INSIDE SALT
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
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Inside the New York Budget Bill: Net Operating Losses and Investment Tax Credit

by | Apr 3, 2015 | , , ,

The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the Budget Bill) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax.  The Budget Bill’s technical corrections to last year’s corporate income tax reform include changes to the economic nexus, tax base and income classification, tax rate (including clarifications to rules applicable to certain taxpayers, such as qualified New York manufacturers), apportionment, combined reporting, net operating loss and tax credit provisions.  The technical corrections are effective on the same date as last year’s corporate income tax reform, which was generally effective for tax years beginning on or after January 1, 2015.

This post is the sixth in a series analyzing the New York Budget Bill, and discusses changes to the net operating loss (NOL) and investment tax credit provisions.

Net Operating Losses – Prior NOL Conversion Subtraction

For tax years beginning on or after January 1, 2015, the calculation of the New York NOL deduction has changed dramatically.  As a result, the Tax Law provides for a transition calculation, a prior NOL Conversion Subtraction, for purposes of computing the allowable deduction for NOLs incurred under the prior law.

To calculate the Conversion Subtraction, the taxpayer first must determine the amount of NOL carryforwards it would have had available for carryover on the last day of the “base year”—December 31, 2014, for calendar year filers, or the last day of the taxpayer’s last taxable year before it is subject to the new law—using the former (i.e., 2014) Tax Law, including all limitations applicable under the former law.  This amount is referred to as the “unabsorbed NOL.”  Second, the taxpayer must determine its apportionment percentage (i.e., its BAP) for that base year (base year BAP), again using the former (i.e., 2014) Tax Law; this is the BAP reported on the taxpayer’s tax report for the base year.  Third, the taxpayer must multiply the amount of its unabsorbed NOL by its base year BAP, then multiply that amount by the tax rate that would have applied to the taxpayer in the base year (base year tax rate).  The resulting amount is divided by 6.5 percent (qualified New York manufacturers use 5.7 percent).  The result of these computations is the prior NOL Conversion Subtraction pool.

A taxpayer’s Conversion Subtraction will equal a portion of its Conversion Subtraction pool computed as outlined above.  The standard rule provides that one-tenth of the Conversion Subtraction pool, plus, in subsequent years, any amount of unused Conversion Subtraction from prior years, may be deducted as the Conversion Subtraction.  The Tax Law as originally drafted also provided that any unused Conversion Subtraction could be carried forward until tax years beginning on or after January 1, 2036 (tax year 2035 for calendar year filers).  The technical corrections include slight changes to that carryforward provision.  Now, any unused Conversion [...]

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Inside the New York Budget Bill: Tax Base and Income Classifications

by | Apr 2, 2015 | , , ,

The New York Legislature has passed bills related to the 2015–2016 budget (S2009-B/A3009-B and S4610-A/A6721-A, collectively referred to herein as the Budget Bill) containing several significant “technical corrections” to the New York State corporate income tax reform enacted in 2014, along with sales tax provisions and amendments to reform New York City’s General Corporation Tax.  The Budget Bill’s technical corrections to last year’s corporate income tax reform include changes to the economic nexus, tax base and income classification, tax rate (including clarifications to rules applicable to certain taxpayers, such as qualified New York manufacturers), apportionment, combined reporting, net operating loss and tax credit provisions.  The technical corrections are effective on the same date as last year’s corporate income tax reform, which was generally effective for tax years beginning on or after January 1, 2015.

This post is the second in a series analyzing the New York Budget Bill, and summarizes the technical corrections to New York’s tax base and income classifications.

Although the modifications are described as “corrections” to last year’s corporate tax reform provisions, the Budget Bill makes a number of substantive changes with respect to the income classification rules.

Investment Capital 

Last year’s corporate tax reform narrowed the definition of investment capital to mean investments in stocks held by a taxpayer for more than six consecutive months but not held for sale to customers in the regular course of business, and excluding stock that is a “qualified financial instrument” for which the taxpayer has elected to use the 8 percent apportionment sourcing rule, stock in a unitary business, stock in a business that is included in a combined report with the taxpayer, and stock issued by the taxpayer.

