MTC, Canada and Northeast State Developments

Transcription

MTC, Canada and
Northeast State
Developments
April 2015
MTC Audits
Canada
Connecticut
Delaware
District of Columbia
Maine
Maryland
Massachusetts
New Hampshire
New Jersey
New York
Pennsylvania
Rhode Island
Vermont
COST 2015 SPRING AUDIT SESSION LIST OF STATE
DEVELOPMENT CONTRIBUTORS
As of April 17, 2015
COST would like to express their appreciation to the state tax attorneys who contributed to the items contained in
the State Development Update. Such items should not be construed as legal advice, and taxpayers are encouraged to
contact local counsel when considering the impact of the procedural and/or substantive items contained herein.
2015 Copyright Council On State Taxation – All Rights Reserved
1
ALABAMA STATE DEVELOPMENTS
Bruce P. Ely (bely@babc.com)
Christopher R. Grissom (cgrissom@babc.com)
James E. Long, Jr. (jelong@babc.com)
William T. Thistle II (wthistle@babc.com)
BRADLEY ARANT BOULT CUMMINGS LLP
One Federal Place, 1819 Fifth Avenue North
Birmingham, Alabama 35203
205.521.8000
www.babc.com
ALASKA STATE DEVELOPMENTS
Robert (Bob) Mahon
PERKINS COIE LLP
1201 Third Avenue, Suite 4800
Seattle, WA 98101
Tel. (206) 359-6360
Fax (206) 359-7360
Email: RMahon@perkinscoie.com
www.perkinscoie.com
ARIZONA STATE DEVELOPMENTS
Jeffrey M. Vesely, Esq. ((415) 983-1075)
jeffrey.vesely@pillsburylaw.com
Kerne H. O. Matsubara, Esq. ((415) 983-1233)
kerne.matsubara@pillsburylaw.com
Annie H. Huang, Esq. ((415) 983-1979)
annie.huang@pillsburylaw.com
Michael J. Cataldo, Esq. ((415) 983-1954)
michael.cataldo@pillsburylaw.com
PILLSBURY WINTHROP SHAW PITTMAN LLP
P.O. Box 2824
San Francisco, CA 94126
ARKANSAS STATE DEVELOPMENTS
Michael O. Parker, Esq. (mparker@ddh-ar.com)
Thane J. Lawhon, Esq. (tlawhon@ddh-ar.com)
DOVER DIXON HORNE PLLC
425 West Capitol, 37th Floor
Little Rock, AR 72201
Phone: (501)375-9151
Fax: (501)372-7142
Website: www.ddh-ar.com
CALIFORNIA STATE DEVELOPMENTS
Jeffrey M. Vesely, Esq.
(415) 983-1075
jeffrey.vesely@pillsburylaw.com
Annie H. Huang, Esq.
(415) 983-1979
annie.huang@pillsburylaw.com
Kerne H. O. Matsubara, Esq.
(415) 983-1233
kerne.matsubara@pillsburylaw.com
PILLSBURY WINTHROP SHAW PITTMAN LLP
P.O. Box 2824
San Francisco, CA 94126
COLORADO STATE DEVELOPMENTS
Not provided.
CONNECTICUT STATE DEVELOPMENTS
Charles H. Lenore
DAY PITNEY LLP
242 Trumbull Street
Hartford, CT 06103-1212
Phone: (860) 275-0119
Fax: (860) 881-2438
Email: chlenore@daypitney.com
Company Website: www.daypitney.com
DELAWARE STATE DEVELOPMENTS
Not provided.
DISTRICT OF COLUMBIA DEVELOPMENTS
Kenneth H. Silverberg
ksilverberg@nixonpeabody.com
Christian M. McBurney
cmcburney@nixonpeabody.com
Robert G. Trott
rtrott@nixonpeabody.com
NIXON PEABODY LLP
401 – 9th Street, NW #900
Washington, DC 20004-2128
202-585-8000
website: http://www.nixonpeabody.com
Donald M. Griswold, Esq. (dgriswold@crowell.com)
Walter Nagel, Esq. (wnagel@crowell.com)
Jeremy Abrams, Esq. (jabrams@crowell.com)
CROWELL & MORING LLP
1001 Pennsylvania Ave., N.W.
Washington, D.C. 20004
Phone: (202) 624-2500
Fax: (202) 628-5116
Web: http://www.crowell.com/statetax
FLORIDA STATE DEVELOPMENTS
Jim Ervin
HOLLAND & KNIGHT LLP
315 Calhoun Street, Suite 600
Tallahassee, FL 32301
Phone: 850/425-5649
Office Email: jim.ervin@hklaw.com
Company Website: www.hklaw.com
FLORIDA STATE DEVELOPMENTS
Mark E. Holcomb, Esq.
MADSEN GOLDMAN & HOLCOMB, LLP
1705-01 Metropolitan Blvd.
Tallahassee, FL 32308
Ph. 850.523.0400
Fax 850.523.0401
mholcomb@mgh-law.com
www.mgh-law.com
2
GEORGIA STATE DEVELOPMENTS
John Allan, J.D., C.P.A. (jmallan@jonesday.com)
(404) 581-8012
Mace Gunter, J.D. (mgunter@jonesday.com)
(404) 581-8256
Eric Reynolds, J.D., C.P.A. (ereynolds@jonesday.com)
(404) 581-8669
JONES DAY
1420 Peachtree Street, N.E., Suite 800
Atlanta, GA 30309
(404) 581-8330 (fax)
HAWAII STATE DEVELOPMENTS
Miki Okumura (mokumura@goodsill.com)
Telephone: (808) 547-5758
Karyn R. Okada (kokada@goodsill.com)
Telephone: (808) 547-5845
GOODSILL ANDERSON QUINN & STIFEL LLP
999 Bishop Street, Suite 1600
Honolulu, Hawaii 96813
Fax: (808) 547-5880
IDAHO STATE DEVELOPMENTS
Robert T. Manicke (rtmanicke@stoel.com)
Kris J. Ormseth (kjormseth@stoel.com)
Dustin R. Swanson (drswanson@stoel.com)
STOEL RIVES LLP
101 S. Capitol Blvd., Ste. 1900
Boise, ID 83702-7705
Phone: (208) 389-9000
Fax: (208) 389-9040
www.stoel.com
Kirk Lyda
JONES DAY
2727 North Harwood St.
Dallas, TX 75201
1.214.969.5013
klyda@jonesday.com
http://www.jonesday.com/klyda/
Robert (Bob) Mahon
PERKINS COIE LLP
Seattle, WA 98101
Tel. (206) 359-6360
Fax (206) 359-7360
Email: RMahon@perkinscoie.com
www.perkinscoie.com
ILLINOIS STATE DEVELOPMENTS
Thomas H. Donohoe
Jane Wells May
Fred M. Ackerson
Catherine A. Battin
Mary Kay Martire
Matthew C. Boch
Lauren A. Ferrante
MCDERMOTT WILL & EMERY LLP
227 West Monroe Street
Chicago, Illinois 60606
(312) 372-2000
www.mwe.com
www.InsideSALT.com
ILLINOIS STATE DEVELOPMENTS
Michael J. Wynne (mwynne@reedsmith.com)
312.207.3894
Adam P. Beckerink (abeckerink@reedsmith.com)
312.207.6528
Jennifer C. Waryjas (jwaryjas@reedsmith.com)
312.207.6470
Douglas A. Wick (dwick@reedsmith.com)
312.207.2830
REED SMITH LLP
10 South Wacker Drive
Chicago, IL 60606
312.207.6400 (Facsimile)
INDIANA STATE DEVELOPMENTS
Francina A. Dlouhy1
FAEGRE BAKER DANIELS LLP
300 N. Meridian Street, Suite 2700
Indianapolis, IN 46204
Tel: (317) 237-1210
Fax: (317) 237-1000
Email: Francina.Dlouhy@FaegreBD.com
www.FaegreBD.com
IOWA STATE DEVELOPMENTS
John Allan, J.D., C.P.A. (jmallan@jonesday.com)
(404) 581-8012
Mace Gunter, J.D. (mgunter@jonesday.com)
(404) 581-8256
Eric Reynolds, J.D., C.P.A. (ereynolds@jonesday.com)
(404) 581-8669
JONES DAY
1420 Peachtree Street, N.E., Suite 800
Atlanta, GA 30309
(404) 581-8330 (fax)
3
KANSAS STATE DEVELOPMENTS
S. Lucky DeFries (LDeFries@CDNLaw.com)
Jeffrey A. Wietharn (JWietharn@CDNLaw.com)
COFFMAN, DEFRIES & NOTHERN, P.A.
534 S. Kansas Ave., Suite 925
Topeka, KS 66603-3407
Phone: (785) 234-3461
Fax: (785) 234-3363
Company Website: www.cdnlaw.com
KENTUCKY STATE DEVELOPMENTS
Timothy J. Eifler (timothy.eifler@skofirm.com)
Direct Dial: (502) 560-4208
Stephen A. Sherman (stephen.sherman@skofirm.com)
Direct Dial: (502) 568-5405
Stoll Keenon Ogden PLLC
500 West Jefferson Street, Suite 2000
Louisville, KY 40202
Erica L. Horn (erica.horn@skofirm.com)
Direct Dial: (859) 231-3037
Jennifer S. Smart (jennifer.smart@skofirm.com)
Direct Dial: (859) 231-3619
STOLL KEENON OGDEN PLLC
300 West Vine Street, Suite 2100
Lexington, KY 40507
LOUISIANA STATE DEVELOPMENTS
William M. Backstrom, Jr.
JONES WALKER LLP
201 St. Charles Ave., Suite 5100
New Orleans, LA 70170-5100
Phone: 504-582-8228
Email: bbackstrom@joneswalker.com
Firm Website: www.joneswalker.com
Jones Walker SALT Twitter: @JonesWalkerSALT
Jones Walker SALT Blog:
www.cookingwithSALTlaw.com
MAINE STATE DEVELOPMENTS
Sarah H. Beard, Esq.
PIERCE ATWOOD LLP
Merrill’s Wharf
254 Commercial Street
Portland, ME 04101
sbeard@pierceatwood.com
(207) 791-1378
MARYLAND STATE DEVELOPMENTS
Alexandra E. Sampson, Esq.
REED SMITH LLP
1301 K Street, NW, Suite 1000 – East Tower
Phone: 202-414-9486
Fax: 202-414-9299
Email: asampson@reedsmith.com
Kenneth H. Silverberg
(ksilverberg@nixonpeabody.com)
Christian M. McBurney
(cmcburney@nixonpeabody.com)
Robert G. Trott (rtrott@nixonpeabody.com)
NIXON PEABODY LLP
202-585-8000
202-585-8080 facsimile
MASSACHUSETTS STATE DEVELOPMENTS
Michael A. Jacobs (mjacobs@reedsmith.com)
Phone: 215-851-8868
Robert E. Weyman (rweyman@reedsmith.com)
Phone: 215-851-8160
Brent K. Beissel (bbeissel@reedsmith.com)
Phone: 215-851-8869
REED SMITH LLP
Three Logan Square
1717 Arch St., Ste. 3100
Philadelphia, PA 19103
MICHIGAN STATE DEVELOPMENTS
Patrick Van Tiflin, Esq., Chair, SALT Practice Group
pvantiflin@honigman.com
Telephone: (517) 377-0702
Fax: (517) 364-9502
Daniel Stanley, Esq., Partner, SALT Practice Group
dstanley@honigman.com
Telephone: (517) 377-0714
Fax: (517) 364-9514
HONIGMAN MILLER SCHWARTZ AND COHN LLP
The Phoenix Building, Suite 400
222 North Washington Square
Lansing, MI 48933-1800
MINNESOTA STATE DEVELOPMENTS
Jerry Geis
BRIGGS AND MORGAN, P.A.
W-2200 First National Bank Building
Saint Paul, Minnesota 55101
(651) 808-6409
jgeis@briggs.com
MISSISSIPPI STATE DEVELOPMENTS
Louis G. Fuller
BRUNINI, GRANTHAM, GROWER & HEWES,
PLLC
190 East Capitol Street, Suite 100
Jackson, Mississippi 39201
P. O. Drawer 119, Jackson, Mississippi 39205
Phone: (601) 948-3101 / Direct: (601) 960-6874
FAX: (601) 960-6902
E-mail: lfuller@brunini.com
Website: www.brunini.com
4
MISSOURI STATE DEVELOPMENTS
Janette M. Lohman
jlohman@thompsoncoburn.com
P: 314.552.6161
F: 314.552.7161
M: 314.602.6161
THOMPSON COBURN LLP
One US Bank Plaza
St. Louis, MO 63101
www.thompsoncoburn.com
MONTANA STATE DEVELOPMENTS
Michael Green
Wiley Barker
CROWLEY FLECK PLLP
P.O. Box 797
Helena, MT 59624
Phone: (406) 449-4165
Fax: (406) 449-5149
Website: www.crowleyfleck.com
NEBRASKA STATE DEVELOPMENTS
Kirk Lyda
JONES DAY Dallas
1.214.969.5013
klyda@jonesday.com
NEVADA STATE DEVELOPMENTS
Kirk Lyda
JONES DAY Dallas
1.214.969.5013
klyda@jonesday.com
NEW HAMPSHIRE STATE DEVELOPMENTS
William F. J. Ardinger
Christopher J. Sullivan
Kathryn H. Michaelis
Stanley R. Arnold
RATH, YOUNG AND PIGNATELLI, P.C.
One Capital Plaza
Concord, NH 03301
Phone: 603.226.2600
E-Mail: wfa@rathlaw.com
Web Site: www.rathlaw.com
NEW JERSEY STATE DEVELOPMENTS
Kyle O. Sollie (ksollie@reedsmith.com)
Phone: 215-851-8852 / Phone: 215-499-6171
David J. Gutowski (dgutowski@reedsmith.com)
Phone: 215-851-8874 / Phone: 609-524-2028
Robert E. Weyman (rweyman@reedsmith.com)
Phone: 215-851-8160
REED SMITH LLP
Three Logan Square
1717 Arch Street, Suite 3100
NEW MEXICO STATE DEVELOPMENTS
Not provided.
NEW YORK STATE DEVELOPMENTS
Not provided.
NORTH CAROLINA STATE DEVELOPMENTS
Charles B. Neely, Jr. (cneely@williamsmullen.com)
Nancy S. Rendleman
(nrendleman@williamsmullen.com)
Eugene W. Chianelli, Jr.
(echianelli@williamsmullen.com)
WILLIAMS MULLEN
P.O. Box 1000
Raleigh, NC 27602
Telephone 919-981-4000
Telecopier 919-981-4300
Website: www.williamsmullen.com
NORTH DAKOTA STATE DEVELOPMENTS
Michael Green
Wiley Barker
CROWLEY FLECK PLLP
P.O. Box 797
Helena, MT 59624
Phone: (406) 449-4165
Fax: (406) 449-5149
NORTH DAKOTA STATE DEVELOPMENTS
Kirk Lyda
JONES DAY Dallas
1.214.969.5013
klyda@jonesday.com
OHIO STATE DEVELOPMENTS
Anthony L. Ehler (alehler@vorys.com)
(614) 464-6400
(614) 464-6350 (fax)
John S. Petzinger
(614) 464-5696
(614) 719-4996 (fax)
VORYS, SATER, SEYMOUR AND PEASE LLP
52 East Gay Street
P O Box 1008
Columbus, Ohio 43216-1008
www.vorys.com
OKLAHOMA STATE DEVELOPMENTS
Sheppard F. Miers, Jr.
GABLE GOTWALS
100 West Fifth Street, Suite 1100
Tulsa, Oklahoma 74103-4217
918-595-4834, Fax 918-595-4990
smiers@gablelaw.com
5
OKLAHOMA STATE DEVELOPMENTS
Kirk Lyda
JONES DAY
2727 North Harwood Street
Dallas, Texas 75201
1.214.969.5013
klyda@jonesday.com
OREGON STATE DEVELOPMENTS
Robert T. Manicke (rtmanicke@stoel.com)
Eric J. Kodesch (ejkodesch@stoel.com)
STOEL RIVES LLP
900 SW Fifth Avenue, Suite 2600
Portland, Oregon 97204-1268
Ph: (503) 224-3380
Fax: (503) 220-2480
www.stoel.com
PENNSYLVANIA STATE DEVELOPMENTS
Lee A. Zoeller (lzoeller@reedsmith.com)
Phone: 215-851-8850
Frank J. Gallo (fgallo@reedsmith.com)
Phone: 215-851-8860
Christine M. Hanhausen
(chanhausen@reedsmith.com)
Phone: 215-851-8865
REED SMITH LLP
Three Logan Square, Suite 3100
1717 Arch Street
RHODE ISLAND STATE DEVELOPMENTS
Kirk Lyda
JONES DAY
Dallas, TX 75201
(214) 969-5013
klyda@jonesday.com
SOUTH CAROLINA STATE DEVELOPMENTS
John C. von Lehe, Jr.
NELSON MULLINS RILEY & SCARBOROUGH LLP
PO Box 1806
Charleston, SC 29402
(843) 534-4311
(843) 534-4349 (fax)
john.vonlehe@nelsonmullins.com
www.nelsonmullins.com
SOUTH DAKOTA STATE DEVELOPMENTS
Patrick G. Goetzinger & Andrew J. Knutson
GUNDERSON, PALMER, NELSON & ASHMORE,
LLP
P.O. Box 8045, Rapid City, SD 57709-8045
Tel. 605-342-1078 Fax: 605-342-9503
E-Mail Addresses: patrick@gpnalaw.com;
aknutson@gpnalaw.com
Website: www.gundersonpalmer.com
TENNESSEE STATE DEVELOPMENTS
Joseph W. Gibbs (jgibbs@babc.com)
Patricia Head Moskal (pmoskal@babc.com)
Brett R. Carter (bcarter@babc.com)
Brian S. Shelton (bshelton@babc.com)
BRADLEY ARANT BOULT CUMMINGS LLP
1600 Division Street, Suite 700
Nashville, TN 37203
615.244.2582
www.babc.com
TEXAS STATE DEVELOPMENTS
Kirk Lyda
JONES DAY
2727 North Harwood St.
Dallas, TX 75201
(214) 969-5013
KLyda@jonesday.com
www.jonesday.com/klyda
UTAH STATE DEVELOPMENTS
Mark K. Buchi
Steven P. Young
Nathan R. Runyan
John T. Deeds
Pamela B. Hunsaker
HOLLAND & HART, LLP
222 South Main Street, Suite 2200
Salt Lake City, Utah 84101
Tel: (801) 799-5800
Fax: (801) 799-5700
Website: www.hollandhart.com
VERMONT STATE DEVELOPMENTS
Kathryn H. Michaelis (khm@rathlaw.com)
William F.J. Ardinger (wfa@rathlaw.com)
Christopher J. Sullivan (cjs@rathlaw.com)
Stan Arnold (sra@rathlaw.com)
RATH, YOUNG AND PIGNATELLI, P.C.
One Capital Plaza
Concord, NH 03301
Phone: 603.226.2600
Web Site: www.rathlaw.com
VIRGINIA STATE DEVELOPMENTS
William L. S. Rowe (wrowe@hunton.com)
Rita Davis (rdavis@hunton.com)
Emily J. S. Winbigler (ewinbigler@hunton.com)
HUNTON & WILLIAMS LLP
951 East Byrd Street
Richmond, Virginia 23219
6
Michael A. Jacobs (mjacobs@reedsmith.com)
Phone: 215-851-8868
Daniel M. Dixon (ddixon@reedsmith.com)
Phone: 215-851-8160
Michael I. Lurie (mlurie@reedsmith.com)
Phone: 215-241-5687
REED SMITH LLP
Three Logan Square
1717 Arch St
WYOMING STATE DEVELOPMENTS
Michael Green
Wiley Barker
CROWLEY FLECK PLLP
P.O. Box 797
Helena, MT 59624
Phone: (406) 449-4165
Fax: (406) 449-5149
Donald M. Griswold, Esq. (dgriswold@crowell.com)
Walter Nagel, Esq. (wnagel@crowell.com)
Jeremy Abrams, Esq. (jabrams@crowell.com)
CROWELL & MORING LLP
Phone: (202) 624-2500
Fax: (202) 628-5116
WASHINGTON STATE DEVELOPMENTS
Robert (Bob) Mahon (RMahon@perkinscoie.com)
Tel. (206) 359-6360 / Fax (206) 359-7360
Gregg Barton (GBarton@perkinscoie.com)
Tel. (206) 359-6358 / Fax (206) 359-7358
PERKINS COIE LLP
Seattle, WA 98101
www.perkinscoie.com
WEST VIRGINIA STATE DEVELOPMENTS
Michael E. Caryl, Esquire
BOWLES RICE LLP
101 South Queen Street
Post Office Box 1419
Martinsburg, West Virginia 25402
Telephone: (304) 364-4225
Facsimile: (304) 267-3822
e-Mail: mcaryl@bowlesrice.com
www.bowlesrice.com
WISCONSIN STATE DEVELOPMENTS
Carl D. Fortner (cfortner@foley.com)
Timothy L Voigtman (tvoigtman@foley.com)
Theresa A. Nickels (tnickels@foley.com)
Eric J. Hatchell (ehatchell@foley.com)
FOLEY & LARDNER LLP
777 East Wisconsin Avenue
Milwaukee, WI 53202-5367
Tel: 414-297-5739 [CDF]
414-297-5677 [TLV]
608-258-4235 [TAN]
608-258-4270 [EJH
Fax: 414-297-4900
Website: www.foley.com
7
March 3, 2015
CONNECTICUT STATE DEVELOPMENTS
Charles H. Lenore
Day Pitney LLP
242 Trumbull Street
Hartford, CT 06103-1212
Phone: (860) 275-0119
Fax: (860) 881-2438
Email: chlenore@daypitney.com
Company Website: www.daypitney.com
I.
INCOME/FRANCHISE TAXES
A.
Legislative Developments
Governor Malloy (D) has proposed several significant corporate tax increases in his biennial budget for fiscal
years 2016 and 2017 (July 1, 2015 – June 30, 2017). These proposals will now be taken up by the General Assembly,
which is in session through June 3, 2015.
The Governor proposed making permanent the 20% surcharge on the Corporation Business Tax rate of 7.5%,
which yields a rate of 9%. The surcharge, which is now in its fourth year, currently is scheduled to expire at the end
of 2015. The 20% surcharge on the capital base tax and the minimum tax also would become permanent.
Additionally, the Governor proposed lowering the cap on the maximum amount of credits that could be used
against a taxpayer’s Corporation Business Tax liability from its current limit of 70% to 35% for 2015, 45% for 2016
and 60% thereafter. No provision has been made to extend credits that might expire before utilization due to this
new lower limit. Similarly, the 35% limit on the use of credits against the Insurance Premiums Tax would be
extended through 2016. That limit was supposed to return to its prior rate of 70% after 2014.
The budget proposal also would cap the use of net operating losses at 50% of net income, beginning in 2015.
This change also would be permanent.
There were no tax increases or significant new taxes enacted during the 2014 legislative session, which was
not surprising since 2014 was an election year.
Legislation was enacted, however, calling for a comprehensive study of the Corporation Business Tax, the
Sales and Use Tax, the Personal Income Tax, the Property Tax, the Estate and Gift Tax and various excise taxes.
The report of the study panel is due by January 1, 2016. The panel has hired a consultant to provide technical
expertise.
As part of the budget for the fiscal year that will end on June 30, 2015, the Department of Revenue Services
was given the responsibility for collecting an additional $75 million in tax revenue. The Department has begun a
Corporation Business Tax collection initiative focused on transfer pricing between related entities, non-filers, and
tax deficiencies remaining following the conclusion of the 2013 tax amnesty. As part of its effort to increase its
auditing of transfer pricing arrangements, the Department hired Chainbridge Software LLC to provide training.
B.
Judicial Developments
There were no judicial developments of note during the last year.
C.
Administrative Developments
There were no administrative developments of note during the last year.
II.
43433298.8
TRANSACTUAL TAXES
A.
As part of his budget proposal for fiscal years 2016 and 2017, the Governor is proposing to reduce the Sales
and Use Tax rate from 6.35% to 6.2% on November 1, 2015, and from 6.2% to 5.95% on April 1, 2017. In each case,
the lower rate would be applicable to sales occurring on and after the effective date.
To offset these rate reductions, the Governor is proposing to eliminate the exemption for clothing under $50
that was to take effect on July 1, 2015. His proposal also would alter the Sales Tax free week for footwear and
clothing in August each year by reducing the exemption from $300 to $100 per item effective for 2015.
As noted above, 2014 legislation provided for a comprehensive study of the State’s tax structure, including
the Sales and Use Tax. Specific aspects of that tax likely to be considered include a comparison of the existing rate
and exemptions to a lower rate and a broader base, and the treatment of business-to-business sales.
Public Act 14-155, Section 14 accelerated the due date for Sales and Use Tax returns from the last day of the
next succeeding month to the twentieth day of the next succeeding month. The provision took effect with respect to
tax periods beginning on or after January 1, 2015. Accordingly, monthly returns for January, 2015 were due on
February 20, 2015. Delinquent taxpayers may be required by the Department of Revenue Services to remit weekly.
B.
There were no judicial developments of note during the last year.
-243433298.8
C.
On July 30, 2014, the Department of Revenue Services released Special Notice 2014(3), which summarizes
legislative changes to the Sales and Use Tax and other transactional taxes.
On February 7, 2014, the Department issued Policy Statement 2014(1), which updates its 1999 policy
statement setting forth the scope of, and procedure for claiming, the exemption for water pollution control
equipment.
III.
PROPERTY TAXES
A.
The Governor did not propose any property tax changes in his budget address. However, it is likely that the
local property tax on automobiles, and the use of property tax to fund special education, each will be raised for
debate this Session.
The legislative tax study noted above also includes the local property tax, which is the only tax for which the
legislation set out specific questions to be considered by the panel. The legislation requires the panel to “evaluate
the feasibility of (A) creating a tiered property tax payment system that includes any property that is (i) stateowned, (ii) owned by an institution, facility or hospital and for which a payment in lieu of taxes has been made
pursuant to section 12-20a of the general statutes, as amended by this act, or (iii) owned by a nonprofit entity, (B)
assessing a community benefit fee upon any property that is not liable for the payment of property taxes, (C) taxing
property owned by an institution, facility or hospital and for which a payment of taxes has been made pursuant to
section 12-20a of the general statutes, and (D) requiring any such institution, facility or hospital to report the value
of its real and personal property.”
Public Act 14-174 established a pilot program in not more than five municipalities to allow for the
assessment of commercial properties based on the net profits of the business occupying such property. The
legislation was effective October 1, 2014, which is the annual assessment date. Public Act 14-174 also allows the
City of Hartford to assess owner-occupied residential units at a lower rate than non-owner occupied residential
units. That provision is effective October 1, 2016.
B.
In Fairfield Merrittview Limited Partnership v. Norwalk, ___ Conn. ___ (App. Ct. April 15, 2014), the
Connecticut Appellate Court held that the plaintiff lacked standing to maintain a property tax appeal as it was not
the owner of the property on the assessment date. The appeal had been brought in the name of a former owner of
the property, who later tried to join the current owner to the litigation as an additional plaintiff.
-343433298.8
IV.
OTHER TAXES
Public Act 14-155 amended the Personal Income Tax to include as Connecticut source income (i)
compensation from nonqualified deferred compensation plans attributable to services performed within the state,
including compensation required to be included in Federal gross income under Section 457A of the Internal Revenue
Code, and (ii) gains and losses from the disposition of an interest in a pass-through entity holding real property in
Connecticut if the fair market value of such real estate exceeds fifty percent of the value of all of the assets of the
entity. The provisions were retroactive to January 1, 2014, although Connecticut Regulation Section 12-711(b)-19
already provided for the sourcing of deferred compensation to Connecticut.
Public Act 14-155 also changed the Personal Income Tax apportionment rules for sales of tangible personal
property by pass-through entities from an origin basis to a destination basis to conform with the Corporation
Business Tax, retroactive to January 1, 2014. No change was made, however, to the apportionment rules for passthrough entities relating to revenue from services.
Public Act 14-47, Section 51, extended the Personal Income Tax credit for “angel investors” under C.G.S.
Section 12-704d through June 30, 2016. The credit originally was to expire on June 30, 2014.
In Adams v. Commissioner, CV-11-0611324 (July 24, 2014), the Tax Court held that an individual’s
deduction for net operating losses under the Personal Income Tax was limited to the amount of that individual’s
taxable income under the Federal Income Tax.
V.
BIOGRAPHY/RESUME
Charlie Lenore practices in the area of state and federal tax law.
Charlie’s tax practice includes Connecticut tax matters, on which he is a well-known speaker and author. In
addition to tax planning and counseling, Charlie has extensive experience litigating tax cases before the Connecticut
Tax Court and the Connecticut Supreme Court, and has served on several taskforces established by the Connecticut
General Assembly and the Department of Revenue Services on tax/policy initiatives. Charlie is the chair of the Tax
Committee of the Connecticut Business and Industry Association.
Charlie has assisted clients with several economic development projects with the State of Connecticut and
municipalities. Funding mechanisms have included grants, loans, sales and tax use exemptions, property tax
exemptions and PILOT payments, and tax credits.
-443433298.8
DISTRICT OF COLUMBIA SALT DEVELOPMENTS
______________________________________________________________________________
KENNETH H. SILVERBERG
CHRISTIAN M. MCBURNEY
ROBERT G. TROTT
NIXON PEABODY LLP
202-585-8000
I.
INCOME AND FRANCHISE TAXES
A.
Corporations, Financial Institutions, and Unincorporated Businesses
1.
Estimated Tax Underpayment Penalty Replaced by Interest Only Regime
Corporations, financial institutions, and unincorporated businesses are required to make
quarterly estimated tax payments. D.C. Code § 47-4215(a). If adequate deposits were not made,
the estimated tax penalty may apply. D.C. Code § 47-4215(c)(1). The penalty for these tax years
is calculated by applying the underpayment interest rate (13 percent per year simple interest rate
from January 1, 2001, to December 31, 2002; thereafter, 10 percent daily compounded rate) to
the underdeposited quarterly payments.
For tax years beginning after December 31, 2011, a business could avoid the
underpayment penalty if, on a quarterly basis, it has paid the lesser of the amount required under
the annualized income method set forth in D.C. Code § 47-4215(b)(2)(A) or 25 percent of the
lesser of the following:
i.
90 percent of the current year’s liability; or
ii.
110 percent of the prior year’s liability (assuming prior year is 12 months). D.C. Code §
47-4215(c).
For tax years beginning after December 31, 2011 and before December 31, 2014 no
underpayment penalty will be imposed if the tax due is less than $1,000 or the taxpayer was in
the District for the full prior year and did not have any tax liability for that year. D.C. Code §
47-4215(e).
The penalty regime in preceding paragraphs of this section were repealed for tax years
beginning after December 31, 2014, and are replaced by an interest-only regime. See Section
7131 of the Fiscal Year 2015 Budget Support Emergency Act of 2014. By not making the
estimated tax a penalty, a corporate taxpayer can deduct such interest (in general, a taxpayer
cannot deduct a government penalty). The same thresholds in (a) apply. D.C. Code § 47-4204.
15157249.1
-22.
Apportionment
L. 2015, Act 20-424 (Law 20-155), effective 02/26/2015 and applicable 10/01/2014
unless otherwise provided, enacts the “Fiscal Year 2015 Budget Support Act of 2014.” After
December 31, 2014, business income will be apportioned to the District of Columbia using only
the sales factor. For sales other than sales of tangible personal property, a sale is considered in
the District of Columbia if the taxpayer's market for the sale is in the District.
3.
Corporate and Unincorporated Business Franchise Tax Rate
L. 2015, Act 20-424 (Law 20-155), effective 02/26/2015 and applicable 10/01/2014
unless otherwise provided, enacts the “Fiscal Year 2015 Budget Support Act of 2014.” The
legislation sets the corporate and unincorporated business franchise tax rate at 9.4% for the
taxable year beginning after December 31, 2014.
B.
1.
Office of Administrative Hearings Grants Stay in Four Chainbridge Cases
A District of Columbia (“District”) Office of Administrative Hearings (OAH) panel of
judges granted stays in four transfer pricing cases, pending the outcome of three cases currently
being appealed by the District that involve the same issues. Ruling in favor of the Office of Tax
and Revenue (OTR) that petitioned the OAH, the panel cited judicial economy and efficiency as
the reason for staying the cases.
In Microsoft Corp. v. D.C. Office of Tax and Revenue, an earlier, unrelated case decided
on April 23, 2012, Judge Paul Handy of the OAH struck down a $2.75 million assessment
against Microsoft Corp., holding that the transfer pricing analysis on which the assessment was
based was “useless in determining whether Microsoft's controlled transactions were conducted in
accordance with the arm's length standard.” Judge Handy’s ruling is the impetus for the resulting
showdown between the OTR and the Chainbridge taxpayers that led to the January 21, 2015
stays ordered by the OAH. At the heart of the disagreement is whether the doctrine of collateral
estoppel binds the OTR to the OAH ruling in Microsoft.
The Chainbridge Cases involve challenges by ExxonMobil of a $2.86 million assessment,
Hess of a $910,635 assessment, and Shell of a $697,523 assessment, which resulted from
Chainbridge Software’s application of federal transfer pricing regulations. The taxpayers’ claim
Chainbridge failed to properly recognize related-party transactions and also relied on improper
comparables.
During an August 27, 2014, OAH hearing, Hess, ExxonMobil, and Shell argued that the
assessments brought against them were all based on the same type of report using the same
previously invalidated method struck down in Microsoft. As such, they argued that Judge
Handy’s ruling was fully vetted and decided, and satisfied the requirements of the doctrine of
collateral estoppel. The taxpayers supported their claim that collateral estoppel with the
following:
15157249.1
-3i.
the primary issue in the cases was litigated in Microsoft and the taxpayers are
asserting the same claims presented in that case;
ii.
the parties in Microsoft had a full and fair opportunity to address the issues in the
case at trial and on appeal, which the OTR initially pursued and then abandoned;
iii.
the Microsoft summary judgment order was a valid judgment on the merits of the
case from which the OTR filed an appeal; and
iv.
the hearing office's decision was essential to the judgment and not mere dicta.
The District argued collateral estoppel should not apply because a year after Handy’s
ruling, Judge John M. Campbell of the D.C. Superior Court denied BP Products’ motion for
summary judgment on the same issue, finding there were issues of fact that could only be
decided at trial. (BP Prods. N. Am. v. District of Columbia, D.C. Super. Ct. No. 201cvt10619,
settlement 1/28/14.)
During the August 27, 2014 hearing, Administrative Law Judge Beverly Nash asked why
an unpublished bench ruling on a motion for summary judgment in another court ought to carry
weight in a matter before the OAH. The District responded that the facts and law are so
intertwined in transfer pricing issues that it cannot be decided as a matter of law, and also that
the decision to not appeal Microsoft was strategic and shouldn’t freeze all future cases on the
issue at the trial level without recourse to appeal. The taxpayers countered that the growing
caseload of similar cases is a good reason for doing exactly that, pointing to six additional cases
that have already been filed and claiming that at least six other taxpayers intended to file suit on
the same grounds. The taxpayers also argued that collateral estoppel was appropriate because
Judge Handy’s decision explains exactly why Chainbridge Software’s method is arbitrary,
capricious, and unreasonable.
In three separate orders issued on November 14, 2014, Judge Nash overturned the
assessments against ExxonMobil, Hess and Shell, ruling that the OTR is bound by Judge
Handy’s earlier OAH ruling in Microsoft. Judge Nash said the doctrine of “nonmutual offensive
collateral estoppel” precludes OTR from raising an issue that had been dealt with in an earlier
case.
The three cases currently under appeal and the four stayed cases all challenge OTR's use
of contractor Chainbridge Software LLC to develop transfer pricing analyses. The four stayed
cases are
i.
Ahold USA Holdings Inc. v. D.C. Office of Tax and Revenue, which challenges a
tax assessment of $575,746.00 based on an income adjustment of $5.7 million;
ii.
AT& T Services Inc. v. D.C. Office of Tax and Revenue, which challenges a $4.3
million assessment based on an income adjustment of $43 million;
iii.
Eli Lilly and Co. v. D.C. Office of Tax and Revenue, which challenges a $506,771
assessment based on an income adjustment of $5 million; and
15157249.1
-4iv.
ExxonMobil Oil Corp. v. D.C. Office of Tax and Revenue, which challenges a tax
assessment of $207,964 based on an income adjustment of $2.08 million.
At a Dec. 3 hearing, attorneys for OTR told a panel of four judges that the District
strongly disagreed with Nash's determination and claimed the District would suffer serious
complications if her ruling is allowed to stand. (234 DTR H-1, 12/5/14) If the District fails to
successfully appeal Hess, ExxonMobil, and Shell, then the door would be open for other
taxpayers seeking to challenge OTR assessments on similar grounds. Nash and Handy
represented two of the four judges on the panel.
Taxpayers assessed based on an analysis by Chainbridge Software, or a method similar to
Chainbridge’s or that invalidated in Microsoft, should consider filing protective claims, pending
the outcome of the current litigation.
II.
ADMINISTRATIVE
1.
Exclusion from Definition of Unincorporated Business
For tax years beginning after December 31, 2014, a trade or business that arises solely by
reason of the purchase, holding, or sale of, or entering, maintaining or terminating of positions in
stocks, securities, or commodities for a taxpayer’s own account is expressly excluded from the
definition of an unincorporated business. D.C. Code § 47-1808.01(6).
2.
Lower Capital Gain for Exchange of Investment in Qualified High
Technology Company
L. 2015, Act 20-514 (Law 20-210), effective 03/11/2015, enacts the “Promoting
Economic Growth and Job Creation Through Technology Act of 2014.” This legislation
establishes the tax rate for a capital gain from a sale or exchange of an investment in a Qualified
High Technology Company (QHTC) meeting specified requirements. For tax years beginning
after December 31, 2018, the tax rate on such capital gains will be 3% if: (1) the investment was
made after the effective date of this Act; (2) the investment was held by the investor for at least
24 consecutive months; (3) at the time of the investment, the stock of the QHTC was not publicly
traded; and (4) the investment is in common or preferred stock of the QHTC. To the extent this
Act reduces revenues below the financial plan, it will apply as of January 1, 2019, or on the
implementation of the provisions in D.C. Code Ann. § 47-181(c)(17) in effect on the effective
date of this Act, whichever is later; provided that the priority list in D.C. Code Ann. § 47-181 is
maintained.
3.
Withholding Methods
L. 2015, Act 20-522 (Law 20-176), effective 03/07/2015 (expires 10/18/2015), enacts the
“Standard Deduction Withholding Clarification Temporary Act of 2014.” The temporary
legislation provides that, regardless of which statutory method of determining withholding is
used, no allowance for the standard deduction is permitted.
4.
15157249.1
IRS Adjustments and QHTC
-5L. 2015, Act 20-555 (Law 20-179), effective 03/07/2015 (expires 10/18/2015), enacts the
“Fiscal Year 2015 Budget Support Clarification Temporary Amendment Act of 2014.” The
temporary legislation amends the “Fiscal Year 2015 Budget Support Act of 2014” (Act 20-424,
Law 20-155) to provide that the defined tax credit related to IRS income adjustments will be
applied over a 4-year period in equal amounts in tax years beginning on or after January 1, 2019.
In addition, the temporary legislation provides that the following amendments in the Fiscal Year
Budget Support Act of 2014 are applicable for tax years beginning after December 31, 2014: the
amendments (1) clarifying the definition of “Qualified High Technology Company,” and (2)
providing that “Qualified High Technology Company” does not include an online or brick and
mortar retail store or a building or construction company.
C. Credits
1.
Equipment and Labor Costs Attributable to Alternative Fuel
For tax years beginning on or after January 1, 2014 through tax years ending December
31, 2026, a credit equal to 50% of the equipment and labor costs directly attributable to the
purchase and installation of alternative fuel storage and dispensing or charging equipment on a
qualified alternative fuel vehicle refueling property. D.C. Code § 47-1807.10.
For tax years beginning on or after January 1, 2014 through tax years ending December
31, 2026, a credit equal to 50% of the equipment and labor costs directly attributable to the cost
to convert a motor vehicle licensed in the District from a vehicle that operates on diesel or
petroleum derived from gas to a motor vehicle that operates on alternative fuel. D.C. Code § 471807.11.
III.
15157249.1
Brief Biography/Resume of Providers
A.
CHRISTIAN M. MCBURNEY (B.A., magna cum laude, Brown University 1981; J.D.
& Law Review, New York University School of Law 1985; LL.M Georgetown
University Law Center, Taxation, 1992) is a partner with the Washington, DC
Office of Nixon Peabody LLP. Former chair and vice-chair of the State and
Local Tax Committee of the Taxation Section, District of Columbia Bar; coeditor-in-chief of the Journal of Multistate Taxation.
A.
KENNETH H. SILVERBERG (B.A. (Economics), University of Michigan, 1968; J.D.,
Georgetown University Law Center, 1973) is a partner with the Washington, DC
Office of Nixon Peabody LLP.
B.
ROBERT G. TROTT (B.A, University of Virginia, 2000; MFA, Queens
University, 2006; J.D., University of Michigan Law School. 2012) is an associate
with the Washington, DC Office of Nixon Peabody LLP.
Donald M. Griswold, Esq.
Walter Nagel, Esq.
Jeremy Abrams, Esq.
Crowell & Moring LLP
Phone: (202) 624-2500
Fax: (202) 628-5116
Email: dgriswold@crowell.com
wnagel@crowell.com
jabrams@crowell.com
I.
FISCAL YEAR 2016 PROPOSED BUDGET
Mayor Muriel Bowser submitted her Fiscal Year 2016 Proposed Budget and Financial Plan to the District
Council in a letter to Chairman Phil Mendelson on April 2, 2015. The $12.9 billion proposed budget entitled
“Pathways to the Middle Class” solves the District’s $193 million budget gap and makes new investments in
education, jobs, affordable housing, public safety, and infrastructure. The plan also includes several “policy
initiatives” to increase general fund revenue to pay for the new investments and close the budget gap. The
proposed initiatives include, among others, increasing the general sales tax rate from 5.75 percent to 6
percent and the sales tax rate for commercial parking from 18 percent to 22 percent; taxing E-cigarettes at
the same rate as other tobacco; and increasing the statute of limitations on income tax audits. The plan
estimates that these increases will generate $36 million in revenue in fiscal year 2016. Mayor Bowser’s
proposed budget represents the 20th consecutive balanced budget in the District.
Council members did not react favorably to the Mayor’s proposed sales tax increases at the first hearing on
the budget on April 13, 2015. Chairman Mendelson criticized the budget for dipping into the District’s
reserve funds, increasing taxes, and deferring maintenance of the District’s infrastructure. Council members
Jack Evans and Mary Cheh also spoke out against the increases Recall that it was only a couple years ago
that this Council reduced the sales tax rate, and members do not seem eager to move backwards.
II.
A.
i.
Tax Relief Package
On February 26, 2015, the D.C. Council enacted the Fiscal Year 2015 Budget Support Act of 2014. The tax
relief bill incorporates several recommendations made by the D.C. Tax Revision Commission following its
lengthy review of the D.C. tax system last year. The Emergency Act includes the following business
franchise tax changes most of which are applicable for tax years beginning after December 31, 2014:


Reduction over time of business franchise and unincorporated business franchise tax rate from 9.975
percent to 8.25 percent;
Exemption of certain passive investment funds from business taxes;
Error! Unknown document property name.


