The states covered in this issue of our monthly tax advisor include:
Arkansas
Sales and use tax: Out-of-state purchases properly subject to tax
A business operator (taxpayer) was properly assessed Arkansas compensating use tax on certain out-of-state purchases where the vendors didn’t charge the applicable sales taxes. In this matter, the taxpayer protested that the assessed transactions didn’t represent out-of-state transactions for tax purposes because the vendors either had locations in Arkansas or had nexus with Arkansas. Further, the taxpayer argued that the vendors were responsible for the collection and remittance of the applicable taxes.
Upon review, the Office of Hearings and Appeals (OHA) noted that the transactions involved tangible personal property that was shipped into Arkansas for use by the taxpayer and that the vendors didn’t collect and remit Arkansas use tax on behalf of the taxpayer for the relevant purchases. The OHA determined that the Department of Finance and Administration correctly assessed use tax upon these transactions, and the taxpayer wasn’t relieved of its tax liability simply because the vendors might have had a business location somewhere within the state if the department properly found the situs of the sales to be outside of the state. Accordingly, the assessment was sustained.
Docket Nos. 23-122, 23-123, Arkansas Department of Finance and Administration, Office of Hearings and Appeals, Nov. 7, 2022.
Colorado
Corporate income tax: Corporation required to include subsidiary in its combined report
A corporation operating in Colorado and other states was required to include a wholly owned subsidiary in its Colorado combined corporate income tax returns, according to the Colorado Court of Appeals. Under Colorado law, corporate taxpayers must file a combined report including all members of their affiliated group that are “includable C corporations.” The term “includable C corporation” means any C corporation that has more than 20% of its property and payroll assigned to locations in the United States. The Department of Revenue argued that the subsidiary qualified as an “includable C corporation” because more than 20% of its property was located in the United States. The taxpayer argued that the subsidiary was not an “includable C corporation” because it did not have 20% of its property and 20% of its payroll within the United States. The department maintained that the statute required only 20% of a single aggregate number representing the combination of separate calculations of both property and payroll factors. The court agreed with the department and said that just because the property and payroll factors are separately calculable does not necessarily mean that the 20% figure must apply to each of them individually.
Avnet, Inc. and subsidiaries v. Department of Revenue, et al., Colorado Court of Appeals, No. 21CA1232, Nov. 17, 2022.
Personal income tax: Retroactive CARES Act provisions applied to 2018 tax year
Taxpayers could rely on retroactive provisions of the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 to reduce their Colorado taxable income by their excess business loss for the 2018 tax year.
What provisions of the CARES Act did the taxpayers rely on?
The CARES Act, enacted on March 27, 2020, modified several provisions of the Internal Revenue Code (IRC), including amending IRC Sec. 461(l) to suspend the excess business loss deduction limits for the 2018 through 2020 tax years. This allowed taxpayers with losses in excess of a threshold to claim the entirety of the loss.
How did the taxpayers and the Department of Revenue interpret the state tax law?
The taxpayers argued that because of Colorado’s rolling conformity to the IRC, they could amend their Colorado returns to apply the CARES Act provisions retroactively to the 2018 tax year.
The Department contended that Colorado incorporated amendments to the IRC only to the extent they were in effect for the tax year in which they were enacted and for future tax years. The Department also contended that the taxpayer’s interpretation of the law, because it required the taxpayers to file amended returns, was contrary to the legislative intent to simplify the preparation of state income tax returns.
What did the court decide?
Based on the plain language of the conformity statute, the Colorado Court of Appeals agreed with the taxpayers’ interpretation of the law. According to the court, the statute plainly and unambiguously stated that the phrase “Internal Revenue Code” included “the provisions of the [IRC], as amended, … for the taxable year,” without any limitation as to when any amendment was enacted or went into effect.