This year’s Budget Bill further narrows the definition of investment capital by extending the holding period from six months to one year, by tying the definition of investment capital to certain Internal Revenue Code provisions, and by requiring taxpayers to separately identify stock held as investment capital in their books and records.  Investment capital now means investments in stocks that meet the following criteria:

  • Satisfy the definition of a “capital asset” under section 1221 of the Internal Revenue Code at all times the taxpayer owned the stock during the taxable year;
  • Are held for investment for more than one year;
  • The dispositions of which are, or would be, treated by the taxpayer as generating long-term capital gains or losses under the Internal Revenue Code;
  • For stocks acquired on or after January 1, 2015, have never been held for sale to customers in the regular course of business at any time after the close of the day on which they are acquired; and
  • Before the close of the day on which the stock was acquired, are clearly identified in the taxpayer’s books and records as stock held for investment in the same manner as required under section 1236(a)(1) of the Internal Revenue Code for the stock of a dealer in securities to be eligible for capital gain treatment (for [...]

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Louisiana Supreme Court Upholds Bundling Portable Toilet Leases and Cleaning Services, but Not Sure About True Object of Resulting Transactions

by | Mar 16, 2015 | , , , ,

If you are ever waiting in line for portable toilet facilities at the St. Patty’s Day Parade and in need of something to think about, consider the property and service you are about to use: Is it the lease of tangible personal property, the provision of a cleaning and waste removal service, or both? The Supreme Court of Louisiana grappled with this fundamental sales and use tax issue in Pot-O-Gold Rentals, LLC v. City of Baton Rouge, No. 2014-C-2154 (La. Jan. 16, 2015). Approaching the provision of toilets and services as a single transaction and finding the true object to be unclear, the court interpreted the taxing statute narrowly and ruled in favor of the taxpayer. Underlying the opinion is an unusually broad, all-or-nothing bundling approach to the taxability of goods and services provided together.

The City of Baton Rouge taxes the lease of tangible personal property but does not tax the provision of cleaning services. The taxpayer provided both: a customer could lease portable toilets, could purchase toilet cleaning services, or could lease toilets and purchase cleaning services together. There was no question that services alone were nontaxable or that the lease of toilets alone was taxable. The issue was how tax should apply when toilets and cleaning services were provided together. The taxpayer had collected tax on the charges for the toilets but had not collected tax on charges for services in such transactions.

Baton Rouge assessed sales tax on the services where toilets also had been provided. The taxpayer challenged the assessment and won summary judgment in its favor, with the trial court allowing the splitting of the transaction into taxable and nontaxable components. The Court of Appeals reversed, No. 2013 CA 1323 (La. Ct. App. 1st Cir. Sept. 17, 2014), holding that the cleaning service and toilet lease components of combined contracts could not be split and addressed separately. That court then applied the true object test to determine that the entire bundled transaction should be treated as a taxable lease.

The Supreme Court reversed in a per curiam opinion, taking the bundled approach of the Court of Appeals but reaching the opposite conclusion on taxability. The Supreme Court observed that it was unclear whether providing tangible personal property in connection with waste removal services constituted the provision of a nontaxable service, comparing the Louisiana Department of Revenue’s Revenue Rulings 06-012 (Aug. 23, 2006) (providing dumpsters with trash removal service is nontaxable) and 06-013 (Sept. 19, 2006) (providing portable toilets with cleaning services is taxable). Given that the true object of such a transaction was “debatable,” the canon of reading a taxing statute narrowly against the state and in favor of the taxpayer applied: The transaction was nontaxable.

Underlying both the Supreme Court and Court of Appeals opinions was a very broad, all-or-nothing approach to taxability. Where many states would view this type of transaction as a taxable lease of property coupled with nontaxable cleaning services that were not “necessary to complete [...]

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Let the Training Begin: MTC Transfer Pricing Audits Draw Near

by , , and | Mar 6, 2015 | , , , ,

Deputy Executive Director Greg Matson (a nice guy at heart) announced this week that the Multistate Tax Commission (MTC) has hired its first transfer pricing training consultant and is scheduled to begin training state auditors.  The training, titled “Identifying Related Party Issues in Corporate Tax Audits” will be hosted by the North Carolina Department of Revenue from March 31 to April 1, 2015 in Raleigh, North Carolina.  While the much anticipated Arm’s Length Adjustment Service (ALAS, discussed in more depth in our February 6, 2015 blog post, available here) is still pending approval of the MTC Executive Committee and ratification at the annual meeting this summer, it has not stopped MTC officials from moving forward with training state auditors on transfer pricing.  This training (and any subsequent training offered before the annual meeting) will be conducted as part of the MTC’s “regular training” schedule (and is not directly tied to the ALAS program since authority to train for that program has not vested).  Nonetheless, Executive Director Joe Huddleston made it clear in a recent letter to the states that “[t]his course will preview the training to be provided through the Arm’s-Length Adjustment Service.”