Switch to single-sales factor apportionment;
Application of market-based sourcing for sales other than sales of tangible personal property.
The Act also makes changes to provisions applicable to Qualified High Technology Companies. It effectively
overrules the BAE decision by limiting QHTC benefits to taxpayers “leasing or owning an office” in the
District. The ACT also provides that “Qualified High Technology Company” does not include an online or
brick and mortar retail store or a building or construction company. These QHTC changes are in addition to
those enacted in prior years discussed below.
ii.
Market Sourcing Effective Date
On March 26, 2015, the D.C. Council enacted the “Market-based Sourcing Inter Alia Clarification
Congressional Review Emergency Amendment Act of 2015.” The emergency legislation keeps in effect an
amendment that clarifies that the statute requiring market-based sourcing is applicable for tax years
beginning after December 31, 2014. Prior legislation making the switch the market based sourcing failed to
include an effective date causing much confusion and frustration among District taxpayers. The Office of
Tax and Revenue has not yet issued market sourcing regulations.
iii.
Capital Gains Rate for Sales of QHTCs
On March 11, 2015, the D.C. Council enacted the “Promoting Economic Growth and Job Creation Through
Technology Act of 2014.” This legislation establishes the tax rate for a capital gain from a sale or exchange of
an investment in certain QHTCs. For tax years beginning after December 31, 2018, the tax rate on such
capital gains will be 3% if: (1) the investment was made after the effective date (March 11, 2015); (2) the
investment was held by the investor for at least 24 consecutive months; (3) at the time of the investment, the
stock of the QHTC was not publicly traded; and (4) the investment is in common or preferred stock of the
QHTC.
iv.
Multistate Tax Compact (Prior Years)
As part of the Fiscal Year 2014 Budget Support Emergency Act of 2013, the D.C. Council repealed the
Multistate Tax Compact and reenacted a modified version of the Compact that does not include the Article
III election provision or the Article IV apportionment formula. The change is effective for tax years
beginning after December 31, 2012.
Observations
In 2011, D.C. departed from the Compact-apportionment method by switching from UDITPA’s three-factor
property, payroll, & sales formula to a four-factor formula with double-weighted sales. By repealing and
reenacting the Compact, DC joins a growing list of jurisdictions around the nation that have taken
preemptive action to minimize exposure for large refunds based on the Compact election provision a la
Gillette v. Franchise Tax Board. Taxpayers should compute their tax using the Compact method in 2011
and 2012 and consider whether filing refund claims may be appropriate. If the Compact-election issue is
ever litigated in D.C., it will be interesting to see how the courts respond to the government/MTC argument
that the Compact never received Congressional approval. D.C. legislation adopting the Compact was
reviewed and approved by both houses of Congress in 1981.
v.
Mandatory Unitary Combined Reporting (Prior Years)
Effective September 14, 2011, the District has adopted a combined reporting regime for corporations and
unincorporated business entities for tax years beginning after December 31, 2010. Any taxpayer engaged in
a unitary business with one or more other corporations that are part of a water’s-edge combined group must
file a combined report which includes the income and the allocation and apportionment factors of all such
corporations. “Unitary business” is defined as “a single economic enterprise that is made up either of
separate parts of a single business entity or of a commonly controlled group of business entities that are
sufficiently interdependent, integrated, and interrelated through their activities so as to provide synergy and
-2Error! Unknown document property name.
mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to
the separate parts.” Each member of the combined group is required to calculate its own tax liability. The
law also permits taxpayers to make an election to file a worldwide combined report, in lieu of filing on a
water’s-edge basis.
On July 30, 2013, the Mayor signed the Fiscal Year 2014 Budget Support Emergency Act of 2013 (A20-130).
The emergency legislation makes technical changes to the combined reporting statute including the
following: modifying the definition of “corporation” to conform to the legislation to final regulations;
clarifying that the term “person” does not include Qualified High Technology Companies, thus excluding
QHTCs from inclusion in the combined group; removing references to partnerships and unincorporated
businesses; authorizing the CFO to adopt regulations explaining the treatment of unincorporated businesses
and distributive shares therefrom within the combined group to prevent double taxation; eliminating the
requirement that the election of a designated agent be made annually; removing subpart F income from the
calculation of tax on a water’s-edge unitary group; and eliminating the automatic renewal of the worldwide
election at the end of the ten-year period.
Observations
In 2012, the District raised $45 million more revenue than expected largely as a result of combined
reporting. However, almost 2 years into this experiment, taxpayers and practitioners alike still desire more
clarity on the law. The Office of Tax and Revenue issued final regulations on September 14, 2012, and
continues to put out new guidance to assist taxpayers. For example, OTR has created a worksheet and
instructions explaining how to include distributive shares from partnerships and unincorporated businesses
in a combined report. Both are available on OTR’s website. We are told that the statute and/or regulations
will be amended again to reflect these explanations. Better late than never.
vi.
Qualified High Technology Companies (Prior Years)
Effective March 5, 2013, D.C. Law 19-211, the Technology Sector Enhancement Act of 2012 (A19-513),
makes the following changes to the taxation of QHTCs: The Act repeals a provision excluding from gross
income qualified capital gain from the sale or exchange of a QHTC asset held for more than 5 years and
amends the definition of a QHTC to clarify (1) that an entity must have two or more employees in the
District; and (2) that the qualifying revenue test applies to revenues earned in the District. The Act also
provides that (1) before January 1, 2012, a certified QHTC shall not be subject to franchise tax for 5 years
after the date that the QHTC commences business in the District; and (2) on or after January 1, 2012, a
certified QHTC shall not be subject to franchise tax for 5 years after the date the QHTC has taxable income.
The Act limits the total amount that each QHTC may receive in exemptions to $15 million. In addition, the
Act requires the Tax Revision Commission to analyze a proposal to tax the capital gain from the sale of
QHTC stock at the rate of 3 percent.
Observations
One area where the District can compete with Virginia and Maryland in terms of business-friendly taxation
is the treatment of QHTCs. A broad range of business activities may qualify a business for QHTC
treatment. Taxpayers should consider whether they qualify as a QHTC or whether, with a little planning,
they can qualify going forward.
vii.
Employer Withholding (Prior Years)
Emergency legislation keeps in effect a requirement that an employer or a payor who is required to withhold
income tax submit to the Chief Financial Officer (CFO) by January 31 of each year a statement of
information for employee or person regarding the prior year payments. An employer or payor required to
submit 25 or more statements shall do so electronically. The CFO may waive the electronic filing
requirement if the CFO determines that the requirement will result in undue hardship to the employer or
payor.
B.
i.
Flow Through Apportionment
Alenia N. America, Inc. v. D.C. Office of Tax and Revenue, No. 2012-OTR-00015 (D.C. O.A.H. Mar. 11, 2014)
In Alenia, the Office of Administrative Hearings granted summary judgment to the taxpayer allowing it to
include in its own apportionment calculation the apportionment factors from a pass through entity in which
it owned a controlling interest. The taxpayer owned a 51 percent interest in a partnership that did not earn
any income in the District. The taxpayer included its distributive share of partnership income in its income
and the partnership’s apportionment factors in its own apportionment computation. OTR excluded the flow
through factors from the taxpayer’s apportionment on audit.
The parties agreed that the taxpayer’s distributive share of income from the partnership was business
income from operation of a unitary business. After reviewing state court decisions on apportionment and
considering the general purpose of the District’s apportionment statute, the OAH determined that the
taxpayer may include the apportionment factors of a unitary pass through entity when calculating its own
franchise tax apportionment because business income from a unitary business ought to be apportioned based
on the apportionment factors of the business generating that income. The court rejected OTR’s argument
that its regulation limited such treatment to taxpayers that file a consolidated return.
ii.
Statute of Limitations
D.C. Office of Tax and Revenue v. Sunbelt Beverage, LLC, No. 10-AA-1331 (D.C. Ct. App. April 11, 2013)
In Sunbelt, the D.C. Court of Appeals ruled that the District was barred by the 3-year statute of limitations
from assessing franchise tax on an unincorporated business. Sunbelt, a limited liability company doing
business in the District of Columbia, mistakenly filed Form D-65 (Partnership Return of Income) instead of
Form D-30 (Unincorporated Business Franchise Tax Return). On its partnership return, Sunbelt accurately
reported its gross income and deductions and identified its corporate parent, which filed Form D-20
(Corporation Franchise Tax Return). However, Sunbelt did not report an apportionment factor or District
taxable income. The parties stipulated that Sunbelt had no intent to evade tax.
OTR issued a notice of proposed assessment more than three years after Sunbelt filed its partnership return.
Sunbelt protested the proposed assessment based on the expiration of the statute of limitations. OTR
argued that Sunbelt’s return was a nullity because it omitted material information that would allow OTR to
determine the correct amount of tax due. Therefore, according to OTR, the statute of limitations never
began to run and OTR could assess a deficiency at any time. The Office of Administrative Hearings granted
summary judgment in Sunbelt’s favor.
On appeal, the court reviewed the structure and purpose of the statutory limitations period in light of
Supreme Court case law on what constitutes a return. The court held that perfect accuracy is not required.
Instead, to trigger the statute of limitations, the taxpayer must file a document that is intended as a return,
identifies the taxpayer, and provides information about the taxpayer’s income. Moreover, the government
has an obligation to examine the return in a timely manner to determine if more information is required. In
this case, Sunbelt’s return triggered the statute of limitations because it was filed on a governmentsanctioned form, reported information about income, and included all necessary identifying information.
The only information lacking was the apportionment formula which was not necessary for OTR to determine
whether Sunbelt was liable for tax. As a result, Sunbelt’s return was not a nullity and OTR should have
proposed an assessment within the statutory three-year period.
iii.
Qualification for High Technology Benefits
Office of Tax and Revenue v. BAE Systems Enterprise Systems Inc., No. 10-AA-1071 (D.C. Ct. App. Nov. 29,
2012)
The taxpayer claimed that it qualified for a franchise tax exemption granted to certain technology companies
that, among other things, “maintain an office . . . or base of operations in the District”. Despite having over
180 employees working full-time at government facilities in the District, OTR took the position that the
taxpayer did not “maintain” an office or base of operations because the taxpayer did not exercise
“predominant dominion, control, or autonomy” over the facilities.
At the trial level, the Office of Administrative Hearings (OAH) determined that the taxpayer maintained a
base of operations in the District because its employees “reported to work at daily locations” in the District,
to “conduct [the taxpayer’s] business of providing services to federal government agencies” and was entitled
to the exemption from franchise tax.
In affirming OAH’s decision, the Court of Appeals rejected an argument by the Office of Tax and Revenue
(OTR) that the word “maintain” requires the taxpayer to exercise “predominant dominion, control, or
autonomy” over the office or base of operations. The Court found OTR’s position unreasonable in light of the
statute’s language, structure, and history and refused to give substantial deference to OTR’s interpretation.
For purposes of the franchise tax exemption, the Court held that a taxpayer having “a sufficient number of
employees performing qualifying high-technology work at a fixed location in a high-technology zone for a
sufficiently extended period of time” will be deemed to maintain an office or base of operations in the
District.
Observations
The Court of Appeals’ decision in BAE may present a refund opportunity for taxpayers that did not claim the
franchise tax exemption or that were denied the franchise tax exemption because they did not “maintain” an
office in the District under OTR’s flawed interpretation. However, the District Council effectively overruled
BAE going forward with recent legislation amending the statutory QHTC provisions involved in the case.
Crowell & Moring represented the taxpayer in this case.
iv.
Contract Transfer Pricing Audits
Microsoft Corp. v. District of Columbia Office of Tax and Revenue, No. 2010-OTR-00012 (Office of
Administrative Hearings April 23, 2011)
Microsoft filed a Motion for Summary Judgment challenging OTR’s Notice of Proposed Assessment of Tax
Deficiency in the amount of approximately $2.75 million. OTR had contracted with ACS State and Local
Solutions, Inc., who then sub-contracted with Chainbridge Software, Inc. (“Chainbridge”), to provide a
transfer pricing analysis of Microsoft’s transactions. Chainbridge issued a report, which found that
Microsoft underreported its income for the 2002 tax year in which Microsoft reported a loss, and OTR
applied that finding to the 2006 tax year to which Microsoft carried the loss forward. The issue in the case
was whether the transfer pricing analysis performed by Chainbridge, and relied upon by OTR, was
arbitrary, capricious, and/or unreasonable. The ALJ determined that it was, and granted summary
judgment in Microsoft’s favor.
Pursuant to D.C. Code §47-1810.03, OTR has the authority to adjust a taxpayer’s gross income and
deductions arising from related-party transactions if necessary to clearly reflect the taxpayer’s income. This
authority is analogous to the authority granted to the IRS under IRC § 482. Accordingly, the ALJ looked for
guidance to the federal regulations promulgated under § 482 in the absence of District-specific regulations.
Chainbridge, who conducts transfer pricing analyses for taxing jurisdictions across the country, analyzed
Microsoft’s transactions for its 2002 tax year. Chainbridge purportedly followed the federal regulations and
used the comparable profits method for its analysis. However, Chainbridge did not isolate controlled
transactions between Microsoft and its affiliated businesses. Instead Chainbridge included all of Microsoft’s
income from any source. Chainbridge also did not attempt to compare similar goods and transactions but
determined that all of Microsoft’s activities were interrelated because they constituted a computer software
business. Based on its analysis, Chainbridge determined that Microsoft’s profit-to-cost ratio was outside the
interquartile range of its comparables, and that Microsoft had therefore underreported its income. OTR
issued a notice based on Chainbridge’s findings and disallowed the NOL deduction claimed by Microsoft on
its 2006 tax return.
The ALJ determined that Chainbridge committed two fatal errors. First, Chainbridge failed to measure
controlled transactions against uncontrolled transactions conducted at arm’s length as the federal
regulations require. Based on Chainbridge’s determination that Microsoft’s transactions were too complex
and its related-party transactions too numerous to separate, OTR argued that the gross income reported by
Microsoft on its D20 tax return was “the most narrowly identifiable business activity for which data
incorporating the controlled transactions is available.” The ALJ rejected this contention as unsupported by
any factors, and found the analysis to be arbitrary, capricious, and unreasonable because it did not measure
what the regulations require it to measure.
Second, Chainbridge failed to measure the profit-to-cost ratios of similar types of transactions. Although the
record reflected that Microsoft engages in various different types of business activities, Chainbridge made no
effort to compare like kind transactions. The ALJ stated that “without any differentiation of the comparable
profits for different product and server lines, an overall profit level indicator is meaningless.”
Accordingly, the ALJ ruled that OTR could not reallocate income between Microsoft and its affiliates on the
basis of Chainbridge’s analysis, and granted summary judgment reversing OTR’s proposed assessment of tax
deficiency.
On December 17, 2012, OTR voluntarily dismissed its appeal to the District of Columbia Court of Appeals in
this case.
Several other cases pending in District courts involve issues similar to the issues in Microsoft. The cases are
Hess Corp. v. District of Columbia, Shell Oil Co. v. District of Columbia, Exxon Mobil Oil Corp. v. District of
Columbia, Eli Lilly and Co. v. District of Columbia, AT&T Services Inc. v. District of Columbia, and Ahold
USA Holdings Inc. v. District of Columbia.
BP Products North America, Inc. v. District of Columbia, No. 2011 CVT 10619 (D.C. Sup. Ct. Mar. 28, 2014)
On March 28, 2014, BP Products North America, Inc. agreed to settle a similar dispute with the District. BP
paid an assessment in excess of $720,000 following an audit by Chainbridge and subsequently filed a claim
for refund of the full amount plus interest. Under the stipulated decision, BP agreed to accept just over
$140,000 plus interest in full settlement of its claim, and the District will retain the remaining $580,000 in
full satisfaction of the assessment.
Observations
The Microsoft decision, now final, could strike a major blow to OTR, who has relied on Chainbridge and
other contract auditors for numerous transfer-pricing audits, presumably because it lacks the resources to
conduct transfer pricing audits on its own. It is unclear if OTR will continue to use faulty transfer-pricing
methods in examinations for years that remain open. However, the enactment of mandatory unitary
combined reporting for tax years beginning on or after January 1, 2011, may obviate the need for OTR to use
contract audits in the future.
II.
TRANSACTIONAL TAXES
A.
i.
Broadened Base
In addition to franchise tax changes discussed above, the Fiscal Year 2015 Budget Support Act of 2014 also
broadens the sales tax base to cover services including bottled water delivery, storage of household goods,
carpet cleaning, health clubs, tanning studios, car washes, bowling alleys, and billiard parlors. Similar
legislation in prior years was vetoed by then Mayor Vincent Gray and the DC Council subsequently voted to
override the Mayor’s veto.
ii.
Reduced Sales Tax Rate (Prior Years)
Effective October 1, 2013, the general sales and use tax rate is decreased from 6 percent to 5.75 percent. The
reduced rate only applies to transactions subject to the general 6-percent tax; special rates for prepaid
telephone cards, certain rentals or leases, parking, tobacco products, and transient accommodations are not
affected. For additional guidance, see OTR Notice 2013-05 (Sept. 17, 2013).
iii.
Remote-Seller Nexus and Sales Tax Collections (Prior Years)
The Internet Sales Tax, Homelessness Prevention, and WMATA Momentum Fund Establishment
Emergency Act of 2013 keeps in effect the provisions for imposing a sales tax on internet sales. Under the
law as written, a seller that is a “remote-vendor” must collect and remit to the District sales and use taxes
on sales made via the internet to a purchaser in the District (“remote sales tax”). A “remote-vendor” is a
seller, whether or not it has a physical presence or other nexus within the District, selling via the internet
property or rendering a service to a purchaser in the District. Vendors with a specified level of cumulative
gross receipts from internet sales to purchasers in the District are exempt from the requirement to collect
remote sales taxes.
Remote sales tax collection is required within 120 days of the effective date of the legislation. OTR officials
have stated that this law will not take effect until Congress passes the Marketplace Fairness Act. Also,
before the District can require collection, the law requires the District to pass certain laws regarding privacy
and confidentiality, a small-vendor exemption, and other simplification measures.
Observations
The Internet Sales Tax, Homelessness Prevention, and WMATA Momentum Fund Establishment
Emergency Act of 2013 shall apply as of the effective date of the Marketplace Fairness Act of 2013. In what
may prove to be one of its most bi-partisan moments in recent years, the U.S. Senate on May 6 passed the
Marketplace Fairness Act by a vote of 69-27. The federal legislation would require remote sellers with more
than $1 million in total sales to collect sales taxes in states that adopt sales tax simplification measures but
would not provide a needed income tax safe harbor.
While Main Street sellers with an in-state physical presence have waited for over two decades (since Quill
was decided) for Congress to act, remote businesses have waited over five decades since Congress last
created a state income tax safe harbor (P.L. 86-272). However, this income tax safe harbor, created in 1959,
only applies to the sale of tangible personal property. During these decades, not only have remote sellers
grown to account for a large share of all sales, but revenue from sales of intangible property has also become
a significant share of the gross domestic product.
Much of corporate America has implied over the years that it would accept sales tax collection obligations on
remote sellers if a state income tax safe harbor was created for the sale of intangible property as a quid pro
quo. However, if the Marketplace Fairness Act is enacted in its current form, remote sellers and state
revenue departments alike will be left with years of litigation while the contours of the states’ ability to
subject the income of remote sellers to taxes works its way through the courts.
iv.
Restaurant Utility Tax (Prior Years)
Effective August 1, 2013, sales of natural or artificial gas, oil, electricity, solid fuel, or steam, directly used in
a restaurant are exempt from sales tax. The term "restaurant" means a retail establishment that is licensed
by the District of Columbia, a separately metered or sub-metered facility, and in the principal business of
preparing and serving food to the public. The term "restaurant" shall include a pizzeria, delicatessen, ice
cream parlor, cafeteria, take-out counter, and caterer, and banquet and food-processing areas in hotels. The
term "restaurant" does not include beverage counters, including coffee shops and juice bars.
v.
Alcohol Sold for Off Premises Consumption (Prior Years)
Emergency legislation keeps in effect the 10-percent sales tax rate on the gross receipts of the sales of or
charges for spirituous or malt liquors, beers, and wine sold for consumption off the premises where sold.
B.
i.
E911 Tax False Claims Suit
A whistleblower has sued several telecommunications companies in Superior Court under the District’s
False Claims Act alleging that the companies have failed to collect and remit over $29 million in Emergency
911 taxes. The defendants have filed a motion to dismiss. The case is Phone Recovery Servs., LLC v.
Verizon Washington, DC, Inc., 2014 CA 002277 B (pending D.C. Superior Court).
Crowell & Moring represents two of the defendants in the case.
ii.
District and Online Travel Companies Reach Settlement on Hotel Taxes
District of Columbia v. Expedia, Inc., et. al., Case No. 2011 CA 0002117B (D.C. Sup.Ct. Sept. 24, 2012)
On September 24, 2012, the Superior Court held that online travel companies are liable for sales tax on the
full value of gross receipts from retail sales of hotel rooms to customers using their travel websites, thus
handing the District an important victory in its efforts to increase revenues from sales tax collection. The
District and the online companies have settled on the amount of damages stemming from the ruling. Under
the agreement announced by Attorney General Irvin Nathan on February 24, 2014, Expedia, Hotels.com,
Hotwire, Orbitz, Travelocity, and Priceline.com will pay a total of $60.9 million to the District, assuming the
Court of Appeals affirms the Superior Court’s judgment. The companies can appeal by posting a bond or
paying the stipulated judgment and seeking a refund.
The District’s suit against Expedia, Hotwire, Orbitz, Priceline, Travelocity and several other online travel
companies, alleged that they owed the District millions of dollars of annual sales tax revenue because the
companies sell hotel rooms at retail prices, while paying District sales taxes based on the hotels’ discounted
wholesale prices. The District asked the court, among other things, to declare that each Defendant is
required by District law to collect and remit sales taxes based on the retail prices that the Defendants
charge website customers for hotel rooms in the District of Columbia. Defendant online travel companies
filed a Motion to Dismiss the case claiming they were not liable for hotel sales taxes because the online
travel companies are not hotels and do not “furnish” rooms to customers.
On October 12, 2011, the court denied the Defendants’ motion, and ruled that the business model of the
Defendants was within the statutory definition of retail sales and that the transactions were therefore
taxable. The court also found that the statute at issue did not require the seller of the room to actually
furnish the room; it only required that the customer acquire the right to occupy the room in the transaction.
While acknowledging the distinction between online travel companies and the hotels themselves, the court
in its September 24, 2012 opinion held that the online travel companies fit within the statutory definition of
“room remarketer” and that room remarketers are taxed on the full value of the transaction, including net
charges and additional charges received by room remarketers, thereby removing any ambiguity regarding
the online travel companies’ liability.
On December 11, 2012, the court denied the Defendant’s Motion to Amend Order to Permit Immediate
Appeal and Motion for a Stay Pending Appeal. The court determined that there is not a substantial ground
for a difference of opinion in interpreting the relevant sales tax laws, and that an immediate appeal would
not materially advance the ultimate termination of the litigation. Accordingly, the statutory grounds for
allowing an immediate appeal have not been satisfied.
iii.
Delinquent Sales Tax Plea Agreement
Stedman v. District of Columbia, No. 08-CT-586 (D.C. 2011)
The taxpayer operated a small carry-out restaurant during the years at issue, but failed to file sales tax
returns. The taxpayer entered into a plea agreement with the District by which she plead guilty to four
counts of non-willful failure to file monthly sales tax returns. In exchange, the District dismissed parallel
counts charging willful non-filing, and suspended a three-month prison sentence. Under the agreement, the
taxpayer was to “pay all District of Columbia taxes due,” consisting of “restitution, fees, penalties, and
interest.” The District proposed a total restitution amount that included a 75% penalty for fraud. The
Taxpayer challenged the penalty and asked for a judicial determination of whether her failures to file
returns were willful, as the penalty statute requires. The District argued the agreement did not permit the
taxpayer to contest the proof of willfulness. The District of Columbia Court of Appeals held that the
taxpayer must be given the opportunity to challenge the government’s proof that her non-filings were
“willful” and thus subject to the penalties imposed. The Court stated it was less reasonable to suppose that
the taxpayer waived the right to dispute willfulness, and so the applicability of a hefty 75% penalty, without
explicit language in the agreement that she meant to do so.
C.
i.
Sales Tax on Services
The Office of Tax and Revenue has proposed regulations regarding collection of tax on services including
bottled water delivery, storage of household goods, carpet cleaning, health clubs, tanning studios, car
washes, bowling alleys, and billiard parlors pursuant to newly enacted legislation.
III.
PROPERTY TAXES
A.
i.
Tax Lien Sales (Prior Years)
On September 17, 2013, the D.C. Council approved legislation declaring the existence of an emergency with
respect to the need to require the CFO to review all residential real property tax liens sold between certain
dates, to consider whether a real property tax lien, sale and foreclosure were the result of excusable neglect
or other equitable circumstances warranting relief, and to identify the amount of funds needed to
compensate persons for whom an equitable remedy would provide substantial justice.
ii.
Cogeneration Equipment (Prior Years)
The Cogeneration Equipment Personal Property Tax Exemption Emergency Act of 2012 declares that
beginning October 1, 2016, cogeneration equipment serving developments of more than 1 million square feet
will be exempt when fuel used to generate electricity is already subject to tax in the District.
iii.
Clean Energy (Prior Years)
The Energy Innovation and Savings Amendment Act of 2012 exempts from personal property tax certain
solar energy systems, and beginning October 1, 2016, cogeneration systems.
iv.
Electric Vehicle Charging Stations (Prior Years)
The Energy Innovation and Savings Amendment Act of 2012 also clarifies that a “public utility” does not
include a person or entity that owns or operates electric vehicle supply equipment but does not sell or
distribute electricity, an electric vehicle charging station service company, or an electric vehicle charging
station service provider.
v.
Eligibility for Exemption from Recordation Tax (Prior Years)
Beginning October 1, 2013, a copy of the Mayor’s certification of exemption from real property transfer tax
must be submitted at the time the deed is recorded.
B.
i.
Tax Board Acted Ultra Vires
District of Columbia v. 17M Assocs., LLC, 98 A.3d 954 (D.C. 2014)
The District of Columbia Court of Appeals reversed and remanded a judgment of the Superior Court, holding
that the Board of Real Property Assessments and Appeals (“BRPAA”) acted beyond its power in determining
that a lease agreement with the District exempted a company from a possessory interest tax. Although
BRPAA members are qualified to decide disputes over a property's assessed value or classification, they are
not qualified to decide whether a tax applied.
ii.
Real Property Tax Sale Threshold
Aeon Financial LLC v. Fenty, No. 09 CZ 1379 (D.C. 2009)
The District of Columbia Office of Tax and Revenue (OTR) promulgated an emergency regulation (9 DCMR
317.1) that established a $1,200 threshold for the sale of delinquent real property taxes at the District’s 2009
real property tax sale. The regulation provided that only those real properties owing $1,200 or more in taxes
would be auctioned at the 2009 tax sale.
The plaintiff filed suit challenging the regulation and the D.C. Superior Court issued a Preliminary
Injunction that required OTR to include in the 2009 tax sale those parcels for which there were arrearages
said to be under $1,200. The Court later issued an order vacating its Preliminary Injunction and
establishing a schedule for the resolution of the case on the merits. The District filed a Motion to Dismiss
and Motion for Summary Judgment. The D.C. Superior Court granted the motion in part ruling that the
District had the authority to establish reasonable threshold limits on properties not to be placed in the
Public Notice for sale. See Aeon Financial LLC v. Fenty, No. 2009 CA 006323 B (D.C. Super. Ct.). However,
the Court denied the District’s motion with respect to the emergency regulation, holding that the regulation
was invalid because it was promulgated in the absence of a justified emergency. See Id.
In November 2009, the plaintiff filed an appeal with the D.C. Court of Appeals challenging the Superior
Court ruling. However, that appeal was dismissed on April 27, 2010.
- 10 Error! Unknown document property name.
iii.
Real Property Tax Sale Limitations Period
Tangoren v. Stephenson and the District of Columbia, No. 07-CV-137, August 6, 2009 (D.C. Cir.)
The District of Columbia Court of Appeals held that efforts by a successful purchaser to foreclose on property
purchased at a District of Columbia real property tax sale two and a half years earlier were not time-barred
because the usual statutory one-year period of limitations did not apply due to the District’s failure to
provide an issue date on the applicable certificate of sale given to the purchaser.
iv.
Real Property Tax Sale Notice to Defunct Corporation
CCD-SAT, Inc. v. Pratt, 972 A.2d 322 (D.C. Cir. 2009)
The District of Columbia Court of Appeals held that the District was not excused from providing the
statutorily required 30-day notice regarding the impending tax sale of a Maryland corporation’s real
property in the District (and of the right to redeem that property) even though, at the time the notice to the
corporation was due, the corporation was in default under Maryland law and its corporate status had been
forfeited. Instead, such notice was still required because the corporation’s sole director and registered agent
stood in the shoes of the defunct corporation, and should have received notice. As a result, the court held
that the tax sale and the subsequently issued tax deed must be set aside because of the District’s failure to
strictly comply with the statutory notice requirement.
C.
i.
Recordation Tax Treatment of Refinanced Commercial Properties
Opinion of the Attorney General (Jul 25, 2011)
There is a dispute between the Office of Tax & Revenue (OTR) and the D.C. Council about the proper
assessment of the recordation tax with respect to refinanced loans. Specifically, the debate is over whether
the recordation tax must be paid on the full amount of the new loan (the Council’s position) or the difference
between the amount of the new loan and the old one (OTR’s position). The District’s Attorney General has
opined that OTR was not erroneous in concluding that, on a refinancing of commercial property, recordation
tax is due only on the amount of debt in excess of the original indebtedness.
In 2001, the District enacted the Tax Clarity Act of 2000 (the “Act”). Prior to the Act, the refinance of a
purchase money security interest instrument was exempt from recordation tax up to the amount of the
existing debt. The Act amended this provision and arguably requires the payment of recordation tax on the
entire amount of the new debt (to the extent that tax was not already paid). However, the Act’s legislative
history is void of any claims that the original exemption for refinanced debt was intended to be removed.
Further, the CFO’s fiscal impact statement indicated that there would be no revenue impact from the
amendments and that the statutory amendment simply clarified “current practice.”
The Attorney General found that a plain reading of the Act suggests that the recordation tax should be
assessed on the full amount of the indebtedness, to the extent that no recordation tax was paid on the
original indebtedness. However, the legislative history points in the opposite direction, indicating that the
Council did not intended to change prior practice under which the tax was imposed only on the additional
amounts of indebtedness, continuing the exemption for the original debt amount.
The Attorney General has recommended that the Act be amended to make clear that on any refinancing the
recordation tax be imposed on the full amount of the indebtedness, to the extent that no tax was paid on the
recording of the original debt.
IV.
MISCELLANEOUS / OTHER ITEMS OF INTEREST
A.
i.
OAH Lacks Authority to Sanction OTR for Behaving Badly
D.C. Office of Tax and Revenue v. Shuman, et al., No. 12-AA-466 (D.C. 2013)
The D.C. Court of Appeals ruled that the Office of Administrative Hearings has no authority to enjoin or
sanction the Office of Tax and Revenue no matter how badly OTR’s actions may be. This case stems from
OTR’s repeated and erroneous notices to the taxpayers for an individual income tax liability they did not
owe, due to an error in OTR’s computer systems. Despite acknowledging the error and agreeing not to issue
further notices, OTR, its computer system, and its bill collectors continued to send notices to the taxpayers
over several years, causing bigger tax problems, personal distress, and prolonged proceedings at the OAH.
In response, the OAH enjoined OTR from sending further notices to the taxpayers and ordered OTR to fix its
computer system, subjected OTR to pay daily fines if it failed to correct the problems, and sanctioned OTR
for wasting the OAH’s resources, ordering it to pay over $80,000 to the OAH. After ruling that the OAH had
jurisdiction over the taxes at issue, the Court of Appeals ruled that the OAH, an administrative agency, had
no statutory authority to enjoin or sanction OTR, actions reserved for judicial bodies. Accordingly, the Court
overruled the OAH’s order issuing injunctive relief and sanctions, noting that the taxpayers could seek
equitable relief in Superior Court.
ii.
Dismissal Without Prejudice of Pending Litigation in Light of Settlement Agreement
District of Columbia v. Young, No. 11-CV-265 (D.C. March 8, 2012)
The District sued the taxpayer in D.C. Superior Court to recover unpaid unincorporated business franchise
taxes and sales and use taxes. While the lawsuit was pending, the District and the taxpayer entered into a
settlement agreement requiring the taxpayer to pay a settlement amount that was substantially lower than
the District’s original claim over a set number of installment payments. The settlement agreement included
a provision that allowed the District to “pursue enforcement of [the] Agreement and/or collection of the taxes
owed, by any means permitted under law”, should the taxpayer default on the agreement. The settlement
agreement did not address explicitly the disposition of the District’s pending lawsuit against the taxpayer.
After the agreement was executed the District proposed to dismiss its pending lawsuit without prejudice, so
that it could reinstate the lawsuit in the event the taxpayer defaulted on his payment obligations. The
taxpayer argued that the District had foregone that remedy by entering into the settlement, and maintained
that the case had to be dismissed with prejudice. The D.C. Superior Court agreed with the taxpayer on the
basis that because the District had agreed to accept the reduced settlement amount in “full and final
settlement,” and the taxpayer had begun making the required payments, the District was barred from any
attempts to reserve the right to relitigate the issues and seek the original debt amount.
On appeal, the D.C. Court of Appeals reversed the decision of the lower court. The Court of Appeals
reasoned that because the taxpayer had not fully satisfied his obligations under the settlement agreement,
by the express terms of the agreement the District was allowed to enforce its original claim against the
taxpayer for the full amount of the tax liability in the event he defaulted on his payment obligations.
iii.
Work-Product Protection
United States v. Deloitte LLP et al., No. 09-5171 (D.C. Cir., June 2010)
The U.S. Court of Appeals for the District of Columbia Circuit held that a corporation did not waive workproduct protection by disclosing two documents (the first document prepared by the corporation’s accountant
and in-house attorney, and the second document prepared by the corporation’s outside counsel) to its
independent auditor; however, a third document, created by the auditor, was ordered to be produced for in
camera review to determine any privilege.
Although this is a federal tax case, it may have important implications in state tax audits and controversies.
Over the years, state tax authorities have increased their efforts to obtain documents that are arguably
covered by the attorney-client or work-produce privileges. The Deloitte case may thwart efforts by state
governments to obtain such information from taxpayers and their advisors.
B.
Government / Administrative Developments
i.
Offer In Compromise
The Office of Tax and Revenue released an updated Form OTR-10 Booklet, Offer in Compromise, on August
13, 2014. The booklet explains important information about OTR’s Offer in Compromise Program including
eligibility, instructions for requesting an OIC, and payment information. The booklet can be found on OTR’s
website.
ii.
Fiscal Year 2014 Annual Financial Report
Mayor Muriel Bowser and DC Chief Financial Officer Jeffrey S. DeWitt recently released the District’s 2014
Comprehensive Annual Financial Report (CAFR). Here are the key findings in the CAFR:
VI.

Total General Fund Balance now $1.87 billion, up from $1.75 billion;

Legally mandated local and Federal reserves will increase by $72 million to $863 million providing
45 days of operating funds;

Credit ratings were enhanced to AA by Fitch and Standard & Poor’s during FY 2014;

The major factor contributing to the improved financial condition was maintaining expenses below
the budget; and

The strong end to FY 2014 demonstrates the District’s financial discipline to address future budget
challenges.
PROVIDERS’ BRIEF BIOGRAPHY/RESUME
A.
Donald M. Griswold
Don is a partner in Crowell’s State Tax Group, resident in the Washington, D.C. office. He serves as a
trusted counselor to corporate tax executives regarding the multistate tax issues that matter most to them.
Over his nearly 30 year career in state tax, Don’s record of success litigating and settling tough tax
controversies includes obtaining tens of millions of dollars in state tax refunds based on novel legal and
constitutional issues, and achieving even larger reductions of tax assessments. He represents Fortune 500
companies around the country before administrative agencies, state and federal courts, and legislative
bodies – but achieves most of his greatest successes for clients in confidential negotiated settlements far
away from the media spotlight. His advice is particularly valued by clients seeking to reevaluate and
improve the quality and viability of their forward-looking state tax planning.
Prior to joining Crowell, Don was KPMG’s national partner-in-charge of State Tax Technical Services, an inhouse tax attorney with a large financial institution, and a partner in another law firm’s nationally-known
state tax practice. Respected for his thought leadership in the field of state and local tax, Don is frequently
invited to speak on a wide variety of state tax topics at conferences around the country. He serves on the
advisory boards of several state tax organizations, including BNA Multistate Tax Advisory Board, Hartman
State Tax Forum, and the Maryland Comptroller’s Business Advisory Council. A recognized authority on
tax-related constitutional issues, Don is an Adjunct Professor at Georgetown University Law Center.
B.
Walter Nagel
Walt is a partner in Crowell’s State Tax Group, resident in the Washington, D.C. office. He focuses his
practice on tax planning, tax policy and controversies for Fortune 500 clients. Walt has strong experience in
the corporate sector. He previously served as Vice President & General Tax Counsel for MCI and as the
President of Peracon, an electronic commerce company. Walt is an Adjunct Professor of Law at the
Georgetown University Law Center. He is a nationally recognized expert in the taxation of major
corporations with particular expertise in telecommunications taxation, having spent over a decade working
on technology, telecommunications and electronic commerce matters, including as counsel to one of the
commissioners of the U.S. Advisory Commission on Electronic Commerce and as an advisor to the Multistate
Tax Commission.
Walt has appeared in the Washington Post, The Wall Street Journal, and the FOX Business Channel, and
he is the editor of two legal treatises. Walter has been invited to speak before the Congressional Internet
Caucus, the IRS, the National Conference of State Tax Judges, the Congressional Chief of Staff Retreat, the
Federation of Tax Administrators, the Multistate Tax Commission and numerous taxpayer associations, bar
associations, and law schools.
C.
Jeremy Abrams
Jeremy is a counsel in Crowell’s Washington, D.C. office where he represents corporations and partnerships
in complex tax matters. He focuses his practice on state tax litigation and consulting. Jeremy defends
against tax assessments and prosecutes refund claims before administrative agencies and in state courts
around the country. He also advises clients on state tax planning, business aviation matters, financial
statement reporting, multistate voluntary disclosures, and state tax due diligence.
Jeremy frequently speaks on state tax issues at events hosted by Tax Executives Institute (TEI). He served
for two years as attorney-adviser to Judge Juan F. Vasquez of the United States Tax Court before joining
Crowell & Moring’s state tax team. Prior to that he was a senior associate in KPMG’s SALT practice.
Jeremy is also an associate member of the nation's only tax law Inn of Court.
MAINE STATE TAX DEVELOPMENTS
SPRING 2015
Sarah H. Beard, Esq.
PIERCE ATWOOD LLP
Merrill’s Wharf
254 Commercial Street
Portland, ME 04101
sbeard@pierceatwood.com
(207) 791-1378
I.
INCOME TAX/FRANCHISE TAX
A. Legislative Developments
Maine Conforms to Internal Revenue Code. Maine enacted P.L. 2015, ch. 1 (February 12,
2015), conforming Maine's income tax law to the federal Internal Revenue Code through
December 31, 2014 with certain exceptions. See
The law includes conformity to the extender items enacted by the federal government in
December, except that Maine continues to decouple from federal bonus depreciation. The law
extends through 2014 the Maine capital investment credit for property placed in service in Maine
(a credit that mimics bonus depreciation for certain property).
Maine tax forms and instructions for 2014 anticipated this legislation, so no changes to these tax
forms or instructions were made following enactment of Public Law, Chapter 1.
B. Judicial Developments
None to report. (See Maine Board of Tax Appeals decisions, described below).
C. Administrative Developments
Maine Board of Tax Appeals, Scope of P.L. 86-272 Protection. In a redacted 2-1 decision,
issued in April, 2014 (published several months later), the Maine Board of Tax Appeals found
that activities conducted by an independent sales broker on behalf of an out of state company in
Maine exceeded the protection of P.L. 86-272. The third board member found the activity
protected by P.L. 86-272. Unprotected activity, according to the majority, consisted of: “[the
Broker’s] gathering of information on the types and quantities of products displayed and the
manner of exhibition—including whether or not competitors’ products are displayed”;
“observation and reporting of [defects in] a product’s condition” which was of “obvious qualitycontrol value to the Taxpayers”; and “actual manipulation of products displayed on the retailers’
shelves, such as [correcting significant visible defects in Taxpayers’] products or affixing
coupons and tags to products to make them more attractive.” The Board found, however, that
penalties must be waived: “the line between the activities engaged in by the Taxpayers and those
{W4803995.1}
protected under P.L. 86-272 is not so clear that the Taxpayers did not have substantial authority
for their filing position, even though that position was erroneous.” The decision, which was not
appealed, is not precedential. BTA-2013-6, April 2, 2014. The Board has heard at least one
other case on the scope of P.L. 86-272 since issuing that decision, but no other decisions have yet
been published.
Maine Board of Tax Appeals, Federal Tax Benefit Rule Inapplicable. The Maine Board of Tax
Appeals was asked to determine whether the federal “tax benefit rule” could be invoked to
reduce the Taxpayers’ 2011Maine individual income tax liability. Taxpayers were Maine
nonresidents with Maine source income derived from a business conducted in Maine. They sold
the business in 2011 and recognized long-term capital gains. A Maine statutory provision
required add back of federal net operating loss (NOL) carried forward to 2009 through 2011 tax
years. (The add back was balanced by a corresponding subtraction in future years, but because
the business was sold in 2011 presumably Taxpayers could not use the NOL carry forward in
future periods.) Taxpayers sought to use the federal tax benefit rule as authority to use the NOLs
to offset their Maine source income in 2011. The Board held that Maine’s NOL add back statute
left no room for the tax benefit rule, and that Taxpayers could not use NOL carry forwards that
did not appear on their federal return for that year under Green v. State Tax Assessor, 562 A. 2d
1217 (Me. 1989). BTA-2013-8, September 12, 2013.
Maine Board of Tax Appeals, Taxpayers Subject to Double Taxation on IRA Distributions. The
Board of Tax Appeals determined that Taxpayers, who had moved from another state to Maine,
were not entitled under the Equal Protection, Full Faith and Credit, Commerce or Due Process
Clauses to subtract IRA distributions that were correctly included as part of their federal adjusted
gross income for 2011 and 2012 in computing their Maine income tax for those years, in spite of
the fact that the amounts were received in 2010 and were subject to tax in 2010 by their former
state of residence, which had decoupled from the federal treatment. BTA-2014-2, August 8,
2014.
MRS Proposes Amendment to Rule 801, “Apportionment.” Maine Revenue Services (MRS)
proposes to restructure section .06 “Sales factor” of the apportionment rule, and to recognize an
exclusion from the numerator of the sales factor for years beginning on or after January 1, 2013,
for the sales of a person whose only business activity in Maine is the performance of services
directly related to a declared state disaster or emergency. Another change clarifies that “gross
receipts” means an amount net of returns and allowances.
MRS Proposes Amendments to Rule 803, “Withholding Tax Reports and Payments.” MRS has
proposed numerous clarifying changes to Rule 803, which identifies income subject to Maine
withholding, prescribes the methods for determining the amount of tax to be withheld and
explains related reporting requirements. One proposed amendment reflects an important change
in filing requirements: there will be separate filing, payment and processing of Maine income tax
withholding and unemployment contributions for tax periods beginning after 2014 and billing
notices issued after June 18, 2014. Another proposed amendment reflects the recent statutory
change that allows the State Tax Assessor to establish the due date for providing Maine
withholding information statements to payees; generally, under the provisions of the proposed
rule, each statement is due the same date that the related federal statement is due.
{W4803995.1}
Amendments to Rule 805, “Composite Filing.” MRS has proposed amendments to Rule 805,
which provides information regarding the filing of composite returns of income by partnerships,
estates, trusts, and S corporations on behalf of nonresident partners, beneficiaries, or
shareholders. MRS proposes to update a reference to the statute as a result of a recent law
change and to make miscellaneous technical changes.
II. SALES AND USE TAX
None to report.
III. PROPERTY TAX
None to report.
None to report.
On March 24, 2015, Maine Revenue adopted amendments to Rule 208 “Revaluation
Guidelines,” which explains the process of revaluation of property and offers guidance for
professionals providing revaluation services. Aside from technical changes, the only change of
significance is to eliminate the requirement for a municipality to obtain approval from the State
Tax Assessor prior to using a new pricing schedule. Instead, municipalities are now required to
provide a copy of new pricing schedules to the State Tax Assessor only upon request.
IV. OTHER - Governor’s Tax Reform Proposal
Maine Governor Paul LePage has proposed a major restructuring of Maine’s tax system as part
of his FY 2016-2017 budget submission. After a series of public hearings in February 2015, the
proposal is now being scrutinized by the Legislature’s Appropriations and Taxation Committees.
The Governor has also been taking his proposal on the road, presenting information sessions to
generate public support.
Generally, the governor’s proposal would decrease the state’s reliance on income tax revenue
and increase its reliance on consumption-based sales and use tax revenue. The sales tax increase
would come in the form of both increased rates and taxation of new services provided to
consumers. The proposal would also likely result in increased property taxes, and would allow
municipalities to tax larger nonprofit entities for the first time. Maine estate taxes would be
phased out.
Proposed changes include:
{W4803995.1}
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

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Income tax
Beginning with the 2016 tax year, the top individual income tax rate would be lowered
gradually from the current 7.95 percent to 5.75 percent for 2019.
The ability to claim itemized deductions (e.g., charitable contributions, mortgage interest)
would be eliminated for the 2016 tax year and beyond. For 2015, deductions would be
limited to $27,500 (other than medical expenses).
Various tax credits would be eliminated, including the high-tech credit, the jobs and
investment credit, the biofuel production credit, and various credits for employerprovided services (e.g., day care).
Beginning with the 2017 tax year, the top corporate income tax rate would be lowered
gradually from the current 8.93 percent to 7.5 percent for 2021.
Estate Tax
 The estate tax exemption would be increased from $2 million to $5.5 million for
individuals dying in 2016. The estate tax would be eliminated for decedents dying in
2017 or after.
Sales and Use Tax / Service Provider Tax




Tax rates on various items would change. The general sales and use tax rate would
increase to 6.5 percent; lodging taxes would remain at 8 percent; the tax on prepared
foods would drop to 6.5 percent; the service provider tax would be at 6 percent; and the
tax on short-term auto rentals would decrease to 8 percent.
The tax base would be increased dramatically, applying to:
o Domestic and household services (e.g., landscaping, cleaning)
o Installation, repair, and maintenance services (all property other than motor
vehicles and aircraft)
o Personal services (e.g., hair care, event planning)
o Personal property services (e.g., dry cleaning, pet services)
o Professional services (e.g., legal, accounting, architectural)
o Additional prepared foods (e.g., candy, soft drinks, snacks)
o Recreation and amusement services (e.g., movies, golf, skiing)
The service provider tax would be expanded to apply to cable, satellite, and radio
services, and personal interstate and international telecommunications services.
An important exemption would be created for sales to businesses of professional services,
personal property services, and installation, repair, and maintenance services.
Property Tax
 Business equipment eligible for the Business Equipment Tax Reimbursement program
(BETR) would be transitioned to the Business Equipment Tax Exemption program
(BETE) over a four-year period, with BETR fully eliminated in 2019. There is no
exception for property enrolled in a Tax Increment Financing agreement (TIF), as had
been the case with the most recent BETR conversion proposal.
 BETR would be funded at 90 percent until its elimination. (It had been scheduled to
return to 100% funding.)
{W4803995.1}

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

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Municipal revenue sharing would be funded for the fiscal year beginning July 1, 2015,
but would be eliminated the following year. This lack of revenue shared with
municipalities would have to be offset by increased local property taxes, reduced
spending, or a combination of both. Higher property taxes would have a major negative
impact on capital intensive businesses.
The exemption for nonprofit entities, other than churches, would be limited to the first
$500,000 of value and 50 percent of the excess above $500,000.
The telecommunications tax (paid to the state) would be repealed, and municipalities
would be given authority to collect local property tax on that property.
New retail property would cease to be eligible for BETE or BETR. Existing retail
property would be eligible for BETE only through 2025.
The tree growth and open space property tax programs would require additional
compliance measures at both the individual and municipality levels.
VI. PROVIDER’S BIOGRAPHY
Sarah Beard is a partner and member of Pierce Atwood LLP’s State & Local Tax Group. Her
practice includes state and local tax counseling and transactional planning, as well as litigation at
the administrative level and in court. She is admitted to practice in Maine and Massachusetts.
Sarah has been listed in editions of The Best Lawyers in America for Tax Law every year since
2007. She is a past Chair of the Taxation Section of the Maine State Bar Association, and is a
member of the Taxation Section of the American Bar Association. Sarah is an Executive
Committee member and past Chair of the National Association of State Bar Tax Sections. She is
a member of the Advisory Board for the New England State and Local Tax Forum.
{W4803995.1}
Alexandra E. Sampson, Esq.
Reed Smith LLP
1301 K Street, NW, Suite 1000 – East Tower
Phone: 202-414-9486
Fax: 202-414-9299
Email: asampson@reedsmith.com
For additional information and articles, see www.reedsmith.com/mdtax.
I.
A.
i.
2014 New and Extended Income Tax Credits & Incentives
The Maryland General Assembly passed legislation that creates or extends a
number of credits against Maryland corporate income tax liabilities,
including the following:

Research and Development. Amendment to the research
and development tax credit to increase the credit from $8
million to $9 million the aggregate amount of credits that
the Department of Business and Economic Development
(DBED) may approve in each calendar year. See SB 570;
effective June 1, 2014 (applicable to all Maryland R&D
credits certified after December 15, 2013.

Regional Institution Strategic Enterprise (RISE) Zone
Program. New incentives for business entities that locate
in a RISE zone. Such an entity is entitled to depreciate
100% of qualified property within a RISE zone in the year
in which the property is placed in service. The business
entity may also claim enterprise zone income tax credits
for regular and economically disadvantaged employees.
The credit is $1,000 per regular employee (or $1,500 per
regular employee in a focus area) and $6,000 per
economically disadvantaged employee (or $9,000 per
economically disadvantaged employee in a focus area).
The entity is also entitled to a property tax credit and
priority consideration for assistance from the state’s
economic development and financial assistance programs.
See SB 600 / HB 742; effective June 1, 2014.

Sustainable Communities Tax Credit. Extension of the
Sustainable Communities Tax Credit Program through
fiscal year 2017. See HB 510; effective June 1, 2014.
US_ACTIVE-109273875.8-AESAMPSO 04/13/2015 3:23 PM

Health Enterprise Zone Program. Expands the credit to
include “health enterprise zone employers” (which
includes a health enterprise zone practitioner, a for-profit
entity, or a nonprofit entity that employs qualified
employees and provides health care services in an health
enterprise zone. Prior to this change, the credit only
included “health enterprise zone practitioners”. The
legislation also extends the credit through tax year 2016
(formerly, applicable through tax year 2015 only). See HB
668; effective June 1, 2014.

Electric Vehicles and Recharging Equipment. Repeals
the Electric Vehicle Recharging Equipment income tax
credit and replaces the credit with a rebate program. An
annual maximum of $600,00 in rebates may be awarded
in fiscal 2015 through 2017. Also, the Qualified Electric
Vehicle Excise Tax Credit is amended to 1) alter the
calculation of the credit, 2) specify that the credit is only
available to qualified vehicles that are purchased new and
titled for the first time before July 1, 2017, and 3) extend
the program through fiscal year 2017. See SB 908 / HB
1345; effective July 1, 2014.
ii.
2013 New and Extended Income Tax Credits
During the 2013 legislative session, the Maryland General Assembly enacted
legislation that created or extended a number of credits against Maryland
corporate income tax liabilities. They included:

Tractor Registration. New credit for the expense of
registering a class F tractor vehicle (applicable to taxable
years beginning after December 31, 2013, but before
January 1, 2017). See HB 102; effective September 1,
2013.

Cybersecurity Investment. New refundable credit for
qualified investments in Maryland cybersecurity
companies (applicable to taxable years beginning after
December 31, 2013, but before January 1, 2019, and will
terminate June 30, 2019). See HB 803; effective July 1,
2013.

Wineries and Vineyards. New credit for qualified capital
expenses made in connection with the establishment of
new wineries or vineyards or capital improvements made
to existing wineries or vineyards (applicable for tax years
beginning after December 31, 2012, and expires June 30,
2018). See HB 1017; effective July 1, 2013.