The court also noted that by incorporating amendments to the IRC into the state income tax code, the preparation of state income tax returns was simplified. It allowed taxpayers to file amended federal and state returns at the same time and based on the same amendments. On the other hand, an interpretation of the statute that required taxpayers to take their federal taxable income, as calculated under federal law, and then determine which, if any, amendments to the IRC were incorporated for state tax purposes, depending on the date of their enactment, created complexity contrary to the legislative declaration.
Did a subsequent rule and/or legislation bar the taxpayers’ refund claim?
In June 2020, the Department adopted a rule stating that federal tax law changes apply for Colorado tax purposes only on a prospective basis. However, this was contrary to the plain language of the statute, and the court declined to defer to it.
At around the same time, the General Assembly enacted legislation preventing taxpayers from using certain CARES Act provisions in calculating their Colorado taxable income for tax years beginning after the enactment of the CARES Act and before Jan. 1, 2021. This required taxpayers to add back a portion of their federal “excess business loss” on their Colorado returns for 2020. The General Assembly further amended the state income tax code in the following year to allow taxpayers a deduction for some of these amounts in 2021. But, neither of these amendments had any bearing on the taxpayers’ 2018 return.
Anschutz v. Department of Revenue, Colorado Court of Appeals, No. 2022COA132, Nov. 17, 2022.
Indiana
Sales and use tax: Rental of equipment used on customer’s manufacturing and production site exempt
A conveyor and equipment manufacturer’s (taxpayer’s) rental of forklifts and scissor lifts used on a customer’s manufacturing and production job site were exempt from Indiana sales tax because the equipment was directly used in the production process and had an immediate effect on the article being produced. Generally, machinery and equipment qualify for an exemption if they have an “immediate effect” on the article produced and are “an essential and integral part of an integrated process which produces tangible personal property.”
The Department of Revenue noted that the taxpayer’s rental of equipment qualified for the manufacturing exemption to the extent that the machinery was directly used for the direct assembly of a distinct piece of food processing, packaging, and conveyor equipment. However, usage of the machinery purely for the installation of various component pieces of any of the aforementioned equipment would not be exempt.
Revenue Ruling No. 2022-05ST, Indiana Department of Revenue, Aug. 25, 2022, released Nov. 16, 2022.
Massachusetts
Corporate income tax: Apportionment of gain from sale of PTE interests explained
Massachusetts issued guidance for corporate excise and income taxpayers on the apportionment of gain from the sale of interests in a Massachusetts pass-through entity (PTE). The guidance explains the Massachusetts Department of Revenue’s interpretation of the decision in VAS Holdings & Investments LLC v. Massachusetts Commissioner of Revenue.
The decision concluded that the department didn’t have statutory authority to tax the gain from the sale of PTE interests by an out-of-state corporation because:
- The corporation did not engage in a unitary business with the Massachusetts PTE.
- The corporation did not actively participate in the PTE’s business or management.
The guidance describes various facts and circumstances when VAS Holdings will or will not apply to the gain from the sale of PTE interests. It also discusses the criteria Massachusetts will consider in determining requests for tax relief because of the decision.
Technical Information Release 22-14, Massachusetts Department of Revenue, Nov. 30, 2022.
Michigan
Corporate income tax: Pro forma federal taxable income for unitary business group members discussed
Michigan has issued guidance on the calculation of pro forma federal taxable income (FTI) for unitary business group (UBG) members that file a federal consolidated return. The pro forma FTI of each member is used as the starting point for arriving at the UBG’s Michigan corporate income tax liability on its combined return. The members included in a federal consolidated return may differ from those required to be included in a UBG’s combined return.
Members of a federal consolidated group that are members of a UBG must each compute their pro forma FTI as a single person and report that amount on Form 4897. The pro forma FTI amount is subject to statutory adjustments to arrive at the UBG member’s tax base, and the amounts for all members are summed to determine the UBG’s combined FTI.
Because of differences between federal law and Michigan law and the required statutory adjustments, the combined pro forma FTI of a UBG on a combined return will not necessarily be the same as the FTI on a federal consolidated return, even when the membership on the two returns is the same.