The kickoff training session at the end of this month will be conducted by former Internal Revenue Service Office of Chief Counsel senior economic advisor, Ednaldo Silva.  He is the founder of RoyaltyStat LLC, one of the transfer pricing consulting firms that is being considered by the MTC to provide their services for the ALAS.  During yesterday’s teleconference of the ALAS Advisory Group, Matson and Huddleston were optimistic that additional training sessions would be offered by the MTC before the ALAS is finalized.  It remains to be seen whether this training will be offered by Silva or another participant from the October 2014 Advisory Group meeting that has submitted a bid to be the contract firm for the ALAS.  Because these trainings are a fundamental threshold step to commencing ALAS audits (projected to begin December 2015), they provide a strong signal that the MTC is optimistic that they will have sufficient support from the states to continue the ALAS program.

Too Soon?

In a letter distributed to 46 states and Washington, D.C. in February 2015, the MTC officially solicited state commitments to the ALAS program.  States were given until the end of March 2015 to respond.  By the terms of the ALAS proposal, the MTC will need a commitment from at least seven states for the program to move forward.  MTC officials announced at yesterday’s Advisory Group teleconference that the current count is zero (with one state declining).  While there is still time to respond, several revenue department officials voiced concern about making a commitment without more detailed estimates of costs.  Others voiced uncertainty about the ability to enter into a contract for such a long period under state law (the program requests that each state commit to four years).  While there was no significant undertone of opposition to [...]

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Illinois Retailers Beware: Class Action Complaint Filed Against Grocer for Collecting Illinois Sales Tax on Manufacturers’ Coupons Lacking Specific Language

by | Mar 5, 2015 | , ,

A class action complaint was filed in federal court last week against the operator of a grocery chain, alleging failure to deduct manufacturers’ coupons from the tax base on which sales tax was calculated and collected from customers.  This latest attack on a retailer relies on an interpretation of a Department of Revenue regulation that, if correct, would be overly burdensome on Illinois retailers. Other Illinois retailers that accept manufacturers’ coupons may be at risk of being sued in similar actions or may be forced to change their practices.

The Illinois sales tax, the Retailers’ Occupation Tax, is a tax on a retailer’s gross receipts. Store coupons, where a retailer does not receive reimbursement from another party, constitute a reduction in a retailer’s gross receipts and therefore reduce the tax owed. 86 Ill. Admin. Code 130.2125(b)(1). Manufacturers’ coupons, on the other hand, involve reimbursement to a retailer from a third party. This reimbursement constitutes taxable gross receipts. 86 Ill. Admin. Code 130.2025(b)(2). As such, manufacturers’ coupons do not decrease the amount of Retailers’ Occupation Tax owed by the retailer.

An Illinois retailer collects Use Tax from its customer as reimbursement for its Retailers’ Occupation Tax. See 35 ILCS 105/3-45; 86 Ill. Admin. Code 130.101(d). The difficulty with manufacturers’ coupons is that the customer has not paid the entire amount of the retailer’s receipts on which Retailers’ Occupation Tax is due. The Department’s regulation addresses the issue by calling for the customer to assume liability for Use Tax in the fine print of the coupon:

Technically, the coupon issuer … owes the corresponding Use Tax on the value of the coupon.  However, in many cases, the coupon issuer incorporates language into the coupon that requires the bearer … to assume this Use Tax liability.  86 Ill. Admin. Code 130.2025(b)(2).

The theory of the complaint is that the coupon did not contain this language shifting the Use Tax liability, and therefore it was improper of the retailer to collect tax on the coupon amount. If the class action attorneys’ theory is correct, store clerks would be expected to carefully read the fine print of each and every coupon that customers present.  Surely, the Department of Revenue could not have intended such a result.  The complaint seeks compensatory damages, punitive damages of at least 1 percent of the revenue from Illinois stores during years in which violations occurred, and fees and costs. Other retailers may risk similar suits and should consider seeking clarity from the Department of Revenue.