Employer Security Clearance Cost. Amendment to the
employer security clearance cost tax credit to increase the
maximum amount of the credit from $100,000 to
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$200,000, and from $250,000 to $500,000 for multiple
sensitive compartmented information facilities. See SB
482; effective July 1, 2013.

iii.
Historic Preservation Credit. Amendment to the credit
for the restoration and preservation of a structure that
has historic or architectural value to increase the credit
from 10% to 25% of properly documented expenses
(applicable to tax years beginning after June 30, 2013).
See SB 144/HB 263; effective June 1, 2013.
Amendment to Biotechnology Investment Credit
The biotechnology investment tax credit permits an investor who invests at
least $25,000 in a qualified Maryland biotechnology company to claim a
credit equal to 50% of the investment, not to exceed $250,000. When the
credit was first established, a “qualified Maryland biotechnology company”
was required to, among other things, have been in business for less than 10
years. Over the years, the Maryland Legislature has approved a number of
exceptions to the 10-year limitation. The current amendment adds an
additional exception by generally allowing a company to qualify for tax
credits for up to 10 years from the date the company first received a qualified
investment from an investor eligible for the tax credit. The amendment
applies to all initial tax credit certificates issued after June 30, 2013. See HB
328/SB 779.
iv.
Amendment to Film Production Credit
The Maryland General Assembly has extended the termination date of the
film production activity tax credit from July 1, 2014 to July 1, 2016. The
General Assembly also increased the total amount of film production activity
tax credits the DBED may award to film production entities from $7.5 million
to $25 million for fiscal year 2014 only. See SB 183. Despite industry
pressure to further increase the amount of film production activity tax credits
that may be awarded, a measure that would have increased the total amount
of credits that could be awarded in fiscal year 2015 from $7.5 million to 18.5
million failed. See SB 1051. However, the Budget Reconciliation and
Financial Act of 2014 authorizes the use of $2.5 million from the Special
Fund for Preservation of Cultural Arts in Maryland and $5 million from the
Economic Development Opportunities Program Account to supplement the
tax credits awarded under the film production activity tax credit program.
See SB 172.
v.
Qualifying Employees with Disabilities Tax Credit Extended
Maryland allows an employer who hires a qualified individual with
disabilities to claim a State income tax credit for certain wages paid to the
employee and for child care and transportation expenses paid on behalf of the
employee in the first 2 years of employment. The Maryland General
Assembly has passed a bill that repeals the termination date of the credit
(previously June 30, 2013). This change is effective June 1, 2013.
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B.
i.
Taxpayer Loss in First Post-Gore Decision
ConAgra Brands, Inc. v. Comptroller of the Treasury, No. 09-IN-OO-0150
(Md. Tax Ct. Feb. 24, 2015)
The Maryland Tax Court issued its decision this week in ConAgra Brands
Inc. v. Comptroller. In the case, which concerns the infamous intangible
holding company issue in Maryland, the Comptroller asserted nexus over
ConAgra Brands based on its licensing of intangibles to various operating
companies that do business in Maryland. Although ConAgra Brands engages
in substantial activity other than the licensing of intangibles (because it is
responsible for the ConAgra group’s multi-million dollar national marketing
and advertising program) the Tax Court decided the case in favor of the
Comptroller.
The Tax Court determined that ConAgra Brands lacked real economic
substance as a separate business entity from its parent. It cited ConAgra
Brand’s use of centralized ConAgra-wide services (such as legal, treasury
function, and information services), shared corporate executives, and circular
flow of funds as proof that Brands could not have functioned as a corporate
entity without the support services it received from “corporate”.
One positive result in the case is the Tax Court’s decision to abate interest
from the date the taxpayer filed its appeal (February 2009) through the date
of the Order (February 2015) and to abate all penalties. With $1.4 million in
tax at issue, at a 13% interest rate on deficiencies, the abatement is
meaningful.
The taxpayer has filed an appeal to Anne Arundel County Circuit Court.
ii.
Maryland Separate Filing Requirement Does Not Prohibit the Taxing
of a Corporation’s Federal Consolidated Return §311(b) Deferred
Gain Where the Taxpayer Reports the Gain on its Maryland Tax
Return
NIHC, Inc. v. Comptroller of the Treasury, 97 A.3d 1092 (Md. 2014).
This case is a continuation of the 2008 Maryland Tax Court case involving
Nordstrom’s intangible holding companies – NIHC and N2HC.
The income sought to be taxed by Maryland arose from a 1999 transaction,
whereby NIHC distributed, as a dividend, a license agreement authorizing
the right to license the use of Nordstrom trademarks, to its parent, N2HC. As
a result of the dividend of the licensing agreement, NIHC recognized gain on
the distribution of appreciated property pursuant to I.R.C. § 311 (b).
Pursuant to Treasury regulation, NIHC was required to defer the reporting of
the gain over the fifteen year period in which N2HC amortized the value of
the license agreement under I.R.C. § 197. Approximately $186 million in
deferred § 311 (b) gain was reported by NIHC each year in the 2002, 2003
and 2004 Nordstrom federal consolidated returns. It is those deferred
amounts that the Comptroller sought to tax. In fact, on its 2002 and 2003
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Maryland tax returns, NIHC reported as Maryland modified income the $186
million in deferred §311(b) gain. NIHC argued that the deferred gain was
reported in error and, based on separate filing rules, Maryland is prohibited
from taxing the deferred gain.
The Tax Court decided three issues. First, the Tax Court found a sufficient
constitutional nexus between NIHC’s §311(b) gain and Nordstrom’s business
activities in Maryland. Second, the Tax Court determined that NIHC’s
§311(b) gain was subject to Maryland taxation because NIHC reported
§311(b) deferred gain as Maryland modified income on its 2002 and 2003
Maryland income tax return. Third, the Tax Court ruled that, in light of the
nexus between NIHC’s §311(b) gain and Nordstrom’s business activities in
Maryland, Maryland’s separate reporting requirement did not prevent the
Comptroller form taxing NIHC’s §311(b) deferred gain as reported on its 2002
and 2003 Maryland tax returns.
On appeal, the Circuit Court affirmed the Tax Court’s decision on the first
two issues, but reversed on the third issue, holding that Maryland’s separate
filing requirement for corporations prohibited the taxing of NIHC’s §311(b)
gain on a deferred basis. The Comptroller appealed to the Maryland Court of
Special Appeals.
The Court of Special Appeals held that because NIHC reported the §311(b)
deferred gain as Maryland modified income on its 2002 and 2003 Maryland
tax returns it was taxable. The court reasoned that nothing precludes
Maryland from taxing income that is constitutionally taxable by Maryland
and that is reported by the taxpayer as Maryland modified income on its
Maryland tax return. The court did not express an opinion on the actual
issue of whether Maryland’s separate filing regime prohibited taxation of the
§311(b) deferred gain, reasoning that the facts of the case (namely, NIHC’s
reporting of the deferred gain on its Maryland return) did not require the
court to address the issue.
The taxpayers appealed to the Court of Appeals, which upheld the decision of
the Court of Special Appeals. The Court of Appeals determined that the
income recognized by NIHC from the transactions had a connection to
business activities of Nordstrom in Maryland during 2002 and 2003, that a
portion of that income was reported on NIHC’s Maryland returns from 2002
and 2003 (which were never amended to reflect the taxpayer’s current
theory), and that the income is taxable by Maryland. The court further noted
that mistakes made by the taxpayer in preparing its Maryland tax returns
did not entitle it to escape tax liability on the income.
iii.
Intangible Holding Company Nexus and the Unitary Business
Principle
Comptroller of the Treasury v. Gore Enterprise Holding, Inc. and Future
Value, Inc., No. 36, September Term, 2013 (Md. March, 24, 2014).
The Gore and Future Value cases resemble your typical intangible holding
company case, with a slight twist – patents were involved. Both Gore and
Future Value were subsidiaries of a common parent corporation. Gore
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earned patent royalties based on a percentage of sales made by its parent
corporation. Future Value earned interest income from loans made out of
accumulated royalty profits that were transferred to it from Gore. The
Comptroller asserted nexus over Gore and Future Value.
The Tax Court held in favor of the Comptroller citing the usual – the
companies were engaged in a unitary business; they had no economic
substance; they depended on the operating parent company for assets and
income; the royalty and interest income were directly connected with
Maryland activity. In a bench ruling, the Circuit Court reversed the Tax
Court. On appeal, the Maryland Court of Special Appeals reversed the
Circuit Court, holding that patent royalties and interest income claimed as
expenses in Maryland and paid to wholly-owned out-of-state subsidiaries are
taxable as part of a unitary business.
The Maryland Court of Appeals determined that the Maryland Tax Court
was correct in holding that Maryland could tax GEH and FVI consistent with
the Court of Appeals’ holding in Comptroller of the Treasury v. SYL, Inc. The
court clarified that although the unitary business principle cannot be used to
establish nexus over GEH and FVI, the subsidiaries nevertheless lacked
economic substance as separate entities. The court pointed to the
subsidiaries’ dependence on Gore for their income, the circular flow of money
between the subsidiaries and Gore, the subsidiaries’ reliance on Gore for core
functions and services, and the general absence of substantive activity from
either subsidiary that was in any meaningful way separate from Gore as
support for this finding.
Although the Court of Appeal decision rejects the notion of a “unitary nexus
theory”, the opinion notes that there’s no reason factors that indicate a
unitary business cannot also be relevant in determining whether subsidiaries
have no real economic substance as separate business entities. This
statement seems to suggest there’s still a significant risk that the Maryland
courts will continue to conflate the “unitary nexus” and “economic substance”
theories, which could influence the outcome in a number of intangible holding
company cases pending at the Maryland Tax Court and circulating at the
Comptroller’s office at audit or in administrative review.
iv.
Comptroller’s Failure to Adopt Regulations and Equitable Tolling of
Statute of Limitations Did Not Permit the Refund of Otherwise TimeBarred Refund Claims
Ralph J. Duffie Trust FBO, et al. v. Comptroller of the Treasury, No. 11-INOO-1287 through -1294 (Md. Tax Ct. Aug. 15, 2013)
The taxpayers, eight electing small business trusts (ESBTs) filed income tax
refund claims.
The trusts asserted that they inadvertently and/or
erroneously overpaid their state income taxes during the years 1999 through
2008 by including in MD adjusted income amounts that should have been
excluded as a result of the federal ESBT income bifurcation calculation. The
Comptroller issued refunds for tax years 2006 – 2008, but denied the request
for refunds for years prior to 2006 as barred by the 3-year statute of
limitations. The taxpayers appealed the denial of the 1999-2005 years to the
Maryland Tax Court.
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On appeal, the taxpayers asserted that the Comptroller breached his
affirmative duty under Tax-Gen. §2-103 to adopt reasonable regulations to
administer the provisions of the tax laws and, as a result, the taxpayers paid
tax on income that was not subject to state income tax. Consequently, the
taxpayers argued, the Comptroller should not be permitted to deny a claim
for refund based on the statute of limitations, and allow the state to be
unjustly enriched by tax on income the Comptroller has conceded should not
be subject to tax.
The Tax Court held in favor of the Comptroller. It first determined that the
Comptroller was not required to issue clarifying regulations regarding the
federal statute at issue. Instead, the Court determined that §2-103 is
intended to authorize the Comptroller to issue regulations as he deems
necessary, rather than to require that he issue a regulation corresponding to
the hundreds of provisions of the Tax-General article of the Maryland Code.
Further, the court determined that even if it were to assume the Comptroller
failed to perform its statutory duty, Maryland follows the “voluntary payment
rule” with respect to tax refunds and, thus, there is no common law right to
sue for a tax refund. To the extent a right to a refund exists, it must be found
in statutory law. Because the taxpayers’ refund claims were filed after the
three-year statute of limitations, the refunds were barred by statute. The
court further held that that statute of limitations (which it determined
operates as a statute of repose and a jurisdictional limitation) was not subject
to equitable tolling.
The taxpayers appealed the Tax Court’s ruling to the Circuit Court for
Baltimore City, but subsequently filed a stipulation dismissing the case in
January 2014.
v.
Rate Stabilization Credits Excluded from Computation of Public
Service Company Franchise Tax
State Department of Assessment and Taxation v. Baltimore Gas & Electric
Company, No. 14, September Term, 2012 (Md. 2013).
Baltimore Gas & Electric (“BGE”) was once the sole provider of electric power
to customers in its service area. Maryland enacted legislation designed to
introduce competition into the market for the supply of electric power. To
facilitate the transition to a competitive market, the legislature enacted a
rate stabilization plan, under which an anticipated increase in BGE’s rates
for the supply of electricity would be mitigated through the application of
credits and subsequent charges to residential customers’ bills.
The
legislation directed BGE to show the credits and charges on the distribution
portion of a customer’s bill to make them nonbypassable. BGE took the
position that placement of the credit on the customers’ bills had the effect of
reducing its distribution income subject to the franchise tax. The Court of
Appeals, however, held that the credits did not affect BGE’s distribution
revenue or its liability for the franchise tax. The court reasoned that the
credits were placed on the customers’ bill in order to make them
nonbypassable so that BGE did not have a competitive advantage in the
energy supply market and, thus, the legislature did not intend for the credits
and charges to affect BGE’s franchise tax liability.
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vi.
County Tax Credit for Taxes Paid by Maryland Residents to Other
States Based on Out-of-State Income
Comptroller of the Treasury v. Wynne, No. 107, September Term, 2011 (Md.
2013)
Maryland allows an individual subject to the Maryland income tax to take a
credit against the state tax for similar taxes paid to other states. However,
no credit is given against the county tax for income taxes paid in other states.
The taxpayer was a Maryland resident and part owner of a Maryland S
corporation who paid income taxes to 39 other states. The taxpayer reported
pass-through income of the S corporation on his Maryland tax return (jointly
filed with his wife). The taxpayer claimed his pro rata share of income taxes
paid to other states as a credit against both his state and county Maryland
individual income tax. The Comptroller denied the credit against the county
income tax. The taxpayer appealed to the Maryland Tax Court, which upheld
the Comptroller’s decision. On appeal the Circuit Court reversed and granted
the credit finding that the failure to provide a credit violated the dormant
Commerce Clause. The Comptroller appealed.
The Maryland Court of Appeals affirmed the circuit court decision below and
held that the failure to allow a credit against the county tax for out-of-state
income taxes paid to other states on pass-through income earned in those
states discriminates against interstate commerce and violates the Commerce
Clause. The Court reasoned that the failure to provide a credit encourages
interstate businesses to conduct more of their business within Maryland and
favors in-state business in the raising of capital from Maryland residents
because Maryland residents are taxed more highly on income earned out-ofstate. The Court determined that the failure to provide a credit made the tax
both unfairly apportioned and discriminatory against interstate commerce.
The Maryland Attorney General’s Office filed a petition for a writ of certiorari
with the U.S. Supreme Court in October 2013. In January 2014, the high
court invited the Solicitor General to file a brief in the case expressing the
view of the United States. On April 4, 2014 the Solicitor General submitted
its brief, urging the Court to hear the case. The U.S. Supreme Court, at the
time of publication of this update, has not yet granted or denied cert in the
case.
C.
i.
Designation and Renewal of Six Enterprise Zones
The Maryland Department of Business and Economic Development (DBED)
approved the designation and renewal of six enterprise zones. Maryland
approved a new zone in Glenmont in Montgomery County, and redesignated
zones in Cecil County, City of Cambridge-Dorchester County, Long
Branch/Takoma Park – Montgomery County, town of Princess AnneSomerset County; and Southwest-Baltimore County.
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DBED approves the State’s Enterprise Zones, while local governments are
responsible for their administration. Businesses operating within an
Enterprise Zone may be eligible for a tax credit towards their state income
tax filings based upon the number of new jobs created, and a tax credit on
their local real property taxes based upon their overall capital investment
into a property.
ii.
Administrative Release No. 18: Net Operating Losses and Associated
Maryland Addition and Subtraction Modifications
Administrative Release No. 18 provides an overview of net operating losses
and related addition and subtraction modifications as they relate to the
computation of Maryland corporate income. The Release was updated July
2013, as a result of certain revisions to Maryland corporate income tax forms,
to note changes in how and where taxpayers compute the NOL deduction
with respect to certain Maryland modifications. According to the Release,
beginning with tax year 2012 returns, the decoupling effect on the NOL
deduction is no long calculated on Maryland From 500DM with the other
decoupling modifications. Instead, a pro forma federal taxable income (FTI)
is first computed to include the effect of other decoupling modifications, and
then the pro forma NOL is applied to reduce the pro forma FTI to no less
than zero. This amount is reported on MD Form 500, Line 5 (in a
carryforward year) and is reported on Form 500X, Line 2b (in a carryback
year). There has been some dispute as to whether this approach is available
only for tax years 2012 and forward, or whether it is also properly applicable
for prior tax years.
II.
TRANSACTIONAL TAXES
A.
i.
Transportation Infrastructure Investment Act (Regarding Motor Fuel
Tax and Sales Tax Laws on Motor Fuel)
The Transportation Infrastructure Investment Act increases transportation
funding by making various amendments to Maryland’s motor fuel tax and
sales tax laws. Two statutory revisions are discussed here.
First, the bill imposes a 1% sales and use tax equivalent rate on motor fuel
beginning July 1, 2013. The rate increases to 2% beginning January 1, 2015,
and 3% beginning July 1, 2015. Unless federal legislation is enacted by
December 1, 2015, authorizing the State to require remote sellers to collect
Maryland sales and use tax, the rate will increase from 3% to 4% beginning
January 1, 2016, and increase to 5% beginning in July 1, 2016. If federal
legislation on sales tax collection is enacted and takes effect before December
1, 2015, the sales and use tax equivalent rate remains at 3% and the
Comptroller is then required to distribute 4% of State sales and use tax
revenues to the state’s Transportation Trust Fund.
The legislation also indexes the motor fuel tax rates for all fuels, except for
aviation or turbine fuel, to the annual change in the Consumer Price Index
(CPI). Beginning July 1, 2013, motor fuel tax rates will increase annually if
the Comptroller’s Office determines the CPI has increased over a specified
-9-
12-month period. The increase will be the percentage growth in the CPI
multiplied by the motor fuel tax rates, rounded to the nearest one-tenth of
one cent. Motor fuel tax rates will remain unchanged if there is no increase in
the CPI. Any increase in the rates may not increase by more than 8% of the
tax rates imposed in the previous year.
See HB 1515.
ii.
Communications Tax Reform Commission
In 2012, the Maryland General Assembly established a Communications Tax
Reform Commission to assess 1) the implications of a competitively neutral
communications tax and fee system that eliminates the disparate treatment
of similar communications service providers, and 2) the efficacy of tax and
other incentives to encourage investment in broadband networks and
emerging technologies. The Commission submitted its final report of its
findings to the Governor and the General Assembly on June 30, 2013.
Unfortunately, due to differences between member positions, the Commission
was unable to arrive at any consensus recommendations for restructuring
Maryland’s communications tax and fee structure. However, the final report
does outline three policy proposals presented by various members of the
Commission. The first proposal suggests reforming the telecommunications
and pay-television tax and fee structure. The second proposal would
exclusively reform the telecommunications industry. The final proposal
focused on reforming the state’s tax and fee structure on communications
services. The report also includes general outlines for reform from additional
Commission members.
iii.
Sales Tax Exemption for Corporate Lodging Facilities
The Maryland General Assembly passed a law that provides an exemption
from certain hotel rental taxes and transient occupancy taxes imposed by
certain counties for the sale of a right to occupy a room as a transient guest
at a dormitory or lodging facility. To qualify for the exemption the facility
must 1) be operated solely in support of a headquarters, training, conference,
or awards facility, or the campus of a corporation or other organization; 2)
provide lodging solely for employees, contractors, vendors, and other invitees
of the corporation that owns the facility; and 3) not offer lodging to the
general public. This law is effective June 1, 2013.
iv.
Prepaid Wireless E-911 Fee
The Maryland General Assembly passed legislation that establishes a
prepaid wireless E-911 fee of 60 cents per retail transaction, which must be
collected by the seller from the consumer for each retail transaction in the
State. The bill defines “prepaid wireless telecommunication service” as a
commercial mobile radio service that allows a consumer to dial 911 to access
the 911 system, must be paid for in advance, and is sold in predetermined
units which decline with use in a known amount.
Under the bill, a retail transaction occurs in the State if: 1) the sale or
recharge takes place at the seller’s place of business located in the State; 2)
the consumer’s shipping address is in the State; or 3) no item is shipped, but
- 10 -
the consumer’s billing address or the location associated with the consumer’s
mobile telephone number is in the State.
Before December 28, 2013, a seller may deduct and retain 50% of all collected
prepaid fees for direct start-up costs. On and after December 28, 2013, the
seller may deduct and retain 3% of the collected fees.
The prepaid fee is the liability of the consumer and not the seller. However,
the seller is liable for remitting all collected prepaid fees.
Prior to the passage of this bill, 911 surcharges were imposed only on wired
and wireless services – not prepaid wireless telecommunication services. The
bill takes effect July 1, 2013. See SB 745.
B.
i.
Electricity Transmitting Equipment Did Not Qualify for Production
Activity Exemption
The Potomac Edison Co. v. Comptroller of the Treasury, No. 12-SU-OO-0644,
-0645 (Md. Tax Ct. Jan. 22, 2015)
The taxpayer is a utility company that provides electric service to customers
in Maryland. The taxpayer filed a refund claim asserting that certain
equipment it purchased (e.g. cables, transformers, substation equipment,
distribution equipment, etc.) to transmit and distribute electricity to its
customers is exempt from sales tax under the production activity exemption.
The Comptroller denied the claim taking the position that only equipment
used to generate electricity at the initial point of output is exempt under the
production activity exemption. The Tax Court upheld the Comptroller’s
denial determining that the transmission and distribution of electricity to
consumers is not a production or manufacturing activity and, thus, the
machinery and equipment used in the transmission of electricity did not
qualify for the production activity exemption.
C.
i.
Taxable Price of Deal-of-the-Day Coupons
The Comptroller amended Reg. 03.06.01.08, which defines “taxable price”, to
address deal-of-the-day coupons. The Regulation provides that the “taxable
price” includes the face value of any coupon issued by any person for which
the vendor can be reimbursed or compensated in any form by a third party.
This includes compensation in the form of advertising or promotion such as
with an online deal-of-the-day eCoupon or similar discount. Thus, under the
Regulation, a $50 deal-of-the-day coupon that permits a customer to purchase
$100 worth of products at a store would be taxed on the $50 – not the $100.
The Regulation also clarifies when there is no arrangement for a third party
to reimburse the vendor, as in the case of a store coupon that in effect
establishes a lower price, the coupon is not included in the taxable price.
Reg. 03.06.01.08 also provides that consumer excise taxes are not included
the taxable price.
The amendments to the Regulation removed the
- 11 -
requirement that a buyer remain liable for payment of a consumer excise tax
in order for the tax to be excluded from the taxable price.
The changes are effective August 19, 2013.
ii.
Taxability of Mixed Tangible Personal Property and Service Lease or
Rental Transactions
The Comptroller took final action on an amendment to Reg. 03.06.01.28
regarding leases of tangible personal property. The Regulation was amended
to provide specific guidance about the taxability of transactions that include a
rental of tangible personal property and delivery of a service.
The Regulation provides that sales tax applies to the entire lease payment,
including service charges, if the dominant purpose of the transaction is to
obtain the property and the service charge is a mandatory charge imposed by
the vendor as a condition of renting the item or the service is incidental and
is not the dominant purpose of the transaction. This applies whether the
service component is separately stated or not (with exceptions for certain
services specifically enumerated in the regulation). Similarly, tax does not
apply to a charge for a service that includes a charge for a lease or rental of
tangible personal property, whether or not the charge is mandatory or
separately stated, if the dominant purpose of the transaction is to obtain a
service and the provision of the tangible personal property is incidental to the
service.
This amendment is effective August 19, 2013.
iii.
Assumption or Absorption of Tax by Vendor
The Comptroller took final action on amendments to two regulations
concerning the assumption or absorption of sales tax by a vendor.
First, the Comptroller amended Reg. 03.06.03.02, regarding recordkeeping, to
provide that a vendor who elects to assume or absorb all or part of the sales
and use tax on a retail sale must maintain records that distinguish sales in
which the vendor assumed or absorbed tax.
Second, the Comptroller amended Reg. 03.06.03.05, regarding refunds of
sales and use tax, to address refund claims by a vendor who assumed or
absorbed the sales and use tax on a sale. The amendment provides that a
vendor who has assumed or absorbed sales and use tax on a retail sale or use
may claim a refund of sales and use tax, interest, or penalty erroneously paid.
The vendor’s records must show that the sales and use tax was separately
stated from the sale price and conclusively demonstrate that the vendor paid
the tax on behalf of the buyer.
These changes are effective August 19, 2013.
iv.
Sales and Use Tax Refunds Involving the Collection Discount
The Comptroller amended Reg. 03.06.03.05, regarding refunds of sales and
use tax, to provide guidance regarding refunds involving a collection discount.
- 12 -
Maryland allows taxpayers who file their sales and use tax returns and pay
their sales tax on a timely basis to keep a portion of the sales tax collected
(up to $500) as a discount. The amendments to the regulation state that if
the entire amount of the taxes previously paid with a return was subject to
the collection discount, the Comptroller shall deduct from an approved refund
the amount of the collection discount. If the previously paid tax amount was
not subject to the collection discount, the Comptroller shall deduct the
collection discount from an approved refund if, after excluding the refund
from the total amount of tax previously paid, the taxpayer would not exceed
the collection discount limitation. This amendment is effective August 19,
2013.
v.
Definition of Medical Equipment Expanded
Maryland exempts certain medical equipment from sales and use tax.
Regulation 03.06.01.09 has been amended to update the list of items included
in the definition of “medical equipment” to include heart monitors and
stairlifts that are not installed so as to become part of real property. The
amendments also update the list of items not included in the definition of
medical equipment to exclude blood pressure devices, thermometers, scales,
and devices to obtain or monitor pulse or respiration. The amendments are
effective August 19, 2013.
vi.
Presumption on Taxability of Propane Gas Containers
Regulation 03.06.01.10, regarding (among other things) natural and artificial
gas, has been amended to provide that propane gas containers less than 60
pounds are presumed to be for recreational, rather than residential, use and,
are therefore subject to tax. The revised regulation also states that sales of
propane gas in containers of any size are subject to tax if the majority of the
usage is not for residential purposes. The amendment is effective August 19,
2013.
III.
PROPERTY TAXES
A.
i.
Transfer of Property Pursuant to IRC 368(a) Reorganization
Senate Bill 106 provides an exemption from the recordation tax and the State
transfer tax for a transfer of real property as part of a reorganization of a
corporation under Internal Revenue Code §368(a). The bill is applicable to all
instruments of writing recorded on or after July 1, 2014. This legislation
directly addresses an issue that was recently decided by the Maryland Court
of Special Appeals (and was pending at the time the legislation was enacted)
See Super-Concrete Corporation v. SDAT, No. 887, Term 13 (Md. Ct. Special
App. Feb. 27, 2015).
ii.
Transfer of Property Between Related Entities
- 13 -
The Maryland General Assembly passed a law that provides an exemption
from the recordation tax and the State transfer tax for the transfer of real
property between a parent business entity and its wholly owned subsidiary or
between subsidiaries wholly owned by the same parent business entity if
certain requirements are met. The bill also exempts from the recordation tax
and the State transfer tax the transfer of real property between a subsidiary
business entity and its parent business entity under certain circumstances.
A business entity is defined as a limited liability company or corporation.
The law takes effect July 1, 2013, and is applicable to all instruments of
writing recorded on or after July 1, 2013. See SB 202 and HB 372.
iii.
Recordation Tax Exemptions
The Maryland General Assembly passed legislation that amends section 12105(f) of the Tax-Property Article of the Maryland Code to impose a
recordation tax on an indemnity mortgage or indemnity deed of trust that is
given in connection with a guaranteed loan that is in the amount of $3
million or more (previously $1 million under 2012 legislation).
The law also requires that a series of indemnity mortgages that are part of
the same transaction must be considered as one for purposes of the
recordation tax. Further, indemnity mortgages recorded before July 1, 2012
may be amended without incurring the recordation tax on the original loan
amount. This law takes effect July 1, 2013. See SB 1302.
B.
i.
Recordation Tax Applicable to State Law Merger
Super-Concrete Corporation v. State Department of Assessments and
Taxation, No. 887, Term 13 (Md. Ct. Special App. Feb. 27, 2015).
Maryland provides an exemption from transfer and recordation tax for
conveyances made pursuant to a reorganization under IRC section 368(a),
which describes a variety of tax-free reorganizations involving corporations.
Silver Hill Materials II, LLC (“Silver Hill”), a Maryland limited liability
company that elected to be treated as a corporation for federal income tax
purposes, merged with and into Super-Concrete Corporation (the
“Taxpayer”), a District of Columbia corporation. As a part of the merger, the
Taxpayer filed a Certificate of Conveyance for real property that Silver Hill
owned in Maryland that was included in the merger. The Taxpayer claimed
an exemption from recordation and transfer taxes for the conveyance,
claiming the conveyance was made pursuant to a reorganization under IRC
section 368(a). SDAT denied the Taxpayer’s exemption claim and assessed
recordation and transfer taxes, stating that IRC section 368(a) does not
describe the merger of a LLC into a corporation. The Taxpayer paid the taxes
and subsequently filed a request for refund. SDAT denied the request and
the Taxpayer appealed to the Tax Court.
- 14 -
The Tax Court ruled in favor of SDAT determining that the merger was not
exempt from the recordation and transfer taxes. The Court held that the
recordation tax exemption only applies to entities that are considered to be
corporations under Maryland law. Although Silver Hill elected to be treated
as a corporation for federal income tax purposes, a LLC is not within the
definition of a corporation under Maryland law.
The Circuit Court for Baltimore City affirmed the decision of the Tax Court.
However, the Maryland Court of Special Appeals reversed. The case has
been remanded to the Tax Court for further proceedings consistent with the
Court of Special Appeals’ decision.
For instruments recorded on or after July 1, 2014, the Maryland General
Assembly has provided a legislative fix to this issue by passing SB 106, which
specifically exempts transfers of real property pursuant to an IRC §368(a)
reorganization.
ii.
Federal Banking Associations Exempt from Recordation and Transfer
Taxes
Montgomery County, Maryland v. Federal National Mortgage Association, et.
al., 740 F.3d 914 (4th Cir. 2014).
Congress has exempted the Federal National mortgage Association (“Fannie
Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”)
generally from state and local taxes, except for state and local taxes on real
property. See 12 USC §1723a(c)(2) (as to Fannie Mae) and §1452€ (as to
Freddie Mac) (collectively, the “federal exemption provisions”).
The taxpayers, Fannie Mae and Freddie Mac, acquired real property in
Maryland through foreclosures on mortgages that they owned or guaranteed.
When selling these properties to third persons, the taxpayers refused to pay
Maryland recordation and transfer taxes, claiming to be exempt from them
under the federal exemption provisions. Montgomery County, Maryland
(along with two counties in South Carolina) disputed the taxpayers’ claimed
exemptions and sued the taxpayers, contending that the federal exemption
provisions do not cover state and local transfer taxes, including recording
fees, insofar as they related to real property. The counties argued that “real
property” includes deeds to the property recorded by the taxpayers because
deeds are indispensable to ownership of real property. The counties also
argued that exempting the taxpayers from state and local transfer taxes for
real property would be unconstitutional as an infringement on the States’
taxing power because transfer taxes at issue are purely intrastate in nature
and the Commerce Clause does not authorize Congress to regulate local,
intrastate activity.
The U.S. District Court for the District of Maryland rejected the counties’
argument and determined that there is a distinction between property taxes
and transfer taxes.
It further concluded that the federal exemption
provisions were a constitutional exercise of Congress’s Commerce Clause
power. On appeal, the U.S. Court of Appeals for the Fourth Circuit affirmed
the District Court decision. It also reasoned that the federal exemption
provisions exempt the taxpayers from state and local taxes except for real
- 15 -
property taxes and transfer and recording taxes (which are taxes on certain
privileges of ownership, such as the right to transfer real property) are
distinct from real property taxes (which are taxes imposed on the ownership
of real property). It further determined that Congress, pursuant to its
Commerce Clause power, could exempt the taxpayers from state and local
transfer taxes, even though they are collected in the context of intrastate
transactions, because the taxes could substantially interfere with or obstruct
the constitutionally justified missions of the taxpayers in bolstering the
secondary mortgage market.
iii.
Property Tax Exemption Upheld for For-Profit Improvements on
State Owned Property
Townsend Baltimore Garage, LLC v. Supervisor of Assessments of Baltimore
City, 79 A.3d 960 (Md. Ct. Spec. App. 2013).
Maryland provides a real property tax exemption for real property owned by
the State of Maryland.
This case involves two parcels of land owned by the State of Maryland and
leased to a non-profit corporation of the University of Maryland BioPark in
Baltimore City (UMB). UMB subleased the two parcels to two for-profit
entities (the “taxpayers”). One subtenant agreed to finance and construct an
office and laboratory building on one parcel, and the other subtenant agreed
to finance and construct a parking garage on the other parcel. Both sublease
agreements provided that during the lease term, title to the improvements
will be held by the subtenant. The sublease agreements further provided
that upon expiration of the sublease term the sublandlord shall be the owner
of the improvements free from any interest of the subtenant. The subtenants
leased the 85% of the office space and 25% of the garage back to UMB for
University purposes.
The Supervisor of Assessments of Baltimore City (“Supervisor”) argued that
although the State owns the underlying land, the land is subleased to two forprofit entities for use in connection with businesses that are conducted for
profit and, thus, the leasehold interests are not subject to real property tax
exemption.
The Tax Court agreed with the Supervisor, concluding that because the
taxpayers, pursuant to the sublease agreements, were the owners of the
improvements and, generally the tax treatment of the improvements and the
land are the same, the property was subject to property taxation. The Circuit
Court for Baltimore City affirmed the decision of the Tax Court.
On appeal, the Court of Special Appeals reversed the decision of the Circuit
Court. It determined, based upon a 2011 Court of Appeal decision involving a
similar issue, that the record owner, as listed in the land records, is the
owner of real property for tax assessment purposes. The court further noted
that ownership of the improvements generally follows title to the land. Thus,
because the State is the owner of the underlying land, it is also deemed the
owner of the improvements. The Court ruled that the stipulated percentage
of the improvements used for University purposes remain exempt from real
property taxes.
- 16 -
iv.
Recordation Tax Exemption for MEDCO
Maryland Economic Development Corporation v. Montgomery County, No.
44, September Term, 2012 (Md. 2013).
The Maryland Legislature granted the Maryland Economic Development
Corporation (“MEDCO”) an exemption from any requirement to pay taxes or
assessments on its properties or activities, or any revenue from its properties
or activities. MEDCO presented a deed of trust for recording in Montgomery
County and claimed an exemption from the recordation tax based on the tax
exemption granted by the legislature. Montgomery County however, argued
that the legislature’s exemption does not include recordation taxes (because
exemptions from all taxation are generally understood to apply only to direct
taxes), that the recording of a deed of trust is not an “activity”, and that the
recording of a deed of trust is not a “requirement”. The Maryland Court of
Appeals disagreed and held in favor of MEDCO. The court determined that
the plain meaning of MEDCO’s tax exemption includes an exemption from
excise taxes, that recording the deed of trust was one of MEDCO’s activities,
and that MEDCO was required to pay the recordation tax, by both its
contract with the lender and by being the entity to present the deed to the
County. Thus, MEDCO was exempt from the recordation tax.
IV.
MISCELLANEOUS / OTHER ITEMS OF INTEREST
A.
i.
Maryland General Assembly Declares Tax Amnesty
The Maryland General Assembly passed legislation to enact a tax amnesty
program from September 1 to October 30, 2015. Under the program, the
Comptroller will waive all civil penalties and one-half of any interest for
taxpayers who failed to file a return required or pay a tax imposed on or
before December 31, 2014. The program is applicable to personal and
corporate income, withholding, sales and use, and admission and amusement
taxes. Any taxpayer that was granted amnesty under a Maryland tax
amnesty program between 1999 – 2014 or was eligible for the July 1 –
November 1, 2004 settlement period for tax years prior to 2003 (related to
intangible holding companies) is not eligible to participate in the 2015
amnesty program. The last amnesty program (held in 2009) generated $38.9
million. See HB 1233 / SB 763.
ii.
Maryland General Assembly Retroactively Reduces Interest Rate
for Refunds Resulting from a Wynne, Win
The Maryland General Assembly passed legislation to retroactively reduce
the state’s interest rate on income tax refunds that result from a final
decision in Maryland State Comptroller of the Treasury v. Brian Wynne, et.
al., 431 Md. 147 (Md. 2013). The legislation provides that the interest rate
payable on such refunds (should the U.S. Supreme Court decline to hear the
case or rules against the State) will be a percentage, rounded to the nearest
- 17 -
whole number, that is equal to the average prime rate of interest quoted by
commercial banks to large businesses during fiscal 2015, based on a
determination by the Board of Governors of the Federal Reserve Bank.
Although the applicable average prime rate of interest for 2015 has yet to be
determined, the average prime rate of interest quoted by commercial banks
to large businesses as of March 2014 is 3.25%, far less than the 13% statutory
rate of interest typically paid on refunds. See SB 172, Section 16.
iii.
Comptroller Must Disclose Usage of General Fund Dollars
The Maryland General Assembly has passed legislation that requires the
Comptroller to include a graph or picture on certain income tax forms
representing how much of each general fund dollar received is spent on
education, health, public safety, and any other category included by the
Comptroller. See SB 604 / HB 743.
iv.
Disaster or Emergency Related Work Does Not Create Nexus
The Maryland General Assembly has enacted legislation that clarifies that
an out-of-state business that performs disaster or emergency related work in
Maryland during a disaster period does not establish nexus with the state. A
“disaster period” is defined as a period that begins 10 days before and 60 days
after a declared state disaster or emergency. A business must provide the
Comptroller with a statement that the business is in the state solely for
purposes of performing disaster or emergency related work. To be considered
an out-of-state business, the business entity must not have nexus or tax
filings in the state prior to the declared state disaster or emergency. An outof-state business includes a business entity that is affiliated with a business
in the state solely through common ownership. The law is effective June 1,
2013. See H.B. 1513.
B.
i.
Amendments to Hearings and Appeals Regulation
The Comptroller amended Reg. 03.01.01.04, regarding appeals to the Office of
Hearings and Appeals.
Maryland requires appeals to the Office of Hearings and Appeals to be filed
via a written application. The amended Regulation now defines the term
“written application” and the definition includes written requests submitted
via U.S. mail, facsimile, email or online appeal, or is delivered in person.
The Regulation was also revised to address appeals of refunds intercepted by
other states. In the event the Comptroller withholds a portion of an approved
refund for a liability certified by the taxing official of another state, a
taxpayer may submit a written application for a hearing to the Office of
Hearings and Appeals within 30 days of the date of the notice of intercept, or
request a hearing with the taxing official of the certifying state in accordance
with the laws of the state that certified the liability.
Other revisions to the Regulation include confirmation that a hearing officer
may require documentation of the reason for an emergency request for
- 18 -
postponement of a hearing, guidelines regarding hearings conducted by
electronic means, and updates to the sections addressing hearings regarding
alcohol and tobacco licenses.
The amendments are effective August 19, 2013.
V.
PROVIDER’S BRIEF BIOGRAPHY/RESUME
A.
Alexandra Eikner Sampson
Alexandra is a member of Reed Smith’s State Tax Group in the Washington,
D.C. office. Her practice includes state and local tax compliance, audits,
appeals and litigation, with an emphasis on District of Columbia, Maryland
and the Carolinas tax matters. She advises clients on complex multistate
issues spanning the corporate income, franchise and business, sales and use,
and property tax areas. Before joining Reed Smith, Alexandra was a fellow
with the Council on State Taxation. She is a co-chair of the ABA/IPT
Advanced Sales Tax Seminar, a former Vice-Chair of the Tax Law Committee
of the ABA’s Young Lawyers Division, and is a member of the Maryland
Chamber of Commerce Taxation Committee and Maryland Bar Association’s
State Tax Study Group.
- 19 -
______________________________________________________________________________
KENNETH H. SILVERBERG
CHRISTIAN M. MCBURNEY
ROBERT G. TROTT
NIXON PEABODY LLP
202-585-8000
I.
INCOME AND FRANCHISE TAXES
A.
Corporations, Financial Institutions, and Unincorporated Businesses
1.
Maryland Health Enterprise Zone Tax Credits
The Maryland Secretary of Health and Mental Hygiene has adopted new and amended
regulations pertaining to the Health Enterprise Zone Tax Credits (Md. Regs. Code §§
10.61.01.03, -.05, and -.06, effective 12/22/2014). The regulations establish procedures for
implementation of the hiring tax credit available to certain health enterprise zone employers.
B.
1.
Out-of-state Subsidiary Income
The Maryland Tax Court has ruled that an out-of-state subsidiary corporation was subject
to Maryland corporate income tax because it had sufficient contacts and the comptroller fairly
apportioned income to the taxpayer's Maryland-related income-producing activities. Intellectual
property from the parent and other subsidiaries were exchanged for taxpayer stock and the
taxpayer managed, controlled, promoted, and marketed its brand names and trademarks as well
as incurred legal and consulting fees protecting the trademarks, but had no employees, agents, or
representatives present or engaged in activities in Maryland. In Maryland, nexus is sufficient to
justify state corporate income taxation the parent's business in Maryland produced the income of
the subsidiary. The taxpayer's royalty income for the licensed trademarks, which was paid back
to the parent in the form of intercompany payments, is subject to Maryland income tax because
the taxpayer lacked real economic substance as a business separate from its parent. The lack of
economic substance is evidenced by the fact that the parent company controlled the taxpayer
through stock ownership, functional integration, and common employees via directors and
officers. With regard to apportionment, Maryland's 3-factor apportionment formula does not
clearly reflect the income allocable to Maryland since the taxpayer did not record Maryland
sales, payroll, or property, and, therefore, the comptroller's blended apportionment factor derived
directly from the Maryland income tax returns of the parent's entities and the parent's own
15157249.1
-2apportionment figures, was appropriate and there was no clear and convincing evidence that this
method was unfair. (ConAgra Brands, Inc. v. Comptroller, Md. Tax Ct., No. 09-IN-OO-0150,
02/24/2015.)
ConAgra is the first case decided in the post-Gore era. It appears Maryland will use the
common unitary indicia of centralization of management and functional integration to establish
that subsidiaries lack economic substance separate from their parent.
2.
Machinery and Equipment Exemption
The Maryland Tax Court has ruled that the transmission of electricity is a taxable service
and does not qualify for the machinery and equipment exemption because it is not a production
activity. The taxpayer, Potomac Edison Company, contends that certain items it purchased in
connection with the transmission of electricity in Maryland should be exempt from sales and use
tax because the transmission of electricity that takes place in a generation plant continues in the
transmission lines that delivers electricity to customers. In Maryland, the sales and use tax does
not apply to a sale of tangible personal property used directly and predominantly in a production
activity at any stage of operation on the production activity site. Further, the transmission of
electricity is specifically included in the definition of “taxable service” and the generation of
electricity is specifically included in the definition of “production activity.” In this case, the
transmission of electricity is taxable because the processing that takes place in the transmission
of electricity is not the same as the processing that takes place in the generation of electricity.
(The Potomac Edison Co. v. Comptroller of the Treasury, Md. Tax Ct., Nos. 12-SU-OO-0644;
12-SU-OO-0645, 01/22/2015.)
3.
Wynne v. Comptroller of the Treasury
The U.S. Supreme Court will consider Wynne v. Comptroller of the Treasury, Md. Ct.
App., Dkt. No. 107, September Term, 2011, 01/28/2013, 431 Md 147, 64 A3d 453 (2013). In
Md. Comptroller of Treasury v. Wynne, U.S., No. 13-485, brief filed 9/19/14, Maryland resident
Brian Wynne argued that the state's partial-credit tax scheme violates the dormant Commerce
Clause by unfairly penalizing Maryland residents for making money across state lines. The law
in question imposes both a state- and county-level tax on Maryland residents. In his merits brief,
Wynne argued that Maryland's individual income tax scheme burdens interstate commerce by
not providing a credit against the county tax for income taxes paid to other states. The Maryland
Comptroller for the Treasury filed a brief in July arguing that it had a sovereign right to tax
Maryland residents' income wherever earned. This position was supported in an August amicus
brief filed by the U.S. Solicitor General. The Supreme Court will hear the comptroller’s appeal
from a Maryland Court of Appeals ruling that residents who earn income from activities outside
the state are treated differently than residents who engage in similar activities but earn all of their
income in Maryland. There is no dispute about whether the state has the sovereign power to
impose an income tax. However, Wynne argues the tax must yield when it offends the
Commerce Clause.
The Maryland Court of Appeals decision relied on Complete Auto Transit Inc. v. Brady,
430 U.S. 274 (1977), in holding the local tax failed the internal consistency test because
Maryland taxpayers are subject to higher taxes than taxpayers in other states. Further, the Court
15157249.1
-3found the tax scheme also failed the external consistency test because income from outside the
state is taxed in the state of origin and in Maryland, which is double taxation on the same
income. Wynne contends this discourages small business owners and pass-through entities from
offering their products and services to customers across state lines.
C. Credits
1.
Sustainable Communities Tax Credit Certifications
The Maryland Department of Planning has adopted the repeal of the regulations
pertaining to the sustainable communities tax credit certifications and has adopted new
regulations to replace them (Md. Regs. Code §§ 34.04.07.01 through -.07 repealed and new §§
34.04.07.01 through -.08 adopted, effective 02/16/2015). The new regulations conform to 2014
legislation that removed certain requirements and added options for small commercial projects to
receive sustainable communities tax credit certifications. Previously, the Department was granted
emergency status effective January 1, 2015 until June 30, 2015 for these regulations. Currently,
they are permanently adopted effective February 16, 2015.
2.
Maryland Regional Institution Strategic Enterprise Zone
The Maryland Department of Business and Economic Development has adopted new
regulations (Md. Regs. Code §§ 24.05.21.01 through .13, effective 03/30/2015) pertaining to the
Regional Institution Strategic Enterprise (“RISE”) Zone Program. The regulations detail the
requirements, procedures, and applications for designation as a “qualified institution” and as a
RISE zone. Also, the person or entity identified in the target strategy for preparing the annual
report must submit an annual report to the Department on a calendar year basis by April 15 of the
following year, in the form and containing the information established by the Maryland Secretary
of Business and Economic Development.
3.
Maryland Health Enterprise Zone Tax Credits
The Maryland Secretary of Health and Mental Hygiene has adopted new and amended
regulations pertaining to the Health Enterprise Zone Tax Credits (Md. Regs. Code §§
10.61.01.03, -.05, and -.06, effective 12/22/2014). The regulations establish procedures for
implementation of the hiring tax credit available to certain health enterprise zone employers.
II.
ADMINISTRATIVE
1.
Tax Liens – Exhaustion of Administrative Remedies
The Maryland Court of Special Appeals has ruled that a company federally charged with
money laundering and operating an illegal gambling operation, resulting in the Maryland
Comptroller assessing deficient Maryland admissions and amusement taxes and fraud penalties
for under-reported gross income, must exhaust all administrative remedies before appealing to
the Maryland Tax Court. After a hearing officer reduced the taxes owed, the taxpayer continued
to protest the assessment by appealing to the Maryland Tax Court. While this appeal was
pending, the comptroller filed a notice of lien against the taxpayer, who filed a petition in the
Circuit Court for Baltimore County asking that the tax lien be vacated. Although the issue in the
15157249.1
-4instant case was rendered moot (i.e., the Maryland Tax Court affirmed the assessment), the
Maryland Court of Special Appeals ruled that the circuit court did not have the authority to
vacate the lien because Maryland statutory law expressly prohibits courts from issuing an
injunction or any other process enjoining or preventing the comptroller's collection of a tax (only
in exceptional and narrow circumstances can a taxpayer obtain collateral recourse from the
judiciary to prevent the assessment or collection of a tax). In this case, the comptroller, in
exercising its broad powers bestowed by the Maryland General Assembly, confronted the
possibility that the taxpayer's assets might be depleted during the pendency of the tax court
appeal, that other creditors might initiate claims, or that more fraudulent acts might occur in
choosing to file the lien before the tax court's final determination. (Comptroller v. Zorzit, Md. Ct.
Spec. App., No. 883, September Term, 2013, 01/30/2015.)
2.
Interest Rates for Refunds and Delinquent Taxes
The Maryland Comptroller's Office has set the interest rates for refunds and delinquent
taxes. The annual interest rate for overpayments and underpayments of taxes for calendar year
2015 remains at 13%. (General Notice, Maryland Comptroller of the Treasury, Maryland
Register Vol. 41, Issue 21, p. 1299, 10/17/2014.)
III.
15157249.1
BRIEF BIOGRAPHY/RESUME OF PROVIDERS
A.
CHRISTIAN M. MCBURNEY (B.A., magna cum laude, Brown University 1981; J.D.
& Law Review, New York University School of Law 1985; LL.M Georgetown
University Law Center, Taxation, 1992) is a partner with the Washington, DC
Office of Nixon Peabody LLP. Former chair and vice-chair of the State and
Local Tax Committee of the Taxation Section, District of Columbia Bar; coeditor-in-chief of the Journal of Multistate Taxation.
A.
KENNETH H. SILVERBERG (B.A. (Economics), University of Michigan, 1968; J.D.,
Georgetown University Law Center, 1973) is a partner with the Washington, DC
Office of Nixon Peabody LLP.
B.
ROBERT G. TROTT (B.A, University of Virginia, 2000; MFA, Queens
University, 2006; J.D., University of Michigan Law School. 2012) is an associate
with the Washington, DC Office of Nixon Peabody LLP.
Spring 2015
www.reedsmith.com/MAtax; www.MassachusettsSALT.com
Michael A. Jacobs
Reed Smith LLP
Three Logan Square
1717 Arch St., Ste. 3100
Phone: 215-851-8868
mjacobs@reedsmith.com
Robert E. Weyman
Reed Smith LLP
Three Logan Square
1717 Arch St., Ste. 3100
Phone: 215-851-8160
rweyman@reedsmith.com
Brent K. Beissel
Reed Smith LLP
Three Logan Square
1717 Arch St., Ste. 3100
Phone: 215-851-8869
bbeissel@reedsmith.com
For additional information, articles, and presentations, see www.reedsmith.com/matax.
I.
Corporate Excise Tax
A.
Market sourcing and throwout effective January 1, 2014: Massachusetts enacted legislation
replacing Massachusetts’ cost-of-performance sourcing regime for receipts from sales other
than sales of tangible personal property. The new law implements market sourcing and a
throwout rule for sales other than sales of tangible personal property for tax years beginning
on or after January 1, 2014.
Under the new market sourcing rule, receipts from sales other than sales of tangible
personal property are sourced to Massachusetts as follows:
(i)
Sales, rentals, leases or licenses of real property are sourced to Massachusetts if the
property is located in the Commonwealth;
(ii)
Rentals, leases or licenses of tangible personal property are sourced to Massachusetts
if and to the extent the tangible personal property is located in the Commonwealth;
(iii)
Sales of services are sourced to Massachusetts if the service is delivered to a location
in the Commonwealth;
(iv)
Leases or licenses of intangible property are sourced to Massachusetts if the
intangible property is used in the Commonwealth;
(v)
Sales of intangible property, if receipts are contingent on the productivity, use, or
disposition of the intangible, are sourced to Massachusetts to the extent the
intangible property is used in the Commonwealth; and
(vi)
Sales of intangible property, where the property sold is a contract right, government
license, or similar intangible property that authorizes the holder to conduct a
business activity in a specific geographic area are sourced to Massachusetts if the
intangible property is used in or otherwise associated with the Commonwealth.
The legislation also institutes a throwout rule for certain sales. Under this rule, sales are
excluded from the sales factor if the taxpayer is not taxable in a state to which a sale is
assigned under the new market sourcing rules, or if the state to which such sales should be
assigned cannot be determined or reasonably approximated. Ch. 46, Acts of 2013, amending
G.L. c. 63, § 38(f). Furthermore, the statute expands the class of receipts from intangible
property that is excluded from the sales factor. Any receipts from intangibles that are not
covered by I.A.1.(iv)–(vi) above are excluded from the sales factor.
COST Semiannual update Spring 2015 04/14/2015 10:46 AM
On January 2, 2015, the Department of Revenue (“Department”) released final regulations to
implement the new sourcing rules. These regulations are discussed below in I.C.1.
Utility excise tax repealed: For tax years beginning on or after January 1, 2014, utility
companies formerly subject to the 6.5% excise tax on net income will be taxed as business
corporations for corporate excise tax purposes. As a consequence, utility companies will now
be subject to tax on the grater of: (1) the sum of 8% of net income plus $2.60 per $1,000 of
value of taxable tangible property located in Massachusetts (tangible property corporations),
or net worth (intangible property corporations); or (2) $456. Utility companies formerly
subject to the public utilities excise tax will now apportion their income using the standard
apportionment formula (property, payroll, and double-weighted sales), and they will also be
able to carry forward losses generated in taxable years beginning on or after 2014. Any
losses incurred by a utility for years prior to 2014 will not be available to be carried forward.
Ch. 46, Acts of 2013.
Research and Development Credit Expanded: On August 13, 2014, Governor Deval Patrick
signed an $80 million economic development bill into law. The law includes an expansion of
the research and development credit. For calendar years 2015, 2016, and 2017, taxpayers
may now elect to take a credit equal to 5% of its qualified research expenses that exceed 50%
of the taxpayer’s average qualified research expenses for the previous three years. The credit
will be increased to 7.5% for 2018, 2019, and 2020; and then increased to 10% for years
thereafter. If the taxpayer did not have qualified research expenses in any one of the three
taxable years preceding the year for which the credit is claimed, the credit equals 5% of the
taxpayer’s qualified research expenses for the year for which the credit is claimed. The term
“qualified research expense” is defined under IRC § 41. These provisions only apply to
qualified research expenses conducted in the Commonwealth. Ch. 287, Acts of 2014.
Corporate tax amnesty program authorized: On February 13, 2015, Governor Charlie Baker
signed legislation authorizing a corporate tax amnesty program, which will run during a twomonth period ending on or prior to June 30, 2015. The Department has provided guidance to
taxpayers regarding eligibility for the program and the period during which the amnesty will
be available, which is discussed at I.C.2 below. Ch. 2, Acts of 2015.
B.
ATB finds nexus for biotechnology company owning drugs being studied in Massachusetts:
On November 17, 2014, the Appellate Tax Board (“ATB”) promulgated Findings of Fact and
Report in which the ATB held that a corporation doing business in Massachusetts was not
entitled to claim the protection of P.L. 86-272 because it owned property in the
Commonwealth and, therefore, was subject to Massachusetts’ corporate excise tax. The
corporation was a biotechnology company headquartered in California that developed and
sold therapeutic drugs.
The corporation appealed an assessment of corporate excise tax, arguing that its activities in
Massachusetts were limited to the solicitation of sales and, thus, were protected by P.L. 86272. The ATB found that, for the years at issue, the corporation (1) shipped large quantities
of drugs to a third-party manufacturer in Massachusetts that encapsulated the drugs and
sent them back to the corporation ready for commercial sale; (2) sent drugs to third-party
clinical researchers in Massachusetts, who conducted clinical trials in Massachusetts on the
corporation’s behalf; and (3) owned machinery and equipment located in Massachusetts. The
corporation retained title to the drugs throughout these research and manufacturing
activities. The ATB found that, based on the continuous presence of the property owned by
the corporation in Massachusetts, the corporation was subject to corporate excise tax in
Massachusetts.
With respect to the clinical trials, the ATB did not attribute the activities of the third-party
clinical researchers to the taxpayer—it focused only on the taxpayer’s ownership of the drugs
2
used by the researchers. Further, the ATB did not address whether the taxpayer’s detailing
activities went beyond the protections of P.L. 86-272.
The taxpayer has appealed the ATB’s decision to the Appeals Court. The taxpayer’s brief is
due April 13, 2015. Genentech, Inc. v. Commissioner, ATB Docket Nos. C282905; C293424;
C298502; and C298891 (Mass App. Tx. Bd. November 17, 2014). appeal pending, Mass App.
Ct. Docket No. 2015-P-0287.
The ATB Upholds Single-factor Apportionment for Manufacturers in Genentech: Separate
from the P.L. 86-272 issue in Genentech v. Commissioner, discussed above, the taxpayer also
challenged the Department’s classification of the taxpayer as a manufacturer and the
resulting assessment from applying the statutory single-factor apportionment for
manufacturers. Massachusetts law requires manufacturing corporations to apportion their
income using a single sales factor.1 As a preliminary matter, the taxpayer argued that it was
not a manufacturer. The taxpayer developed its drugs by injecting animal or bacteria cells
with DNA molecules, causing the cells to produce certain types of proteins. The taxpayer
then sold these proteins as therapeutic drugs. The taxpayer analogized its activities to that
of a farmer: just as a farmer harvests crops and sells them, the taxpayer harvested proteins
and sold them. The ATB labelled that analogy “facile at best,” pointing out that the taxpayer
extracted and purified the proteins by subjecting the cells to physical change, in order to
create a product fit for consumption. The ATB found that this process constituted
manufacturing.
The taxpayer then argued that even if it did engage in manufacturing, it was not a
“manufacturing corporation” subject to single-factor apportionment. By statute, a taxpayer
is a “manufacturing corporation” if it derives 25% of its gross receipts from the sale of goods
that it manufactures.2 For purposes of this test, the taxpayer argued that “gross receipts”
includes gross receipts from the maturity or redemption of short-term securities that the
taxpayer generated through its treasury function. The ATB agreed that the plain language
of the statute supported the taxpayer’s position, but nevertheless held that the gross receipts
at issue must be excluded because to hold otherwise would lead to an “absurd result.”
According to the ATB, the legislative intent behind the 25% test was to determine whether a
taxpayer’s manufacturing activities were a substantial part of its business. The ATB found
that the inclusion of gross receipts generated by the taxpayer’s treasury department—
roughly 90% of its total gross receipts for the years at issue—would subvert that intent.
due April 13, 2015. Genentech, Inc. v. Commissioner, ATB Docket Nos. C282905; C293424;
C298502; and C298891 (Mass App. Tx. Bd. November 17, 2014). appeal pending, Mass App.
Ct. Docket No. 2015-P-0287.
Interest deductions on intercompany debt: The ATB issued another decision denying truedebt treatment for intercompany obligations. The ATB upheld assessments denying
National Grid’s3 interest deductions for payments under deferred subscription arrangements
(“DSAs”) on the basis that the DSAs did not qualify as true debt. The ATB also upheld the
Department’s decision to add back the DSAs in computing National Grid’s net worth, which
resulted in additional tax under the net worth component of Massachusetts’ corporate excise
tax.
The DSAs were refinancing instruments used by National Grid as part of its purchase of
several US energy companies. When National Grid purchased a US energy company, it
would initially finance the purchase with a loan from the global parent of the affiliated
group, a UK entity (“UK Parent”).
1
M.G.L. c. 63, § 38(l).
M.G.L. c. 63, § 38(l)(1).
3
The appeals involved three affiliated entities; for purposes of this outline, we are referring to the three entities collectively as
“National Grid”.
2
3
After a corporate reorganization to integrate a newly acquired company, National Grid would
become the obligor under the loan from UK parent. National Grid would then enter into a
DSA with an affiliated special purpose entity (“SPE”), whereby it agreed to purchase shares
in the SPE. The DSA would require National Grid to make a small initial payment, and then
agree to make “call payments” to the SPE equal to the amount of the initial loan from the UK
Parent plus additional amounts. National Grid characterized these additional amounts as
interest payments and characterized the DSAs as debt.
National Grid would then sell its shares in the SPE to a different affiliate for an amount that
permitted repayment of the loan to UK parent, but National Grid would retain its obligation
to make the call payments pursuant to the DSAs.
National Grid treated the DSAs as debt when computing its net worth and deducted
payments under the DSAs as interest in computing its federal taxable income. This
treatment was consistent with the characterization of the DSAs as debt in National Grid’s
financial statements and filings with the U.S. Securities and Exchange Commission. While
the DSAs were not in the form of traditional loan documents, National Grid argued that, in
substance, the DSAs operated as debt because: (1) they had a fixed maturity date; (2) the
SPE had a legally enforceable right to the call payments; and (3) there were penalty,
interest, and other enforcement mechanisms that the SPE could employ if National Grid did
not make the call payments. Furthermore, National Grid did ultimately make call payments
equal to the initial loan amount from UK Parent plus additional amounts that it argued were
“interest” payments that reflected interest it would have been charged if it had financed the
transaction through a third-party loan.
The ATB ultimately rejected the taxpayer’s argument. It found that DSAs were not true
indebtedness because although the SPE had a legally enforceable right to demand payment,
the taxpayer was not under an unconditional obligation to pay. Accordingly, the Board found
in favor of the Commonwealth.4 National Grid Holdings, Inc., et. al. v. Commissioner,
Docket No. C292287–89, 2014 WL 2535189 (Mass. App. Tax Board, June 4, 2014) appeal
pending, Mass App. Ct. Docket No. 2014-P-1662.
In a separate appeal, the Board found that the taxpayer could not challenge the
Commissioner’s denial of deductions for its interest payments based on the treatment of
those payments in a closing agreement with the IRS. As discussed above, the Department
denied National Grid’s interest deduction for payments to the SPE for the 2002 tax year and
issued an assessment. Subsequent to National Grid’s appeal of that assessment, the
taxpayer resolved a federal tax audit for the same tax year through a closing agreement.
The closing agreement allowed the taxpayer to deduct a portion of its interest payments to
the SPEs. Following the agreement, the taxpayer filed a separate application of abatement,
this time challenging the Commissioner’s audit assessment based upon the terms of the
taxpayer’s closing agreement with the IRS.
The Commissioner took no action with respect to the second application for abatement; as a
result, the taxpayer appealed to the Board. The Board noted that a taxpayer may not file a
second application for abatement that challenges an item of tax that has already been
challenged in a previous application, unless warranted by a change in fact or law. The
taxpayer argued the IRS closing agreement created sufficient grounds for a second
application, because the Department was bound by the IRS closing agreement, specifically
the allowance of interest deductions. The Board disagreed, holding that the Commissioner
was not bound by the closing agreement. Although Massachusetts net income is premised on
federal net income, the Court noted that the dollar amounts for each need not match.
Accordingly, it granted the Commissioner’s motion to dismiss the appeal. National Grid USA
Service v. Commissioner, Docket No. C314926, (Mass. App. Tax Board, Sept. 19, 2014)
appeal pending, Mass App. Ct. Docket No. 2014-P-1861.
4
The ATB ruled for the taxpayer regarding the treatment of an intercompany loan (separate from the DSA) as debt. The Department
had conceded this issue in its brief.
4
National Grid appealed both ATB decisions to the Appeals Court, and has submitted briefs.
The Commissioner’s briefs are due May 29, 2015.
Securitization entity qualifies as financial institution: The ATB issued a decision that
provides insight into the treatment of bankruptcy remote entities that are used for
securitization transactions. The appeal involved Gate Holdings, a wholly owned subsidiary
of First Marblehead Corporation. Gate Holdings held beneficial interests in trusts that
purchased and held securitized student loans initially issued by third parties. The
Department contended that Gate Holdings did not qualify as a “financial institution” for
corporate tax purposes. The ATB rejected the Department’s argument, holding that Gate
Holding was properly classified as a financial institution because it was engaged in lending
activity (through its trust subsidiaries) that was in substantial competition with other
financial institutions. See M.G.L. c. 63 § 1 “Financial institution” (e).