Revenue Administrative Bulletin 2022-23, Michigan Department of Treasury, Dec. 6, 2022.
Montana
Corporate, personal income taxes: Credit for taxes paid to another state on pass-through entity income discussed
Montana announced that residents who are owners of a pass-through entity (PTE) that paid income taxes in another state may be eligible for a credit on those taxes. The credit is available for a resident’s distributive share of income tax paid to another state on the PTE’s activity in that state. The news release provides information on the taxes that qualify for the credit as well as how to calculate and claim the credit.
News Release, Montana Department of Revenue, Dec. 1, 2022.
New York
Corporate income tax: Deriving receipts nexus thresholds, MTA surcharge rate unchanged for 2023
The New York corporate franchise tax MTA surcharge rate will remain at 30% for tax year 2023. The rate will also remain the same in later tax years, unless the Commissioner of Taxation and Finance establishes a new rate.
Deriving receipts nexus thresholds
The thresholds at which a corporation is deemed to be deriving receipts from activity in the state and in the Metropolitan Commuter Transportation District (MCTD) for purposes of imposing the corporate franchise tax and MTA surcharge will remain at $1,138,000 for tax years beginning on or after Jan. 1, 2023, and before Jan. 1, 2024.
In addition, the receipts thresholds used in determining whether members of a unitary group meeting the ownership requirements under Tax Law Sec. 210-C are deriving receipts from activity within the state and in the MCTD will remain at $11,000 and $1,138,000.
The thresholds will remain the same until the Commissioner next reviews the cumulative percentage change in the consumer price index and is required to adjust the receipts thresholds.
TSB-M-22(2)C, New York Department of Taxation and Finance, Dec. 1, 2022.
Sales and use tax: Individual personally liable for LLC’s unpaid taxes
An individual who was a member of a limited liability company (LLC) was properly liable for the LLC’s outstanding New York State sales and use tax liabilities because the Division of Taxation (division) established that he was personally responsible for those taxes. In this matter, the individual was listed as a member with a 45% ownership interest in the LLC, a restaurant. The division determined that the individual was a responsible person for the LLC’s sales tax liabilities for the tax period and issued the notices of determination. The individual argued that the business was opened “fictitiously” under his name and that the address appearing on the LLC’s application for sales tax vendor was not his.
Upon review, the Division of Tax Appeals (DTA) found that the individual had the authority to sign checks and prepare tax returns on behalf of the LLC, and his primary duties were listed as tax manager or general manager. Moreover, the DTA noted that the documents presented by the division established the individual’s status as a member of the LLC, and that the individual’s testimony was contradictory and lacked credibility. Accordingly, the assessment was sustained.
Patterson, New York Division of Tax Appeals, Administrative Law Judge Unit, DTA No. 829906, Nov. 10, 2022.
Note: Many state laws allow the tax authority to collect certain unpaid taxes, including fiduciary taxes such as sales and employee withholding taxes, from a person responsible for such taxes. For example, California rendered a similar decision in Henriquez, California Office of Tax Appeals, No. 18042584, Sept. 26, 2022 (released November 2022).
Unclaimed property: Abandoned property laws updated to include unclaimed virtual currency
Recently enacted New York legislation amends the abandoned property law, in relation to including unclaimed virtual currency within the scope of property covered by such law. Section 103 of the abandoned property law is amended by adding two new subdivisions defining the terms “virtual currency” and “virtual currency business activity.”
The legislation has added a new Sec. 1319 to provide coverage for unclaimed virtual currency. The legislation provides that any virtual currency held or owing by any banking organization, corporation, or other entity engaged in virtual currency business activity which has remained unclaimed by the person entitled thereto for a period of five years will be deemed abandoned property as of the 13th day of the preceding June and must be paid or delivered to the Comptroller on or before the 10th day of the next succeeding November.
