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State DOR Letters and Administrative Rulings

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

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

State Regulations and Public Notices

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

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

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

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

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

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

State Legislative Affairs

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

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

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

Judicial and Administrative Decisions

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

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

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

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

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

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

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

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

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

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

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

Other Documents

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