Purchasing loans is a "lending activity": In reaching its determination, the ATB

Expansive definition of "substantial competition": In interpreting the "substantial
broadly applied the term “lending activity”, finding that although Gate Holdings and
its trusts did not issue loans to the public, Gate Holdings still engaged in a lending
activity because the trusts it owned purchased and held student loans.
competition" requirement, the ATB found that banks also engaged in similar
transactions involving the securitization of loans, and that such transactions
facilitated lending by the banks. The ATB further noted that the purchase and
securitization of loans by Gate Holdings and its affiliates reduced the investment
opportunities available to other banks and financial institutions. Thus, the ATB
determined that Gate Holdings and its affiliates were in substantial competition with
other financial institutions. The ATB rejected the Department’s argument that the
"substantial competition" prong was satisfied only if the taxpayer directly competed
with other financial institutions to purchase the specific loans in its portfolio.
The taxpayer appealed the ATB’s decision, but the Department did not challenge the ATB’s
determination that Gate Holding’s is a financial institution—see I.B.5 for further
information regarding additional issues in the appeal. First Marblehead Corp. & Gate
Holdings, Inc. v. Commissioner, Docket Nos. C293487, C305217, C305240, C305241 (Mass.
App. Tax Board, April 17, 2013), aff’d on other grounds First Marblehead Corp. v.
Commissioner, 470 Mass. 497 (2015).
ATB applies economic-nexus analysis in determining whether taxpayer is eligible for
apportionment, but does not take into account activities of third-party contractors: The First
Marblehead & Gate Holdings decision, see I.B.4 above, also provided guidance regarding a
financial institution’s eligibility for apportionment and the sourcing of the institution’s loan
portfolio for property-factor purposes. Significantly, the ATB held:

Economic nexus standard applied to determine whether taxpayer is "taxable" in
another jurisdiction: Gate Holdings had no payroll or receipts, and no property other
than the student loans it purchased. Nonetheless, the ATB held that Gate Holdings
was entitled to apportion its income because it held loans made to borrowers in all 50
states, and the presence of those borrowers would permit those other states to impose
tax on Gate Holdings—presumably under Massachusetts’ economic-nexus standard.

Third-party activities are not considered in sourcing loans for property-factor
purposes: For financial institutions, a loan is included in the property factor and
sourced to the regular place of business where the preponderance of the "SINAA"5
activities occur with respect to the loan. Gate Holdings argued that in determining
5
The SINAA activities with respect to a loan are solicitation, investigation, negotiation, approval, and administration. See G.L. c. 63,
§ 2A(e)(vi)(3)(C).
5
where the SINAA activities occurred with respect to its loans, it should be permitted
to take into account the location of activities conducted by the third-party loan
servicers under contract with Gate Holdings. The ATB rejected this argument
because it did not consider the loan servicers to be agents of Gate Holdings. Instead,
the ATB concluded that Gate Holdings did not have a regular place of business,
either inside or outside of Massachusetts, and sourced the loans to Gate Holding’s
commercial domicile in Massachusetts.

Third-party activity insufficient to establish taxpayer is “taxable” in other
jurisdictions: The taxpayer also argued that activities of its third-party loan
servicers were sufficient to cause Gate Holdings to be subject to tax in states other
than Massachusetts. The ATB rejected this argument on the basis that no agency or
other relationship existed between Gate Holdings and the third parties sufficient to
attribute the activities of the servicers to Gate Holdings. If the ATB had not rejected
this argument, the Department could have used the same theory to assert that outof-state taxpayers were similarly "taxable" in Massachusetts based on the
Massachusetts activities of unrelated third parties, based merely on the fact that
those third parties were paid by the taxpayers.
The taxpayer appealed to the Massachusetts Appeals Court; however the Supreme Judicial
Court took the case sua sponte. After hearing oral argument on October 7, 2014, the
Supreme Judicial Court upheld the ATB’s decision that Gate Holdings was required to
source 100% of the value of its loan portfolio to its commercial domicile for purposes of
computing its property apportionment factor because Gate did not originate or service the
loans, and thus, it had no SINAA factors. Therefore, all of the loans were sourced to Gate’s
commercial domicile—Massachusetts.
First Marblehead Corp. & Gate Holdings, Inc. v. Commissioner, Docket Nos. C293487,
C305217, C305240, C305241 (Mass. App. Tax Board, April 17, 2013), aff’d, First Marblehead
Corp. v. Commissioner, 470 Mass. 497 (2015).
C.
Department releases final market sourcing regulations: On January 2, 2015, the Department
released final regulations implementing the new market-sourcing laws for sales other than
the sale of tangible personal property. See I.A.1. The regulations provide specific sourcing
rules based on the characterization of a sale.
(i)
Sourcing of receipts from services: The regulations specify three types of services,
each with its own sourcing rules.
(1)
In-Person Services: These services are those that are physically provided in
(2)
Professional Services: These are services that require specialized knowledge
(3)
Services Delivered to the Customer or Through or on Behalf of the Customer:
person, such as cleaning, medical, and repair services. They are sourced to
the state where the services are performed.
and in some cases require a license, degree, or professional certification.
Sales to individuals are sourced to the customer’s state of primary residence.
Sales to businesses are sourced to the state where the contract of sale is
principally managed by the customer. Receipts from financial institutions
which are not covered by the existing Financial Institution Excise Tax
sourcing rules, such as broker’s fees, are sourced under the rules for
professional services.
These are services that are neither in-person services nor professional
services. These receipts are sourced to the state where the service is
6
delivered or received, depending on (1) the delivery method (electronic or
tangible) and (2) the nature of the customer (individual or business).
(ii)
Sourcing of receipts from the licensing of intangibles: The regulations distinguish
between the licensing of marketing, production, and mixed intangibles.
(1)
Licensing of Marketing Intangibles: These are licenses granted for the right
to use intangible property in connection with the sale, lease, license, or other
marketing of goods, services, or other items. Royalties or other licensing fees
paid by the licensee for such right are sourced to Massachusetts to the extent
that the fees are attributable to the sale or other provision of goods, services,
or other items purchased or otherwise acquired by customers in
Massachusetts.
(2)
Licensing of a Production Intangible: These are licenses granted for the right
(3)
License of a Mixed Intangible: These are licenses that include both licenses
for marketing and production intangibles. Fees attributable to the license of
mixed intangibles are presumed to be for the license of marketing
intangibles, and are sourced accordingly, unless the fees are separately
stated in the licensing agreement.
(4)
License of an intangible that resembles a sale of an electronically-delivered
good or service: These are sales that do not involve the license of a marketing
to use intangible property other than in connection with the sale, lease,
license, or other marketing of goods, services, or other items, and the license
is to be used in a production capacity. The licensing fees paid by the licensee
for the right of use are sourced to Massachusetts to the extent that the use
for which the fees are paid takes place in Massachusetts.
or production intangible. Examples include the sale of digital goods,
database access, or certain electronically delivered software. Receipts
attributable to these sales are sourced as though they are derived from sales
of services delivered directly to the customer through electronic delivery. See
I.C.1(ii)(3).
(iii)
Sourcing receipts from the sale of intangibles: The regulations implement different
sourcing rules depending on the type of sale:
(1)
Contract Right or Government License that Authorizes Business Activity in
Specific Geographic Area: Receipts are sourced to Massachusetts if and to the
extent that the right or license is used or otherwise associated with
Massachusetts.
(2)
Agreement Not to Compete: Receipts are sourced to Massachusetts if and to
(3)
Sales where the payment is based on productivity, use, or disposition of the
intangible property: These sales are treated as licenses and sourced in
the extent that the U.S. geographic area governed by the contract is in
Massachusetts.
accordance with the rules discussed above in I.C.1.(vii).
(4)
(iv)
Receipts from all other sales of intangibles are excluded from the sales factor.
Licenses of software transferred on a tangible medium: Licenses of software
transferred to the licensor on a disk or other tangible medium are treated as sales of
tangible personal property. The regulations provide an exception to this rule for
licenses to duplicate the software, which would likely be treated as production,
marketing, or mixed intangibles. See I.C.1(ii).
7
(v)
Rules of Reasonable Approximation: If the state to which a sale is attributed under
the specified rules cannot be determined, the taxpayer must source sales by a method
of reasonable approximation. The taxpayer may use the approximation method of its
choice (subject to the Department’s review). However, the draft regulations provide
that the taxpayer’s choice becomes final once the return is submitted: the taxpayer
cannot modify its approximation method by filing an amended return or an
abatement claim under the draft regulations. The draft regulations also provide that
the taxpayer must use the same approximation method consistently from year to
year. Should the taxpayer wish to modify or change its approximation method, the
taxpayer must obtain the Department’s approval.
(vi)
Throwout Rules: Throwout is required for the following sales:
(1)
Sales other than sales of tangible personal property where the taxpayer is not
taxable in the state to which the sale is assigned;
(2)
Sales other than sales of tangible personal property where the Department
determines that the taxpayer’s method of reasonable approximation is
unreasonable (unless Department substitutes its own “reasonable
approximation method);
(3)
Sales of securities, goodwill, going concern value, and workforce in place;
(4)
Sales of patented technology (unless the purchaser’s payments are based on
the productivity, use, or disposition of the patented technology);
(5)
Sales of other intangible property, unless specifically included in the factor
(as discussed above in I.C.1.(ix)); and
(6)
Sales other than sales of tangible personal property where the taxpayer
cannot determine or reasonably approximate the state to which a sale should
be assigned.
The final regulations followed a working draft of the regulations which was released in
March 25, 2014, and proposed regulations released on October 30, 2014. The substantial
changes from the proposed draft to the final regulation include: (1) reductions to the
thresholds taxpayers must meet to qualify for safe harbors that permit the sourcing of
receipts based on the customer’s billing address; (2) expansion of certain safe harbors to
apply to professional services; (3) addition of specific bases for the Commissioner to audit and
adjust a taxpayer’s sourcing methodology; and (4) substantial revisions to the sourcing rules
for transportation receipts. 830 CMR 63.38.1: Apportionment of Income (revised January 2,
2015).
Department releases detailed guidance for corporate excise tax amnesty program: The
Department released a technical information release specifying the administrative details of
the amnesty program authorized by the legislature. The amnesty period is open now through
May 15, 2015, for eligible taxpayers who owe corporate excise taxes (business corporations,
as well as financial institutions, and insurance companies); estate taxes; fiduciary income
taxes; and individual use tax on motor vehicles. Any tax that was covered by the amnesty
program offered last fall is ineligible.
A taxpayer with an outstanding assessment is eligible for the amnesty program if the
taxpayer has an assessment of an unpaid and self-assessed tax liability stated on a bill
issued by the Commissioner on or before January 1, 2015 or a tax liability assessed by the
Commissioner dated on or before January 1, 2015 that remains unpaid. All other taxpayers
are eligible if the taxpayer is a corporation, and the taxpayer is in compliance with the
requirement to file an annual report imposed by the Secretary of State. An eligible taxpayer
who participates in the Amnesty Program will not be eligible to participate in any future tax
8
Amnesty Programs for a period of ten consecutive years, beginning with calendar year 2015.
The Department intends to notify taxpayers that are eligible to participate in the program.
The following taxpayers are not eligible to participate in the amnesty program:
(1)
Any taxpayer engaged in pending litigation with the Commissioner if, as of
March 16, 2015, the Appellate Tax Board or any court of law has made a
determination in the Commissioner’s favor with regard to the issue being
litigated, where (i) such determination relates either to the pending period or
(ii) such determination relates to a prior tax period and the Commissioner
concludes that the contested issue in the current period is substantially
identical to the issue upon which the determination was made for the prior
period;
(2)
Any taxpayer who has been or is the subject of a tax-related criminal
investigation or prosecution;
(3)
Any taxpayer who has delivered or disclosed a false or fraudulent application,
document, return or other statement.
(4)
Any taxpayer, with respect to tax periods regarding which the taxpayer has
signed a settlement agreement with the Commissioner including, without
limitation, any settlement reached through the Department’s Litigation
Bureau, Office of Appeals, or Offer-in-Settlement Unit; and
(5)
Any taxpayer, with respect to tax periods covered by a settlement agreement,
who still owes or is properly disputing penalties with regard to an assessment
for those periods at the start of the amnesty period.
In order to receive a full waiver of penalties under the amnesty program, a taxpayer must
pay tax and interest in full for a particular tax type and period. In addition, a taxpayer
participating in the amnesty program must agree to waive any right to claim a refund of any
amounts paid pursuant to the program. In exchange, the taxpayer will be granted amnesty
for unpaid penalties associated with such tax type and period. Tech. Information Release 152: Limited Amnesty Program for Taxpayers with Certain Tax Liabilities (March 16, 2015).
Department issues draft directive to provide guidance on basis adjustments for Investment
Tax Credit and Economic Development Incentive Credits: The Department released a
working draft directive to assist taxpayers in calculating the basis of qualified property for
purposes of the Investment Tax Credit and certain Economic Development Incentive Credits
to properly reflect federal bonus depreciation under IRC §§ 167 and 168, and elections under
IRC § 179.
Corporations qualifying as manufacturing corporations, research and development
corporations, or corporations engaged in agriculture or commercial fishing are allowed to
take the Investment Tax Credit to offset corporate excise taxes. The amount of the credit is
3% of the “cost or other basis for federal income tax purposes” of qualifying tangible
property.6 In addition, Economic Development Incentive Credits are general tied to qualified
property under the investment tax credit. The draft directive provides that, when
calculating the “cost or other basis for federal income tax purposes” for purposes of the
credits, no adjustment is required on the basis that federal bonus depreciation was elected on
the qualified property. However, where a taxpayer elects for federal purposes to deduct the
expense of the cost of the property under IRC § 179, a similar reduction in the basis is
needed for purposes of calculating the Investment Tax Credit, and, by incorporation,
Economic Development Incentive Credits. The credits, can only be claimed on the remaining
basis for federal tax purposes after the deduction allowed under IRC § 179. Working Draft
6
M.G.L. c. 63, § 31A(i).
9
Directive 15-XX: Determining Basis for Purposes of Calculating the Massachusetts
Investment Tax Credit and Certain Economic Development Incentive Credits – Impact of
Depreciation and Expensing Deductions (March 20, 2015).
Department issues directive 14-4, denying deductions to corporate taxpayers: The
Department released Directive 14-4, which states that if a taxpayer elects to take a credit
instead of a deduction for purposes of computing its federal tax liability, the taxpayer is
prohibited from claiming that deduction for purposes of computing its Massachusetts tax
liability.
The Commonwealth defines “net income” as “gross income less the deductions, but not
credits, allowable under the provisions of the Federal Internal Revenue Code.” In issuing the
directive, the Department interpreted “net income” as being computed based on the exact
deductions claimed for federal income tax purposes on a federal consolidated return, even if
different deductions could have been elected on a separate company federal return. Directive
14-4: Massachusetts Income Tax and Corporate Excise Deductions Where Federal Law
Allows A Credit In Lieu of Deduction (December 16, 2014).
D.
Hot Issues for 2015
Market sourcing and throwout are here: Market sourcing and throwout go into effect for tax
years beginning on or after January 1, 2014. As discussed above, the Department’s proposed
rules are lengthy and complex and contain several traps for the unwary. Some areas of
potential concern are the Department’s attempt to prevent taxpayers who use a “reasonable
approximation” method from later filing amended returns; the disparate treatment of sales of
intangible property compared to licenses; the exclusion of receipts from sales of partnership
interests from the sales factor; and the increasing potential for distortion created by various
throwout rules. Because the Department’s final regulations generally prohibit taxpayers
form adjusting their reasonable approximation method, taxpayers must take extreme care
when calculating their receipts factor on the first return filed using market sourcing rules.
Receipts from providing professional services are treated differently under market sourcing:
One interesting aspect of the final market sourcing regulations is that the Department has
determined that, unlike all other service receipts, receipts from sales of professional services
must be sourced in the first instance using rules of reasonable approximation.
The Department’s position appears to be contrary to the statute, which requires taxpayers to
first source sales of services to the location of delivery. Rules of reasonable approximation
are only supposed to apply if the location of delivery cannot be determined.7
Denying taxpayers the ability to source receipts based on the location of delivery can
dramatically alter the sourcing of some receipts. Take brokerage services, for example.
Under the current regulations, brokerage services are treated as a professional service and
brokerage fees are sourced to the purchaser location under rules of reasonable
approximation. Assuming an individual customer is located in Massachusetts, the brokerage
fees are 100% sourced to Massachusetts.8
The result is vastly different if receipts form brokerage services are sourced based on
delivery location, using the plain language of the statute. Brokerage services would appear
to be analogous to services delivered “on behalf” of a customer.9 To determine the “delivery”
location of services delivered on behalf of a customer, the regulations ignore customer
location. Instead, delivery occurs at the location where the taxpayer actually delivers the
service. For example, if a New York broadcaster sells advertising placement to be shown
only in the New York City market to a Massachusetts customer, the broadcaster ignores the
7
M.G.L. c. 63, § 38(f).
See 830 CMR 63.38.1(9)(d) 4.d (Example 1 and 2).
9
See 830 CMR 63.38.1(9)(d) 4.c.
8
10
fact the customer is located in Massachusetts the service is deemed to be delivered in New
York City, where the advertisement is broadcast to an audience “on behalf” of the customer.10
In the same way, a broker that executes a trade on an exchange located in New York delivers
its service “on behalf” of its Massachusetts customer at the location of the exchange and
should be able to source the sale to New York—not Massachusetts. Thus, under a “location
of delivery” rule, the sourcing of brokerage fees could produce a completely different result
than that produced under the regulation.
The Department’s determination regarding professional services appears to be contrary to
the intent of the Legislature to source receipts to delivery location and some taxpayers
providing professional services will have a strong argument that they should be entitled to
source their receipts using a method other than that outlined in the regulations.
The Department continues to challenge deductions for payments to affiliated entities: The
Department continues to aggressively challenge intercompany payments between affiliated
entities at audit—especially in audits involving tax years before mandatory combined filing
went into effect. In pending or recently resolved cases, the Department has been arguing for:




The reclassification of payments made by a distribution company for purchases of
products from its affiliate as embedded royalties;
The disallowance of deductions for amounts paid to affiliates for various services;
The increase of a taxpayer’s net income derived from sales of pharmaceuticals to an
affiliated retailer, based on general industry financial ratios; and
The increase of a taxpayer’s net income derived from sales to affiliates despite two
third-party transfer-pricing studies supporting taxpayer’s sales price.
A recent filing with the ATB by a national restaurant chain is illustrative. The chain had a
centralized purchasing and distribution entity that handled just-in-time purchasing for food,
as well as centralized purchasing for other products used at the chain’s restaurant locations
around the country. Separate legal entities operated the chain’s restaurant locations. These
entities purchased food and other products from the purchasing and distribution company.
The auditor first asserted that the purchase price charged by the purchasing and distribution
company was greater than an arm’s-length price and, thus, limited the deductions claimed by
the restaurant entities for the cost of their purchases, pursuant to the Department’s
authority under M.G.L. c. 63 § 39A. The auditor then made a second adjustment, further
reducing the cost-of-goods-sold deduction for the restaurant entities, by treating a portion of
the already reduced purchase price paid as an “embedded royalty” that was not deductible
under intangible expense add-back provision.
The Department appears to be making transfer pricing adjustments on a case-by-case basis.
As cases proceed through the appeal process, the Department will likely be required to
develop standards to justify its adjustments. Taxpayers should keep a close eye on briefs and
other Department filings in which the Department sets forth standards for determining fair
intercompany pricing.
Cost of performance litigation continues: While market sourcing is in effect for tax years
beginning on or after January 1, 2014, the application of the cost of performance sourcing
rules for earlier tax years continues to be a major source of controversy at the ATB. Dozens
of recently settled or pending appeals involve situations in which either the taxpayer or the
Department is arguing for “all or nothing” cost-of-performance sourcing of certain receipts.
Examples of the types of receipts for which the Department has objected to sourcing entirely
outside Massachusetts based on using an “operational approach” include:


10
Franchise fees;
Broker/dealer receipts (several cases);
See 830 CMR 63.38.1(9)(d) 4.c.ii(C)1.
11




II.
Consulting fees;
Receipts from cable television programming services;
Money transfer charges; and
Wholesaler credits.
Sales and Use Tax
A.
Massachusetts’ use tax policy on vehicles purchased out-of-state upheld by ATB in Regency
Transportation: On December 4, 2014, the ATB issued Findings of Fact and Report in which
the ATB held that a taxpayer, an interstate freight transportation company, was subject to
Massachusetts use tax on vehicles purchased outside of Massachusetts, because those
vehicles were stored and used in Massachusetts. The vehicles in question had all been
purchased in states that either did not impose a sales tax or did not impose a sales tax on
vehicles engaged in interstate commerce.
The taxpayer had argued that the vehicles were exempt from tax because they were engaged
in interstate commerce (the taxpayer’s transportation business covered the entire Eastern
United States), and that the imposition of the tax on the taxpayer failed to satisfy all four
prongs of the test set forth by the United States Supreme Court in Complete Auto Transit,
Inc. v. Brady.11 The taxpayer argued that the tax must be apportioned among all states in
which the vehicles were used, because subjecting the entire purchase price of the vehicles to
Massachusetts use tax resulted in the vehicles being taxed twice. The ATB rejected that
argument, holding that the use tax need not be apportioned because the Massachusetts use
tax scheme prevented double taxation by allowing a credit against the use tax for sales tax
paid to other states.
On the issue of penalties, the ATB ruled in the taxpayer’s favor. It held that the penalties
assessed against the taxpayer should be waived because the taxpayer had relied on a letter
ruling12 issued by the Department in 1980, which provided an exemption from use tax for
certain purchases of vehicles bought outside of Massachusetts that entered the
Commonwealth for the first time while engaged in interstate commerce. The ATB noted that
the letter ruling was based on regulations that ceased to be in effect in 1996, but held that
the taxpayer’s reliance on the ruling was reasonable in light of the fact that the Department
had continued to publish the outdated ruling. However, this reliance was not sufficient to
defeat the Department’s assessment of tax.
due April 28, 2015. Regency Transportation, Inc. v. Commissioner, ATB Docket No. C310361
(Mass App. Tx. Bd. December 4, 2014) appeal pending, Mass App. Ct. Docket No. 2015-P0384.
ATB finds orthopedic braces are exempt from sales and use tax: On October 24, 2014, the
ATB issued Findings of Fact and Report holding that orthopedic braces were exempt from
sales and use tax. The ATB concluded that the braces were “individually designed,
constructed or altered” to be used as a brace for a “particular crippled person” within the
meaning of G.L. c. 64H, § 6(l).
The ATB ruled for the taxpayer, finding that each brace had a unique function and was
individually fitted to each patient by a certified orthotics fitter. The fit was made by
following a detailed set of instructions written by the prescribing physician, which set forth
the type of brace required, the desired range of motion, the patient’s injury history, and the
patient’s physical attributes. Accordingly, the ATB found the braces indistinguishable from
11
12
430 U.S. 274 (1977).
Letter Ruling 80-22, May 9, 1980.
12
the orthopedic foot braces the Commissioner ruled were exempt in Letter Ruling 98-8. Excel
Orthopedic Specialists, Inc. v. Commissioner, ATB Docket No. C318083 (Mass App. Tx. Bd.
October 24, 2014).
B.
The Department rules that a lump sum contract to fabricate, engineer and install a ski lift is
a construction contract: The Department issued a letter ruling concluding that a contract to
fabricate, engineer, and install a ski lift, in exchange for a lump sum contract price, was a
construction contract. The contractor agreed to furnish the component pieces of the ski lift
(which it purchased from an affiliate who manufactured thet parts); and also to provide
labor, supplies, and materials to install the ski lift; concrete foundations for towers and
terminals; and cables, batteries, motors, terminals, etc.
In a construction contract, the contractor bears the responsibility to pay sales and use tax on
its taxable purchases used or consumed in performing the contract—the contractor’s
customer does not pay sales and use tax on the price of the construction contract. A
construction contract is “a contract for the construction, reconstruction, alteration,
improvement remodeling or repair of real property.”13 However, a contract will not be a
construction contract if the contract is a sale in which contractors act as a retailer selling
tangible personal property in the same way as other retailers, and simply install a complete
unit of standard equipment which requires no further fabrication beyond the installation,
assembly, or connection services.
Here, the Department ruled that the contract involved more than installation of a complete
unit of standard equipment, notwithstanding some of the component pieces of the ski lift
were standard equipment, and a provision in the contract which specified that the ski lift
remained personal property until the final installment payment was made on the lump sum
contract. Once the final payment was made, the contract deemed the ski lift real property.
Thus, the Department ruled that the contract qualified as a construction contract, and the
contractor, not the customer, was responsible for paying the tax on its purchases used or
consumed in performing the contract. Letter Ruling 15-1: Sales/Use Tax on Sale and
Installation of a Ski Lift (January 20, 2015).
The Department revises its position on cloud computing services: The Department revised
and reissued Letter Ruling No. 12-8 regarding the taxability of a vendor’s cloud computing
services, finding that the services are not subject to sales tax.
In Letter Ruling 12-8, the vendor sold cloud computing products that gave customers access
to the vendor’s computer infrastructure and operating system, allowing the customer to use
the vendor’s computer resources and storage space to perform various activities.
Customers needed an operating system that would enable them to use the vendor’s cloud
computing products. They had three options: (1) provide their own operating system; (2) use
an open-source system; or (3) use an operating system the vendor licenses from a third party.
The vendor charged its customers by the hour, and imposed a higher hourly rate for
customers that used a third-party operating system.
In the original version of the ruling, the Department found that charges associated with the
third option were subject to tax, because the customer’s object in choosing that option was to
obtain the right to use software—not the vendor’s cloud computing services. (The
Department previously found that when customers chose the other two options, the vendor’s
charges were not subject to tax.) In its revision, the Department reversed course, finding
that the vendor’s services were not subject to tax, regardless of the operating system option
selected by the customer.
13
Classic Kitchens, Inc. v. Commissioner, ATB Docket No. C262393 (Mass App. Tx. Bd. March 15, 2004).
13
The Department, however, also commented that the vendor would be required to pay
Massachusetts use tax on the “apportioned cost of prewritten operating system software that
it consumes in the provision of the nontaxable services to customers in Massachusetts.” This
appears to be an expansion of the Department’s policy regarding the taxability of remotely
accessed software.
The Department also ruled that the vendor’s remote storage services were not subject to tax.
Letter Ruling 12-8: Cloud Computing (July 16, 2012, revised November 8, 2013).
The Department rules that sales of online database access are not taxable: On February 10,
2014, the Department released Letter Ruling 14-1, responding to a taxpayer’s inquiry into
whether its sales of subscriptions to its online database were taxable sales of prewritten
software, or nontaxable sales of web database services.
The taxpayer sold its customers subscriptions to a database that provided information on
suppliers and purchasers of goods and services located throughout the world. Using the
taxpayer’s website, customers could view the database to find suppliers and purchasers best
suited to meet their needs. The taxpayer relied heavily on the use of software to compile the
data and organize it in a way that was user-friendly; however, no software was transferred to
or downloaded by the customer. In addition to accessing the database, customers could
create profiles viewable by other customers; upload information about their business; receive
reports provided by the taxpayer’s analysts; and send emails to purchasers or suppliers
through the taxpayer’s website.
The Department concluded that the taxpayer’s subscription sales were not taxable. Applying
the object of the transaction test, the Department determined that the customers sought
access to the taxpayer’s database, not the software facilitating its use. Accordingly, the
Department found that the taxpayer’s activities were the sale of “database services,” not
subject to Massachusetts sales tax. Letter Ruling 14-1: Sales/Use Tax on Subscription to Online Merchandise Database (February 10, 2014).
Training services provided online are not subject to sales and use tax: On May 29, the
Department issued Letter Ruling 14-4, ruling that corporate training programs accessed
online were not subject to sales and use tax.
The Taxpayer sold training programs focused on corporate ethics and compliance. The
programs were available only online, and were hosted on a third-party server. The training
programs had both audio and visual components, as well as interactive features: users could
take quizzes and answer questions. Purchasers were able to access the training programs
through use of an ID number and password provided by the Taxpayer. The purchasers had
no ability to direct or control the training programs’ underlying software. The Taxpayer
inquired whether the sales of its online training programs were subject to sales and use tax.
The Department ruled that the Taxpayer’s sales were not subject to tax, relying on the
“object of the transaction” test. The Department determined that the object of the
transaction was the information contained in the online training programs, rather than the
software used to communicate that information to the user. Accordingly, the Department
concluded that the Taxpayer sold nontaxable database access services, rather than taxable
prewritten software. Letter Ruling 14-4: On-Line compliance and Ethics Training (May 29,
2014).
Draft Directive pending to provide guidance on the “object of the transaction” test for mixed
software and services products: After issuing over a dozen letter rulings on the application of
sales tax to a variety of transactions involving the purchase of software and services, the
Department issued a draft directive attempting to summarize the analysis and rules
scattered throughout its ad hoc guidance to taxpayers. Although there hasn’t been any
visible movement toward finalizing the Directive, the Department has indicated it still
intends to do so.
14
As outlined in the Draft Directive, when nontaxable services and access to prewritten
software are sold for a single bundled price, Massachusetts looks to the object of the
transaction to determine whether the transaction is a taxable sale of prewritten software, or
a nontaxable service. The Draft Directive lays out eight criteria that may indicate that the
object of a transaction is the purchase of taxable software—including the vendor branding
itself as a provider of ASP, software as a service (“SaaS”), or cloud-computing services—and
ten criteria that may indicate that the object of a transaction was the purchase of a
nontaxable service.
In general, under the Draft Directive, a bundled transaction is more likely to be treated as a
taxable purchase of software:

The more the purchaser is able to manipulate or control the
software; and

The fewer services the vendor provides to the purchaser beyond
and repairing the software and the network
maintaining
The Draft Directive is subject to change before the Department issues its final guidance. The
timeline for issuing the final Directive is unclear. Working Draft Directive 13-XX: Criteria
for Determining Whether a Transaction is a Taxable Sale of Pre-Written Software or a Nontaxable Service (February 7, 2013).
Directive issued to provide guidance on sales tax exemption for certain direct mail
promotional advertising materials: Sales of direct promotional advertising materials
distributed to residents of the Commonwealth are exempt from sales and use tax. M.G.L. c.
64H, § 6(ff). The Department issued a Draft Directive to provide guidance on the exemption.
The Draft Directive provides that materials are exempt if they meet the following criteria:






The materials contain discount coupons;
The materials are no longer than six pages;
The materials qualify as direct mail;
The materials are distributed by U.S. mail or common carrier;
The materials are distributed at no charge to the mailing recipient; and
The materials are not be mixed-use publications.
The Draft Directive defines “direct mail” as material mailed directly to a specific or
prospective customer that is listed in the sender’s mailing lists or database. “Coupon” is
defined in the Draft Directive as a printed piece of paper, scan card, code, or other identifier
that, upon presentation to a vendor, entitles a retail customer to receive a service or product
for free or at a lower price. Directive 14-3: Sales and Use Tax Exemption for Certain Direct
Mail Promotional Advertising Materials under G.L. c. 64H, s. 6(ff) (October 20, 2014).
C.
Hot Issues for 2015
Mobile telecommunications company challenges sales tax assessment on early termination
fees: In a petition filed recently with the ATB, a mobile telecommunications company is
contesting a sales tax assessment by the Department. The assessment resulted from the
Department asserting that the sales tax on telecommunications services applies to “early
termination fees.”
For sales tax purposes, taxable telecommunications services are defined as the “transmission
of messages or information by electronic or similar means.” At audit, the Department
adopted an expansive view of this definition, and issued an assessment against the
Petitioner for failure to collect sales tax on “early termination fees” that the Petitioner
charged when a customer with a contract cancelled the contract prior to its expiration date.
Moreover, the Department’s assessment—according to the Petitioner—included tax on early
termination fees that were waived and thus never collected from customers.
15
In its ATB petition, the telecommunication company is arguing that the early termination
fees received were not charges for the transmission of messages and information. Indeed,
the fees in question were charged because the customer informed the vendor that it did not
want the vendor to “transmit” any messages.
Are eFax emails taxable telecommunications services?: Separate from the taxpayer
challenge to the Department’s assessment of early termination fees, a recent ATB petition
alleges that, on audit, the Department has taken an aggressive position that the scope of
taxable telecommunications services includes “eFax” services.
The appeal involves a vendor that receives faxes intended for its customers. The vendor
converts each fax into a computer file and sends an email to the intended recipient of the fax
with a copy of the file. The intended recipient can then view the file wherever they can
access their email. In its petition to the ATB, the vendor alleges that the Department
auditor classified these eFax services as taxable telecommunications services and estimated
the portion of the services to be sourced to Massachusetts based on the percentage of
population in Massachusetts to the population through the United States as a whole.
The taxpayer is challenging the assessment on a variety of grounds, including (1) whether
the eFax services provided by the vendor are non-taxable data processing or information
services; (2) whether the assessment of sales tax on the eFax services violates the Internet
Tax Freedom Act; and (3) whether the assessment is contrary to the Department’s own
published guidance.
This appeal is relevant to any company doing business in Massachusetts that provides any
service whereby an electronic communication—fax, voicemail, video, etc.—is converted to a
file format that the customer can access by email.
Software services are still being taxed: The “object of the transaction” test outlined in the
Department’s Draft Directive (see II.B.5.) tilts heavily in the favor of taxing purchases that
combine both software and services on the basis that the object of the customer’s purchase
was taxable software. For example, the directive indicates that merely branding a sale as a
SaaS transaction—while not determinative of the tax treatment—is an indication that the
object of the purchase is software, not related services. Several taxpayers have brought
appeals to the ATB challenging the Department’s application of the “object of the
transaction” test. Currently, there are pending appeals filed by both SaaS and ASP vendors
contending that their sales are not subject to sales tax in Massachusetts.
Can Massachusetts tax remotely accessed software? In addition to appeals challenging the
Department’s application of the “object of the transaction” test, there are also pending
appeals at the ATB that raise the issue of whether Massachusetts can tax remotely accessed
software at all. Vendors that provide their customers with a free applet in order to allow the
customers to access software hosted by the vendor on a server outside of Massachusetts via
the internet, and vendors whose customers access the vendors’ software exclusively through
web browser are challenging the Department’s regulation treating such sales as subject to
sales tax to the extent the purchaser accesses the software in Massachusetts. The vendors
are arguing that there is no taxable “transfer” of software and therefore, the sales are not
subject to Massachusetts sales tax. If these cases are ultimately decided in the vendors’
favor, almost a decade of Department guidance would be overturned and numerous vendors
would be entitled to abatements.
III.
Tax Administration
A.
Non-filer Amnesty Proposed: As part of his budget proposal for fiscal year 2016, Governor Charlie
Baker, who took office in January, announced his intention to enact legislation authorizing a tax
amnesty program for nonfilers to run throughout the entire 2016 fiscal year (July 1, 2015 through
June 30, 2017). Businesses and individuals with Massachusetts tax liabilities that have not
previously filed Massachusetts returns, regardless of whether they are known or unknown to the
16
Commonwealth, would be eligible to participate, as long as they have not yet received an
assessment.
IV.
B.
Mark Nunnelly takes over as Commissioner of Revenue: On March 26, 2015, Governor Charlie
Baker appointed Mark Nunnelly as the new Commissioner of Revenue, effective March 30, 2015.
Nunnelly replaced former Commissioner Amy Pitter, who announced on January 6, 2015, that she
would be resigning as Commissioner.
C.
Department is currently offering a tax amnesty program: The Legislature authorized a tax amnesty
program, permitting taxpayers to pay delinquent taxes, including corporate excise tax, without
incurring penalties. See above, I.C.2., for more details about the program.
Biographies
A.
Michael A. Jacobs
Mike is a partner in Reed Smith’s State Tax Group. He focuses his practice on state tax planning and
controversy matters, specializing in income/franchise and sales and use taxes. Prior to joining Reed
Smith, Mike was a partner at the Boston based law firm of Choate, Hall & Stewart. He is admitted
in Massachusetts and has over 15 years of experience handling Massachusetts state tax matters.
Mike writes and speaks frequently on Massachusetts tax issues, including the following:
Massachusetts Quarterly Update
Co-Author(s): Robert E. Weyman, Brent K. Beissel
Reed Smith Client Alert
6 March 2015
Reed Smith Massachusetts Corporate Tax Teleseminar: Massachusetts Releases Final Market
Sourcing and Throwout Regulations "Over Seventy Pages; What Do You Need to Know?"
Co-Presenters: Robert E. Weyman, Brent K. Beissel
21 January 2015
AIM Proposes Improvements to Tax Rules
Co-Author(s): Robert E. Weyman,
AIMBlog
19 December 2014
14 October 2014
Reed Smith Massachusetts Corporate Tax Teleseminar: Massachusetts Releases Proposed Market
Sourcing and Throwout Regulations, What Does it Mean for You?
Co-Presenters: Robert E. Weyman, Brent K. Beissel
10 April 2014
11 February 2014
16 October 2013
Massachusetts Delays Reporting for Software Services Tax; Repeal Imminent?
17
16 September 2013
Massachusetts Rules Against Taxpayer on Treatment of Intercompany Debt—Again
6 September 2013
Reed Smith Massachusetts Corporate Tax Teleseminar
Co-Presenter: Robert E. Weyman
21 August 2013
Reed Smith Massachusetts Sales Tax Teleseminar
Co-Presenter: Robert E. Weyman
7 August 2013
16 July 2013
Massachusetts Department of Revenue and Appellate Tax Board Look to Expand Tax Dispute
Mediation Programs
21 June 2013
Massachusetts Tax Developments
25 April 2013
Software Vendor Challenges Massachusetts’ Restrictive Policy on Multiple Points of Use Certificates
Co-Author(s): Robert E. Weyman
12 April 2013
Reed Smith Massachusetts Quarterly Update
4th Quarter 2012
Title Transfer Not Enough to Establish Resale in Massachusetts
Reed Smith Client Alerts
13 November 2009
Massachusetts Appellate Tax Board Expands Availability of Sales Tax Exemption for R&D
Corporations—But Constitutional Issues Still Remain Unresolved
Reed Smith Client Alerts
8 September 2007
B.
Robert E. Weyman
Rob is an associate in Reed Smith’s State Tax Group. He focuses his practice on state tax planning
and controversy matters, specializing in income/franchise and sales and use taxes. Rob writes and
18
speaks frequently on Massachusetts tax issues and has worked on several significant Massachusetts
tax appeals.
C.
Brent K. Beissel
Brent is an associate in Reed Smith’s State Tax Group. He focuses his practice on state tax planning
and controversy matters, specializing in income/franchise and sales and use taxes. Brent writes
frequently on Massachusetts tax issues and has worked on several significant Massachusetts tax
appeals. Brent also edits and contributes to Reed Smith’s Massachusetts tax blog:
www.massachusettssalt.com.
19
Kathleen King Parker
Pierce Atwood LLP
100 Summer Street, Suite 2250
Boston, MA 02110-2106
617-488-8114 voice
617-824-2020 fax
Email: kparker@pierceatwood.com
Web: www.pierceatwood.com
I.
Philip S. Olsen
Pierce Atwood LLP
100 Summer Street, Suite 2250
Boston, MA 02110-2106
617-488-8113 voice
617-824-2020 fax
Email: polsen@pierceatwood.com
Web: www.pierceatwood.com
A.
Increase in EDIP Tax Credits. This legislation increases the annual cap for the economic development
incentive program (EDIP) tax credits from $25 million to $30 million. It also reduces the amount of life sciences tax
incentives that would have been available for the 2015 tax year from $30 million to $25 million. St. 2014, c. 360.
Amnesty Program. Beginning March 16, 2015, the Massachusetts Department of Revenue (the “DOR”) is
offering an aptly described “limited” amnesty program for taxpayers with certain tax liabilities. The 60-day program
applies to all corporate excise taxes imposed under G.L. c. 63 (corporate excise, financial institutions, insurance,
public utilities, and banks), estate taxes imposed under G.L. c. 65C, fiduciary income taxes imposed under G.L. c. 62,
and individual use tax on motor vehicles imposed under G.L. c. 64I. All penalties are covered including the onerous
20 percent penalty imposed by G.L. c. 62C, § 35A for substantial understatement of tax. The Amnesty Program will
apply to tax years or periods where a Notice of Assessment was issued by the Commissioner of Revenue on or before
January 1, 2015. The program is limited by certain conditions that may exclude or deter otherwise interested
taxpayers, including:



The Commissioner of Revenue must notify taxpayers of their eligibility to participate in the Amnesty
Program. Only those taxpayers to whom a Tax Amnesty Notice has been issued may be eligible.
The taxpayer may not contest the tax at issue. In order to participate in the Amnesty Program, the taxpayer
cannot seek a refund or contest the liability of the tax amounts paid pursuant to amnesty.
Corporate taxpayers, to be eligible, must also be in compliance with all filing requirements with the
Massachusetts Secretary of State. St. 2015, c. 52.
B.
Biotechnology Manufacturer Has Massachusetts Nexus. The Massachusetts Appellate Tax Board (the
“ATB”) held that Genentech, Inc., an out-of-state biotechnology company, was engaged in manufacturing and its
manufacturing activities in Massachusetts were sufficient to create nexus in Massachusetts. Manufacturing
companies are required to use a single sales factor apportionment formula, whereas most other corporations are
required to use a three-factor apportionment formula. Genentech argued it was not a manufacturing company and
thus was allowed to use the three-factor formula. The ATB found that Genentech retained title to bulk inventory
during a stage of production in Massachusetts and to drugs used during clinical trials conducted in Massachusetts.
Furthermore, Genentech’s Massachusetts manufacturing activity was substantial for the periods at issue since its
revenue generated from that manufacturing activity was substantial when measured against its gross receipts, thus
it was required to use a single sales factor apportionment formula. Genentech, Inc. v. Commissioner of Revenue,
Mass. App. Tax Bd., Dkt. No. C282905 (Nov 17, 2014).
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Financial Institution’s Property Located in Massachusetts for Apportionment Purposes. The First
Marblehead Corporation (FMC) helped college students obtain financial assistance for the cost of their education,
but did not make any loans directly to the students. Instead, it brought together banks, loan guarantors and loan
servicing companies. Third-party banks entered into agreements with FMC through which the banks issued loans to
student borrowers. The banks sold portfolios of these loans to a number of different Delaware trusts controlled by
Gate Holdings, Inc., a wholly-owned subsidiary of FMC set up largely to hold the beneficial interests of the trusts.
Loan servicing was outsourced by FMC to independent entities. Gate had no employees, payroll, tangible assets, or
office space. Its principal office was located at the same Boston address as FMC. The ATB held that Gate was a
financial institution as defined in G. L. c. 63, § 1, because it derived more than 50 percent of its gross income from
“lending activities” in substantial competition with other financial institutions. Since it held loans with students in
all 50 states, Gate was entitled to apportion its income in accordance with G. L. c. 63, § 2A. There was no dispute
over the calculation of Gate’s receipts or payroll factors. The sole issue on appeal was the calculation of Gate’s
property factor. The Supreme Judicial Court (SJC) concluded that the loan portfolios that represented all of Gate's
property for the tax years at issue should be treated as having been located entirely within Massachusetts. When
the property at issue consists of loans, and the taxpayer does not have a regular place of business as was the case
with Gate, then G. L. c. 63, § 2A(e) creates a rebuttable presumption that the loans should be assigned to the
taxpayer’s commercial domicile. In this case, Gate’s commercial domicile was Massachusetts. The presumption may
be rebutted if the taxpayer demonstrates that the “preponderance of substantive contacts regarding the loan”
occurred outside the state. Gate argued unsuccessfully that the loans should be assigned to the out-of-state locations
of the loan servicers. The SJC noted that the examination of substantive contacts must consider activities such as
“solicitation,” “investigation,” “negotiation,” “approval,” and “administration” of the loan. The only possible factor
that could apply to Gate was administration of the loan since it had no role in any of the other listed activities. The
First Marblehead Corp. v. Commissioner of Revenue, 470 Mass. 497 (2015).
C.
Market-Based Sourcing Regulation Adopted. After several proposed drafts, the DOR repealed and replaced
830 CMR § 63.38.1, which provides the rules for apportioning income from sales other than sales of tangible
personal property, to be consistent with recent amendments to G. L. c. 63 § 38. Prior to the statutory change,
Massachusetts apportioned these receipts under a “cost of performance” method. Beginning January 1, 2014 (the
effective date of the statutory change), all corporations must use market-based sourcing principles in determining
the sales factor. The regulation provides specific market-based sourcing rules for the sale, rental, lease or license of
real property, the rental, lease or license of tangible personal property, the sale of a service, the license or lease of
intangible property, and the sale of intangible property. The regulation includes numerous examples illustrating
the sourcing of each category of sale. Sales factor rules for airlines, motor carriers, and courier and package delivery
services are now part of this regulation. 830 CMR § 63.38.1.
No Ability to Take State Deduction when Federal Credit is claimed in lieu of Federal Deduction. The DOR
has stated that in calculating corporate excise tax, Massachusetts law generally permits a taxpayer to deduct a
business expense only when that expense is actually deducted for federal purposes. Thus, absent specific statutory
authority, when a taxpayer claims a federal credit with respect to an expense, rather than a federal deduction, the
taxpayer may not take a deduction at the state level. Massachusetts DOR Directive 14-4 (Dec. 16, 2014).
D. Trends/Outlook for 2015
Governor Baker Proposes Tax Legislation. Massachusetts Governor Charlie Baker submitted the Fiscal
Year 2016 budget proposal and a stand-alone tax bill. The budget would further delay the taking of the FAS 109
deduction allowed to certain publicly traded companies. Also proposed is a tax amnesty program for non-filers for
any tax type and for any tax periods to be made available for a duration of 60 days within fiscal year 2016 but to
expire not later than June 30, 2016. Governor Baker hopes the program will generate $100 million of tax revenue.
The Governor has also proposed an increase of the earned income tax credit which would be offset by a phase out of
the Film Tax Credit.
II.
TRANSACTIONAL TAXES
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A.
Sales and Use Tax Exemption for Materials Used in Marine Industrial Parks. This new law exempts from
sales and use tax sales of building materials and supplies used in the construction, reconstruction, alteration,
remodeling or repair of any building or structure located in a marine industrial park that is exclusively used for
agricultural production or seafood processing or as a seafood storage facility. St. 2015, c. 503.
B.
Interstate Trucks Subject to Use Tax. The ATB held ruled that an interstate carrier was liable for use tax
on the full sales price of its fleet vehicles used in interstate commerce, which were purchased out of state but stored
and used in the state. The taxpayer purchased tractors and trailers outside of Massachusetts and paid no sales or
use tax to any state during the period, therefore the out-of-state transfers exemption provided under 830
CMR 64H.25.1(7)(g) did not apply. The ATB held that the tax was permissible under the Commerce Clause and was
administered in a manner consistent with the Equal Protection Clause of the U.S. and Massachusetts Constitutions.
The ATB did abate the penalties because the carrier had reasonable cause for failing to file use tax returns or pay
use taxes, specifically because the taxpayer had relied on Letter Ruling 80-22, a public written statement by the
Commissioner based on regulations which were repealed in 1996, but which nevertheless continued to be published
by the Commissioner. Regency Transportation v. Commissioner of Revenue, Mass. App. Tax. Bd., Dkt. No. C310361
(Dec. 4, 2014).
Excise Tax Does Not Discriminate Against Satellite Television Companies. In 2010, Massachusetts enacted
an excise tax upon satellite companies at a rate of five percent of their gross revenues derived from the provision of
video programming in Massachusetts. (See G. L. c. 64M, §§ 1, 2.) DirecTV and Dish Network brought a complaint for
declaratory and injunctive relief alleging that the tax violated the Commerce Clause of the U.S. Constitution. They
argued that the tax discriminated against interstate commerce because it did not apply to companies that provide
video programming through cable networks. The lower court ruled against the satellite companies, and the SJC
affirmed. The SJC noted that cable and satellite companies offer similar programming and that there was a great
deal of overlap in their methods of operation. However, the companies differ significantly in how they assemble and
deliver programming to their customers. Cable companies pay franchise fees to local governments at the rate of
three to five percent of gross revenues from cable services. At the same time the excise was enacted against the
satellite companies, cable companies became subject to personal property tax on their poles, underground conduits,
wires, and pipes. The SJC rejected the argument that the excise tax discriminates against interstate commerce by
disadvantaging the satellite companies and benefiting the cable companies. Each is subject to unique obligations in
connection with the privilege of selling video programming services to Massachusetts consumers. No greater tax
burden was imposed on the satellite companies. In fact, the statute offers a streamlined collection method to the
satellite companies because the tax is administered and collected by the DOR. Cable companies, on the other hand,
must pay varying amounts to each of the local cities and towns in which they operate. In the eyes of the court, “this
instance of differential treatment, rather than burdening the satellite companies, is advantageous to them.”
Similarly, the calculation of taxes does not operate to burden the satellite companies. While the satellite companies
were subject only to a flat tax rate of five percent of gross revenues, cable companies were obligated, among other
things, to pay franchise fees as well as additional fees used to support public-oriented programming. Directv, LLC v.
Department of Revenue, 470 Mass. 647 (2015).
III.
C.
D.
Trends/Outlook for 2015
PROPERTY TAXES
A.
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B.
Agricultural Nonprofit is Exempt from Property Tax. The Massachusetts Appeals Court reversed the ATB
and held that a Massachusetts not-for-profit corporation is a charitable organization exempt from property taxes.
The ATB had held that the taxpayer was not charitable because its primary beneficiaries were its members, which
are local farmers. The Appeals Court disagreed and held that the primary beneficiaries were an indefinite number
of people, many of whom are not members, and any benefit to member-farmers is but the means adopted for this
purpose. The taxpayer distributes a free annual locally grown farm products guide to nearly 50,000 households, and
help the elderly, low income citizens, school children, and urban residents receive fresh local food that they would
otherwise struggle to access. By increasing food security and developing sustainable local farming, the taxpayer
engages in charitable activities that benefit the general public. Community Involved in Sustaining Agriculture, Inc.
v. Board of Assessors of Deerfield, Mass. App. Ct., Dkt. No. 13-P-1050 (Rule 1:28 Order) (Nov. 10, 2014).
IV.
C.
D.
GENERAL
A.
B.
C.
New DOR Commissioner Appointed. On March 26, 2015, Mark Nunnelly was announced as the next
Commissioner for the Massachusetts DOR, effective March 30, 2015. Mr. Nunnelly, a former Managing Director of
Bain Capital, will replace current Commissioner Amy Pitter.
Unified Audit Procedures for Pass-Through Entities. The DOR promulgated a new regulation to implement
the unified audit procedures for pass-through entities as authorized by G. L. c. 62C § 24A. The regulation
streamlines audit, assessment, and appeal procedures as they apply to pass-through entities and their members,
and ensures consistent tax treatment of the members of a pass-through entity. The unified audit procedures provide
for a separate audit process applicable only to pass-through entities that is conducted at the entity level. The entity
is represented by the tax matters partner, who has an obligation to keep the members of the entity informed as to
the audit. 830 CMR 62C.24A.1
Amendment to Tax Information Exchange Regulation. The DOR amended 830 CMR § 62C.22.1, related to
exchange of information with other taxing authorities, clarifying that it applies to disclosures related to specific
requests from other taxing authorities and does not affect the ability of the Commissioner to enter into and share
information on an ongoing basis pursuant to agreements with other taxing authorities.
D.
V.
PROVIDERS’ BIOGRAPHIES
Kathleen King Parker, partner, is a member of the Pierce Atwood State & Local Tax Group. Ms. Parker’s
practice concentrates on state tax matters and state tax litigation. She also has significant experience in federal and
local tax matters, including multi-state tax planning. Before joining the Boston office of Pierce Atwood, Ms. Parker
practiced at Choate Hall & Stewart in Boston and served in state government as an Assistant Attorney General,
Assistant District Attorney, and Chief of the Rulings and Regulations Bureau of the Massachusetts Department of
Revenue.
Ms. Parker is past Chair of the National Association of State Bar Tax Sections, past Chair of the Tax Section
of the Boston Bar Association and past Chair of its State Tax Committee. Ms. Parker is active in the State and
Local Tax Committee of the Taxation Section of the American Bar Association, author of the Massachusetts Chapter
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of the ABA Sales & Use Tax Desk Book, and past editor of The State and Local Tax Lawyer. In addition, she is a
Trustee of the Massachusetts Taxpayers Foundation. She speaks and writes frequently on tax law and related
subjects.
Philip Olsen focuses his practice on local and state tax consulting and litigation. Philip has more than 20
years of experience representing clients in major tax controversies before administrative boards, superior courts,
bankruptcy court, state appeals courts, and state supreme courts. He also has experience in unclaimed property
consulting and audit defense. Prior to joining Pierce Atwood Philip was a partner at Burns & Levinson LLP, and
before that, a partner with McCarter English. He was also a senior trial attorney and litigation supervisor for the
Department of Revenue, where he litigated significant tax cases on behalf of Massachusetts before the Appellate
Tax Board, the Superior Court, and the U.S. Bankruptcy Court.
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NEW HAMPSHIRE STATE DEVELOPMENTS
WILLIAM F. J. ARDINGER
CHRISTOPHER J. SULLIVAN
KATHRYN H. MICHAELIS
STANLEY R. ARNOLD
Rath, Young and Pignatelli, P.C.
One Capital Plaza
Concord, NH 03301
Phone:
603.226.2600
E-Mail: wfa@rathlaw.com
Web Site:
www.rathlaw.com
I.
A.
1.
Reporting Federal Changes. On June 20, 2013, Governor Hassan signed into law S.B. 30, amending
a taxpayer’s requirement to report changes made to its tax return by the Internal Revenue Service to
the New Hampshire Department of Revenue Administration (the “DRA”). The law now requires
DRA to notify a taxpayer that DRA is reviewing the taxpayer’s return within 6 months of the
taxpayer’s report to DRA of a federal change. The law previously required the Department to notify
the taxpayer of any adjustment to the tax due within 6 months. The new law will apparently
broaden the time the Department has to issue an assessment, although the Department asserts that
the new law does not change its practices with respect to issuing RAR adjustments. TAXPAYERS
ARE ADVISED TO PROCEED WITH CAUTION REGARDING RARs, and to include RAR analysis
when engaged in settlement discussions.
2.
Definition of Compensation. For taxable periods beginning on or after January 1, 2013, H.B. 2
(2013) amended the definition of “compensation” for purposes of the Business Enterprise Tax (the
“BET”) to mean all wages, salaries, fees, bonuses, commissions, or other payments paid “directly” or
accrued “by the business enterprise.” The amendment excludes from compensation “any tips
required to be reported by the employee to the employer under section 6053(a) of the United States
Internal Revenue Code.”
3.
R&D Tax Credit Increased. On March 21, 2013, Governor Hassan signed into law S.B. 1, which
increased the maximum credit allowed for qualified manufacturing research and development
expenditures under RSA 77-A:5, XIII, (the “R&D Credit”) from $1,000,000 to $2,000,000. This
increase to the R&D Credit was originally part of her “Innovate NH” jobs plan and was announced as
part of her proposed budget. The bill also repealed the expiration date for the R&D Credit, which
was previously extended by H.B. 518 (2012) from July 1, 2013 to July 1, 2015. The DRA issued
administrative guidance concerning these changes in TIR 2013-001 (Apr. 17, 2013). In July of 2014,
the Governor announced that 166 businesses received tax credits in 2014 as part of the program.
4.
Net Operating Loss Increase. The amount of net operating losses that may be carried forward and
deducted against BPT in future tax years has increased from $1,000,000 to $10,000,000 effective
January 1, 2013. H.B. 2 (2011); H.B. 242 (2012).
5.
BET Carry Forwards. On June 29, 2011, H.B. 187, which extended the carry forward period during
which a taxpayer may credit the amount of BET paid against BPT liability, became law without the
signature of then Governor Lynch. The act, which amended RSA 77-A:5, X, increased the carry
forward period from five to ten taxable periods. The change took effect for taxable periods ending on
or after July 1, 2014. In 2014, S.B. 243 further amended the provision to clarify that any unused
BET credit from taxable periods ending on or after December 31, 2014 may be carried forward for 10
years from the period in which it was paid.
1
6.
Tax Expenditures Examined. H.B. 1531 (Ch. 28, Laws 2014) established a Joint Committee on Tax
Expenditures Review to review all qualifying tax expenditures on a rotating 5 year basis. See also
TIR 2014-005 (9/8/14).
B.
No recent judicial developments.
II.
C.
1.
BET Filing Threshold. RSA 77-E:5, I requires the DRA to biennially adjust the BET filing
thresholds for inflation, using the Consumer Price Index. The DRA inflation adjusted BET filing
thresholds for taxable periods ending on or after December 31, 2015 are gross business receipts in
excess of $207,000 or enterprise value tax base greater than $103,000. TIR 2014-012 (12/8/14).
2.
BET Carry Forwards. On September 8, 2014, DRA issued administrative guidance reminding
taxpayers and practitioners of the new ten year carryforward provision for any unused BET credit
and to keep BET and BPT records necessary to utilize the new carryforward. TIR 2014-005 (9/8/14).
3.
Basis Step-Up Adjustment Under BPT. DRA has aggressively taken the position that when a “sale
or exchange” of a business organization occurs and results in a net increase in the basis of the
business organization’s assets transferred or sold, an additional modification in the amount of the
increase must occur pursuant to RSA 77-A:4, XIV of the Business Profits Tax (“BPT”). Recent DRA
audits have sought to impose this position in the context of transfers of partnership interests that
result in a basis increase under section 743(b) of the Internal Revenue Code, as well as sales of
interests in single member limited liability companies. This attempt to apply “aggregate theory”
principles from the federal system to the separate entity requirements of the BPT system often
violates the BPT statute.
4.
Business Profits Tax Rules Revisions. The BPT rules were recently revised and became effective
January 16, 2015. Changes include new definitions, new rules regarding taxpayer identification,
updating provisions reflecting the legislative changes to the reasonable compensation deduction,
changes to the economic revitalization tax credit and other credit carryforwards, return attachment
requirements, newly-added QIC election and reporting requirements and informal pre-assessment
conference rules.
TRANSACTIONAL TAXES
New Hampshire does not have a general retail sales tax, but employs a number of transactional taxes,
including a meals and rooms tax and a real estate transfer tax.
A.
1.
Real Estate Transfer Tax Definitions and Exceptions. If enacted, H.B. 180 (2015) would amend the
definition of “price or consideration” for purposes of the Real Estate Transfer Tax (“RETT”),
clarifying that the definition only applies in the case of a “contractual transfer.” Additionally, the
bill would amend the list of transactions that are exempt from RETT to clarify that, in addition to
transfers that occur by devise, transfers by other testamentary disposition would be exempt from
RETT, regardless of any consideration paid or obligation assumed by the transferee. The House
Ways and Means committee voted in favor of the bill and practitioners expect the House to pass it.
The Bill is currently in Senate Ways and Means.
Relatedly, S.B. 232 would amend the RETT statute to explicitly exempt the transfer of any lease,
where the term of the lease, including all renewals, is less than 99 years. This legislation was
proposed in the wake of the 2014 readoption of the DRA’s RETT regulations, discussed below.
2
III.
2.
RETT Examples. On July 11, 2014, Governor Maggie Hassan signed S.B. 243 into law, authorizing
the DRA to adopt rules containing written examples of transactions that are taxable or nontaxable
under the RETT. DRA solicited support for this legislation from the tax professional community,
and practitioners testified before the Legislature in support of the bill on the basis that it is
necessary to clarify the law following the controversial court decisions in the RETT area over the last
five years.
B.
1.
Taxation of Online Travel Company Services. On October 16, 2013, the State filed a complaint in
Superior Court against multiple online travel companies, including Expedia, Inc., Hotels.com, LP,
Hotwire, Inc., Orbitz, LLC, Priceline.com, Inc., and Travelocity.com, LP (the “OTCs”), alleging that
the OTCs failed to collect and remit Meals and Rooms Tax (“M&R Tax”). The case remains pending
in Superior Court with trial expected in early 2016.
C.
1.
Statutory Conversions. The DRA has taken the position that no RETT is due following the
conversion of a Massachusetts business trust, whose sole asset is real estate located in New
Hampshire, to a New Hampshire limited liability company, pursuant to the statutory conversion
provisions of RSA 304-C. Dec. Rul. 10566 (4-8-2014). In the ruling, the current beneficiary of the
trust would have an identical interest in the new limited liability company, and would receive no
consideration other than the membership interest in the new entity.
2.
New RETT Forms. In January of 2014, the DRA modified the RETT forms (the CD-57-P, CD-57-S
and PA-34) purportedly to conform to the standardized format of other DRA forms and to allow for
digital scanning of the forms. After the release of the 2014 forms, some taxpayers and practitioners
continued to file returns using the prior versions of these forms, which the DRA accepted in lieu of
the current versions. However, as of January 1, 2015, the DRA no longer accepts returns filed using
the old forms. Taxpayers or practitioners must file a current version of the RETT forms no later
than 30 days from the date of the transfer or recording of the deed, whichever is later, in order to
avoid interest and penalties. TIR 2014-010 (12/1/14).
3.
Revisions to RETT Rules. The DRA’s real estate transfer tax regulations (Rev Chapter 800) were up
for readoption in 2014. The DRA took the timing of the readoption as an opportunity to clean up old
provisions and address numerous issues stemming from several controversial cases addressing the
imposition of the tax on related-party transfers. The rules went through several stages of revisions
and hearings with JLCAR, with some revisions resulting in controversy, including the disclosure of a
policy position to tax certain ground leases. Other areas of taxation were clarified, including
reorganizations and conversions, de minimus transfers of real estate holding companies, and
updating the definition of a “real estate holding company.” Some of these revisions remain in
dispute, prompting further examination during the current legislative session.
PROPERTY TAXES
A.
1.
Renewable Energy PILOTs. On July 28, 2014, Governor Maggie Hassan signed H.B. 1549 into law,
which makes explicit that renewable generation facility property covered by an agreement with a
municipality for payments in lieu of property taxes (“PILOTs”) is subject to the State’s equalization
process in the same manner as PILOTs covering non-renewable energy property. PILOTs are
generally important for renewable energy developers and lenders, as they provide predictability that
facilitates project finance.
B.
3
1.
Equal Protection Challenge to Right-of-Way. In Northern New England Telephone Operations, LLC
D/B/A FairPoint Communications – NNE v. City of Concord, N.H. Supreme Court (Aug. 29, 2014),
FairPoint brought an action challenging the constitutionality of the city’s right-of-way property tax
assessments against it under the federal and state equal protection clauses. The Superior Court
found in favor of FairPoint, implicitly finding that the city had selectively taxed FairPoint, and
struck down the tax. On appeal, the Supreme Court vacated the Superior Court rulings on the basis
that the Court applied an erroneous legal standard. The matter was remanded for further
proceedings.
2.
DRA Valuation Upheld. In Appeal of Coos County et al., N.H. Supreme Court (June 18, 2014), the
Supreme Court rejected the county’s argument that the DRA’s assessed value of the property was
disproportionate and unreasonable on the basis that the utility tax appraisal used by DRA was
greater than the PILOT agreement value. Further, the Court held that DRA was not required to
consider other evidence when determining the equalized values of the county other than its utility
tax appraisal.
C.
There are no significant developments.
IV.
OTHER TAXES
A.
1.
Changes to Medicaid Enhancement Tax. The Medicaid Enhancement Tax (“MET”) statute (RSA 84A) was amended during the 2011 legislative session by Chapter 224 (Laws 2011), primarily in
response to a ruling of the U.S. Department of Health and Human Services finding that New
Hampshire was not following the federal requirements in distributing its disproportionate share
payments. As part of these amendments, changes were made to the following provisions of the MET
Statute: RSA 84-A:1, III (redefining “hospital”) and RSA 84-A:1, IV-a (redefining “net patient
services revenue”). The 2011 Amendments became effective July 1, 2011 (RSA 224:413, XIII), and
resulted in litigation that is discussed below. In 2013, Governor Hassan signed into law H.B. 2,
creating the Medicaid Enhancement Tax Study Commission, to study the MET laws and possible
alternatives. In 2014, S.B. 369 (Ch. 158:1-9, 11, 19, Laws of 2014) was passed, further amending the
definitions under the MET statute, making rate changes and specifically removing “specialty
hospitals for rehabilitation” from the definition of a taxable “hospital” in part due to a settlement on
litigation challenging the constitutionality of the tax as discussed below.
2.
Tobacco Tax Documentation. Changes to the tobacco tax were made, effective September 9, 2014, as
a result of S.B. 243 (Ch. 192, Laws 2014). S.B. 243 clarified the licensing and tax documentation
requirements for sub-jobbers, vending machine operators, retailers or anyone else engaging in the
sale, display, shipment, storage, import, transport, carrying or other possession of tobacco products.
In addition, S.B. 243 clarified that the lack of tax documentation shall result in the product being
contraband and subject to forfeiture. See also TIR 2014-006 (9/8/14).
B.
1.
MET Unconstitutional. Following the legislative changes discussed above, multiple hospitals
brought suit against the State challenging the constitutionality of the MET. On February 7, 2014, in
Northeast Rehabilitation Hospital v. Dep’t of Rev. Admin., 218-2012-CV-00185, the Rockingham
Superior Court held the MET, as related to outpatient services, is an unconstitutional classification
of taxpayers. Accordingly, the taxpayer (a for-profit hospital) was entitled to a refund for the portion
of the MET paid on revenue derived from any outpatient services that were not subject to the MET
when provided by non-hospital entities. The Hillsborough County Superior Court went further in
Catholic Medical Center v. Dep’t of Rev. Admin., 216-2011-CV-00955 (Apr. 8, 2014) and refused to
sever any portion of the MET, holding the entire tax unconstitutional under the Equal Protection
clauses of the State and federal constitutions. The court concluded that hospitals received
4
discriminatory treatment under the MET compared to non-hospital entities providing similar
services, and that there was no rational basis for such discrimination. Subsequent to the decisions,
the State and 25 New Hampshire hospitals entered into an overall settlement agreement resolving
the hospitals’ outstanding challenges to the constitutionality of the MET, which included refund
claims for the 2014 tax payments, and to Medicaid rate reductions made in previous years. The
mechanics of the MET will remain in dispute in the 2015 legislative session.
C.
1.
V.
Changes to Medicaid Enhancement Tax. In addition to the amendments to the MET statutes
discussed above, the DRA amended its MET regulations, at N.H. Administrative Rules, Rev 2300,
which became effective April 21, 2011. In doing so, the DRA made substantial revisions to many
provisions in Rev 2300, including redefining “net patient services revenue.” However, subsequent to
these changes, the DRA began auditing hospitals and other MET taxpayers, and applying these
changes retroactively. In the fall of 2013, the DRA also issued a TIR addressing its interpretation of
the MET for the first time. As indicated above, the hospitals challenged this application of the
regulatory change and resolved all audits as part of the overall state settlement of the pending
litigation. On October 2, 2014, the DRA issued guidance briefly summarizing its view of the
legislative changes of S.B. 369 (Ch. 158:1-9, 11, 19, Laws of 2014), discussed above. TIR 2014-008.
2015 / 2016 TRENDS
A.
Budget and Fiscal Outlook. Incumbent Governor Maggie Hassan was reelected to her second term
in office during the fall of 2014, defeating challenger Walt Havenstein. On February 12, 2015,
Governor Hassan presented her budget address for the upcoming biennium (beginning July 1),
proposing a roughly 6.4 percent increase over the prior budget. Governor Hassan’s $11.5 billion
budget plan and its companion legislation contained a number of relevant tax proposals.
The Governor’s budget package includes voluntary disclosure and amnesty programs, as well as
restrictions on the use of off-shore “tax havens,” by erecting a “blacklist” of 39 countries. COST is
actively working on this issue, as a standalone bill, H.B. 551, was also introduced. The Governor’s
proposal was removed from the House budget (H.B. 2), and an attempt to reinsert the language on
the House floor failed by a vote of 234-147.
One of the legislative vehicles for the voluntary disclosure and amnesty programs is S.B. 34, which
was killed in the Senate, although practitioners expect it to be revived as budget negotiations
continue. An alternative bill, S.B. 220, which covers only tax amnesty, was also killed in the Senate,
although it too could become the vehicle for both programs during the negotiations. Similarly, the
companion legislation to the Governor’s tax haven proposal, H.B. 551, was killed in the House,
although practitioners believe it too may be revived.
The Governor’s other proposals include increasing the cigarette tax, as well as vehicle registration
and boat access fees. Members of the legislature have proposed other changes as well, including
amending the RETT as described above, requiring bitcoin be an acceptable method of payment for
taxes and fees, and increasing the research and development tax credit against the BPT.
B.
Additional DRA Staff. In March of 2015, DRA Commissioner John Beardmore testified before the
House Ways and Means Committee to request funding to fill up to 12 vacant positions within DRA,
including 5 auditors, 2 of which will be dedicated to multistate audits. The Committee unanimously
voted to approve the Commissioner’s request, which now requires approval from the House Finance
Committee. Governor Hassan emphasized the need to fill these vacancies during her budget address
and practitioners anticipate increased audit activity if these positions are filled. Relatedly, the
Senate passed S.B. 192, which would establish the new position of “tax policy analyst” within the
DRA, and the bill is now before the House Ways and Means committee.
5
C.
VI.
MTC Audit Program. During his testimony before the House Ways and Means Committee in March,
Commissioner Beardmore also recommended that the State join the Multistate Tax Commission
audit program. The Committee also unanimously voted to approve the Commissioner’s request,
which now requires approval from the House Finance Committee.
PROVIDER’S BRIEF BIOGRAPHY/RESUME

Christopher J. Sullivan (B.A., Harvard College, 1989; J.D., Georgetown University Law Center, 1996) is
a shareholder and tax attorney with a particular focus on state tax matters at Rath, Young and
Pignatelli, P.C.

Kathryn H. Michaelis (B.A. Kenyon College, 1993; J.D., DePaul University College of Law, 1996; LL.M.,
in Taxation, DePaul University College of Law, 2000) is a Shareholder with the Tax Practice Group of
Rath, Young and Pignatelli, P.C., and was formerly with PricewaterhouseCoopers LLP and the Illinois
Department of Revenue in Chicago.

William F.J. Ardinger (B.A., University of New Hampshire, 1982; J.D., Harvard University, 1985) is the
director of the Tax Practice Group at the Concord, N.H. law firm of Rath, Young and Pignatelli, P.C.

Stanley R. Arnold (B.S., Cameron University, 1974; M.B.A., Plymouth State College, 1982; CPA, 1985)
served as the Commissioner of the New Hampshire Department of Revenue Administration for 14 years
and is currently the Senior Tax Policy Advisor at Rath, Young and Pignatelli, P.C.
6
Spring 2015
www.reedsmith.com/NJtax
Kyle O. Sollie
David J. Gutowski
Reed Smith LLP
Reed Smith LLP
Three Logan Square
Three Logan Square
1717 Arch Street, Suite 3100 1717 Arch Street, Suite 3100
Phone: 215-851-8852
Phone: 215-851-8874
Phone: 215-499-6171
Phone: 609-524-2028
ksollie@reedsmith.com
dgutowski@reedsmith.com
Robert E. Weyman
Reed Smith LLP
Three Logan Square
Phone: 215-851-8160
For additional information, articles, and whitepapers, see www.reedsmith.com/njtax.
Quick Summary of New Jersey Opportunities
1. Increase Your New Jersey Basis: In Toyota Motor Credit Corp. v. Director and Ford Motor Credit
Co. v. Director, the New Jersey Tax Court held that New Jersey couldn’t impose Corporation Business
Tax on gains from the disposition of property where the gains were essentially recapture of depreciation
deductions that had never produced any tax benefit. As a result, the taxpayers were entitled to a basis
adjustment on assets they disposed of during the tax years. Any taxpayer that has realized a gain from
the disposition of depreciable property should analyze these cases for potential refund opportunities. For
further discussion, see below.
2. Is the Corporation Business Tax Still Voluntary? In BIS LP, Inc. v. Director, the New Jersey Tax
Court and Appellate Division determined that a passive, non-resident limited partner with a 99% interest
in a partnership doing business in New Jersey is not subject to tax. That case is now final. Meanwhile,
in Village Supermarkets, the Division won a limited-partnership nexus case. Village Supermarkets
involved a partner that was operationally integrated with the operating partnership. That case has now
settled. Further adding to the milieu, the state has passed legislation to address the BIS result. But that
legislation is constitutionally suspect. For further discussion, see below.
3. Partnership Level NOLs and Partnership Withholding: The Division is Requiring Excess
Withholding. In addition to the nexus issues in the wake of BIS and Village Supermarkets, the Division
has been increasing its attention to the partnership withholding tax imposed under N.J.S.A. 54:10A15.11. The Division has been asserting that partnerships are not entitled to carryover net operating
losses at the partnership level. Instead, the Division has been demanding that partnerships pay the
withholding tax for any income year, without any deduction for a partnership-level loss from a prior
year. That position clearly conflicts with the language of the statute. Partnerships, deduct your NOLs!
4. Net Operating Losses.

11-year Carryover. The Division’s position is that most NOLs carried into 2002–2005 get only
seven carryover years, despite the fact that the NOLs were suspended during those four years. In our
view, those NOLs get an eleven-year carryover. For an explanation, see below.

NOLs Absorbed by Dividends. Under New Jersey law, an NOL is absorbed if a taxpayer receives
a dividend. Taxpayers that receive a dividend from certain foreign subsidiaries or non-unitary
subsidiaries or from E&P generated before the subsidiary was unitary should not be required to
Sollie, Gutowski, & Weyman Reed Smith LLP
absorb the NOL. Regardless, subsidiary factor representation is appropriate in many cases to fairly
reflect income in the year the NOL would otherwise be used. For an explanation of this opportunity,
see below.

Post-apportionment Carryover. The Division’s position is that a New Jersey NOL carryover must
be carried over on a pre-apportionment basis. In many cases, especially if a taxpayer’s
apportionment has declined significantly, this results in a diminished value of the NOL carryover.
Taxpayers may be entitled to Section 8 (alternative apportionment) relief. One option is to carry
over the post-apportioned NOL. This issue may be particularly relevant to New Jersey-concentrated
taxpayers whose apportionment percentage will be reduced under New Jersey’s single, market-based
sales factor.

Exclude Certain 4797 Gains. As discussed above, taxpayers that sold depreciated business
property and recognized substantial 4797 gains from depreciation recapture should file refund claims
if NOLs could not be carried forward to offset those gains.

