update    

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