Ch. 640 (S.B. 9360), Laws 2021, effective Nov. 22, 2022.
Ohio
Corporate income tax: CAT not applicable to some nationwide licensing revenue
The Ohio Supreme has found that the Commercial Activity Tax (CAT) couldn’t be applied to a portion of the revenue a taxpayer derived from nationwide contracts licensing the rights to use its intellectual property. The taxpayer is the sanctioning body of stock car racing and is headquartered in Florida. The company had no offices in Ohio, owned no property in Ohio, and employed no workers in Ohio.
What did the audit find?
Ohio audited the company for the period of July 1, 2005, through 2010. Ohio looked at five different types of revenue.
- Broadcast revenue. Ohio sitused the broadcast revenue to Ohio and determined that the gross receipts were sitused to Ohio based on the proportion of the television audience located in Ohio.
- Media revenue. Ohio sitused gross media receipts under an intellectual property provision using the same methodology as for the broadcast revenue, the ratio of Ohio cable TV households to United States cable TV households. The broadcast and media revenues together totaled $139,470,294 in taxable gross receipts.
- Licensing fees. Using United States census data — taking Ohio’s population as a proportion of the national population — Ohio determined the taxpayer’s taxable gross receipts from licensing to be $10,230,588.
- Sponsorship fees. Ohio used its population as a proportion of the national population as a basis for the assessment, situsing to Ohio $26,123,178 of sponsorship revenue.
- Sanction fees, memberships, and competition. Ohio added these revenue streams together for a total of over $186,592,000 in taxable gross receipts and applied the tax rate to determine that the taxpayer owed taxes in the amount of $328,739. Interest and penalties led to a final tax assessment of $549,520.
What did the taxpayer challenge?
The taxpayer challenged the bulk of the tax assessment, arguing that its broadcast revenue, media revenue, licensing revenue, and sponsorship revenue were not subject to the CAT. The taxpayer argued that the assessment was incorrect based on the tax code and on the “dormant” or “negative” part of the Interstate Commerce Clause of the United States Constitution. Specifically, the taxpayer argued the revenue should be sitused to its corporate domicile in Florida.
Intellectual property receipts may be sitused to Ohio only to the extent that they are “based on” the right to use the property in Ohio. None of the sample contracts tied payments to the right to use property in Ohio. Ohio was not even mentioned in the contracts.
What did the court decide?
The court found the payments were contingent not on the right to use in Ohio but, rather, solely on the right to use the property. Because none of the revenue categories were based on the right use the taxpayer's property in Ohio, the assessments were reversed regarding the taxpayer's broadcast revenue, media revenue, licensing fees, and sponsorship fees.
NASCAR Holdings, Inc. v. McClain, Supreme Court of Ohio, No. 2021-0578, Nov. 22, 2022.
Texas
Income tax: Wealth management services
A Texas Comptroller decision held that a Texas-based investment advisory firm’s receipts from its wealth management services should be apportioned to Texas. The investment advisory firm sometimes used third-party investment advisors located outside Texas to perform certain aspects of its services.
The Comptroller allowed the investment advisory firm to exclude payments made to these third-party advisors from revenue as flow-through funds mandated by contract or subcontract to be distributed to other entities. However, the Comptroller didn’t allow the investment advisory firm to apportion service receipts to states other than Texas as the investment advisory firm didn’t provide sufficient evidence that the services for which its customers paid were actually performed outside Texas.
Decision, Hearing Nos. 112,108, 112,109, 112,110 & 112,111, Texas Comptroller of Public Accounts, June 24, 2022, released Nov. 21, 2022.
Washington
Sales and use tax: Apportionment of patent procurement services upheld
For business and occupation (B&O) tax purposes, revenues generated by an out-of-state law firm (taxpayer) were properly attributed to Washington because the customers received the benefit of these services at their corporate headquarters. In this matter, the taxpayer rendered legal services related to the procurement of patents.