Conduct R&D Anywhere? Get 15-Year NOL Carryover Period. Prior to 2009, the NOL carry
over period was only seven years. But for losses generated in 1999-2001, taxpayers that conducted
research activities in New Jersey got a 15-year NOL carryover period. This preferential tax
treatment for in-state activities violates the Commerce Clause. Taxpayers with expired NOLs from
1999-2001 that conducted research activities outside of the state should consider filing a refund
claim to resurrect those expired losses.
5. Throwout. Under Whirlpool, taxpayers that paid additional tax due to throwout should consider filing
refund claims. Takes the position that throwout does not apply to any receipts. This position can find
further support in the recent Tax Court order in Lorillard Licensing Co. v. Director, Docket No. 0087722006. For more discussion, see below.
6. Intercompany Interest. It is easy to qualify for an exception to the addback of related-party interest
expense and the Division has been favorably settling taxpayer appeals. Any taxpayer that did not claim
an addback exception should file a refund claim.
7. Amnesty Penalty. Taxpayers that have been billed (or paid) amnesty penalties should protest the
penalties or file a refund claim. The New Jersey Supreme Court has ruled that amnesty penalties should
not apply to deficiencies uncovered in a routine audit. For more discussion of the case, see below.
8. Sourcing Intangible and Services Receipts. The Division has withdrawn its proposed market-sourcing
regulation for services. The Division continues to take inconsistent positions in pending litigation
concerning whether receipts from services and intangibles should be sourced based on the customer’s
location or where the underlying activities are performed. Meanwhile, in Whirlpool Properties, the Tax
Court will be required to rule on whether licensing intangibles creates New Jersey nexus where the
licensee sells licensed products in the state but where the royalty is not computed based on a percentage
of sales.
Kyle O. Sollie
David J. Gutowski
Reed Smith LLP
Reed Smith LLP
Three Logan Square
Three Logan Square
1717 Arch Street, Suite 3100 1717 Arch Street, Suite 3100
Phone: 215-851-8852
Phone: 215-851-8874
Phone: 215-499-6171
Phone: 609-524-2028
ksollie@reedsmith.com
dgutowski@reedsmith.com
Robert E. Weyman
Reed Smith LLP
Three Logan Square
Phone: 215-851-8160
For additional information, articles, and whitepapers, see www.reedsmith.com/njtax.
I.
A.
1.
Operational Income: In New Jersey, only operational income is subject to apportionment.
Under McKesson, income from an I.R.C. § 338 liquidation was deemed non-operational.
In response to McKesson, the legislature changed the definition of non-operational
income by substituting the word “and” for “or” so that non-operational income is now
limited to situations in which the acquisition, management, and disposition of property
constitute integral parts of the taxpayer’s business. The new definition is effective for
privilege periods ending on or after July 1, 2014. See P.L. 2014, c.13
2.
Limiting Refunds for No-Nexus Limited Partners: Under BIS, a nonresident limited
partner is entitled to a refund of tax paid on its behalf by the partnership under N.J.S.A.
54:10A-15.11. In response to BIS, the legislature amended the statute to require a
nonresident corporation to file a return reporting income subject to tax in New Jersey in
order to get a refund. This legislation, which on its face applies only to a “nonresident
partner,” discriminates against interstate. Therefore, the law (which takes effect for
privilege periods ending on or after July 1, 2014) is likely to be challenged. See P.L.
2014, c.13 § 5.
3.
Single Sales Factor: New Jersey has now fully phased in a single sales factor. P.L. 2011,
c.59. New Jersey does not conform to UDITPA and its sales factor rules often differ
from other states; thus, unique opportunities (and exposures) often exist.
4.
Decoupling from Federal Deferral of Discharge of Indebtedness Income: Section 108(i)
of the Internal Revenue Code allows businesses that repurchase debt in 2009 and 2010 to
defer gain on discharge of indebtedness and then to spread the gain over five years.
Under N.J.S.A. 54:10A-4(k)(14), CBT taxpayers must: (i) for privilege periods beginning
after December 31, 2008 and before January 1, 2011, include in entire net income the
amount of discharge of indebtedness income excluded for federal income tax purposes
under I.R.C. § 108(i); and (ii) for privilege periods beginning on or after January 1, 2014
and before January 1, 2019, exclude the amount of discharge of indebtedness income
included for federal income tax purposes under I.R.C. § 108(i). L. 2009, c. 72.
5.
Adjusting NOL Carryovers for Discharge of Indebtedness Income: Under new
legislation, NOL carryovers must be reduced by discharge-of-indebtedness income
excluded from federal taxable income under I.R.C. § 108. The change takes effect for
privilege periods ending on or after July 1, 2014. See P.L. 2014, c.13.
6.
NOL Carryover Period: The carryover period under N.J.S.A. 54:10A-4(k)(6)(B) is twenty
years for a net operating loss generated in any period ending after June 30, 2009. L.
2008, c. 102. This extends the NOL carryover period from seven to twenty years, which
is in line with several other states as well as the Internal Revenue Code. For prior
periods, there are significant opportunities to increase the amount of the NOL carryovers
and also the carryover period itself.
7.
Throwout Rule: The sales-fraction “throwout” rule under N.J.S.A. 54:10A-6(B) was
repealed for periods beginning on or after July 1, 2010. L. 2008, c. 120. The throwout
rule required that a taxpayer exclude from its sales-fraction denominator any receipts that
would be assigned to a state where it is not subject to a tax on or measured by profits,
income, business presence, or business activity. Taxpayers that paid more tax as a result
of throwout should consider filing refund claims.
Interestingly, one unfavorable effect of the repeal of throwout is that taxpayers that are
protected by P.L. 86-272 may find themselves subject to the Alternative Minimum
Assessment, which was repealed effective in 2006 for all taxpayers—except those
protected by P.L. 86-272. We believe any taxpayer that is now subject to AMA should
challenge that tax because imposing the AMA only on P.L. 86-272 taxpayers clearly
discriminates against interstate commerce.
8.
Regular Place of Business Requirement: The archaic “regular place of business”
requirement under N.J.S.A. 54:10A-6 was repealed for periods beginning on or after July
1, 2010. L. 2008, c. 120. Under this requirement, a taxpayer with nexus outside New
Jersey was denied the right to apportion. Even for years before the repeal of this
requirement, taxpayers should argue for apportionment under New Jersey’s alternative
apportionment statute. See Hess Realty Corp. v. Director, 10 N.J. Tax 63 (1988).
9.
Nexus for Transportation Companies: Legislation has been signed into law that provides
that a foreign corporation does not have nexus for CBT purposes as a result of the
operation of a motor vehicle or bus over public highways or places in New Jersey for
carrying passengers in transit from a location outside the state to a New Jersey destination
or from inside the state to a destination outside of New Jersey. P.L. 2013, c.98.
10.
Grow New Jersey—Economic Development Legislation: The New Jersey Economic
Opportunity Act of 2014 again changed New Jersey’s incentive landscape. P.L. 2014, c.
23. The 2014 Act made several changes to the Grow New Jersey program. Among other
things, the Act increased bonuses for investing in Camden and increased the investment
requirements to qualify for job retention credits.
11.
Angel Investor Tax Credit Program Created: The “NJ Angel Investor Tax Credit Act” is
intended to encourage investment in New Jersey emerging technology businesses. These
businesses include those with fewer than 225 employees and 75% of their workforce in
New Jersey in a number of targeted industries. The enacted law provides a tax credit of
up to 10% of the angel investor’s investment in the emerging technology business. The
credits can be applied against the corporation business tax or gross income tax and excess
amounts can be refunded or carried forward for 15 years. Credits are limited to $500,000
per investment. P.L. 2013, c.14.
B.
1.
State Tax Addbacks: For CBT purposes, state taxes must be added back to line 28
taxable income to the extent they were “on or measured by profits or income, or business
presence of business activity.” N.J.S.A. 54:10A-4(k)(2)(C). Historically, the Division
has broadly applied this addback—even to taxes paid based on gross receipts and net
worth. In PPL Electric Utilities Corporation v. Director, 28 N.J. Tax 128 (N.J. Tax
2014), the court considered a Pennsylvania gross receipts tax calculated according to the
actual sale of electricity in Pennsylvania. Since it was based solely on the amount of
electricity sold (not the taxpayer’s business presence or business activity) and applied
regardless of whether the taxpayer realized income or profit from such sales, the court
concluded that the tax was not required to be added back to entire net income. The court
further concluded that the Pennsylvania Capital Stock Tax was a property tax and thus
was not required to be included in entire net income. Rather, the only state taxes required
to be added back were “taxes similar to that of the CBT.”
The Tax Court provided further analysis of the add back statute in Duke Energy Corp. v.
Director, 28 N.J. Tax 226 (N.J. Tax 2014). It concluded that: “The legislative history of
N.J.S.A. 54:10A-4(k)(2)(C) clearly indicates that the add back provision is intended to
capture only taxes paid to other States on a taxpayer’s net corporate income.” Taxpayers
that added back net worth taxes and gross receipts taxes in prior years should consider
filing a refund claim.
2.
Intercompany Interest: New Jersey requires an addback of interest paid to an affiliate
unless an exception applies. One of the exceptions is an “unreasonableness” exception.
The Division has interpreted that exception to apply only if the taxpayer demonstrates
that tax was paid to another state on the interest received by the affiliate—if that criterion
isn’t met, the Division refuses to look further. The New Jersey Tax Court determined
that the statute does not require a tax to be paid to qualify for the “unreasonableness”
exception. By refusing to look beyond that criterion, the Tax Court determined that the
Division abused its discretion. Therefore, the court ordered the Division to allow the
deduction. Morgan Stanley & Co. v. Director, 2014 N.J. Tax Lexis 23.
3.
Limited Partner Nexus: BIS LP, Inc. was a 99% limited partner in a partnership
(“Solutions”). Solutions conducted a banking information processing and outsourcing
business in New Jersey. But BIS itself had no property or payroll in New Jersey; its only
connection to New Jersey was its interest in Solutions. BIS, as the limited partner, was
not permitted to participate in the active management of Solutions. Rather, Solutions’
business was managed by the general partner, who was also the 100% owner of BIS.
The Tax Court and Appellate Division held that BIS and Solutions were not integrally
related and that BIS lacked sufficient constitutional presence to be subject to tax in New
Jersey. BIS LP, Inc. v. Director, 25 N.J. Tax 88 (Tax 2009); aff’d Dckt No. A-1172-09T2
(N.J. Sup Ct. App. Div. Aug. 23, 2011).
Solutions had paid a withholding tax with respect to BIS’s share of its income On
remand, the Tax Court held that the limited partner, BIS, should receive the refund on
account of the tax paid on its behalf by Solutions. See BIS LP v. Director, Docket No.
007847-2007 (New Jersey Tax Court, October 25, 2012). The Appellate Division
affirmed in an April 11, 2014 order. That case is now final.
Meanwhile, The Division won a case in Tax Court by proving, through a multi-day trial,
that a limited partner and limited partnership were operationally integrated. Thus, the
limited partner had nexus. Village Supermarkets of PA, Inc. v. Director, N.J. Tax Court
Docket No. 021002-2010 (Oct. 23, 2013). That case has been settled on appeal.
Therefore, corporate partners whose only contact with New Jersey is a limited
partnership interest that have paid CBT may still be entitled to a refund—especially if the
limited partner is merely a holding company or is not otherwise operationally integrated
with the limited partnership.
4.
Apportioning the Income of a Corporate Partner: Even if a corporate partner has nexus
with New Jersey based on its own activities, it may still have a refund opportunity in light
of the BIS decision. Under N.J.A.C. 18:7-7.6(g), if a corporate partner is not unitary
with the underlying partnership, the partner must complete its tax using the separate
accounting method. The corporate partner apportions its distributive share of the
partnership income using the partnership’s apportionment factors, then separately
computes tax on its non-partnership income using its own property, payroll, and sales. If
this method produces less tax than the “flow-up” method, then the corporate partner
should file a refund claim.
5.
Limitation on the McKesson Liquidation Exception: In McKesson Water Products Co. v.
Director, 408 N.J. Super. 213 (App. Div. 2009), aff’g, 23 N.J. Tax 449 (Tax 2007), the
Appellate Division held that a taxpayer’s gain from a deemed asset sale under I.R.C.
338(h)(10) was nonoperational income under N.J.S.A. 54:10A-6.1 (and thus not
includable in the taxpayer’s apportionable tax base). The court reasoned that in order for
the gain to be operational income “the acquisition, management, and disposition of the
property [must] constitute integral parts of the taxpayer’s regular trade or business
operations ….” Since the transaction at issue resulted in the cessation of a line of
business with a complete liquidation and distribution of the proceeds of the sale to the
taxpayer’s parent, this was an extraordinary event and, thus, the gain was not operational
income. More recently, the Tax Court distinguished McKesson in Elan Pharmaceuticals,
Inc. v. Director, N.J. Tax Court Docket No. 010589-2010 (May 2, 2014), which involved
a pharmaceutical company’s sale of the U.S. and Canadian markets and New Jerseybased manufacturing facility of its subsidiary (another pharmaceutical company
producing cancer drugs). The court found that the business lines and facility sold
constituted integral and regular parts of the taxpayer’s business.
6.
Amnesty Penalty: In United Parcel Service, the Division also attempted to impose a fivepercent amnesty penalty pursuant to N.J.S.A. 54:53-17(b) and -18(b), which applies to
“tax liabilities eligible to be satisfied during the period established pursuant to subsection
a. of this section that were not satisfied during the amnesty period.” The Tax Court
interpreted “tax liabilities eligible to be satisfied … to refer to liabilities which, during the
applicable amnesty period, were known to the taxpayer or which, by reasonable inquiry,
could have been known.” Based on the circumstances of this case, the court concluded
that the amnesty penalty could not be imposed because the taxes were not “eligible to be
satisfied” during the amnesty period. The court reasoned that during the amnesty period
the taxpayer acted in good faith and did not know and by reasonable inquiry could not
have known that additional taxes were due, or that the Division claimed that additional
taxes were due.
The New Jersey Appellate Division upheld the Tax Court’s decision that the amnesty
penalty should not be imposed based on the notion that a tax liability was not finally
determined until the state issues its assessment of additional tax due. United Parcel
Services General Services Co. v. Director, 430 N.J. Super 1 (App. Div. March 7, 2013).
The New Jersey Supreme Court upheld the decision of the Appellate Division in
December 2014. United Parcel Services General Services Co. v. Director, 220 N.J. 90
(2014). Thus, the case is final.
The UPS case is noteworthy for taxpayers assessed amnesty penalties related to the 2009
amnesty that ended on June 15, 2009 because the 2009 amnesty statute also contains the
identical statutory imposition of the amnesty penalty. Thus, any taxpayer that has paid,
in the last 4 years, an amnesty penalty on any assessment may claim a refund of that
penalty—so long as the underlying position was reasonable. By contrast, if a taxpayer
takes a position on a return that is contrary to “long settled” law and there is no “genuine
question of fact or law” to support the position, the amnesty penalty will be sustained.
De Rosa v. Director, 2015 N.J. Tax Lexis 1 (Jan. 22, 2015).
7.
Facial Challenge to the Throwout Rule: On July 28, 2011, the Supreme Court issued its
opinion regarding the facial constitutionality of New Jersey’s sales factor throwout rule.
The court ruled that New Jersey's throwout rule is constitutional, generally. But the court
limited its ruling in that throwout may apply constitutionally only to untaxed receipts
from states that lack jurisdiction to tax the corporation due to insufficient nexus, but not
to receipts that are untaxed because a state chooses not to impose an income tax.
According to the court, another state’s policy choices should have no bearing on the
application of New Jersey's throwout rule. The court's decision significantly limits the
application of throwout. The throwout rule statute requires a taxpayer to exclude receipts
from the sales-fraction denominator if sourced to a state in which the taxpayer is "not
subject to a tax." New Jersey's nexus rules are among the broadest in the country and if
those same nexus standards are applied for throwout purposes (i.e., for purposes of
determining whether a taxpayer "is subject to a tax" in another state), then a taxpayer will
have sufficient constitutional nexus nearly everywhere. As a result, throwout arguably
should not apply to any receipts.
Indeed, even if a taxpayer's activities do not exceed P.L. 86-272, throwout should
arguably not apply based on the court’s reasoning in Whirlpool. Another state's decision
to impose an income tax (as opposed to a gross receipts tax that is not restrained by P.L.
86-272) is a policy choice. And another state's policy choices, according to the court,
should not affect the throwout computation. Therefore, throwout should not apply even
to receipts sourced to states in which the taxpayer is P.L. 86-272 protected.
After Whirlpool, the Division of Taxation issued a notice dated September 7, 2011, that it
will not throw out the receipts of Nevada, Wyoming, and South Dakota because those
states have chosen not to impose a business activity tax. Otherwise, the Division stated
that its throwout policy will be unchanged.
Notwithstanding the Division’s guidance, any taxpayer that paid more tax as a result of
throwout should consider filing refund claims based on Whirlpool.
Currently, the Whirlpool case is before the Tax Court for a determination of whether, in
light of the Supreme Court’s holding, the throwout rule can be applied constitutionally to
the taxpayer. Oral argument before the Tax Court was held in July 2013. In October
2013, however, the court ruled that factual issues remained unresolved and denied the
parties’ motions for summary judgment. In particular, the court determined it was
unclear whether Whirlpool even has nexus with New Jersey. Although Whirlpool
licensed trade names and marks to an affiliate, the royalty was not computed based on the
licensee’s sales. The court distinguished this situation from the typical Lanco-type
arrangement. If a taxpayer licenses intangibles based on a flat fee or a percentage of
costs (rather than a percentage of sales), it should consider filing a protective refund
claim.
8.
Ongoing Litigation over Throwout—the Lorillard case: In August 2013, New Jersey Tax
Court ruled that throwout doesn’t apply to an intangible holding company’s royalty
receipts. Lorillard Licensing Co. v. Director, Docket No. 008772-2006. Lorillard
involved an intangible holding company that licensed trademarks and trade names to an
affiliated operating company. In exchange, the affiliate paid Lorillard a royalty based on
a percentage of the affiliate’s sales; the royalty arrangement covered the entire United
States. The Division of Taxation applied throwout and excluded non-sourced sales from
the denominator of its sales fraction. This resulted in sourcing 100% of Lorillard’s sales
to New Jersey. Lorillard argued that none of its receipts could be thrown out. The Tax
Court agreed with Lorillard and issued an unpublished opinion on January 14, 2014.
Any taxpayer that paid more tax under the throwout rule should file a refund claim. This
includes taxpayers that excluded receipts sourced to states in which they were immune
from income tax under P.L. 86-272 or that involved intercompany transactions that got
eliminated on a unitary-combined return.
9.
Excluding Depreciation Recovery Gain from Entire Net Income: In Toyota Motor Credit
Corp. v. Director, 28 N.J. Tax 96 (Aug. 1, 2014) and Ford Motor Credit Co. v. Director,
N.J. Tax Court Docket No. 015751-2009 (August 5, 2014), the Tax Court allowed the
taxpayers to adjust the basis of disposed vehicles because the taxpayers had not realized
any tax benefit from the related depreciation deductions. (The depreciation deductions
had generated losses that couldn’t be used because of New Jersey’s NOL suspensions.)
10.
Statute of Limitations for Deficiency Notices: The Tax Court held that the 3–year
limitations period for deficiency notices in N.J.S.A. 54A:9-4(a) begins to run from the
date of the original tax return rather than the date of the amended return. DiStefano v.
Director, 23 N.J. Tax 609 (Tax 2008). This case involved the Gross Income Tax and the
statute of limitations provisions relevant to that tax. The Tax Court’s rationale may,
however, also apply in the CBT context. (The Division’s position has been that filing an
amended return refreshes the four year statute of limitations for assessment.)
Any taxpayer that is facing an assessment for a period that would be closed but for the
filing of an amended return should challenge the statute of limitations on the basis of
DiStefano.
11.
Limited discretion to adjust line 28 taxable income: Taxpayers earned extraterritorial
income that was included in their line 28 taxable income for federal income tax purposes.
The Division issued an assessment on the basis that income from sources outside of the
United States must be added-back to federal taxable income in order to calculate net
income for CBT purposes. The Taxpayers appealed and the Tax Court ruled that the
Legislature never expressly adopted a provision requiring taxpayers to add-back
extraterritorial income in their New Jersey tax base. International Business Machines
Corporation, et al., v. Director, N.J. Tax Court Docket No. 011795-2009 (2011).
Similarly, foreign taxpayers should not include income in their CBT base unless it was
reported on line 29 of their federal Form 1120-F. Taxpayers that paid CBT on such
income should file a refund claim.
12.
Sourcing of Intangible Income: There is pending litigation on whether income from
financial transactions should be sourced based on the payor’s location or where the
services were performed. There is also pending litigation on whether technology-related
services should be sourced based on market or where the services were performed. The
Division is taking inconsistent positions in these cases. Therefore, taxpayers should
source their income from intangibles based on the method that results in the least amount
of tax.
13.
Net Operating Loss Suspension—4 more years: There is litigation pending on whether
NOLs that carried over into the 2002–2005 suspension period are always extended by 4
years. Under the statute, a 2001 loss that would ordinarily expire after 2008 doesn’t
expire until after 2012 because it gets four additional carryover years. A 2002 loss that
would ordinarily expire after 2009 would get a three year extension for the three years
after 2002 in the suspension period, so that loss would also expire in 2012.
The Division of Taxation, however, promulgated a regulation in 2007 that limits the fouryear extension. If the regulation were upheld by the courts, the regulation would limit the
extension to only those NOLs that would have otherwise expired during the four year
2002–2005 suspension period. So a 2001 NOL would get no additional carryover years
because it is scheduled, under the ordinary seven year carryover period, to expire in 2008.
This regulation is not supported by the statute. The better rule, as a matter of statutory
construction and as a matter of sound tax policy, is that any loss carried into the 2002–
2005 suspension period should be extended by four years. Therefore, taxpayers with
significant losses should consider using the statutory rule rather than the Division’s rule.
C.
1.
Market Sourcing Regulations for Services: The Division has withdrawn its proposed
market-sourcing regulation for services. Under the proposed regulation, service receipts
would have been sourced based on the location of the customer or benefit received—
regardless of where the services were performed. While the regulation was withdrawn,
the Legislature may decide to make such a change in light of the full phase-in of single
sales factor reform. In any case, the proposed regulation evidences the fact that New
Jersey is not a strict cost-of-performance state. The Division employs different methods
based on the taxpayer’s specific facts and circumstances. With New Jersey’s move to a
single sales factor, now is a good time for taxpayers to evaluate their sourcing method for
services receipts.
2.
Intercompany Transfer Pricing and Related Party Transactions: The Division issued a
TAM regarding the treatment of intercompany and related-party transactions. In general,
it seems the Division will adhere to federal transfer-pricing principles and provide great
weight to Advanced Pricing Agreements with the Internal Revenue Service and transfer
pricing studies that form the basis of an APA. The Division intends to codify the TAM in
a regulation. TAM 2012-1-CBT
3.
Add Back of Related Member Interest Expense: On February 24, 2011, the Division
issued a Technical Advisory Memorandum clarifying its interpretation of the statutory
exceptions to add-back under N.J.S.A. 54:10A-4(k)(2)(I). Specifically, the memorandum
outlines (1) the Division’s interpretation of the “three percent tax rate”, “foreign nation”
and “conduit guarantee” exceptions; and (2) fact patterns that would qualify for the
“unreasonable” and “alternative apportionment method” exceptions. TAM 2011 – 13 –
CBT.
The memorandum contradicts the Beneficial decision in that the Division states that
taxpayers have to show evidence that (1) there is a flow of actual funds rather than book
and accounting entries; (2) that the loan is memorialized in an agreement executed at the
time of loan origination; and (3) the related lender must pay income tax on the interest
income in at least 12 other separate company jurisdictions. These requirements do not
follow from the Beneficial decision. To the extent that the TAM contradicts Beneficial, it
should be disregarded.
4.
D.
Sourcing Gift Card Redemption Fees: The Division has issued a letter ruling regarding
the sourcing of redemption fees received by a taxpayer that issues and sells stored value
cards, gift cards, gift certificates and similar items. Where the redemption fees are
attributable to consumer gift care redemption events at retail store location in New Jersey,
the fees are sourced to New Jersey and must be included in the numerator of the sales
factor. Income recognized from gift card payments attributable to breakage and deferred
unredeemed gift card balances must be included in the sales factor numerator based on
the percentage of gift card redemption fees sourced to New Jersey. Any miscellaneous
investment income that the taxpayer earns from the investment of cash on hand must be
sourced to the taxpayer’s commercial domicile. Letter Ruling 2012-5-CBT (June 29,
2012).
1.
2.
Nexus:
a.
Intercompany Lending: The Division has ruled that performing corporate treasury
functions for a New Jersey-based affiliate creates CBT nexus.
b.
Licensing Intangibles: The Division has expanded the nexus rule of Lanco, Inc. v.
Director, 908 A.2d 176 (N.J. 2006) beyond that facts in that case, which involved
an IHC that licensed trademarks to an affiliate. The Division’s policy is that
licensing other intangibles, such as patents, can create CBT nexus—even if the
licensee’s manufacturing activities are performed outside New Jersey. The
Division has also ruled that licensing intangibles to non-affiliates creates nexus.
The courts will have an opportunity to limit New Jersey’s nexus standards in
Whirlpool Properties, which involves the issue of whether Lanco applies only to
royalties that are computed based on a percentage of the licensee’s sales.
Net Operating Loss Suspension—4 more years: New Jersey suspended, in whole (in
2002–2003) and in part (2004–2005), the deductibility of NOLs during the period 2002
through 2005. The legislation that suspended the deductions for this four-year period
gave taxpayers the right to extend the normal seven-year carryover period by four years
for any loss carried into the period of suspension (or less, if the loss was generated during
the suspension period). The Division of Taxation, however, promulgated a regulation in
2007 that limits the extension to only those NOLs that would have otherwise expired
during the four year 2002–2005 suspension period.
This regulation is not supported by the statute. The better rule, as a matter of statutory
construction and as a matter of sound tax policy, is that any loss carried into the 2002–
2005 suspension period should be extended by four years. Therefore, taxpayers with
significant losses should consider using the statutory rule (see far right column of table)
rather than the Division’s rule.
Statutory
Division’s
Rule: NOL
Tax Period Of Without Suspension
Rule: NOL
Expires
Expires After
After
Loss
NOL Expires After
2004
2011
2011
2012
2003
2010
2010
2012
2002
2009
2009
2012
2001
2008
2008
2012
2000
2007
2007
2011
1999
2006
2006
2010
1998
2005
2006
2009
1997
2004
2006
2008
1996
2003
2006
2007
1995
2002
2006
2006
We encourage any taxpayer to consider using the carryover period listed in the “statutory
rule” column of this table rather than the period listed in the “Division’s rule” column.
3.
Foreign Dividends: If your company made a major repatriation of foreign earnings,
consider this issue.
Under New Jersey law, the dividend received deduction is computed after the deduction
for NOL carryovers. Thus, a dividend, even if it will be deducted by virtue of a DRD,
absorbs NOLs.
Many taxpayers have had significant dividends under the American Jobs Act. Those
dividends have been paid, often, by foreign corporations that are managed and operated
completely separate from the domestic business. Because of water’s edge treatment in
many unitary states and Kraft-mandated dividend received deductions in many separate
reporting states, taxpayers have not focused on whether those dividend-paying
subsidiaries are unitary because the dividends are excluded from income regardless.
But if the subsidiary is not unitary, then the dividend paid by the subsidiary should not
absorb the NOL carryover of the unitary group. After all, under Hunt Wesson, a state
cannot tax by indirect means what it cannot tax by direct means. So if New Jersey cannot
impose a tax on a dividend from a foreign subsidiary because that foreign subsidiary is
separately managed and thus not unitary, then New Jersey cannot reduce the NOL of the
taxpayer by reference to that dividend.
As a consequence, taxpayers that received a § 965 dividend from foreign subsidiaries or
other foreign dividends should consider the authority of the ASARCO and Woolworth
cases, in which the Supreme Court determined that foreign subsidiaries engaged in the
same business as the domestic parent were, nonetheless, not unitary with the domestic
parent if the subsidiaries were sufficiently independent. If your foreign subsidiaries are
also not unitary, then your New Jersey NOL should not be reduced by the amount of the
foreign dividend.
4.
Intercompany Interest: In August 2010, the Tax Court issued a decision addressing New
Jersey’s addback of deductions for interest paid to affiliates. See Beneficial New Jersey,
Inc. v. Director, N.J. Tax. Court No. 009886-07. The Division has settled other
intercompany interest cases. See, e.g., Household Finance Corp. III v. Director, N.J. Tax
Court No. 009890-07; Morgan Stanley & Co., Inc. v. Director, N.J. Tax Court Docket
No. 007557-07; Mark IV IVHS, Inc. v. Director, N.J. Tax Court No. 001671-2009.
a.
Cash Sweep Arrangement: After the addback statute was enacted, the Division
published various informal guidance suggesting that there is a “cash sweep”
exception to the addback of related party interest. Under a cash sweep
arrangement, one affiliate manages the excess cash and short-term funding
requirements for other affiliates. As discussed above, in Beneficial New Jersey,
Inc. v. Director, N.J. Tax Court Docket No. 009886-07 (decision issued August
31, 2010), the Tax Court concluded that it was unreasonable for the taxpayer to
addback interest paid to its parent as part of a cash sweep arrangement. Further,
the Division acknowledged a limited cash sweep exception in TAM 2011-13.
Therefore, any taxpayer that has increased entire net income as a result of an
intercompany cash management arrangement should consider filing a refund
claim.
b.
Offsetting Interest Income and Interest Expense: In Morgan Stanley & Co., Inc. v.
Director, N.J. Tax Court Docket No. 007557-07, the taxpayer borrowed funds
from affiliates and paid interest on those amounts. Meanwhile, during the same
tax year, the taxpayer earned interest income on amounts lent to affiliates. In
computing its New Jersey addback for interest paid to affiliates, the taxpayer
netted the two amounts and added back only the net interest expense. The
Division did not agree with the taxpayer’s approach. The Division assessed
additional tax under the view that the taxpayer must add back the interest paid to
affiliates, while recognizing in full the interest received from affiliates. This case
was settled and in TAM 2011-13 (described above), the Division conceded this
netting approach.
c.
Interest Imputation: In UPS and Mark IV IVHS, Inc., taxpayers were challenging
the Division’s efforts to impute interest in various situations. Generally, the
taxpayers were challenging whether the intercompany balances are appropriate
for imputation of interest and, if they are, whether the balances should be netted
and whether the rate applied on the net balances is appropriate.
The taxpayer in Mark IV case negotiated a favorable settlement of its case. Mark
IV IVHS, Inc. v. Director, N.J. Tax Court No. 001671-2009. As discussed above,
the tax court issued a decision in UPS in June 2009.
5.
Throwout: After the New Jersey Supreme Court’s decision in Whirlpool Properties, Inc.
v. Director, and the Tax Court’s recent order in Lorillard Licensing Co. v. Director,
taxpayers should consider filing returns or refund claims on the basis that throwout no
longer applies to any receipts. Furthermore, the Supreme Court only addressed the facial
constitutionality of throwout; other issues have been raised in Whirlpool and other
appeals. For example, taxpayers are seeking relief based on the as-applied issue (i.e.,
whether throwout is unconstitutional or unfair as applied to the particular taxpayer’s
facts). The as-applied issue involves looking at the distortion that results from applying
throwout. Taxpayers are also seeking relief based on whether the $5 million cap
discriminates against out-of-state companies. These issues can apply regardless of the
amount of distortion involved.
II.
6.
Subjecting Out-of-State Financial Services Companies to CBT: The Division’s regulation
creates a broad nexus rule for financial services companies. N.J.A.C. 18:7-1.8(b). Given
the retroactive nature of this regulation despite the fact that it is directly contrary to prior
guidance from the Division and Court decisions that limit the Division’s broad nexus
standards, taxpayer’s should consider challenging the application of this regulation.
7.
Sourcing Receipts from Intangibles: The courts will likely provide guidance concerning
whether intangible receipts are sourced based on market principles or instead based on
the taxpayer’s commercial domicile, or where the relevant activities are performed.
SALES AND USE TAXES
A.
Legislative Developments:
1.
Printed Advertising Material Exemption: In late 2008, New Jersey amended its statute to
bring it into conformity with various Streamlined requirements. P.L. 2008, c. 123,
Introduced as New Jersey Assembly Bill A3111 (Approved December 19, 2008). But the
amendment also contained some little-noticed changes to the exemption for direct mail
advertising. These changes provide a refund opportunity for taxpayers that ship printed
advertising materials from New Jersey.
Historically, New Jersey had a broad exemption for printed advertising materials shipped
out of state. In 2005, New Jersey narrowed its direct mail exemption (N.J.S.A. §54:32B8.39) so that it applied only to paper advertising materials or other printed advertising
materials shipped with printed paper advertising material. Also, beginning in 2005, the
exemption did not apply if the materials were shipped to a single address, for example a
bulk shipment of advertising to a sales representative. Under the 2008 amendment,
however, the exemption is effectively returned to its original form. As a result, all
printed advertising material (not just advertising material printed on paper) that is shipped
outside New Jersey should qualify for exemption—even if the material is shipped to a
single address. Vendors may still be charging tax based on the 2005 rule, however. So
taxpayers that file refund claims should expect resistance from the Division, which
published a notice that the new law “does not result in a change of taxability from prior
law.”
2.
Employee Leasing Services: The legislature clarified the tax liabilities of client
companies and employee leasing companies in the event that the sales and use tax were
to be applied prospectively to employee leasing services. The statutory amendment
provides that any sales tax imposed on employee leasing services would only apply to the
vendor’s mark-up. P.L. 2011, c.118.
3.
Nexus: The definition of “seller” under the Sales and Use Tax Act for sales occurring on
or after July 1, 2014 has been modified to create a rebuttable presumption that an out-ofstate seller who makes taxable sales of tangible personal property, specified digital
products, or services is soliciting business and has nexus in New Jersey if: 1) the seller
enters into an agreement with a New Jersey independent contractor for compensation in
exchange for referring customers via a link on its website to the out-of-state seller; and 2)
has sales from those referrals to customers in New Jersey in excess of $10,000 for the
prior 4 quarterly periods. N.J.S.A. 54:32B-2(i)(1).
B.
1.
Manufacturing Exemption and Capital Improvements: On February 14, 2012, the New
Jersey Tax Court determined that the manufacturing exemption did not apply to supplies,
parts and equipment located in the taxpayer’s paper manufacturing facility. In rejecting
numerous factual assertions by the taxpayer, the court afforded great weight to how the
taxpayer treated the disputed items for federal tax and accounting purposes. In this case,
the taxpayer's accounting treatment was not consistent with its position for New Jersey
sales tax purposes and the taxpayer was unable to overcome the statutory presumption of
taxability. Taxpayers should be mindful, therefore, that how an item is treated for
accounting and federal tax purposes can have New Jersey sales tax implications.
Schweitzer-Mauduit International Inc. v. Director, N.J. Tax Court Docket No. 0073762005 (2012), affirmed by Schweitzer-Mauduit International Inc. v. Director, New Jersey
Appellate Division Docket No. A-3946-11T2 (April 30, 2013).
2.
Refund Projection and Issue Preservation: The taxpayer's appeal involved both an
assessment appeal and a refund claim. Although the court denied substantially all of the
taxpayer's requested relief, it agreed that the taxpayer had erroneously paid tax of $98.35
on certain parts for manufacturing equipment. Since the overpayment was included in the
sample month selected by the auditor to compute the Division of Taxation's projected
assessment, the taxpayer asserted that it should be able to similarly project its refund. The
court, however, refused to project the refund. The court concluded that the Division had
broad discretion to use sampling methods to calculate assessments, but denied the
taxpayer the same right to project overpayments. Schweitzer-Mauduit International Inc.
v. Director, N.J. Tax Court Docket No. 007376-2005 (2012). This seems inconsistent
with the principles in the Taxpayer Bill of Rights, P.L. 1992, c.175, which guarantees
“consistent treatment for assessments and refunds.” See N.J. Division of Taxation,
Publication ANJ-1 (December 2004). Therefore, despite the Tax Court's decision,
taxpayers should continue to press the Division of Taxation to project overpayments in
the same manner as underpayments.
The Court also prohibited the taxpayer from raising new issues at trial. The Court noted
that there was “no evidence that any of the new claims for exempt treatment had been
raised with [the hearing officer] during the course of the administrative protest.” The
Court’s ruling is consistent with United Parcel Services General Services Co. v. Director,
25 N.J. Tax 1 (Tax 2009). In that case, the Court held that a taxpayer couldn’t rely on
information at trial if it wasn’t provided during the audit process. This reinforces the
importance of raising all issues and documentation before getting to Court. Otherwise, a
taxpayer may be precluded from raising those issues later.
The Appellate Division subsequently affirmed the Tax Court’s decision in an opinion
issued on April 30, 2013. Schweitzer-Mauduit International Inc. v. Director, New Jersey
Appellate Division Docket No. A-3946-11T2 (April 30, 2013).
3.
Charges for Distribution of Electricity: The Tax Court has determined that the amount
charged for the distribution of electricity through the local distribution infrastructure to a
consumer is subject to sales tax as receipts from the transportation of transmission of
natural gas or electricity (by means of mains, wires, lines, or pipes) to users and
consumers. Furthermore, the Court also clarified that all of the charges (authorized by
the Legislature and Board of Public Utilities) imposed on customers to recover expenses
associated with electricity generation, demand management, customer services, energyrelated social programs, and other costs should be included in receipts from utility
services for purposes of calculating the sales tax due to the state as the total amount of
consideration paid for those services. Atlantic City Showboat, Inc. v. Director, N.J. Tax
Court Docket No. 000036-2007 (2012). The Tax Court’s decision was sustained.
Atlantic City Showboat Inc. v. Director, 2013 N.J. Tax LEXIS 25, cert. denied 217 N.J.
303 (2014).
4.
Septic Waste System Cleaning and Disposal: Taxpayer operated a septic cleaning and
disposal firm and argued that charges for transportation and disposal of the waste were
not taxable regardless of how they were identified on the customer invoices. The
Division countered that the charges for transportation and disposal had to be specifically
identified on the invoices for the services to be nontaxable. Alternatively, the Division
also argued that even if the charges had been separately listed on the invoices, all the
services provided by the taxpayer were taxable because the object of the transaction was
removal of the waste from the septic tanks and not the transportation of the waste. The
Tax Court ruled in favor of the Division and this ruling was upheld by the New Jersey
Superior Court, Appellate Division. English Sewage Disposal, Inc. v. Director, Docket
No. A-4539-10T1 (N.J. Super. A.D. 2012).
5.
Recycling Equipment Exemption: The New Jersey Tax Court ruled that an excavator and
a skid loader used by the taxpayer in a tree recycling business qualified for the recycling
equipment exemption pursuant to N.J.S.A. 54:32B-8.36(a). The Division of Taxation
agreed that the taxpayer did in fact only use the equipment for recycling, but argued that
the equipment was not exempt because it could be used for general construction
activities. The Tax Court ruled that the fact that the equipment could be used for general
construction did not disqualify the equipment from the exemption. The court reasoned
that the statute requires there to be exclusive use in the recycling process; but does not
require that the equipment be only capable of use in the recycling process. Becker’s Tree
Service v. Director, N.J. Tax Court Docket No. 006203-2007 (2013).
6.
Storage and Manufacturing Exemptions: The New Jersey Tax Court ruled that purchases
of parts that a taxpayer shipped into New Jersey to assemble pretzel warmers did not
qualify for the storage exemption as property assembled by the taxpayer and merely
stored in New Jersey before being shipped out-of-state. The Tax Court also found that
the pretzel warmers were not used in manufacturing.
The taxpayer sells frozen pretzels to pretzel vendors, and also sells or loans pretzel
warmers to vendors that request them. When a customer requests a pretzel warmer, the
taxpayer orders the necessary parts and ships them into New Jersey where the pretzel
warmer is assembled and shipped to its customers. Following an earlier administrative
determination, the taxpayer only paid tax on parts attributable to pretzel warmers that it
shipped to customers in New Jersey. At audit, the Division imposed use tax on all parts
shipped into New Jersey.
The Tax Court upheld the assessment, first finding that the taxpayer did not store the
parts in New Jersey because the parts were only ordered once a pretzel warmer was
requested by a customer and the pretzel warmer was quickly shipped to customers once
the pretzel warmers were assembled. The Court distinguished the taxpayers facts from
Cosmair, Inc. v. Director, 109 N.J. 562 (1988), and found that while the taxpayer
assembled the pretzel warmers, the parts were not actually stored in New Jersey or
withdrawn from storage for purposes of N.J.S.A. 54:32B-6(B). The Court also found that
the parts used to create the pretzel warmers did not qualify as “machinery, apparatus, or
equipment” necessary to qualify for the manufacturing exemption. It also found that the
pretzel warmers themselves were not used by the taxpayer in manufacturing process since
the taxpayer manufactured frozen pretzels, and the warmers were not integral to that
process. Finally, the Court rejected the taxpayer’s equitable estoppel argument based on
the Division’s prior administrative treatment of its parts purchases, however, the Court
did strike penalties and interest. J&J Snack Food Sales Corp. v. Director, N.J. Tax Court
Docket No. 004986-2012 (2013).
7.
Urban Enterprise Zone Refund Claim Rejected as Untimely: The Tax Court upheld the
Division’s narrow reading of the statute of limitations for refund claims related to the
UEZ sales tax exemption. A law firm filed refund claims for tax periods January 1, 2008
through March 31, 2012 on purchases of property and services sourced to its Newark
office, which was located in a designated urban enterprise zone. The Division denied the
majority of the refund claim on the basis that the one year statute of limitations to claim
the UEZ sales tax exemption had expired.
On appeal, the taxpayer argued that the statute of limitations was four years for UEZ
sales tax refunds, consistent with the standard statute of limitations for sales tax refunds
in New Jersey. The Tax Court disagreed and concluded that the statutory language
unambiguously limited the statute of limitations to one year from the payment of the tax.
In addition, the taxpayer argued that the limitations period was held open by a waiver to
extend the period for issuing an assessment. Again, the Court disagreed, noting that the
statute of limitations had already expired by the time the waiver was executed. McCarter
& English v. Director, N.J. Tax Court Docket No. 000541-2013 (2014).
8.
No Mailbox Rule in New Jersey: Highlighting a potential trap for the unwary, the Tax
Court ruled that for purposes of the statute of limitations, a Tax Court complaint is
deemed filed on the day it is received by the Court, not the mailing date. In this case, the
taxpayer’s complaint was sent by certified mail within ninety days of the Division’s Final
Determination; however, it was not received by the Tax Court until after the ninety days
had expired. The Court ruled that because the Tax Court did not receive the complaint
until after the 90 days had passed, the court lacked jurisdiction to review the case. Smart
Publications, LLC et al. v. Director, Docket No. A-3516-13, N.J. Tax Court Docket No.
012506-2013.
9.
Wrapping Supply Exemption Upheld for Packaging Shipped to Related Entity: The New
Jersey Tax Court granted a taxpayer’s motion for summary judgment finding that
purchases of wrapping supplies by a warehouse company used to ship merchandise to
retail stores owned by various affiliated entities were exempt from tax. The taxpayer
received merchandise from third-parties that it then repackaged and shipped to affiliated
retail stores, and filed a refund claim for tax paid on the packaging materials used to ship
the merchandise to the affiliates. At court, the Division conceded that the various
external and internal packaging materials at issue constituted wrapping supplies,
however, the Division contested the taxpayer’s claimed refund on the basis that the
wrapping supplies were for “internal use” and not part of transactions with “another
party”. The Tax Court rejected the Division’s argument, finding that the warehouse
company and its affiliates were separate legal entities and that there was nothing in the
statutory language that would preclude the exemption from applying to transactions
between related parties. Further, the court rejected the Division’s substance over form
argument, finding that the Division failed to provide sufficient justification for ignoring
the taxpayer’s corporate form. Burlington Coat Factory Warehouse Corp. v. Director,
Division of Taxation, N.J. Tax Court Docket No. 007007-2013 (December 2, 2014)
C.
D.
Letter Rulings
1.
Production Machinery: The Division provided guidance regarding the taxability of the
purchase of a machine used to create a series of four foil pouches which contain dietary
supplements sold as retail products. These products were only sold in sleeves of four and
not in individual pouches. The machine is used to assemble the pouches together, wrap
and glue a paper sleeve around the pouches, and imprint a lot code and expiration date
onto the paper sleeve. The Division advised that the purchase of the machine is exempt
from sales tax as machinery used in the production of tangible property, as provided in
N.J.S.A. 54:32B-8.13(a). Letter Ruling 2012-3-SUT (June 22, 2012).
2.
Sales of Paper and Plastic Products to Restaurants: The Division issued guidance on the
sale of plastic delivery bags, plastic plates, paper plates, and styrofoam plates, cups and
bowls to restaurants and other food establishments. The taxpayer at issue was a
wholesale supplier of food products to restaurants and other food establishments. The
Division advised that these purchases are exempt as non-taxable wrapping supplies
because these items are non-returnable and used in the delivery of prepared food to the
end consumer. Letter Ruling 2013-2 SUT (September 6, 2013).
3.
Long-Term Apartment Rentals: The Division issued guidance regarding long-term
apartment rentals for corporate housing. The taxpayer at issue was a corporate housing
company. The Division advised that the taxpayer will not be considered to be operating a
hotel and thus, does not have to collect sales tax from lessees if the company’s activities
are limited to providing furnished apartments for residents on a business-to-business
basis and does not open its facility to the public for transient occupancy. The Division
also distinguished the taxpayer from a hotel in that the taxpayer does not provide typical
hotel services, such as room service, parking, front desk services, conference rooms and
24 hour security. Letter Ruling 2013-3 SUT (September 10, 2013).
1.
Software and Software Services: The Division has adopted amendments to the existing
regulations regarding the sales tax treatment of software and related services (e.g.,
whether software services constitute taxable repairs, maintenance, installation, or
servicing).
The proposed regulations have several taxpayer-friendly definitions. For example: (1)
limiting taxable installation services to “loading executable files” onto a computer; (2)
broadly defining non-taxable modification services to include any service to enhance,
improve, or customize software other than installation services or servicing. (3) limiting
taxable servicing of software to repairs and maintaining compatibility with other
hardware and software products; (4) expanding the definition of custom software to
include software developed using prewritten functions and routines; and (5) permitting
taxpayers to break out taxable and non-taxable components of software maintenance
contracts—even if they were not separately stated on the invoice. See N.J.A.C. 18:2425.1, 25.6, and 25.7 (Amended Effective December 1, 2014).
2.
Information Services: New Jersey has adopted regulations concerning information
services. The tax does not apply to personal or individual information and the Division’s
regulations provide examples distinguishing between information services, and services
that provide personal or individual information, as well as services provided by lawyers,
physicians, and accountants that require the collection of information but the true object
of the transaction is not an information service. N.J.A.C. §18:24-35.1 – 35.5.
Even if a taxpayer purchased taxable information services, New Jersey tax should be paid
only to the extent that the services were used in New Jersey. Multi-state taxpayers that
paid New Jersey tax on the entire purchase price should consider filing a refund claim.
3.
Contractor Exemption for Qualified Exempt Entities: The Division issued a technical
bulletin clarifying the exemption for contractors engaged in improving, altering, or
repairing real property of an exempt entity. When a contractor is engaged in such work
and makes purchases of materials, supplies and services used exclusively to fulfill the
contract with the exempt organization, those purchases are not subject to tax. The
exemption applies if the contractor is engaged in such work for a: tax-exempt entity
(nonprofit), Urban-Enterprise Zone qualified business, or a qualified housing sponsor.
Purchases of construction equipment, office equipment, temporary buildings, and repair
services to equipment are still subject to tax. TB-67 (November 1, 2012).
4.
Cloud Computing Services: The Division issued a technical bulletin providing guidance
on the sales tax ramifications of various cloud computing arrangements and services.
Generally, the use of software, platforms and applications via cloud computing resources
will not be taxable if there is no delivery of the item to be used. In most instances,
purchasers pay to access these resources. As such, these are services that are not
enumerated as taxable in the sale and use tax law. In addition, data hosting and
webhosting services are not subject to sales tax as well. TB-72 (July 3, 2013).
5.
Automated Teller Machines (ATMs): The Division issued a technical advisory
memorandum discussing the purchase and installation of ATMs, bank vaults and safe
deposit boxes. A free-standing ATM is not considered to be “permanently affixed” to
real property. As such, it does not constitute an exempt capital improvement and charges
for installation are subject to tax. An ATM that is installed in the wall is considered to be
“permanently affixed” to real property and is thus considered to be an exempt capital
improvement. Therefore, installation charges for these ATMs are not subject to tax.
The Division also provided that bank vaults and safe deposit boxes in a wall or vault and
drive-through windows are also considered to be exempt capital improvements.
Installation charges for these items are not subject to sales tax. TAM 2013-1 (July 7,
2013).
6.
Additional Guidance on Information Services: The Division issued additional guidance
discussing the taxation of information services. Taxable information services do not
include personal or professional services or non-enumerated services in which the service
provider may collect or review information to provide the purchaser with the “true
object” of the service. Additionally, the publication explains how certain information
services are not taxable information services because they provide personal or individual
information that is not incorporated into reports, publications or another medium
generally provided to paying clients. ANJ-29 (August 1, 2013).
7.
Medical Devices: N.J.S.A. 54:32B-8.1 provides an exemption for certain medical
supplies and equipment. The Division has proposed new regulation N.J.A.C. 18:24-37 to
provide guidance on what types of tangible personal property falls within the sales and
use tax medical exemption. Included in the new regulation are definitions of statutory
terms such as drug, grooming and hygiene products; and examples of taxable and exempt
items.
8.
Urban Enterprise Zone Sales and Use Tax Exemptions: The Division has proposed
amendments, repeal, and new rules to the UEZ. Most notable are the following:
a.
Definitions section: substantially expanded to include definitions of certified
seller, energy, motor vehicles, natural gas, partial sales tax exemption, qualified
business, and utility service. N.J.A.C. 18:24-31.2.
b.
Examples: numerous examples are proposed to provide clarity to the definitions
and requirements such as examples of services used or consumed exclusively
within a UEZ (N.J.A.C. 18:24-31.3(b)(2)); examples of transactions that originate
within a UEZ that qualifies for the partial sales tax exemption, as well as the
timing of payments on orders, and taxability of delivery charges (N.J.A.C. 18:2431.4(d)-(h)).
c.
Updated to reflect common business practices as a result of changes in technology
(email, internet). N.J.A.C. 18:24-31.4(e).
d.
Section delineating taxable services not eligible for the partial sales tax
exemption. N.J.A.C. 18:24-31.5.
9.
Charges for Postage: The Division issued updated guidance to sellers of printed
advertising materials confirming that sales tax is due on a print and mail vendor’s
delivery charges—including postage—for sales of printed advertising materials mailed
into New Jersey. However, the Division also clarified that if the customer uses its own
postal permit and USPS deducts the postage cost directly from the customer’s account, no
tax is due. “Information for Sellers of Printed Advertising Material: Charges for
Postage” (December 18, 2014).
10.
Nexus: In December, New Jersey issued administrative guidance regarding the affiliate
nexus statute passed earlier in 2014. (See II.A.3). The guidance details activities
triggering the presumption of nexus for an out-of-state seller receiving referrals from instate independent contractors and/or representatives, as well as requirements the seller
must meet to rebut that presumption. Specifically, an out-of-state seller presumed to be
soliciting business in New Jersey through in-state representatives can rebut the
presumption by (1) entering into an agreement with the in-state representative that
prohibits the in-state representative from engaging in solicitation activities; and (2)
obtaining a yearly certification from the in-state representative that the in-state
representative does not conduct solicitation activities on behalf of the remote seller. TB76 (December 12, 2014).
III.
ADDITIONAL ITEMS
1.
Alternative Business Calculation Established: New Jersey’s Gross Income Tax is
imposed on a taxpayer’s gross income by summing a number of separately stated
enumerated categories of income. Until 2012, a taxpayer could not net gains and losses
between income categories and there was no provision for any type of loss carryover.
This means that a taxpayer with S corporation gain/loss, partnership gain/loss, and sole
proprietor gain/loss could not net these gains and losses to arrive at taxable income.
The alternative business calculation would allow taxpayer to consolidate gains and losses
between business income categories and carryover losses for up to 20 years. A taxpayer
would calculate taxable income without the new calculation and with the new calculation.
The resulting difference between the two is referred to as the business increment.
Beginning in 2012, taxpayers may deduct a percentage of the business increment when
arriving at taxable income. The phase in of the percentages is as follows: 10% for tax
year 2012; 20% for tax year 2013; 30% for tax year 2014; and 50% for tax year 2016 and
thereafter.
2.
The End of TEFA: The Transitional Energy Facility Assessment is a tax imposed on
electricity bills that first was born as a temporary tax as part of an electric energy
deregulation initiative. The Christie administration committed to and budgeted for the
continued phase-out of the assessment by the close of 2013. P.L. 2008, c.32.
3.
End of Regular Place of Business Requirement Rule: The Division has issued guidance
that an unincorporated business entity no longer has to maintain a regular place of
business outside of the state to allocate income. This follows the statutory change made
to the corporation business tax which eliminated the requirement for incorporated
taxpayers. As such, owners and shareholders of unincorporated business entities may
complete the Business Allocation Schedule, Form NJ-NR-A to allocate their multi state
business income.
4.
Scope of Refund Claims for Paid Audit Assessments: In Kinko’s Network, Inc. v.
Director, No. A-2261-13T2 (Jan. 31, 2014), the Tax Court ruled that a taxpayer pay an
assessment and later file a refund claim to recover that tax paid with respect to any issue
raised in the assessment. For this purpose, the court concluded that an issue had been
raised by the assessment where the Division’s auditor refused to make an adjustment
requested by the taxpayer during the audit. The case is currently on appeal before the
Appellate Division.
If you are interested in any pleadings or briefs in these cases, e-mail kdicicco@reedsmith.com.
Kyle O. Sollie
Partner
Reed Smith LLP
Three Logan Square
Tel: +1 215 851 8852
Tel: +1 415 659 5905
Email: ksollie@reedsmith.com
Kyle joined Reed Smith in March 2007 and is a member of the firm's State Tax Group. Kyle and his colleagues
in Reed Smith's offices in San Francisco, Chicago, Philadelphia and D.C. use the right legal tools at the right
time to help their clients pay no more state tax than legally due. Kyle's practice includes state tax appeals,
focusing on the states of Pennsylvania, New Jersey, Delaware, and California. For example, he is currently
representing one of the taxpayers in the New Jersey throwout litigation Pfizer, Inc., et al v. Division of Taxation,
2008 WL 2357918. His litigated cases also include McNeil-PPC, Inc. v. Commonwealth of Pennsylvania, 834
A.2d 515 (Pa. 2003), First Union National Bank v. Commonwealth, 867 A.2d 711 affirmed, 901 A.2d 981 (Pa.
2006) and Dial Corp. v. Delaware Director of Revenue, C.A. No. 06C-05-014 (Del. Super. 2008). He has also
co-authored the amicus briefs filed by the Tax Foundation in DaimlerChrysler Corp. v. Cuno, 126 S.Ct. 1854.
More commonly, of course, he leverages the credible threat of successful litigation to negotiate favorable
resolutions for taxpayers outside the courtroom and outside of the public light. He has also helped effect
regulatory changes through the official and unofficial comment process and he has successfully obtained
unpublished policy documents through state-law FOIA claims, appeals, and litigation in Delaware,
Pennsylvania, New Jersey, and California.
Publications










Co-Author, “The BIS Case: A Big Shift in New Jersey’s Unitary Business Rule and the Taxation of
Corporate Partners,” J. of Multistate Taxation and Incentives (May 2012)
Co-Author, “New Jersey Adopts Expansive, Retroactive Nexus Regs,” State Tax Notes (8/15/11).
Co-Author, “Appellate Court Upholds New Jersey Throwout Rule,” J. of Multistate Taxation and
Incentives (Feb. 2011)
Co-Author, “New Jersey Won’t Appeal Interest Addback,” State Tax Today (Oct. 11, 2010)
Co-Author, “Resolving New Jersey Throwout Cases Without Waiting For the Courts’ Ultimate
Resolution in Whirlpool and Pfizer,” BNA Multistate Tax Report (Aug. 2010)
Co-Author, New Jersey NOL Carryovers: Get Four More Years Despite the Tax Division's Contrary
Views, RIA's Journal of MultiState Taxation, Vol. 18, No. 9 (January 2009)
Co-Author, Commerce Energy: Does Ohio's Sales and Use Tax, Imposed on Natural Gas, Violate the
Commerce Clause?, IPT Income Tax Report (November 2008)
Co-Author, Temporary Setback for Taxpayers on Throwout in New Jersey, IPT Income Tax Alert (July
2008)
Co-Author, Maryland Comptroller Assesses 'Wolves in Sheep's Clothing' to Generate Revenue, State
Tax Notes (Feb. 20, 2008)
Co-Author, "Delaware Wins Bank Apportionment Case but Loses Commerce Clause Argument," State
Tax Notes (11/16/07)





Co-Author, New Jersey Tax Court: "'No Reasonable Cause' for IHC Not to File Returns", State Tax
Notes (8/28/07)
Co-Author, "Company Files Summary Judgment Brief in New Jersey Throwout Case," State Tax Notes
(5/30/07)
Co-Author, "Tax Foundation Files Amicus Brief in Tax Nexus Case," State Tax Notes (5/8/07)
Co-Author, "Refund Deadline Looms for New Jersey Alternative Minimum Assessment," State Tax
Notes (3/27/07)
Co-Author, "Throwout and FIN 48 Pose Multiple Headaches for Passive Investment Companies in New
Jersey," BNA State Tax Management Portfolio, 2007 No. 5 (1/19/07)
Experience


2007—Reed Smith
1996—Dechert
Education


1996—J.D., cum laude, Villanova University School of Law
Member, Villanova Law Review
1993—B.A., magna cum laude, Temple University
Professional Admissions / Qualifications


