pennsylvania Commonwealth Court rules in Procter & Gamble Paper Products Co. v. Commw. that pallet used to transport and hold products constitutes exempt packaging for sales and use tax purposes. This is a tax opportunity across the various states.

Ford Motor Co. sues the Florida Department of Revenue to overturn a decision that mandates Ford to pay use tax on parts provided by Ford to complete warranty repairs by repair shops.

Washington Department of Revenue issues a decision regarding agents for growers, warehousing and separate business, and fruit bin rentals. A fruit packing house asserts that its fruit sorting and packing income is exempt from the service and other activities B&O tax, alleging that its income was compensation for the “receiving, washing, sorting, and packing” of fruit from a grower.  It also protests the warehousing B&O tax assessed on amounts derived from its storage of fruit claiming that this activity was not a separate business activity from its fruit sorting and packing business. Taxpayer also protests the deferred sales tax/use tax assessed on fruit bin rentals. While income from performing the fruit sorting and packing services would be exempt if performed for a grower, the customer was a packing house, so no exemption. As to the separate business issue, the DOR pointed to Yakima Fruit Growers Ass’n v. Henneford, 187 Wash. 252, 60 P.2d 62 (1936), which analyzed the separate business issue as to growers, and rejected the taxpayer’s argument. Regarding the argument that sales and use tax did not apply, the DOR pointed to a lack of documentation to prove up that sales tax had already been paid, or to show that the bins belonged to the customers and rejected the claim. In another released decision, the Washington Department of Revenue rules that a grocery store does not qualify for the lower B&O rate slaughter houses due to processing of meat products in the store delis. Finally, it lays out in another ruling the proper tax treatment for certain amusement and recreation sales, and how that fits into the resale exemption for purchased items necessary to provide those services, all in the context of the B&O tax. It is a detailed ruling, and instructive for bifurcating sales of TPP from services, and how the resale exemption fits into that box.

 

Other Documents

It was a flyer for a New York school hockey team that gave the New York State Department of Taxation and Finance the motivation to enact the controversial Amazon law based on affiliate contact. Robert Plattner, Commissioner, stated that an employee of the Department received a flyer from his son’s hockey team, and the flyer touted that the hockey team would receive 6 percent of all sales purchased through Amazon. That appeared to be more like a commission, the active solicitation of sales in New York by Amazon, and along the lines of Scripto as opposed to Quill. The rest is history. Thanks to Amy Hamilton for her report.

Weekly SALT News Update

October 11, 2011

State DOR Letters and Administrative Rulings

The Tennessee Department of Revenue rules that software configuration services are not subject to sales tax. The industrial equipment exemption does not apply as to sales tax in connection with the sale of compressed air with compressors on site. The assembly of leased equipment is subject to sales tax as services necessary to complete a sale.

In a shift, the Indiana Department of Revenue issues a statement that it will no longer impose sales tax on digital goods unless specific circumstances exist, citing the Streamlined Sales and Use Tax Agreement.

The Louisiana Department of Revenue issues guidance on the new exemption from sales tax for breastfeeding equipment.

The Missouri Administrative Hearing Commission upholds a retaliatory insurance tax against a Kansas insurance company.
The Montana Revenue Tax Appeal Board rules on property tax assessments based on comparables, and lays out how not to fight a property tax dispute.

New Jersey issues guidance on the sales tax treatment of manufacturer and seller coupons. It states that the coupons should be treated “like cash” since the seller gets the coupon value from the manufacturer. Thus sales tax is charged on the face value of the coupon. However, coupons issued by sellers are treated as discounts, and not as cash. Sales tax is imposed on the discounted value of the sale. Note that the sales tax treatment for coupons varies from state to state. For example, the Texas Comptroller seems to treat Groupon discounts as cash , while other coupons are reductions in price for sales tax. See also New York’s policy here.

The Kansas Department of Revenue clarifies that layaway charges are not subject to sales tax.

 

State Regulations and Public Notices

Arkansas and Kentucky revise their taxability matrix for the streamlined sales and use tax agreement.

The California Franchise Tax Board lays out the state franchise tax treatment of series LLCs. While California law does not provide for series limited liability companies, it does accommodate them for tax purposes.

The Mississippi Attorney General opines that property manufactured in Mississippi does not qualify for the free port warehouse exemption as it goes beyond the purpose of the exemption and does not comply with a strict reading of the statute.

 

State Legislative Affairs

None noted.


Judicial and Administrative Decisions

New York Tax Appeals Tribunal rules that a taxpayer must consolidate its returns. Presumption for consolidation when wholly owned and combined group engages in unitary business. Ernst & Young LLP was engaged to provide multistate tax planning ideas and strategies. No business purpose as transactions entered into had no potential for profit and unnecessary for credit and collection functions. E&Y report showing met Section 482 principles irrelevant as no proof that transaction “merits tax respect.”

The 9th Circuit rules in Confederated Tribes and Bands of the Yakama Indian Nation that a state requirement imposed by Washington for tribal members to collect sales tax does not violate the U.S. treaty with the tribe. The requirement imparts a minimal interference into the business of the tribe, and is constitutional.

The United States Supreme Court denied petition to both the KFC and the Lamtec cases. The two cases used an expansive interpretation of nexus to that has been hotly contested. The Court, without comment, declined the opportunity to clarify Quill.

The Maryland Court of Appeals in Timothy A. Frey, et al v. Comptroller holds that the nonresident tax on in-state income is constitutional. It is a compensatory tax, and should be upheld pursuant to Oregon Waste Systems, Inc. v. Department of Environmental Quality,511 U.S. 93 (1994).

The Commonwealth Court of Pennsylvania in Kurbatov v. Department of Labor elevated its decision to a published ruling, laying out the line on whether a person is an employee or an independent contractor.

 

Other Documents

Rutgers issues a study showing New Jersey lost up to $171 million in sales and use tax as a result of uncaptured Internet sales.

The Texas Taxpayers and Research Association sides with the Texas Comptroller and the Attorney General in the Allcat case, opining that the Texas franchise tax cannot be viewed as a net income tax, but is a tax on an entity not the natural partner. TTARA also pointed to the U.S. Bureau of the Census as declaring the Texas franchise tax to be a fee for doing business, and not a net income tax. The Texas Attorney General filed its brief on the merits. A detailed analysis is here.

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.