Upon audit, the Department of Revenue issued an assessment of service and other activities B&O tax, interest, and penalties based on its determination that the taxpayer had substantial nexus with Washington since the customers received the benefits of the services from their headquarters. The taxpayer, however, asserted that it didn’t have substantial nexus with Washington and, additionally, requested a waiver of penalties and interest.
Upon review, the Administrative Review and Hearings Division (division) noted that the taxpayer’s receipts from its patent procurement services were properly apportioned to the location of each customer’s headquarters. The taxpayer’s services related to its customers’ strategic planning and corporate management activities that occurred at the customers’ respective headquarters. Further, the division didn’t waive the assessed penalties because the taxpayer failed to show that the default was caused by circumstances beyond its control. Finally, the division determined that the taxpayer was entitled to a partial waiver of interest because it relied on the department’s erroneous written instructions. Accordingly, the division granted the taxpayer’s protest for waiver of interest and denied the remainder of the petition.
Determination No. 21-0044, Washington Department of Revenue, 41 WTD 355, Oct. 26, 2022.
Wisconsin
Property tax: Pay tax first, file claim after
The Supreme Court of Wisconsin has determined that a taxpayer must first pay a challenged tax prior to filing a claim, otherwise the taxpayer’s claim is procedurally deficient. The taxpayer had argued that it properly filed a claim for recovery of unlawful taxes according to all procedures required and that the applicable statute contains no requirement that taxpayers first pay the challenged tax prior to filing a claim for recovery of unlawful taxes against the city. It argued that the only temporal requirements were that taxpayers both pay the challenged tax and file the claim by January 31 of the year in which the tax is payable.
The court of appeals disagreed and the Supreme Court of Wisconsin affirmed. The state Supreme Court held that the plain language of the statute requires the taxpayer to first pay the challenged tax or any authorized installment payment prior to filing a claim because if it has not yet paid the tax, then it is not “aggrieved by the levy and collection of an unlawful tax,” and there is no paid tax to “recover.”
St. John’s Communities, Inc. v. City of Milwaukee, Supreme Court of Wisconsin, No. 2020AP1696, Nov. 22, 2022.
Sales and use tax: Taxpayer entitled to refund on indirect materials purchased for resale
An access equipment provider (taxpayer) was exempt from Wisconsin sales and use tax on certain “indirect materials” purchased by it for resale to the federal government. In this matter, the contracts that the taxpayer and the U.S. government entered into included clauses providing for the transfer of title to indirect materials, such as office supplies and security cameras, from the taxpayer to the government.
The taxpayer filed two claims, one requesting the Department of Revenue (department) to reverse the use tax assessment and the other to refund the sales and use tax that it paid on purchases that it contended were resold and transferred to the federal government during the period at issue. The department denied both claims. The taxpayer argued that the title to these materials was transferred to the federal government under the terms of contracts and, therefore, they were exempt. The department asserted that the taxpayer could not contract away tax liability for indirect materials when such materials were in the possession of and used by the taxpayer and not physically transferred to the federal government.
Under the applicable statute, “sale” includes the transfer of title to tangible personal property. Upon review, the Tax Appeals Commission noted that the relevant statute seems to create a slippery slope in which businesses can evade paying taxes by creating what amounts to a fictional resale, but which satisfies the letter of the law. Here, part of the cost of doing business involved the purchase of office supplies, computers, landscaping services or equipment, security cameras, and other items identified as “indirect materials.” The fact that such materials were used by the taxpayer in service of its contracts with the federal government should be understood as a cost of doing business. However, the commission concluded that although it was unlikely that this was the intent of the legislature, the language of the statute is not ambiguous. Therefore, the title transfer alone in this matter was sufficient to constitute a sale. Accordingly, the taxpayer’s motion for summary judgment was granted.
Oshkosh Corporation v. Department of Revenue, Wisconsin Tax Appeals Commission, No. 20-S-058, Oct. 10, 2022.
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