Pennsylvania
New Jersey
Court Admissions

U.S. Supreme Court
Professional Affiliations


Certified member of the Institute for Professionals in Taxation, serving as the Vice-Chair of its Legal
Committee - Sales Tax
Chair of the institute's 2006 Sales & Use Tax Symposium Committee.
Member of the editorial board of RIA's Journal of MultiState Taxation and Incentives
Focuses on editing articles for that publication related to New Jersey developments
Notable Quotes








"New Jersey's 'Throwout Rule' Faces Repeal as Governor, Legislature Ramp Up Efforts to Stimulate
State's Economy", BNA Daily Tax Report (Nov. 19, 2008)
"N.J. Tax Court Rules on Apportionment Issues," CCH State Income Tax Alert, Vol. XVII, No. 12 (July
15, 2008)
"Pennsylvania Court Case Could Change the tax rules for Bank M&A," American Banker (June 24,
2008)
"U.S. Supreme Court Upholds Kentucky Tax Law Giving Interest Exemption to In-State Bonds", BNA
Daily Tax Report (May 23, 2008)
"U.S. Supreme Court Upholds Kentucky Municipal Bond Tax Exemption," State Tax Notes (May 20,
2008)
"Supreme Court Upholds State Municipal Bond Exemption", Law.com (May 20, 2008)
"New Jersey's Throwout Rule: The Division of Taxation Singles Out General Engines for Full Summary
Judgment", BNA Daily Tax Report (May 16, 2008)
"New Jersey Tax Court Oral Arguments in Throwout Case", State Tax Notes (April 3, 2008)









"Oral Argument Held in New Jersey Throwout Litigation", CCH State Income Tax Alert, Vol. XVII, No.
6 (April 1, 2008)
"Supreme Court Rebuffs Ohio Tax Break Challenge," The Wall Street Journal (May 2006)
"PA Business Privilege Tax Penalizes Manufacturers," The Philadelphia Inquirer (June 2006)
"Federally Chartered Banks Protected by Commerce Clause," CCH State Income Tax Alert, Vol. XVI,
No. 20
"New Jersey Tax Court Finds IRC § 338(h)(10) Transaction Creates Non-Operational Income," CCH
State Income Tax Alert, Vol. XVI, No. 15 (9/1/07)
"New Jersey Throwout Cases Progress," CCH State Income Tax Alert, Vol. XVI, No. 10 (6/1/07)
"Lanco and MBNA File Petitions for Certiorari With U.S. Supreme Court," CCH State Income Tax
Alert, Vol. XVI No. 6 (4/1/07)
"Deadline for New Jersey Refund Claims Nears," CCH State Income Tax Alert, Vol. XVI No. 6 (4/1/07)
"New Jersey Plaintiffs Attempt to Throw Out Throwout," State Tax Notes (2/13/07)
David J. Gutowski
Partner
Reed Smith LLP
Three Logan Square
Tel: +1 215 851 8874 ▪ +1 609 524 2028
Email: dgutowski@reedsmith.com
David is a partner in Reed Smith's State Tax Group. His practice involves multi-state sales and use and
corporate tax appeals, including representing clients in state tax litigation before administrative boards and
courts in various jurisdictions. David is a New Jersey registered lobbyist and has submitted comments on behalf
of COST concerning New Jersey regulations.
David is a frequent speaker on state and local tax issues. He has spoken on various state tax issues for the
Equipment Leasing Association, Strafford Legal Teleconferences, the Institute of Professionals in Taxation, and
COST. David is a regular contributor to such publications as the Journal of Multistate Taxation, Tax Analyst's
State Tax Notes, and BNA's Multistate Tax Report.
He is a member of the New Jersey Chamber of Commerce's Taxation Committee and a member of the
Pennsylvania and New Jersey Bars. David is a graduate of Franklin and Marshall College (B.A., 1995) and
Temple University School of Law (J.D., cum laude, 2000).
Articles and Publications













Quoted, “Settlement in New Jersey Nexus Case Leaves Unanswered Questions,” State Tax Notes
(3/12/15).
Quoted, “New Jersey Tax Court Order Could Spell Trouble for Throwout Rule,” State Tax Notes
(9/16/13).
Quoted, “New Jersey Division of Taxation Proceeding With Market-Based Sourcing,” State Tax Notes
(4/30/13).
Quoted, “New Jersey Alternative Minimum Assessment Looms Over P.L. 86-272 Companies,” State
Tax Notes (10/15/12).
Co-Author, “The BIS Case: A Big Shift in New Jersey’s Unitary Business Rule and the Taxation of
Corporate Partners,” J. of Multistate Taxation and Incentives (May 2012)
Quoted, “Broader Implications of New Jersey's Interpretation of Throwout Opinion,” State Tax Notes
(10/11/11).
Quoted, “New Jersey's Voluntary Disclosure Initiative for Media Companies,” State Tax Notes
(8/29/11).
Co-Author, “New Jersey Adopts Expansive, Retroactive Nexus Regs,” State Tax Notes (8/15/11).
Quoted, “New Jersey's Throwout Rule Continues to Throw Punches,” State Tax Notes (8/15/11).
Quoted, “Navigating New Jersey's New Business Tax Structure,” State Tax Notes (5/16/11).
Author, “COST Comments on New Jersey Financial Services Nexus Regulation,” State Tax Today (Apr.
7, 2011)
Co-Author, “Appellate Court Upholds New Jersey Throwout Rule,” J. of Multistate Taxation and
Incentives (Feb. 2011)
Co-Author, “New Jersey Won’t Appeal Interest Addback,” State Tax Today (Oct. 11, 2010)

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












Co-Author, “Resolving New Jersey Throwout Cases Without Waiting For the Courts’ Ultimate
Resolution in Whirlpool and Pfizer,” BNA Multistate Tax Report (Aug. 2010)
Co-Author, “Regulation of State Lobbying Activities: Traps for the Unwary,” State Tax Today
(9/14/2009)
Quoted, “New Jersey Court Rules Related Party Interest Properly Computed,” CCH State Income Tax
Alert, Vol. XVIII, No. 13 (8/1/09)
Co-Author, “New Jersey Tax Court Denies Apportionment, Provides Guidance on Equitable Relief
Provisions,” State Tax Today (5/28/2009)
Co-Author, “New Jersey NOL Carryovers,” J. of Multistate Taxation and Incentives (Jan. 2009)
Co-Author, “New Jersey Sidesteps Quill’s Physical-Presence Requirement,” J. of Multistate Taxation
and Incentives (Summer 2008)
Co-Author, “New Jersey Throwout: General Engines Singled Out for Full Summary Judgment,” BNA
Multistate Tax Report (Spring 2008)
Co-Author, “New Jersey to Gather and Publish Information About Corporations Receiving Subsidies,”
J. of Multistate Taxation and Incentives (Spring 2008)
Co-Author, “ Company Files Opposition Motion in New Jersey Throwout Case,” State Tax Today
(3/17/08)
Quoted, “Computation of Trucking Company's Apportionment Formula Affirmed” CCH State Income
Tax Alert, Vol. XVII, No. 1 (1/15/08)
Quoted, “Pennsylvania Supreme Court Affirms Transportation Apportionment Decision,” State Tax
Today (1/11/08)
Quoted, “New Jersey Tax Court Finds IRC § 338(h)(10) Transaction Creates Non-Operational Income,”
CCH State Income Tax Alert, Vol. XVI, No. 15 (9/1/07)
Co-Author, New Jersey Tax Court: “'No Reasonable Cause' for IHC Not to File Returns,” State Tax
Notes (8/28/07)
Quoted, “New Jersey Throwout Cases Progress,” CCH State Income Tax Alert, Vol. XVI, No. 10
(6/1/07)
Co-Author, “Company Files Summary Judgment Brief in New Jersey Throwout Case,” State Tax Today
(5/30/07)
Quoted, “Deadline for New Jersey Refund Claims Nears,” CCH Income Tax Alert, Vol. XVI, No. 6
(4/1/07)
Co-Author, “Refund Deadline Looms for New Jersey Alternative Minimum Assessment,” State Tax
Notes (3/27/07)
Quoted, “FIN 48 requirements create problems for state tax departments and professionals,” CCH
Income Tax Alert, Vol. XVI, No. 4 (3/1/07)
Quoted, “New Jersey Plaintiffs Attempt to Throw Out Throwout,” State Tax Notes (2/13/07)
Co-Author, “Throwout and FIN 48 Pose Multiple Headaches for Passive Investment Companies in New
Jersey,” BNA Multistate Tax Report, 2007 No. 5 (1/19/07)
Quoted, “Taxpayers challenge constitutionality and fairness of New Jersey's throwout rule,” CCH
Income Tax Alert, Vol. XVI, No. 1 (1/15/07)
Co-Author, “Partnership Factor Flow-Through: New Jersey Takes an Unusual Approach,” J. of
Multistate Taxation and Incentives, Vol. 15, No. 4 (July 2005)
Experience


2007—Reed Smith
2000—Dechert
Education


2000— J.D., cum laude, Temple University School of Law
Member, Villanova Law Review
1995— B.A., Franklin and Marshall College
Court Admissions


State Supreme Court - New Jersey
State Supreme Court - Pennsylvania
Professional Affiliations



Member of the New Jersey Chamber of Commerce Taxation Committee
Member of the New Jersey Business and Industry Association Taxation Committee
2011 and 2012 New Jersey Super Lawyers Rising Star
Robert E. Weyman
Associate
Reed Smith LLP
Three Logan Square
T: +1 215 851 8160
F: +1 215 851 1420
Email:rweyman@reedsmith.com
Rob is a senior associate in the State Tax Group. Rob assists clients with income, sales, and gross receipts tax
issues around the country. His practice includes state tax return position evaluation, audit defense,
administrative appeals, and litigation.
Rob co-leads Reed Smith’s growing Massachusetts state tax practice, which represents taxpayers on a widerange of Massachusetts income and sales tax issues at audit, through all administrative appeal levels, and at the
Appellate Tax Board. Rob is also a member of the Associated Industries of Massachusetts Tax Committee.
Rob is a frequent writer and speaker on a wide range of state tax issues, and has presented at COST, TEI and
other industry conferences. Rob co-authors Massachusetts SALT, Reed Smith’s Massachusetts state tax blog.
Publications







"Governor Baker Names Mark Nunnelly New Commissioner of Revenue," Massachusetts SALT, 26
March 2015
Co-Author(s): Brent K. Beissel
"Massachusetts Tax Developments - A Reed Smith Quarterly Update," Reed Smith Client Alerts,
6 March 2015
"A Quick Overview of Substantive Changes in Final Massachusetts Market Sourcing Regulation
830 CMR 63.38.1—From 10/30/14 Draft to Final," Massachusetts SALT, 5 January 2015
Co-Author(s): Michael A. Jacobs
"Massachusetts Promulgates Final Market Sourcing Regulation," Massachusetts SALT, 2 January
2015
Co-Author(s): Michael A. Jacobs, Brent K. Beissel
"AIM Proposes Improvements to Tax Rules," AIMBlog, 19 December 2014
"Interstate Truckers Beware—Massachusetts Aggressive Use Tax Policy on Vehicles Purchased
Out-of-State Upheld by ATB in Regency Transportation Case," Massachusetts SALT, 11
December 2014
"Massachusetts Market Sourcing Update: Report from Public Hearing on Market Sourcing and
Special Industry Apportionment Regulations," Massachusetts SALT, 4 December 2014
"N.J. Sales Tax—New Software Regulations Adopted," Reed Smith Client Alerts, 26 November
2014
Co-Author(s): David J. Gutowski
















"ATB Upholds Single-Factor Apportionment for Manufacturer," Massachusetts SALT, 21
November 2014
"Massachusetts Taxpayers Foundation Tax Conference Report," Massachusetts SALT, 5
November 2014
"Massachusetts Releases Second Draft of Market Sourcing Regulations," Massachusetts SALT,
30 October 2014
"ATB rules that orthopedic braces sold by orthopedic surgeon are exempt from sales and use
tax.," Massachusetts SALT, 27 October 2014
"Massachusetts Audits and Appeals Update—Transfer Pricing and Embedded Royalties,"
Massachusetts SALT, 27 October 2014
"Massachusetts Tax Developments - A Reed Smith Quarterly Update (3rd Quarter 2014)," Reed
Smith Client Alerts, 14 October 2014
"Supreme Judicial Court hears argument in First Marblehead Case," Massachusetts SALT, 7
October 2014
"Council on State Taxation 50 State Tax Development Summary – Massachusetts," Council On
State Taxation (COST), Fall 2014
"Massachusetts House Budget Would Include Tax Amnesty Program For 2015 Fiscal Year,"
Massachusetts SALT, 30 April 2014
"Are early termination fees charges for “telecommunications services” in Massachusetts?,"
"Commonwealth Faces Tough Questions from Appeals Court Justices In Sham Transaction
Case," Massachusetts SALT, 18 April 2014
"NJ Sales Tax - New Software Regulations to be Released Monday," Reed Smith Client Alerts,
18 April 2014
Co-Author(s): David J. Gutowski
"Corporate members of LLC can qualify as mutual fund service corporations," Massachusetts
SALT, 17 April 2014
"Department Extends Comment Period for Proposed Market Sourcing Regulations,"
State Taxation (COST), Spring 2014
"Massachusetts Releases Proposed Market Sourcing and Throwout Regulations, What Does it
Mean for You?," Massachusetts SALT, 25 March 2014


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












"Massachusetts Tax Developments - A Reed Smith Quarterly Update (4th Quarter 2013)," Reed
Smith Client Alert, 11 February 2014
"Massachusetts Tax Regulation Changes on the Way—Department of Revenue lays out plans for
amended and new regulations for 2014," Massachusetts SALT, 21 January 2014
"Massachusetts Department of Revenue posts audit manual," Massachusetts SALT, 13 December
2013
"Reminder for Taxpayers to File Refunds for the Defunct Massachusetts “Tech Tax”,"
Massachusetts SALT, 25 November 2013
"Welcome to Reed Smith’s Massachusetts SALT Blog," Massachusetts SALT, 25 November
2013
"Massachusetts DOR Announces Expanded, Permanent Tax Mediation Program," Massachusetts
SALT, 25 November 2013
"Massachusetts Tax Developments - A Reed Smith Quarterly Update (3rd Quarter 2013)," Reed
Smith Client Alert, 16 October 2013
State Taxation (COST), Fall 2013
"Massachusetts Delays Reporting for Software Services Tax; Repeal Imminent?," Reed Smith
Client Alert, 16 September 2013
"Massachusetts Rules Against Taxpayer on Treatment of Intercompany Debt—Again," Reed
Smith Client Alert, 6 September 2013
"Massachusetts Quarterly Update - A Reed Smith Quarterly Update (2nd Quarter 2013)," Reed
Smith Client Alert, 16 July 2013
"Massachusetts Department of Revenue and Appellate Tax Board Look to Expand Tax Dispute
Mediation Programs," Reed Smith Client Alert, 21 June 2013
"Massachusetts Tax Developments - A Reed Smith Quarterly Update (1st Quarter 2013)," Reed
Smith Client Alert, 25 April 2013
"Software Vendor Challenges Massachusetts’ Restrictive Policy on Multiple Points of Use
Certificates," Reed Smith Client Alert, 12 April 2013
"Reed Smith Massachusetts Quarterly Update," Reed Smith Client Alert, 4th Quarter 2012
"Title Transfer Not Enough to Establish Resale in Massachusetts," Reed Smith Client Alerts, 13
November 2009




"100 Days in the Making—Highlights of Pennsylvania's 2009-2010 Budget," Reed Smith Client
Alerts, 15 October 2009
"Massachusetts Supreme Judicial Court Provides Relief to Retailers – No Massachusetts UseTax Collection Obligation for Over-The-Counter Sales Occurring ," Reed Smith Client Alerts, 26
August 2009
"Massachusetts Supreme Judicial Court Upholds Economic Nexus in Geoffrey and Capital One
Decisions," Reed Smith Client Alerts, 13 January 2009
Co-Author(s): Michael A. Jacobs, Brent K. Beissel, Gordon Yu
Speaking Engagements

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


"Transfer Pricing in the State Arena," Tax Executives Institute, Inc., Malvern, Pennsylvania, 25
February 2015
"Over Seventy Pages; What Do You Need to Know? Massachusetts Releases Final Market
Sourcing and Throwout Regulations," Reed Smith Massachusetts Tax Teleseminar, 21 January
2015
"Agency Settlement Bureaus: Using Them Effectively (Using California, Massachusetts &
Pennsylvania as a Case Study)," COST Pacific Northwest Regional State Tax Seminar, Concord,
California, 24 June 2014
"Transfer Pricing Issues in the State Arena," "Elective Apportionment Under the MTC and State
Action," Tax Executives Institute, Inc., Studio City, California, 16 May 2014
"Massachusetts Releases Proposed Market Sourcing and Throwout Regulations, What Does it
Mean for You?," Reed Smith Massachusetts Tax Teleseminar, 10 April 2014
"Massachusetts Apportionment Update," Reed Smith Massachusetts Tax Teleseminar, 21 August
2013
"Massachusetts Sales Tax on Software and Related Services," Reed Smith Massachusetts Tax
Teleseminar, 7 August 2013
Employment History

2007 - Reed Smith
Notable Quotes




"Massachusetts DOR Releases Final Market-Based Sourcing Regs”, Tax Analysts, 6 January
2015
"Massachusetts DOR Revises Draft of Market-Based Sourcing Reg”, Tax Analysts, 3 November
2014
"Coming Clean: Voluntary Disclosure Agreements Carry Risk and Reward”, Tax Analysts, 4
August 2014
"Massachusetts Market-Based Sourcing Regs May Create Difficulties for Taxpayers,
Practitioners Say”, Tax Analysts, 27 March 2014
PENNSYLVANIA STATE DEVELOPMENTS
Lee A. Zoeller
Reed Smith LLP
Three Logan Square
Suite 3100
1717 Arch Street
Phone: 215-851-8850
lzoeller@reedsmith.com
Frank J. Gallo
Christine M. Hanhausen
Reed Smith LLP
Reed Smith LLP
Three Logan Square
Three Logan Square
Suite 3100
Suite 3100
1717 Arch Street
1717 Arch Street
Phone: 215-851-8860
Phone: 215-851-8865
fgallo@reedsmith.com chanhausen@reedsmith.com
I. INCOME/FRANCHISE TAXES
1. Act 52 of 2013: In 2013, the General Assembly passed, and then-Governor Tom Corbett
signed into law, Act 52. Act 52 includes the following:

Single Sales Factor: For taxable years beginning on or after December 31, 2012, all
business income shall be apportioned using a single sales factor.

Phase out of the Capital Stock and Foreign Franchise Taxes: The capital stock and
foreign franchise taxes now phase-out beginning in 2016.

Increase Cap on Net Loss Deductions: Act 52 slightly relaxed the limitations on the
amount of NOL deductions a taxpayer can utilize in a particular tax year. For tax
years beginning in 2014, the cap is the greater of $4 million or 25% of taxable income.
For tax years beginning after 2014, the cap is the greater of $5 million or 30% of
taxable income.

Related-Party Addback: For tax years beginning after December 31, 2014, Act 52
requires taxpayers to add back related-party intangible expenses and certain interest
expenses, unless an exception applies. The addback applies to related-party interest
expenses directly related to intangible expenses. The addback provision includes a
credit for tax paid by affiliated entities. The exceptions include:
Principal Purpose and Arm’s Length Exception: Transactions that (1) do not have as
the principal purpose the avoidance of Pennsylvania corporate income tax, and (2)
that are done at arm’s length;
Income Tax Treaty Exception: Transactions with a foreign affiliate in a nation that
has an income tax treaty with the United States; and
Conduit Exemption: Transactions where an affiliate paid a non-affiliate for the
intangible or interest expense, and is equal to or less than the taxpayer's
proportional share of the transaction.

Market-Based Sourcing of Services. Act 52 adds market-based sourcing for sales of
services; sales, leases, or rentals of real property; and rentals, leases, and licenses of
tangible personal property for tax years beginning on or after January 1, 2014.
Pennsylvania’s new market-sourcing rules apply to receipts from (i) services; (ii)
sales, leases and rentals of real property; and (iii) rentals, leases and licenses of
tangible personal property. (These new rules are effective for tax years beginning on
or after January 1, 2014. While other states have completely shifted to market-based
sourcing for receipts from all transactions other than sales of tangible personal
property, Pennsylvania’s shift is only partial. Pennsylvania has retained the cost-ofperformance rule for many types of receipts. In addition, the Department published
guidelines regarding the new market-sourcing rules. See below Section I.C.1.
US_ACTIVE-121608368.1
Reed Smith LLP
Sales of Services: Before Act 52, sales of services were sourced under the catch-all
rule for sales other than tangible personal property. This meant that services were
sourced to Pennsylvania only if more income-producing activity was performed in
Pennsylvania than in any other state, based on cost of performance. Under Act 52’s
new market-based sourcing regime, the default rule is that services are sourced to
where the service is delivered. If the delivery location cannot be determined, then
the services are sourced to where the customer places the order for the services. If
the location from which the services were ordered cannot be determined, then the
services are sourced to the customer’s billing address.
Sales, Leases, and Rentals of Real Property: Before Act 52, sales of real property
were sourced under the catch-all rule. Under Act 52, the new rule is that these
receipts are sourced to Pennsylvania if the property is located in Pennsylvania. If
the real property is located both inside and outside of Pennsylvania, the portion
sourced to Pennsylvania is based on the “percentage of original cost of the real
property” in Pennsylvania. This is a change from the often overlooked prior
statutory rule that sourced rental income from any property—including real
property—based on cost of performance.
Rentals, Leases, and Licenses of Tangible Personal Property: Before Act 52, rentals,
leases, and licenses of tangible personal property were sourced under the catch-all
rule. Under Act 52, the new rule is that these receipts are sourced to Pennsylvania if
the customer “first obtained possession” of the property in Pennsylvania. If the
property is subsequently taken out of Pennsylvania, taxpayers are permitted to use a
“reasonably determined estimate” to source only a portion of the sale to Pennsylvania
and the remainder outside Pennsylvania. Again, this is a change from the oftenoverlooked prior statutory rule that sources rental income from any property—
including tangible property—based on cost of performance.
Sales of Intangibles: Under Act 52, sales of intangibles continue to be sourced
according to cost of performance. Following the Department’s policy of interpreting
income-producing activity to mean the location where the customer received the
benefit, taxpayers can continue to elect whether to follow the statute (cost-based
sourcing) or the Department’s policy (market-based sourcing) in sourcing intangibles.
1. Can an Amended Return be Filed to Claim a Corporate Tax Refund? On February 11, the
Commonwealth Court, en banc, heard oral argument in a case in which the sole issue
before the court was a procedural one: whether an amended return can be used to claim a
corporate tax refund, or whether a corporate tax refund must be claimed by filing the
Department of Revenue’s refund claim form with the Department’s Board of Appeals.
There is no doubt that the taxpayer in this case timely filed an amended return, but the
Department’s position is that an amended return resulting in a refund is not the same as a
“petition for refund.” The Department argues that it is not required to take any action on
an amended return, and any action (or inaction) in response to an amended return cannot
be appealed. Moreover, the Department has also ignored its own regulation—and, in this
litigation, did not tell the court about the regulation—that allows a taxpayer time to cure
any deficiency in the form of a refund claim.
The taxpayer in this case filed an amended return within the three-year statute of
limitations for a refund claim. The taxpayer and the Department corresponded back-andforth about the changes reflected on the amended return during the three-year period for
claiming a refund. Then, after that three-year period had expired, the Department notified
the taxpayer that the Department did not agree with the amended return. According to the
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Department, the taxpayer was then unable to file a refund petition because the statute of
limitations was closed.
In practice, the Department seems to routinely accept amended returns that increase tax,
while often not acting on amended returns that decrease tax. For the taxpayer in the case
that was argued February 11, it will now be up to the court to decide whether the amended
return at issue was sufficient to preserve its right to a refund.
In should be noted that in many situations, an amended return will satisfy all the relevant
requirements for a refund petition under the Department’s regulation, 61 Pa. Code § 7.14.
So if you find yourself in a situation similar to the taxpayer in this litigation, you may still
be able to argue that you timely filed a refund petition. That said, if you are still within the
three-year limitations period, the safest bet is to file the Department’s refund claim form.
1. Department of Revenue Issues Market-Sourcing Guidance: The Pennsylvania Department
of Revenue has issued guidance on Pennsylvania’s new market-based sales-factor sourcing
statute. The Department did not promulgate a formal regulation, but instead issued an
“Information Notice.” We note that the Information Notice is mere “Revenue Information.”
The Department’s own regulations downplay the importance of a notice like this because,
under the regulations, Revenue Information is “material … issued for informational
purposes only and should not be relied upon.”
Nonetheless, the notice is a useful tool to understand the Department’s policies on salesfactor sourcing, even though it does not carry the same weight as a law (or a regulation, for
that matter). Under the statute, therefore, taxpayers continue to have much flexibility in
sourcing of receipts from services and intangibles.
For example, interest receipts and receipts from licensing or sales of intangibles are clearly
not covered by the market-sourcing rules. In addition, other classes of receipts fall into a
gray area between receipts from services and those from intangibles. We believe that, if it
benefits your company, you can take the position that the following receipts continue to be
sourced on a cost-of-performance basis:
- Finance leases, treated as such for GAAP purposes
- Franchise fees
- Data processing, telecommunications, and information services
D. Trends and Outlook for 2015–2016
1. Mandatory Combined Reporting: Gov. Wolf proposed mandatory unitary combined
reporting. This proposal is not new to Pennsylvania. In fact, combined reporting was a
major recommendation of Gov. Rendell’s Business Tax Reform Commission in 2004 (and
Wolf was a member of that commission). Various combined reporting proposals have
circulated in the House during recent years, but none of the proposals had enough support
to move forward.
2. Reduce Corporate Net Income Tax Rat: Gov. Wolf proposed to reduce the corporate net
income tax rate from 9.99% to 4.99% by 2018. This proposal is to increase the appeal of
combined reporting; however, it is not clear that combined reporting has enough support in
the legislature.
3. NOL Cap: While tax reform measures in recent years have increased the cap on the net
loss deduction, see above Section I.A.1, Gov. Wolf proposed to undo those changes and
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reduce the cap back to $3 million, or 12.5% of income. Any revenue generated by the cap
would ultimately have to be refunded to taxpayers if a court agrees that the flat-dollar cap
constitutes a uniformity violation. Wolf’s team justifies this proposal because “only
approximately 290” corporations would be affected by the reduced cap.
4. Department of Revenue Targeting Royalty-Earning “IP Holding Companies”: The
Department continues to occasionally assert sham transaction/economic substance
arguments to disallow royalty deductions for royalty payments to affiliates for intellectual
property rights. The Department is doing this in both the corporate net income tax and
franchise tax context.
In fact, the Board of Finance and Revenue recently issued a decision upholding the
Department’s disallowance of royalty deductions from federal taxable income (for income
tax purposes) and book income (for franchise tax purposes). According to the Board, “[t]he
royalty payments were illegitimate and lacked economic significance because the
transactions served no economic purpose and were engaged in for the sole purpose of
evading the payment of Pennsylvania corporate taxes.”
Taxpayers continue to appeal these issues to Commonwealth Court and those able to
demonstrate that their IP Holding Companies had economic substance have been able to
enter into favorable negotiated settlements.
It’s unclear whether the Department will continue to rely on sham transaction and
economic substance arguments in attacking IP Holding Companies going-forward now that
Pennsylvania’s new royalty addback statute is effective (for corporate net income tax
purposes only) for tax years beginning on or after January 1, 2015. That new statute also
codifies the Department’s “sham transaction” authority.
5. Market Sourcing vs. Cost of Performance: For receipt factor apportionment purposes prior
to 2014, Pennsylvania sources receipts from sales other than sales of tangible personal
property based on cost of performance. Nonetheless, the Department has, at times, taken
the position that market sourcing is necessary to fairly reflect the taxpayer’s business
activity in the State. Some taxpayers have also taken this position on their returns or in
refund claims. Recently a few costs of performance cases have settled in Pennsylvania.
Taxpayers that were assessed by the Department using a market-based approach received
a significant settlement percentage. Taxpayers that took the market sourcing position
themselves also received meaningful relief at settlement.
The new market-sourcing statute, which leaves plenty of room for interpretation as
written, continues to source sales of intangibles according to cost of performance.
Accordingly, the Department may continue to interpret this provision using a marketbased approach where beneficial to the Commonwealth.
II. SALES AND USE TAXES
A. Judicial Developments
1. Sales Tax Class Action Suits—Are They Allowed? Two class action suits against retailers
are pending in courts in Pennsylvania. In both cases, the plaintiffs allege that the retailer
collected sales tax on the full price of items when customers used discount coupons. The
plaintiffs are seeking refunds of the tax paid on the discounted portion of the purchases,
along with treble damages and attorneys’ fees.
This is not the first time a plaintiff has brought a sales tax class action suit in
Pennsylvania courts. The previous attempts, however, have been unsuccessful. For
example, in 2011, in the case of Stoloff v. Neiman Marcus Group, Inc., the Pennsylvania
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Superior Court held that "primary jurisdiction over the tax-refund claims belong to the
[Revenue] Department.”
The pending cases have bounced back and forth between federal and state courts in
Pennsylvania. At this time, whether these cases will face the same fate as the Neiman
Marcus case is unclear.
B. Administrative Developments
1. Revised Mining Exemption Guidance: On September 22, 2014, the Department of Revenue
issued an information notice on the sales and use tax exemption for tangible personal
property and services predominantly used directly in mining activities. Information Notice
Sales and Use Tax 2014-02: Natural Gas Mining (9/22/14).
Notably, the Department’s new guidance specifically lists items as taxable under the
theory that they fall within the “vehicles required to be registered” clause. Per the
Department, this includes vehicles registered under the International Registration Plan
and truck chassis to which a drilling unit or service rig is affixed. However, there are cases
pending at Commonwealth Court currently that specifically address the taxability of these
items. That is, the Department’s new guidance might go beyond the statutory reach.
C. Trends and Outlook for 2015–2016
1. Expand Reach of Sales and Use Tax and Increase the Rate: Gov. Wolf proposed increasing
the state sales and use tax rates to 6.6% and increasing the base to include services not
currently taxable and eliminating 45 exemptions currently in place. Wolf’s budget analysis
estimates a $1.5 billion revenue increase from these changes.
Las session, Senate Bill 76, a school district property tax reform proposal that also sought
to overall the sales and use tax to replace the property tax funds, circulated both the House
and Senate and was at the forefront of the debate.
However, SB 76 did not have enough support in the legislature. In addition, business
groups, including the Council on State Taxation (COST), expressed concern about SB 76
because it would effectively shift much of the tax burden from individuals to businesses.
Senate Bill 76 would also tax an array of services that have historically gone untaxed (e.g.,
legal and accounting services).
Given the history of SB 76, we can expect a lot of debate surrounding any major reform to
the sales and use tax base.
2. Treatment of Cloud Computing: Through a letter ruling, the Department of Revenue
changed its taxation of cloud computing from location of server to location of end-user.
Letter Ruling No. SUT-12-001 (May 31, 2012).
The taxpayer in the ruling used cloud computing in two ways. First, the taxpayer
purchased and installed software on remote servers that was accessed by its employees
through the cloud. The employees were not charged for using the software. Second, the
taxpayer installed software on remote servers and charged customers a fee to access the
software.
The Department determined that, as a result of recent case law and advances in
technology, a fee paid for accessing otherwise taxable software housed on a server is
subject to sales and use tax when the user is located in Pennsylvania. The Department
focused on the fact that a user accessing remote software exercises power and control over
the software. Similarly, the letter ruling states that if the software is located on a server in
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Pennsylvania, but all end users are outside of the Commonwealth, no tax is due.
If the billing address for the software is a Pennsylvania address, it is presumed that all
users are located in the Commonwealth. To rebut this presumption, the taxpayer must
identify the percentage of users in Pennsylvania by completing an exemption certificate.
The Department continues to modify its proof requirements for taxpayers seeking to
establish the number of end users located outside the Commonwealth. Additionally, the
Department recently asserted that all unassigned licenses will be considered Pennsylvania
receipts. The Department’s treatment will likely continue to evolve as various appeals
make their way through the administrative process and into Commonwealth Court.
III. PROPERTY TAXES
A. Judicial Developments
1. Senior Citizens Property Tax and Rent Rebates Assistance Act invalidated: In Muscarella
v. Commonwealth, the Commonwealth attempted to argue that the Department of
Revenue’s validly-promulgated regulation should be disregarded. The Commonwealth
Court rejected this argument. The Commonwealth Documents Law requires that the
notice-and-comment process cannot be ignored when the Commonwealth (or one of its
agencies) acts in a manner that amends or establishes a regulation.
Muscarella involved a challenge to Department of Revenue’s regulations interpreting the
property tax rebate available to senior citizens. The Department’s regulations permit a
decedent’s estate to claim the rebate if the decedent would have otherwise qualified under
the statute, but only if the decedent survived the entirety of the calendar year in which the
taxes were paid. The taxpayer in this case represented a class of estates that could have
claimed the rebate but for the fact that the decedent did not survive the entirety of the
calendar year in which the tax was paid.
The taxpayer argued that the Department’s regulations violate state and federal due
process and equal protection principles because they treated estates of decedents who
survived the entire year more favorably than estates of decedents who did not. The court
agreed with the taxpayer and declared the regulations invalid insofar as they limited the
ability of an estate to claim a rebate if the decedent did not live for the entire year in which
the tax was paid. This meant that any estate could claim the rebate so long as the
statutory requirements were met.
The Commonwealth, having lost on the constitutional issues, then turned to arguing that
the Department’s regulations should be disregarded entirely because the statute is clear on
its face that no estates may claim the rebate. Not only did the court disagree with the
Commonwealth on this point, but the court also noted that the Commonwealth Documents
Law precludes the Commonwealth from attempting to amend or void the Department’s
properly promulgated regulations. The court made it clear that the Department would
have to follow formal notice-and-comment procedures to make changes to the regulations.
Muscarella v. Commonwealth, 87 A.3d 966 (Pa. Commw. 2014).
2. Eligibility for Purely Public Charity Exemption: A few recent cases may spur more
challenges to the HUP status of not-for-profit entities of traditionally tax exempt
organizations.

Hospitals: The City of Pittsburgh sued University of Pittsburgh Medical Center
(UPMC) for back payroll taxes, alleging that UPMC did not qualify as a “purely
public charity” and, therefore, was not exempt from the payroll tax. UPMC argued
that it did not have any employees, so it could not owe payroll taxes—the medical
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center’s staff members were employees of UPMC’s subsidiaries. On June 14, the
Allegheny County Court of Common Pleas issued a ruling in favor of UPMC. The
court did not, however, address the issue of whether UPMC was a purely public
charity. The City could have filed a new claim against the UPMC subsidiaries, but
the City instead chose to drop the case. No. GD 13-005115, City of Pittsburgh v.
University of Pittsburgh Medical Center, (pending, Court of Common Pleas of
Allegheny County); Civil Action No. 13-565, 2013 WL 4010990 (W.D. Pa. August 6,
2013).

Universities: In January 2014, the Monroe County Court of Common Pleas stripped
a not-for-profit student housing corporation affiliated with East Stroudsburg
University (“ESU”) of its tax exempt status. ESU formed the not-for-profit
corporation, University Properties, Inc. (“UPI”), to construct, operate, and maintain
student housing for ESU.
UPI received a tax exempt status for the 2013 tax year, but the East Stroudsburg
School District appealed that exemption. At trial, the parties conceded that UPI
satisfied four of the five prongs of the HUP test, the constitutional test for whether
an organization is exempt from tax as a purely public charity. The School District,
however, contested that UPI did not donate or render “gratuitously a substantial
portion of its services.” The trial court agreed.
Relying on an unreported opinion of the Commonwealth Court, CHF-Kutztown LLC
v. Berks County Board of Assessment Appeals, the trial court found that neither the
provision of free services to resident advisors nor the donation of surplus revenue to
ESU demonstrated that UPI donated or rendered gratuitously a substantial portion
of its services. Rather, the trial court held that the focus of this prong should be on
whether the housing provided subsidies to ESU students who did not have the
financial resources to pay for housing. Because UPI failed to produce any
quantifiable evidence on this point, the trial court concluded that UPI did not satisfy
the HUP test and stripped UPI of its not-for-profit standing. East Stroudsburg Area
School District v. Monroe County Board of Assessment Appeals.

Constitutional Amendment Proposal: An amendment to the Pennsylvania
Constitution has been proposed to clarify that the General Assembly has the
authority to determine what is a “purely public charity.” The proposed
amendment would need to win further approval from the Legislature during
the upcoming session as well as voter approval in the form of a ballot
referendum.
B. Administrative Developments
1. Department Expands Property Tax Rent Rebate Program: Following the Court’s decision
in Muscarella v. Commonwealth, 87 A.3d 966 (Pa. Commw. 2014), discussed above at
III.A.1., on September 8, 2014, the Department of Revenue issued a press release
indicating that beginning with claim year 2013, the Department will pay property tax and
rent rebate claims filed on behalf of claimants who lived at least one day during a claim
year.
C. Trends and Outlook for 2015–2016
1. Property Tax Reform: Wolf repeatedly noted his proposal to decrease school district
property taxes and relieve Pennsylvanians of that tax burden. This is not new either.
There has been much debate regarding property tax reform. One of the big questions that
remained after the last legislative session was how to replace property tax revenue because
school district property taxes account for more than $13 billion of revenue annually.
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2. School District Property Tax Reform: As discussed above, major school district property tax
reform proposals circulated both the House and Senate last legislative session. Now, Gov.
Wolf is proposing a different property tax reform where additional funds are allocated to
the property tax relief fund which may be used by certain localities towards the homestead
credit.
IV. OTHER TAXES
A. Personal Income Tax
1. Judicial Developments

Limited Partners: In Wirth v. Commonwealth, the Pennsylvania Supreme
Court held that Pennsylvania was not prohibited from taxing nonresident
limited partners whose only connection to Pennsylvania was a minority
interest in a partnership.
The partnership purchased a building located in Pittsburgh, obtaining financing
through a nonrecourse mortgage. The partnership business continuously produced
losses which the nonresident partners could not use to offset other Pennsylvania
income. Eventually, the mortgage was foreclosed. Pennsylvania took the position
that the nonresident partners owed tax on their distributive share of the
partnership’s discharge of indebtedness income arising from the foreclosure.
The taxpayers argued: (1) the tax would violate due process because the partners had
no nexus with Pennsylvania; (2) the foreclosure was not a taxable event; (3) the “tax
benefit rule” prohibited tax on their discharge of indebtedness income; (4) the tax
violated the Uniformity Clause of the Pennsylvania Constitution; and (5) the tax
violated the federal Privilege and Immunities and Equal Protections Clauses. The
court ruled against the taxpayers on all issues. Wirth v. Commonwealth, 95 A.d 822
(Pa. 2014).
2. Administrative Developments

Intangible Drillings Costs: On December 2, 2013, the Department of Revenue
issued guidance on how to recover intangible drilling and development costs
associated with oil, gas and geothermal wells, under Act 52.
Pursuant to Act 52, a person must capitalize intangible drilling and development
costs (“IDCs”) and amortize those costs over a 10-year period. However, a taxpayer
may elect to currently expense up to one-third of the IDCs in the tax year in which
they are incurred and amortize the remaining costs. A person may expense a portion
of the IDCs for personal income tax purposes without regarding to federal treatment.
Informational Notice Personal Income Tax 2013-04: Intangible Drilling &
Development Costs (12/2/2013).
3. Trends and Outlook for 2015–2016

Increase Personal Income Tax Rate. Wolf proposed increasing the personal
income tax rate by more than 20%, from 3.07% to 3.7%. His budget estimates
a $2.4 billion revenue increase from this change alone. Importantly, this
increase to the personal income tax rate will impact small businesses
structured as flow-through entities or sole proprietorships that pay personal
income taxes on their business income.
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B. Bank Shares Tax
1. Legislative Developments

Act 52 Includes Changes to Bank Shares Tax: The changes under Act 52 of
2013 include:
A broader tax base: The Bank Shares Tax now applies to every “institution doing
business in this Commonwealth.” The legislation creates a new definition of “doing
business in this Commonwealth,” extending the tax to banking institutions that
generate at least $100,000 of gross receipts apportioned to Pennsylvania, and solicit
business in Pennsylvania; or hold a security interest, mortgage or lien in real or
personal property located in Pennsylvania.
A change in apportionment: Starting 2014, the Bank Shares Tax is apportioned using
only the receipts factor. That is, taxpayers will now disregard the payroll and
deposits factors.
A change in rate: The Bank Shares Tax rate is now .89% of the book value of total
bank equity capital.
Market Sourcing: Like the Corporate Net Income Tax, the receipts-factor sourcing
will be based on market principles.

Supreme Court Validates Bank Shares Tax: On December 27, 2013, the
Pennsylvania Supreme Court held that the statutory method for computing
the Bank Shares Tax for banks engaging in merger transactions was
constitutional.
The Lebanon Valley constitutional challenge focused on the unique tax base for the
Bank Shares Tax, which was a six-year average of a bank’s equity. More specifically,
the constitutional issue involved how to compute the tax base for a bank that was
involved in a merger. Under the statute, the tax base for a bank involved in a merger
was computed by combining the premerger equity of the merged banks. That
provision was the subject of litigation in First Union National Bank v.
Commonwealth 885 A.2d 112 (Pa. Commw. Ct. 2005) almost a decade ago, and in
that case the court held that the historical equity of an out-of-state bank could not be
combined with that of an instate bank when the two merged. As a result of First
Union, the survivor of a merger of an out-of-state bank into an in-state bank typically
could end up paying less tax than an otherwise similar survivor of a merger of two
instate banks.
Lebanon Valley involved the merger of two instate banks. Lebanon Valley argued,
under the uniformity clause of the Pennsylvania constitution, that its merger must
be treated the same as the merger of an out-of-state bank into an instate bank—that
is, the survivor of a merger of two instate banks must be entitled to dilute its tax
base in the same manner as the survivor of a merger of an out-of-state bank into an
instate bank.
After lengthy litigation, the Pennsylvania Supreme Court concluded that it was
permissible for the legislature to classify these two transactions differently because
"[t]he merger or combination of two institutions, both previously taxed on their
historic average values, is a different scenario than a combination that introduces
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previously untaxable assets to the calculation." As a result, the court held that the
different treatment did not violate constitutional uniformity principles.
The Bank Shares Tax was substantially amended effective January 1, 2014. Thus,
the Lebanon Valley decision is of limited impact on a going forward basis. Lebanon
Valley Farmer’s Bank v. Commonwealth, 83 A.3d 107 (Pa. 2013).

Department of Revenue Releases Receipts Factor Notice: On April 14, 2014,
the Department issued a notice intended to clarify the changes under Act 52.
Under the notice, the Department instructs taxpayers with receipts from
investment assets or activities to use Method 2 under the statute for
determining the receipts from both trading and investment assets and
activities to be included in the numerator of the receipts factor. Information
Notice – Bank Shares Tax 2014-01: Bank Shares Tax Receipts Factor
Apportionment (4/14/14).

Bank Shares Tax Rate Increase: Gov. Wolf proposed to undo part of the
change made by Act 52 of 2013 and increase the bank shares tax rate from
0.89% back to 1.25%.
C. Gross Receipts Tax

Limit on Telecom Gross Receipts Tax: Several taxpayers are challenging the
Department of Revenue’s broad interpretation of the telecommunications
gross receipts tax in cases pending in Commonwealth Court. Verizon, the
taxpayer in the lead case, argued that Bell Telephone was wrongly decided by
the Pennsylvania Supreme Court in 1943.
In July 2013, the court issued its decision, concluding that the Department’s
interpretation went too far. Specifically, the court concluded that receipts from nonrecurring service charges are not subject to gross receipts tax, but receipts from
private line and directory assistance charges are taxable.
The gross receipts tax is imposed on receipts from “telephone messages transmitted”
(traditional telephone messages) and receipts from “mobile telecommunications
service messages” (cell phone messages). The Verizon case involved the portion of
the statute imposing tax on traditional telephone messages, so the controversy
focused on the meaning of the phrase “telephone messages transmitted.” Specifically,
the issue was whether three distinct types of receipts are subject to tax: receipts from
certain non-recurring service charges; directory assistance charges; and flat-rate
charges for private lines.
The statutory language at issue—“telephone messages transmitted”—has existed
since 1929. And in the 1943 case of Commonwealth v. Bell Telephone Company of
Pennsylvania, the Pennsylvania Supreme Court interpreted this language very
broadly. Verizon argued that Bell Telephone was wrongly decided. Alternatively,
Verizon argued that the receipts at issue are not taxable even under the Bell
Telephone framework. The Commonwealth Court did not revisit the Bell Telephone
decision itself. Instead, the court analyzed Verizon’s receipts under the framework
established by Bell Telephone.
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Both parties filed appeals to the Supreme Court. The Supreme Court heard oral
argument on March 10. However, the Court limited the oral argument to the issue
involving the non-recurring service charges, which consists of three different charges:
(i) installation of telephone lines; (ii) moves of, and changes to, telephone lines and
services; and (iii) repairs of telephone lines. Verizon Pennsylvania, Inc. v.
Commonwealth, Pennsylvania Supreme Court Docket No. 70 MAP 2013.
D. Severance Tax and Act 13 Marcellus Shale Impact Fee

Portions of Act 13 Declared Unconstitutional: On December 19, 2013, the
Pennsylvania Supreme Court ruled that certain provisions of Act 13 are
unconstitutional (Act 13 contains the 2012 amendments to the Pennsylvania
Oil and Gas Act).
Act 13 gave each county the power to impose a $40,000 to $60,000 flat fee—the
"Impact Fee"—for a well’s first year of operation, with the amount of the fee declining
over the next 15 years. The Act did not contain any refund procedures for Impact
Fees paid in error. And although enacted in 2012, Act 13 also authorized a
retroactive Impact Fee on all wells drilled before 2012.
The Act further included zoning and setback requirements, requirements that the
Robinson Township court found to be unconstitutional.
Now, the Supreme Court has ordered the Commonwealth Court to determine if the
unconstitutional zoning and setback provisions are "severable" from the rest of the
Act. On March 13, 2014, the Commonwealth Court issued an Order directing the
parties to brief specific issues which does not include the impact fee. Thus, it appears
that the impact fee will survive the Court’s ruling that will follow the May 14, 2014
en banc hearing.
Nevertheless, it is still possible that the impact fee will be invalidated in the pending
litigation. Even if the Commonwealth Court allows the Impact Fee to remain in
effect, there is still a question of whether the retroactive component of the fee
violates the State and federal due process. The retroactivity issue is only relevant to
fees paid on wells drilled before 2012. Robinson Township v. Commonwealth, No. 63
MAP 2012, December 19, 2013.

Severance Tax on Natural Gas Drilling. Gov. Wolf proposed a 5% severance
tax on the “value of the natural gas extracted at the wellhead plus $.047 per
thousand cubic feet of gas severed.” This means Pennsylvania would go from
no severance tax to a dual “value” and “volume” based tax.
The “severance tax” would replace the existing Impact Fee, which currently provides
funds directly to the counties. Under Wolf’s proposal, a portion of the severance tax
revenue would be distributed directly to the counties.
E. Unclaimed Property

Change in Dormancy Period Proposed: As part of his 2014-2015 budget, thenGov. Corbett signed legislation that reduces the holding period for certain
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property from 5 years to 3 years, which is expected to generate a $150-million
one-time revenue increase. It also established registration requirements for
non-lawyer third-party finders.
Under Pennsylvania’s unclaimed property law, Pennsylvania-incorporated entities
that hold certain property for the actual owners, including uncashed checks and
outstanding credits, must remit that property to Pennsylvania after a period of
inactivity, referred to as the dormancy period. For example, Pennsylvaniaincorporated entities must pay unidentifiable credits over to Pennsylvania after the
dormancy period. Further, any vendors holding credits to Pennsylvania-based
businesses must pay those credits over to Pennsylvania after the dormancy period.
Once the property has been remitted, the Commonwealth is supposed to hold the
property in trust for owners to claim. However, in reality, the value of the unclaimed
property remitted to the Commonwealth goes directly to the General Fund as
revenue. The state returns only an estimated 5 percent of the almost $2 billion of
unclaimed property it holds each year.
F. Local Taxes

Safe Harbor from Local Business Privilege Taxes: On May 6, then-Governor
Corbett approved Act 42, which limits a municipality’s authority to impose a
local Business Privilege Tax (“BPT”). Under Act 42, a BPT may only be
imposed on: taxpayers that have a “base of operations” in that taxing
jurisdiction; or taxpayers that conduct business more than 15 calendar days
per year in that taxing jurisdiction. In other words, Act 42 creates a safe
harbor protection from tax for taxpayers conducting business 15 days or less
in a taxing jurisdiction. In the event a taxpayer has a “base of operations” in
one jurisdiction and also conducts business in another jurisdiction for more
than 15 days, the 15-day jurisdiction takes priority—that is, amounts taxed
by the 15-day jurisdiction cannot be taxed by the base-of-operations
jurisdiction.
The legislation is a response to the Pennsylvania Supreme Court’s 2007 decision in
Rendina, Inc. v. Harrisburg and the Harrisburg School District. In Rendina, the
Court held that a municipality could impose BPT on a taxpayer that lacked a
permanent base of operation within the municipality.

Philadelphia Community Development Corporation Contributions Credit:
Philadelphia has amended its city code (Chapter 19-2600 “Business Income
and Receipts Taxes”) to increase the number of businesses that may obtain a
credit against business income and receipts taxes upon contributing to
certain community development corporations engaged in neighborhood
economic development activities in the city. The ordinance increases the
number of businesses from 35 to 40 beginning with tax year 2013. Phila. Ord.
130012, eff. tax year 2013.

Supreme Court to Rule On Granting Refunds in lieu of Credits: The
Pennsylvania Supreme Court has agreed to review the Pennsylvania
Commonwealth Court’s decision in City of Philadelphia v. Philadelphia Tax
Review Board, et al., a decision that granted over $6 million in Philadelphia
tax credits to taxpayers who filed refund claims based on federal audit
changes—even though the statute of limitations for refunds had expired.
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The taxpayers timely reported and paid their 2003 and 2004 Philadelphia Business
Income & Receipts Tax (“BIRT”). Then, in 2009, after the 3-year limitations period
for filing a refund claim expired, the taxpayers’ 2003 and 2004 federal taxable income
was reduced upon audit. The taxpayers properly filed amended BIRT returns
reporting the federal audit changes. The taxpayers also petitioned for refunds of the
resulting overpayments. The Philadelphia Department of Revenue refused to issue
refunds because the petitions were filed after the expiration of the 3-year statute of
limitations.
The taxpayers appealed to the Philadelphia Tax Review Board. The Board agreed
with the Department that the taxpayers’ refund petitions were untimely, but it
awarded the taxpayers credits equal to the amount of tax overpaid. The
Commonwealth Court affirmed the denial of the refund claims and upheld the award
of credits to the taxpayers. According to the Commonwealth Court, the three-year
limitations period on refunds was inapplicable to credits; unlike refunds, taxpayers
could receive credits for overpayments at any time. The Commonwealth Court denied
rehearing, and the city filed a Petition for Allowance of Appeal with the Pennsylvania
Supreme Court. The Supreme Court agreed to hear the appeal, and briefing has
already begun. City of Philadelphia v. Philadelphia Tax Review Board, et al.,97 & 98
C.D. 2013.

Court Concludes That Localities May Not Impose Tax on Rental Income: On
September 19, 2014, the Commonwealth Court issued a decision concluding
that Lower Merion Township (“the Township”) may not impose its business
privilege tax (“BPT”) on a taxpayer’s gross receipts from rental income.
The Township imposes a BPT on “[e]very person engaging in a business, trade,
occupation or profession in the Township” at the rate of 1.5 mills on gross receipts.
This BPT is authorized under the Local Tax Enabling Act (“LTEA”); however, it is
also subject to restrictions under the LTEA. One of those restrictions prohibits
localities from imposing a tax on “leases or lease transaction s.” 53 P.S. §
6924.301.1(5)(1).
The taxpayers owned and leased real property in the Township. The Township
imposed its BPT on rental receipts from those properties. The trial court sided with
the Township and found the imposition of tax permissible because the BPT is
imposed on a taxpayer’s aggregate annual income/proceeds from the lease, and not on
each individual lease transaction.
The Commonwealth Court framed the issue as a matter of statutory construction
involving an exclusion from tax. As a result, the court strictly constructed the
statutory provision against the Township. Ultimately, the Commonwealth Court
agreed with the taxpayers and concluded that the LTEA prohibited a locality from
imposing any tax on leases or lease transactions. That is, because the BPT would be
imposed on the lease revenue at a rate of 1.5 mills, it was a tax on leases in violation
of the LTEA.
Any taxpayer that earns revenue from leases or rentals of property and pays local
BPT in Pennsylvania (not including Philadelphia taxes) should consider whether it is
entitled to a refund.

Court Invalidates Scranton’s Commuter Tax: On September 30, 2014, the
Lackawanna County Court of Common Pleas struck down a recently enacted
Scranton ordinance that imposed a .75% earned income tax solely on
nonresidents. Scranton enacted the tax pursuant to the Municipal Pension
Funding Standard and Recovery Act, which permits a municipality to
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increase its tax rate on earned income above maximum rates set by otherwise
applicable laws.
The taxpayers argued that the tax was unlawful because it was imposed exclusively
on nonresidents. The court agreed. Because the Municipal Pension Funding
Standard and Recovery Act was silent on the issue, the court looked to other laws
governing Scranton’s taxing power: The Local Tax Enabling Act, the Home Rule
Charter and Optional Plans Law, and the Municipalities Financial Recovery Act.
The court found that these laws all placed limitations on Scranton’s power to tax
nonresidents. The court inferred from these limitations that Scranton’s earned
income tax was impermissible.
The City has until October 30, 2014 to appeal the decision to the Commonwealth
Court. In re City of Scranton Ordinance No. 36 of 2014, No. 2014 CIV 4799, (Sept. 30,
2014).

Commonwealth Court Finds Freight-Brokerage Provider Not Public Utility:
On October 15, 2014, the Commonwealth Court issued a decision concluding
that a taxpayer acting as a middleman between shippers and PUC-licensed
freight carriers was subject to the City of York’s (“City”) business privilege
tax (“BPT”), because the taxpayer did not qualify for the “public utility
service” exemption.7 The taxpayer in this case did not engage in any
transportation activities itself. Rather, its business was charging shippers a
fee and then negotiating for shipment by a licensed carrier and remitting
shipping costs to the carrier.
The City’s BPT is subject to the limitations of the LTEA, which exempts from BPT
gross receipts derived from transactions involving the rendering of “public utility
services.” In this case, the court concluded that the taxpayer was not engaged in
rendering a public utility service because it simply “facilitates the buying of shipping
services but does not, itself, transmit, deliver or furnish transportation of property –
the hallmark rendering of any public utility service as a common carrier.”

Philadelphia Sustainable Business Credit Regulation: The Philadelphia
Department of Revenue has issued Business Income and Receipts Tax
Regulation 505, effective March 11, 2013, to assist in administration of the
sustainable business tax credit against Philadelphia business income and
receipts tax. The regulation provides definitions, information on filing
applications, addresses eligibility requirements and the amount of the credit.
The regulations provide that businesses must apply for certification as a
sustainable business on a form specified by the Mayor's office of
Sustainability, and all annual certifications will be granted on a first come,
first serve basis. Eligible businesses will receive a tax credit equal to $4,000
for tax years 2012 through 2017.
G. Slot Machine Tax

Supreme Court Liberally Construes Deductions from Slot Machine Tax: In
Greenwood Gaming & Entertainment, Inc v. Commonwealth, the
Pennsylvania Supreme Court issued a taxpayer-friendly decision interpreting
the statutory provision at issue as an exclusion (interpreted in favor of the
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taxpayer) rather than an exemption (interpreted in favor of the
Commonwealth).
The Greenwood Gaming case involved Pennsylvania’s tax on slot machine revenue.
Under the statute, the calculation of the tax base—which is called Gross Terminal
Revenue (“GTR”)—starts with wagers received by a slot machine and then subtracts:
amounts paid out to players as a result of playing a slot machine; amounts paid to
purchase annuities to fund prizes payable to players as a result of playing; and
personal property (other than comps such as travel expenses, food, refreshments,
lodging, or services) distributed to players as a result of playing.
Greenwood Gaming, which operates Parx Casino, argued that it should be entitled to
deduct from GTR the cost of vehicles, concert tickets, sporting event tickets, and gift
cards given to patrons with slot-player cards. The Commonwealth argued that the
statute requires a direct, traceable connection between slot play and the personal
property given to the player. According to the Commonwealth, only payouts reflected
in the Department of Revenue’s central control computer system (“CCCS”)—which
tracks GTR—are permitted to be deducted. And the only amounts reflected in the
CCCS are those that are directly traceable to a particular instance of slot play. The
Commonwealth Court ruled in favor of the Commonwealth, holding that the only
payments that are deductible are those made “as a direct and immediate result of
physically operating a slot machine.”
The Supreme Court reversed. As noted above, the court concluded that the definition
of GTR created exclusions, which are interpreted in favor of the taxpayer. As a
result, the court interpreted the phrase “as the result of playing a slot machine” to
mean that payments can still be deducible even if “tied more generally to slot
machine play at the gaming facility,” rather than being “tied to specific machines.”
As a result of this decision, a casino can now take a deduction from its tax base for
the cost of promotional giveaways to slot players. The combined state and local tax
rate imposed on GTR is 55%, so without this deduction, many giveaways were
impractical.
The case was remanded to Commonwealth Court to make a factual determination of
whether the promotional items given away by Parx were tied to slot play at all.
Greenwood Gaming and Entertainment, Inc. v. Commonwealth, 90 A.3d 699 (Pa.
2014).

Department Issues Bulletin on Promotional Items: In response to Greenwood
Gaming, 90 A3d 699 (Pa. 2014), on March 27, 2015, the Department of
Revenue issued the attached Gaming Tax Bulletin stating the Department’s
policy on the deductibility of promotional items for purposes of calculating
gaming taxes.
The Department limits the deduction of promotional items to a specified group of four
categories of prizes awarded as the result of a slot machine or table game wager. In
addition, prior to the start of the promotion, the licensed venue must give the
Department electronic notice of the pending promotion. The bulletin also outlines
return filing and documentation requirements.
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V. ADDITIONAL NOTES OF INTEREST
A. Update on the Board of Finance and Revenue. The overhaul of the Board of Finance and Revenue
became fully effective April 1, 2014. The newly structured Board consists of three members—two are
appointed by the Governor (and confirmed by the Senate), and the third is the Treasurer or the
Treasurer’s designee.
Argument Procedure: Hearings before the new three-member Board have proved to be a meaningful
opportunity for taxpayers to present issues and have them decided by an independent tax tribunal.
The taxpayer presents its argument first. The Department is then permitted to present its
arguments and respond to any questions the Board may have. (Lawyers from the Department of
Revenue’s Office of Chief Counsel have been representing the Department at these hearings and
presenting legal arguments to the Board.) The taxpayer is then given an opportunity to rebut the
Department’s argument.
Operating Rules: The Board released Operating Rules that set forth the procedures for the new
Board. The Treasury Department initiated the formal regulation process with the Independent
Regulatory Review to formalize these operating rules.
The following are some important provisions of the Operating Rules. The rules, however, are
flexible: they are to be liberally construed such that the Board may, at any stage of the proceeding,
waive a particular requirement, including a deadline, where appropriate.
Ex Parte Communication: While ex parte communications between a party and the Board’s
staff are not permitted under Act 52, a party can waive its right to participate in such
communications. Furthermore, where a party is given notice and an opportunity to
participate, the failure of a party to participate in a communication will be deemed a waiver
by that party.
Communication with Board Members: The Board members may not participate in any
communications with either party regarding the merits of a case, outside of the hearing.
Initial Submissions: Unless a different time is provided by the Board, all submissions must
be submitted to the Board no later than 60 days after the filing of the petition.
Responses: The opposing party has 30 days to respond to any submission. The Board is not
required to review submissions and responses filed after the prescribed deadline.
Compromise: If a petitioner offers a compromise, it must submit a completed Board of
Finance and Revenue Compromise Form either with the petition or within 30 days of filing
the petition. For the Board to issue a compromise order, the parties must agree to waive any
right to file an appeal that raises the same issues for the tax period(s) and liability(ies)
addressed in the compromise order.
Request for Reconsideration: A party may file a request for reconsideration of the Board’s
order within 15 days of the decision.
Publication or Orders: The Board is required to publish all final orders on the Internet.
Prior to an order being published, the Board will redact certain confidential taxpayer
information. Taxpayers are permitted to participate in the redaction process.
B. Possible Change to the Uniformity Clause of the Pennsylvania Constitution: Subcommittees have
been formed to review specific provisions of the Pennsylvania constitution to determine whether
those provisions need to be “modernized.” One of the provisions being studied is the uniformity
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clause which provides that “all taxes shall be uniform, upon the same class of subjects…” within the
same taxing jurisdiction. Because of this uniformity provision Pennsylvania cannot impose a
graduated income tax rate, cannot tax residential and commercial property at different rates, and
also cannot issue “spot assessments” but instead must reassess all property in a county instead of
singling out specific property for reassessment. There is some concern that “modernization” of the
uniformity clause may undo these taxpayer-friendly protections.
C. “Pay-to-play” at the Board of Appeals? The Department has taken the position that the only issues
that can be addressed by the appeal boards in a corporate net income or franchise tax assessment
appeal are ones directly related to the adjustments made by the Department in its assessment. (In
the past, a Pennsylvania taxpayer could raise any issue in an appeal of a "settlement," i.e.,
assessment.) This position can create a problem when a taxpayer agrees with the Department's
adjustment, but disagrees with the overall tax assessed because other issues would reduce the
amount of tax liability. Now, for a taxpayer to request an adjustment to its tax liability, the
taxpayer must first pay the assessment, and then file a refund claim raising those issues that are not
directly related to the assessment.
Additionally, the Department is automatically dismissing refund petitions where an amount remains
unpaid on the taxpayer’s account for the tax year at issue.
D. Payment of Assessment Opens Appeal Period. In the case of amounts paid as the result of an
assessment, determination or settlement, a petition for refund must be filed within 6 months of the
actual payment of tax. Previously, a taxpayer was required to file within 6 months of the mailing
date of the notice.
VI. BIOGRAPHIES
A. Lee A. Zoeller
Lee is the Practice Group Leader of Reed Smith’s State Tax Group. He works closely with clients to
determine the best course of action--from strategy development through litigation--to resolve the
taxpayer’s issues. In addition to representing clients in state tax appeals, Lee also provides multistate advice to corporations on various state income, franchise and sales tax issues--and works with
these corporations to implement any resulting tax-saving strategies.
B. Frank J. Gallo
Frank is a partner in Reed Smith’s State Tax Group. He focuses his practice on state tax planning
and controversy matters, specializing in income/franchise and sales and use taxes. He advises
clients in a variety of industries, with an emphasis on the pharmaceutical, financial services, and
consumer product industries.
C. Christine M. Hanhausen
Christine is an associate in Reed Smith’s State Tax Group. She handles multi-state corporate tax
and sales and use tax issues and specializes in Pennsylvania taxes. She represents clients in a widerange of industries in connection with state tax return positions, audits, administrative appeals, and
litigation in various jurisdictions.
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RHODE ISLAND STATE TAX DEVELOPMENTS
SPRING 2015
Kirk Lyda
JONES DAY
Dallas, TX 75201
(214) 969-5013
klyda@jonesday.com
Lawyerly Caveat: The views set forth herein are the personal views of the authors and do not necessarily reflect
those of the law firm with which they are associated.
I.
CORPORATE INCOME TAX
A.
Overview
Rhode Island imposes a corporate income tax on the net income of corporations incorporated or doing
business in the state. Taxable net income is generally equal to federal taxable income, with certain additions and
subtractions required by Rhode Island law.
The Rhode Island budget bill signed June 19, 20141 adopted combined reporting, single sales factor
apportionment, and market-based sourcing. The changes reduced the corporate income tax rate to 7%, repealed the
franchise tax, and created a non-binding independent appeals process to resolve certain apportionment disputes.
The changes apply to tax years beginning on or after January 1, 2015.
Combined reporting is required for corporations that are directly or indirectly more than 50 percent owned
by a common owner (or owners) and are engaged in a unitary business. Certain types of businesses are excluded
from the combined reporting requirement. An affiliated group of corporations can generally make a five year,
irrevocable election to file on a consolidated basis (in lieu of unitary combined).
The prior three factor apportionment formula is replaced by a single sales factor. Sales are generally
sourced using market sourcing, applying a Finnigan approach to sales by group members that lack nexus with
Rhode Island. The bill contains transition rules for net operating losses and credits from tax years prior to January
1, 2015.
In mid-2014, the Taxation Division issued a draft regulation and statement of principles interpreting the
above legislative changes. Comments were originally due in December 2014 but were being accepted after that date.
The full text of these documents is available on the Tax Division’s website at
http://www.tax.ri.gov/Tax%20Website/TAX/combinedreporting/
B.
1.
2014 Legislative Session
See discussion of the major changes made by House Bill 7133 above.
1
Rhode Island House Bill 7133.
DLI-266523941v1
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2013 Budget Bill
The 2013 Rhode Island budget bill (House Bill 5127) made a number of corporate income tax changes.
Effective January 1, 2014 (for assets placed in service after 2013), assets may be expensed as provided in IRC § 179.
Effective for tax years beginning after 2013, taxpayers are required to add back domestic production activity
deductions claimed under IRC § 199. Effective July 3, 2013 taxpayers may claim a historic rehabilitation credit
against the corporate income tax for a certain percentage of qualifying rehabilitation expenditures for the
substantial rehabilitation of a certified historic structure, subject to limitations. Also effective July 3, 2013, the total
credit for certain contributions to scholarship organizations is increased to $1.5 million (up from $1 million).
C.
1.
Administrative Decisions Now Available Online
The Tax Division has started posting copies of administrative decisions online at:
http://www.tax.ri.gov/AdministrativeDecisions/
Currently, administrative decisions for 2011, 2012, 2013, and 2014 are online.
2.
Rhode Island Ruling Request No. 2011-04 (February 16, 2011) – Company’s President Who
Had Check-Writing Authority and Also Signed Returns Is Considered a Responsible Officer
for Withholding Tax Purposes
Ruling No. 2011-04 addresses corporate responsible officer liability in the context of personal income tax
withholding. Given the dearth of responsible officer authority in Rhode Island, however, the implications of the
approach taken in this ruling should be considered more broadly.2
After learning that the company in question was in bankruptcy, the Division of Taxation initiated a review
of the company’s records. Following its review, the Division issued an estimated assessment for unpaid withholding
tax. A corresponding assessment was also issued against the company’s president as a responsible officer.
Under R.I. Gen. Laws § 44-30-76, every employer, including every officer and employee of a corporation who
is under a duty to deduct and withhold Rhode Island personal income tax, is liable for paying the withholding tax.
Based on a reading of federal case law―Fiataruolo v. U.S., 8 F.3d 930 (2d Cir. 1993)―the hearing officer concluded
that the inquiry into potential responsible officer liability focused on whether an individual could have exerted
influence over the business. The hearing officer cited a “number of factors” that are considered in making this
determination, no one of which is determinative. These factors include whether the person: (1) is an officer or board
member; (2) has an ownership interest; (3) is active in day-to-day affairs; (4) has the ability to hire and fire
employees; (5) makes decisions regarding payment of debts or taxes; (6) controls bank accounts and records; and
(7) has check-signing authority. On the basis of the record (the officer in question did not appear at the hearing), the
hearing officer concluded that as the president of the company, who signed checks and tax returns on behalf of the
company, the officer had responsibility to withhold and remit the tax.
3.
Adoption of Regulations Regarding the Exclusion of Distributive Share of Public Service
Income
Regulation CT 10-12, effective January 1, 2011, implements R.I. Gen. Laws § 44-11-12(2) allowing a
deduction of the distributive share of the taxable income of a public service corporation liable for the public service
corporation tax. The regulations provide the following examples:
2
See discussion of Hearing Decision No. 2011-03.
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Example 1: A utility company sells tangible, intangible or real property not devoted to its utility operation.
Such net gain distribution is a taxable transaction for Chapter 13 [Public Service Corporation Tax] purposes
and therefore is excludable for Chapter 11 [Business Corporation Tax] purposes.
Example 2: A utility company sells tangible, intangible or real property devoted to its utility operation. Such
net gain distribution is a nontaxable transaction for Chapter 13 [Public Service Corporation Tax] purposes
and therefore is not excludable for Chapter 11 [Business Corporation Tax] purposes.
D.
Trends/Outlook for 2015/2016
1.
Combined Reporting
In our update for Spring 2014, we advised that the adoption of mandatory combined reporting remained a
serious threat in Rhode Island. After years of studying the issue, including requiring pro forma combined reports,
Rhode Island has now joined the growing number of combined reporting states. As we have seen with other states
that have recently adopted combined reporting, important policies and procedures will be analyzed and
implemented in the months and years to come. It will be important for companies engaging in business in Rhode
Island to follow and perhaps play a role in shaping those policies and procedures. The regulation implementing
these important changes is being developed.
II.
SALES AND USE TAX
A.
Overview
The Rhode Island sales tax is imposed at the rate of 7 percent of gross receipts from retail sales of tangible
personal property, as well as certain specified services, telecommunication charges, accommodations, and other
enumerated items. The tax is imposed on consumers but is collected by retailers. A complementary use tax is
imposed on the storage, use, or other consumption of taxable property in the state. No Rhode Island localities are
authorized to charge a sales or use tax.
Rhode Island adopted the Streamlined Sales and Use Tax Agreement effective January 1, 2007, and is a
member of the Governing Board. The state’s taxability matrix, which outlines how the state treats the library of
definitions from the agreement and how certain products are taxed, is available at
http://www.tax.state.ri.us/streamlined.
B.
1.
No significant sales tax changes were made.
2.
2013 Budget Bill
The 2013 Rhode Island budget bill (House Bill 5127) made a number of sales tax changes. The new law
would require sellers to collect sales or use tax on “remote sales,” if such a requirement is authorized by a change in
federal law. The new law would make certain changes to the sales tax rates and tax base contingent on the passage
of such federal legislation. The legislation also created a special commission to conduct a comprehensive study of
the state sales tax.
3.
2012 Sales Tax Changes
Effective October 1, 2012, the sales tax applies to:

Taxi, limousine, and intrastate charter bus services

Pet care services
DLI-266523941v1
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Effective July 1, 2012, the former tax on tour and sightseeing transportation services was repealed.
Effective October 1, 2012, the clothing and footwear exemption is capped at $250 (the tax applies to these
items if and to the extent the sales price is greater than $250).
4.
Contingent Rate Changes
In the event a federal law is enacted requiring remote sellers to collect and remit state sales taxes, Rhode
Island will change its sales-type taxes as follows:

The 7 percent sales and use tax rate would drop to 6.5 percent.

The 1 percent local meals and beverage tax would increase to 1.5 percent.

The 1 percent local hotel tax would increase to 1.5 percent.
C.
1.
Administrative Decisions Now Available Online
The Tax Division has started posting copies of administrative decisions online at:
http://www.tax.ri.gov/AdministrativeDecisions/
Currently, administrative decisions for 2011, 2012, 2013, and 2014 are online.
2.
items.
New Commercial Farming and Related Items Regulation SU 14-153
The Tax Division adopted the above regulation and repealed several prior regulations related to farming
3.
New Streamlined Sales Tax Regulation SST 13-01
Effective May 1, 2013, the Tax Division adopted new Regulation SST 13-01 in an effort to reflect the current
language in the streamlined sales tax agreement regarding direct mail.
4.
New Retailer Record Keeping Regulation SU 13-91
Effective May 1, 2013, the Tax Division adopted a new Regulation SU 13-91 related to record keeping
requirements applicable to retailers. The Tax Division intended to tighten the record keeping requirements.
5.
Regulations Implementing The 2012 Legislative Changes
Generally effective October 1, 2012, the Tax Division adopted new regulations implementing the legislative
changes for taxi and limousine services (SU 12-151), pet services (SU 12-152), and the clothing and footwear
exemption (SU 12-13).
6.
Rhode Island Admin. Hearing Decision No. 2012-11 – Refund claim denied for sales tax paid
on computer software system being used in contract with the Navy.
In this hearing, the Tax Division denied the taxpayer’s refund claim for sales tax paid on software being
used to perform a contract with the Navy. The manufacturing exemption applies to the manufacturing of tangible
personal property for sale. Under the Rhode Island statutes, tangible personal property includes prewritten
(canned) computer software. The ALJ found that the software in question was not prewritten computer software.
DLI-266523941v1
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7.
Rhode Island Admin. Hearing Decision No. 2012-04 – Asphalt manufacturer held liable for
tax to extent asphalt was manufactured for the taxpayer’s own use.
In this hearing, the Tax Division held an asphalt manufacturer liable for sales tax because 58% of the
asphalt was manufactured for the taxpayer’s own use.
8.
Rhode Island Admin. Hearing Decision No. 2011-12 – Used-Car Dealer Liable For Use Tax
On Use Of Truck
The Tax Division recently held that a used car dealer was liable for use tax on a new truck purchased and
sold several weeks later. The taxpayer argued that the truck was part of the dealer’s inventory, and only used for
demonstration and advertising purposes. The Tax Division showed that the truck was purchased using personal
funds and driven about 2,500 miles. The Hearing Officer held that use tax applied.
III.
PROPERTY TAX
A.
Overview
Unless specifically exempted, real property within the State of Rhode Island is subject to ad valorem
taxation. Property taxes in Rhode Island are levied by the city or town where the taxpayer either is domiciled or has
property located. All real and tangible personal property is assessed as of midnight on December 31. Real and
tangible personal property is taxed at rates determined by the various municipalities. Intangible property is not
subject to ad valorem taxation, with the exception of certain utility-owned and credit union property.
B.
1.
No significant changes were made to the property tax.
2.
2013 Legislation
The 2013 legislature enacted a number of property tax provisions. These provisions dealt with a number of
classification and exemption issues applicable to particular localities.
C.
UTGR, Inc. v. Mandillo, PC-08-2614, PC-101172 (R.I. Superior Court, April 26, 2011) – Town’s
Valuation of Improvements Failed to Reflect the Full and Fair Value of the Property
The superior court held that a town’s tax assessment needed to be adjusted because the valuation of
improvements did not reflect the full and fair value of the property. The taxpayer, UTGR, owns and operates a
racino, considered a special-use property, under a video lottery and gaming entertainment license. Originally
operated as a race track, first for horses and then for dogs, the facility eventually discontinued live racing. In
addition to the casino space, the facility also currently consists of limited restaurant and entertainment amenities
and a large parking lot. Under its contract with the state, UTGR undertook renovations at the facility that
increased the casino space, converted a portion of the existing space to back-of-the-house space, and included
removal of the large concrete grandstands previously used for racing.
The court upheld the town’s raw land valuation portion of the appraisal. After considering competing expert
testimony, the court concluded that the analysis of the taxpayer’s expert lacked credibility because the expert failed
to include the value of other commercial land in the town, subjectively selected comparable sales of destination
casinos in other states, and did not adjust for variations in market conditions. Despite noting problems with the
town’s valuation methods, the court held that the taxpayer failed to carry its burden of proving the proper valuation
of the land.
DLI-266523941v1
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The court did, however, accept the taxpayer’s valuation of the improvements. The court found, in part, that
the town failed to properly account for the functional obsolescence of several aspects of the improvements (e.g., the
unused concrete grandstands and food court areas), that the taxpayer’s expert more accurately computed the
percentage of completion of ongoing renovations, and that the town overstated the square footage in its per-squarefoot cost analysis by considering a hypothetical identical building rather than just the functional space.
IV.
BIOGRAPHIES
Kirk Lyda, partner, attorney and CPA, concentrates his practice on state tax litigation, controversies, and
planning. His experience includes representing taxpayers in cases such as Rylander v. Bandag Licensing
Corp., 18 S.W.3d 296 (Tex. App.–Austin 2000, pet. denied) (declaring the Texas franchise tax
unconstitutional as applied to a foreign corporation without any substantial physical presence in the state
and awarding attorneys’ fees to the taxpayer), and Rylander v. Fisher Controls Int’l, 45 S.W.3d 291 (Tex.
App.–Austin 2001, no pet.) (holding that the Texas Comptroller violated the Texas Tax Code’s “throwback
rule” for purposes of Texas franchise tax apportionment). He assisted in the representation of the taxpayers
in Sharp v. Park ’N Fly of Texas, Inc., 969 S.W.2d 572 (Tex. App.–Austin 1998, pet. denied) (Texas sales tax
lawsuit), and Nabisco, Inc. v. Rylander, 992 S.W.2d 678 (Tex. App.–Austin 1999, pet. denied) (Texas
franchise tax lawsuit). He has represented taxpayers in numerous Texas franchise tax and Texas sales tax
hearings before the Texas Comptroller of Public Accounts.
More recently, Kirk has represented taxpayers with intangible property management company tax cases
pending before the courts or administrative agencies of Maryland, Massachusetts, and North Carolina. He
has extensive experience representing major online travel service companies in tax controversies and
litigation and in related transactional and legislative work. He has advised clients on the state tax
implications of restructuring their business operations throughout the United States.
Kirk has spoken at seminars and conferences throughout Texas and in other states on a variety of state tax
topics. He also coauthored Accounting and Finance for Lawyers, a Harcourt publication, and Business
Purpose: What Is It? How Much Is Enough?, a 2004 publication of the New York University Institute on
State and Local Taxation.
Admitted: Texas
Education: The University of Texas at Austin (J.D. 1999; M.P.A. 1996; B.B.A. 1996)
CAVEAT: Please consult your tax advisor on your specific facts. This outline does not offer, nor is it intended to
offer, legal advice.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any
U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be
used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting,
marketing or recommending to another party any transaction or matter addressed herein.
DLI-266523941v1
6
VERMONT STATE DEVELOPMENTS
KATHRYN H. MICHAELIS
WILLIAM F. J. ARDINGER
CHRISTOPHER J. SULLIVAN
STAN ARNOLD
Rath, Young and Pignatelli, P.C.
One Capital Plaza
Concord, NH 03301
Phone:
603.226.2600
E-Mail: khm@rathlaw.com
wfa@rathlaw.com
cjs@rathlaw.com
sra@rathlaw.com
Web Site:
www.rathlaw.com
I.
A.
1.
Tax Havens Hitting the Radar in Vermont. Piggy-backing on the national movement on the
“tax haven” front - including legislative action in New Hampshire this session - the Vermont
legislature is considering a more conservative approach with a proposal for the Commissioner of
Taxes to report to the legislature on or before January 15, 2016 with a recommendation as to
how to “include income from tax havens in the calculation of Vermont’s corporate income tax.”
(H. 489, As Introduced). US Senator Bernie Sanders (VT) is a staunch supporter of the
Corporate Tax Fairness Act, the federal legislation aimed at ending offshore tax havens. Should
New Hampshire’s legislature enact the tax haven legislation currently being considered, it is
likely Vermont will follow suit in a similar fashion by 2016.
2.
Consolidated Return Election Binding for Five Years. The 2014 miscellaneous tax bill,
supported by the Governor’s administration, made the election to file a consolidated return
binding for a five-year period, including the year the election is made. Previously, Vermont
permitted a consolidated election for Vermont-nexus corporations that file as part of the same
federal consolidated income tax return, but did not require consistent filing from year to year.
The change took effect January 1, 2014 and applies for “the tax year 2014.” The 5-year rule was
supported by VDOT to prevent corporations from reconfiguring the filing group from year to
year to minimize taxes in a way that does not fairly represent the group’s ability to pay. The
proposal was projected to be revenue-positive. (H 884, Act 174; 32 V.S.A. § 5862(c))
3.
Reduction to Research and Development Credit Enacted. The 2014 miscellaneous tax bill
reduced the R&D credit from 30% to 27% of the federal credit. The reduction took effect
retroactively to January 1, 2014 and will apply to any application or claims for credits filed after
that date, regardless of the tax year for which the credit was sought. In addition, the legislation
requires the VDOT to disclose which companies were approved for the credit. (H 884, Act 174;
32 VSA § 5930ii)
4.
Federal Conformity Updated. The federal income tax code as in effect for taxable year 2013 was
adopted in the 2015 session for purposes of computing Vermont corporate income tax liability,
effective retroactively to January 1, 2014 and applicable to taxable years beginning on or after
January 1, 2013. (H 884, Act 174; 32 VSA § 5824). The 2015 legislation similarly proposes to
update the adoption to 2014. (H. 272, S. 17).
5.
VDOT Administrative Provisions Applicable to Franchise Tax. 2015 legislation proposes to
make the VDOT administrative provisions applicable to corporate franchise taxes, including
those provisions relating to assessments, refunds, interest, penalties, appeals and collection. (H.
272, S. 36).
1
6.
B.
New 1099 Filing for Credit Card Processers Required. Credit card processers are now required
to file a copy of any 1099 with VDOT that was filed with the IRS within 30 days. (H 844, Act
174; 32 VSA § 5862d)
1.
Vermont Supreme Court To Issue First Unitary Decision Soon. Oral arguments were recently
heard before the Vermont Supreme Court on the first reported unitary business case in
Vermont. The case was on appeal from the Washington Civil Division of the Vermont Superior
Court, which held that a subsidiary ski resort was not unitary with its insurance and financial
parent group, overturning the Department’s administrative hearing decision.
The Superior Court addressed two fundamental issues, the first of which was whether a
subsidiary company that operated a Vermont ski resort, Stowe Mountain Resort (“MMC” or
“Stowe”), was a member of the unitary business group of its parent (AIG) for the tax year 2006,
the first year Vermont required combined unitary filings. The VDOT hearing officer held that
MMC was unitary with the AIG unitary group for numerous reasons, including the facts that:
MMC was included in the AIG combined return in all other unitary states; AIG was actively
involved in the financial operations of MMC; AIG supported MMC with non-arm’s length
financing; AIG provided numerous corporate services to MMC; and AIG retained authority over
all of MMC’s capital and borrowing decisions.
The Superior Court rejected the findings of the VDOT hearing officer, with a somewhat scathing
commentary on the lack of VDOT’s evidentiary basis, stating that the VDOT’s findings “far
outrun the evidence, which unambiguously shows that Stowe was a discrete business…” The
Court further noted that the only relevant witnesses were those provided by AIG. The Court
acknowledged the findings of intercompany transactions and flows of value between AIG and
Stowe – including certain employee benefits, corporate services and financing – but found them
“insufficient” to demonstrate a unitary relationship. Rather, the Court found that AIG’s
evidence reflected its passive investment in a discrete business in Vermont.
The second issue addressed by the court was whether the VDOT’s February 4, 2011 assessment
for the 2006 tax year was barred by the three-year statute of limitations. AIG timely filed its
2006 return on extension on October 15, 2007, and filed an amended 2006 tax return excluding
MMC from the unitary group on March 25, 2009. The Vermont statute provides that the VDOT
may issue an assessment “at any time within three years after the date that tax liability was
originally required to be paid…” and that “[i]f the taxpayer fails to file a proper return with
respect to any tax liability” the assessment may be made at any time before the end of three
years after the taxpayer files such a return. 32 V.S.A. § 5882. AIG asserted that the 2011
assessment was barred because the three-year statute of limitations period expired in 2010
(three years from when the original return was filed, in October of 2007). VDOT asserted that
the 2011 assessment was timely because the October 2007 original return was not a “proper
return,” and therefore, VDOT had three years from the March 25, 2009 amended return in
which to assess AIG. The Vermont hearing officer agreed with VDOT, stating that when AIG
filed its 2009 amended return with corrections and adjustments, the provisions of § 5882
allowed for a period of three years from that return for VDOT to issue an assessment. The
hearing officer noted that Vermont’s statutory wording differs from any other state by allowing
an additional three years if the taxpayer “fails to file a proper return.” The Superior Court
upheld this portion of the VDOT decision, stating that the filing of an amended return that gives
the VDOT a full picture of the taxpayer’s liability is a proper return that “restarts” the threeyear statute of limitations.
The VDOT appealed the Superior Court decision to the Vermont Supreme Court, where oral
arguments were recently made. A decision should be issued by mid-2015. The case is
significant for two reasons: (1) it is the first unitary decision reported and on appeal in
Vermont; and (2) if the Superior Court analysis is upheld on appeal, Vermont’s first decision
interpreting its unitary business law places Vermont on the spectrum of states that adopt a
2
more narrowly-drawn definition of the unitary business principle. See AIG Insurance
Management Services v. Vermont Department of Taxes, Superior Court, Washington Civil
Division, Docket No. 589-9-13 Wncv (July 30, 2014) (on appeal to Vermont Supreme Court).
C.
No recent developments.
II.
TRANSACTIONAL TAXES
A.
1.
Miscellaneous Sales and Use Tax Revisions Made in 2014. Several minor changes were
made to the sale and use tax provisions in the 2014 enacted legislation, some of which
include:
a.
b.
c.
d.
B.
2.
Imposition of Use Tax on Telecommunications Services. The 2014 miscellaneous tax bill
imposed the 6% use tax on “every person” for telecommunications services “for the use within
this State.” Certain exclusions apply. The legislature has stated that the proposal was
necessary because the provision of telecommunications services can be provided remotely
through services such as Voice Over Internet Protocol (VOIP), and the state recognizes that
it cannot require collection of sales tax on transactions with VOIP providers that do not have
nexus with the state. The stated purpose of the amendment was to ensure that all Vermont
recipients of telecom services are taxed equally and to provide a level playing field for
Vermont providers. The proposal was projected to be revenue-neutral. (H 884, Act 174; 32
VSA § 9773))
3.
Taxes on Propane Gas Amended. Effective July 1, 2014, propane sold at retail in freestanding containers is subject to the 5% sales tax, but not the Fuel Gross Receipts Tax. (See
33 VSA 2503 ad 32 VSA 9741(26)
1.
C.
Redefining the definition of a “retail sale” to include sales to contractors,
subcontractors, or repair persons of materials and supplies for use by them in
erecting structures or modifying real property.
Redefining “tangible personal property” to include property used to improve, alter or
repair real property by a business who is primarily engaged in the business of
making retail sales of tangible personal property.
Revising the direct payment permit provisions.
Revising sales provisions regarding “compost” - creation of an exemption from sales
and use tax for clean high carbon bulking agents and compost. (H 884, Act 174; 32
VSA §§ 9701, 9771, 9745, 9701, 9741)
Vermont and City of Burlington Announce Action Against Online Travel Companies. In
2014, the State of Vermont and the City of Burlington publicly announced their intent to
pursue imposition of their respective meals and rooms tax on online travel companies.
Burlington imposes a local option tax in addition to the state-level tax. Outside contingency
fee counsel has been hired to pursue these claims, despite the fact that governmental
agencies have been losing the majority of similar claims across the country. See “Burlington
seeks to squeeze online travel companies for unpaid taxes,” April Burbank, Burlington Free
Press (March 24, 2014).
3
III.
1.
Cloud Computing Regulations Unofficially on Hold by VDOT. Due to the expiration of the
legislative moratorium on collection of sales tax on prewritten software accessed remotely,
effective June 30, 2013, Vermont taxes certain “cloud computing” transactions.
On June 13, 2013, the VDOT issued a Fact Sheet addressing what transactions it considered
taxable, which substantially mirrored the Massachusetts provisions. The VDOT has
withdrawn the Fact Sheet and was making efforts to draft regulations addressing taxation of
cloud computing transactions. The VDOT has been struggling to define key issues and the
scope of taxation in the regulations, seeking the input of industry and practitioners over the
summer and fall of 2014. Because the cloud legislation was aimed at filling a $3 million
budget hole and the state is heading into a tough budget year, it is questionable whether
moratorium legislation will resurface. In the meantime, the draft regulations appear to be
unofficially on hold.
2.
Sales and Use Tax on Contractors, Manufacturers and Retailers Clarified. On March 31,
2014, the VDOT issued a “Fact Sheet” addressing the imposition of the sales and use tax on
products used by contractors and professionals making improvements to real property.
Issues addressed include taxation of mark-ups, built-ins, online memberships, border issues
and option taxes. Contractors and Use Tax: FAQs, Vermont Department of Taxes (March
31, 2014). In addition, on July 1, 2014, the VDOT issued another “Fact Sheet” addressing
the imposition of the sales and use tax by manufacturers, retailers and contractors of items
permanently installed in a home or business. Vermont Sales Tax for Manufacturers,
Retailers & Contractors of Items Permanently Installed in a Home or Business, Vermont
Department of Taxes (July 1, 2014).
OTHER TAXES
A.
1.
2015 Miscellaneous Tax Proposals. As Vermont continues to struggle with implementation
of its healthcare system, the legislature is examining ways to fund the system through the
creation of new taxes. The healthcare bill that is currently being addressed currently
includes tax proposals for two new taxes:
 A $0.02 per ounce excise tax on “sugar-sweetened beverages” and “syrup and powder”
sold in Vermont. The proposed tax would be imposed on every “distributor” and
collected as part of the retail price.
 A “health care payroll tax,” imposed on every Vermont employer equal to .3% of all
wages paid by the employer. As originally proposed (at a higher rate), the proposed
payroll tax was estimated to generate an additional $41 million in revenue.
(H. 481, As Introduced)
2.
Property Transfer Tax Rate Increase Proposed. As part of a water quality bill targeted at
cleaning up Lake Champlain, a 0.2% increase in the property transfer tax is being
considered. (H. 35, As Introduced)
3.
Solar Capacity Tax Revisions Made. In the 2014 session, revisions were made to the Solar
Capacity Tax as applicable to renewable energy plants, specifically, the method of valuation.
In addition, the meaning of a “renewable energy” was redefined. (H 884, Act 174; 32 VSA §§
2802(17), 3481(1)(D), 3845)
4.
Miscellaneous Cigarette and Tobacco Tax Changes Made. Changes to numerous technical
and definitional sections in the cigarette and tobacco tax provisions were made in the 2014
miscellaneous tax bill, including increases to the rates and changing report filing deadlines.
(H 884, Act 174; 32 VSA §§ 7771, 7811,7814). In addition, the tax statutes were amended
relating to “licensed wholesale dealers” and to clarify the types of tobacco products subject to
tax. (H 71, Act 14)
5.
Amendments Relating to Solar Energy Plants Enacted. Numerous changes were made to the
property tax and uniform capacity tax relating to solar energy plants in 2014, including: a
4
blanket exemption for certain smaller solar energy plants from both the education and
municipal property tax; implementing a process for fair market valuation; and increasing the
current exemption from the capacity tax. (H 884, Act. 174)
C.
6.
Gas and Diesel Tax Amendments Increase Tax and Assessments. The 2014 transportation
bill increased the tax on diesel, and imposed a new 2% motor fuel assessment on the adjusted
retail price of gasoline. The effective dates vary. (H 510, Act 12)
7.
Tax Rates on Spirituous Liquor Changed. The tax rates on spirituous liquor in Vermont
were changed in 2014 as follows: 5% if the seller’s gross revenue is $500,000 or lower;
$25,000 plus 10% of gross revenues over $500,000, if the seller’s gross revenue is between
$500,000 and $750,000; 25% if the seller’s gross revenue is over $750,000. Additional
changes were made to the retail sales of liquor made by a manufacturer/rectifier at a “fourth
class” or farmer’s market location. (H 884, Act 174; 7 VSA § 422)
8.
Credit for Reinsurance Allowed. Legislation was enacted, effective May 9, 2014, that permits
domestic insurance companies to take credit for insurance on its annual statement that is
ceded to a certified reinsurer domiciled in another country without requiring the certified
reinsurer to maintain 100 percent security for the risk ceded. (H 260, Act 121)
1.
IV.
Unclaimed Property Initiatives Stepping Up. The State has indicated its intention to step up
efforts in unclaimed property audits, also seeking to add new audit staff and engaging
outside auditors. Vermont delegates are also actively involved in the ULC efforts at drafting
revisions to the model act.
2014 / 2015 TRENDS
A.
Tax Reform Remains on the Table Going into 2015, A January 2015 report to the JFO reflects a
disappointing start to Vermont’s FY2015, with net changes in total revenues slightly negative.
Corporate tax receipts were reported to have exceeded targets due to some “one time” events that are
not expected to continue. Other tax revenue continues to lag as Vermont comes out of a slow economy.
As a result, as Vermont continues to struggle to fill its estimated budget gap of $93 million and has
underperforming tax revenue, both the Governor and the legislature are looking to a combination of
cost-cutting measures within state government as well as rate increases and new taxes as reflected in
this report.
B.
Direct Tax Appeals to Supreme Court Proposed. As part of a cost-saving measure, a bill is being
introduced to the Committee on the Judiciary that proposes to require appeals of VDOT hearing
decisions to be made directly to the Vermont Supreme Court. (Draft unnumbered bill 3/10/2015, as
Introduced) Currently, VDOT hearing decisions are appealed directly to the Vermont Superior
Court (trial court), with any appeal following directly to the Vermont Supreme Court (Vermont has
no appellate court). The bill is expected to prompt the input of Vermont tax practitioners.
C.
Taxing “the Cloud” Still Up in the Air. VDOT struggles to draft regulations defining the scope of “cloud
computing,” as discussed above. Whether renewed legislative efforts resurface again this session is
unclear. Vermont is heavily influenced by other state actions in this area, including Massachusetts.
And, the Governor and several in-state companies burdened by the resulting use tax are in favor of
extension of the moratorium. As of now, VDOT’s regulatory efforts are unofficially on hold and it is
expected that audits of “cloud issues” will not be aggressively pursued unless clearly falling within the
statute.
D.
Effective Date of “Amazon Nexus” in Potential Limbo. As we reported in 2011 and 2012, Vermont
joined the growing number of states attempting to impose sales tax on remote sellers based upon
“click-through nexus” provisions. Under the Vermont provisions, a remote seller making taxable
sales is presumed to be soliciting business through an “independent contractor, agent, or other
representative” if the retailer enters into an agreement with a Vermont “resident” under which the
5
resident, for a commission or other consideration, directly or indirectly refers potential customers,
“whether by a link on an Internet website or otherwise” to the retailer. (Act No. 45, s. 36a, Laws
2011) In an unusual step, Vermont’s click-through nexus provisions did not take effect until the date
on which, “through legislation, rule, agreement, or other binding means,” 15 or more other states
have adopted requirements that are “the same, substantially similar, or significantly comparable to
the requirements” in Vermont’s statute as determined by the Attorney General. (Act No. 45, §
37(13), Laws 2011). This delayed effective date was believed to ensure that Vermont will not be the
state at the forefront in litigation with regard to click-through nexus legislation. As more states
have adopted Amazon requirements since 2011,Vermont is now faced with the possibility of having
to make its law effective in the near future. A 2015 legislative initiative - backed by the Governor
after Amazon was reported to have cut advertising contacts with Vermont online companies proposed to change the effective date from after enactment by 15 states to enactment by 25 states.
For Tax Commissioner Peterson’s January 7, 2015 statement, see www.state.vt.us/tax.
V.
E.
Economic Development Initiatives Underway. In the 2014 session, the Governor supported multifaceted legislation providing support for start-up, expansion and retention of companies in Vermont,
particularly focusing on the high-tech sector. In addition, the VDOT, Vermont Secretary of State,
Department of Labor, Attorney General and other agencies are in the process of developing a web
portal for all business registrations and informational material. The portal is targeted to go “live” by
June 30, 2015 and is part of Vermont’s overall effort to further economic development within the
state. (S 220, Act 199)
F.
Taxpayer Delinquent List Went Live. The legislature authorized the Tax Commissioner to publish a
list of the top 100 delinquent individual taxpayers and top 100 delinquent business taxpayers. The
list was first published in early 2015. (H 884, Act 174; 32 VSA § 3102(m))
G.
Tax Expenditure Purpose Statements Required. As part of its push for transparency, Vermont
enacted legislation requiring that the statutory purpose for each of the tax expenditures listed in the
tax expenditure report that was required under 32 VSA § 312 be placed into the statutes. (S 221, Act
200).
PROVIDERS’ BRIEF BIOGRAPHY/RESUME

Kathryn H. Michaelis (B.A. Kenyon College, 1993; J.D., DePaul University College of Law, 1996; LL.M.,
in Taxation, DePaul University College of Law, 2000) is a Shareholder with the Tax Practice Group of
Rath, Young and Pignatelli, P.C., and was formerly with PricewaterhouseCoopers LLP and the Illinois
Department of Revenue in Chicago. Kathryn is admitted to practice in Vermont, New Hampshire and
Illinois and currently serves as a member of the Vermont Tax Advisory Board with Tax Commissioner
Mary Peterson.

William F.J. Ardinger (B.A., University of New Hampshire, 1982; J.D., Harvard University, 1985) is the
Director of the Tax Practice Group at the Concord, N.H. law firm of Rath, Young and Pignatelli, P.C.
Bill is admitted to practice in Vermont.

Christopher J. Sullivan (B.A., Harvard College, 1989; J.D., Georgetown University Law Center, 1996) is
a shareholder and tax attorney with a particular focus on state tax matters at Rath, Young and
Pignatelli, P.C. Chris is admitted to practice in Vermont.

Stanley R. Arnold (B.S., Cameron University, 1974; M.B.A., Plymouth State College, 1982) is Senior Tax
Policy Advisor with the Tax Practice Group of Rath, Young and Pignatelli, P.C. and served for 14 years
as the Commissioner of the New Hampshire Department of Revenue Administration.
6

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