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Inside the New York Budget Bill: Guidance Released Regarding Transitional Compliance and Qualified New York Manufacturers

by | Mar 2, 2015 | , , , ,

On March 31, 2014, Governor Andrew Cuomo signed into law a budget bill containing major corporate tax reform.  That new law resulted in significant changes for many corporate taxpayers, including a complete repeal of Article 32 and changes to the Article 9-A traditional nexus standards, combined reporting provisions, composition of tax bases and computation of tax, apportionment provisions, net operating loss calculation and certain tax credits.  Most of the provisions took effect on January 1, 2015.

Due to the sweeping nature of this corporate tax reform, taxpayers have been awaiting official guidance from the New York State Department of Taxation and Finance on many areas of the reform.  On January 26, 2015, the Department started releasing Technical Memoranda on certain aspects of the corporate tax reform.

The first Technical Memoranda, TSB-M-15(2)C, provides guidance on many transitional compliance issues, including, but not limited to, (1) clarifying the filing requirements for Article 32 and Article 9-A taxpayers with fiscal years that span both 2014 and 2015, (2) addressing the inclusion in a combined report of a member with a tax year end that is different from the designated agent, (3) addressing compliance issues involving short periods and corporate dissolutions, (4) clarifying the filing dates and estimated tax payment obligations for 2015 Article 9-A taxpayers.

The second Technical Memoranda, TSB-M-15(3)C, (3)I, addresses the benefits available to qualified New York manufacturers.

Transitional Compliance Issues

Taxpayers and tax return preparers should be particularly careful when preparing 2015 Article 9-A tax returns, as the Department’s guidance on transitional compliance issues indicates that returns submitted on incorrect forms or on prior year forms will not be processed by the Department and will not be considered timely filed, which could result in the imposition of penalties.

Fiscal Years Spanning 2014 and 2015

The Department’s guidance makes it clear that for any 12-month tax year that began before January 1, 2015, taxpayers must complete the relevant 2014 return (e.g., an Article 32 taxpayer must file a 2014 Article 32 franchise tax return and, if applicable, a MTA surcharge return) according to the Tax Law that was in effect before January 1, 2015.  Fiscal year taxpayers, both Article 32 and Article 9-A, with a 12-month tax year that began in 2014, but will end in 2015, will not be permitted to file short period returns solely as a result of corporate reform.

Combined Reports that Include Taxpayers with Different Year Ends

For tax years beginning on or after January 1, 2015, a taxpayer is required to file a combined report with other corporations engaged in a unitary business with the taxpayer if a more-than-50-percent common ownership (direct or indirect) test is met, with ownership being measured by voting power of capital stock.  Under the Tax Law, a combined report must be filed by the designated agent of the combined group.   The “designated agent” must have nexus with New York and is generally the parent corporation of the combined group.   If there is no such parent corporation or if the parent [...]

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New Market-Based Sourcing in DC: Major Compliance Date Problem Fixed… For Now

by , and | Feb 5, 2015 | , , , , ,

The Problem

On September 23, 2014, the District of Columbia Council enacted market-based sourcing provisions for sales of intangibles and services as part of the 2015 Budget Support Act (BSA), as we previously discussed in more detail here.  Most notably the BSA adopts a single sales factor formula for the DC franchise tax, which is applicable for tax years beginning after December 31, 2014.  But the market-based sourcing provisions in the BSA did not align with the rest of the tax legislation.  Specifically, the BSA market-based sourcing provisions were made applicable as of October 1, 2014—creating instant tax implications on 2014 returns.  Absent a legislative fix, this seemingly minor discrepancy will trigger a giant compliance burden that will require a part-year calculation for both taxpayers and the Office of Tax and Revenue (OTR) before the 2014 franchise return deadline on March 15.  For example, taxpayers filing based on the new BSA provisions, as originally enacted in September, will have to use the cost-of-performance approach for the first nine months of the 2014 tax year and the new market-based sourcing approach for the remaining three.

The Fix

Citing to the unintended compliance burden, the Council recently enacted emergency legislation to temporarily fix the unintended compliance burden.  However they have not solved the problem going forward.  On December 17, 2014, Finance and Revenue Committee Chairman Jack Evans introduced identical pieces of legislation that included both a temporary and emergency amendment to quickly fix on the problem (both pieces of legislation share the name “The Market-Based Sourcing Inter Alia Clarification Act of 2014”).  These legislative amendments explicitly make the applicability of market-based sourcing provisions synonymous with the other provisions of the BSA, beginning for tax years after December 31, 2014.  In DC, “emergency” legislation may be enacted without the typical 30-day congressional review period required of all other legislation, but is limited to an effective period of no longer than 90 days.  Because the emergency market-based sourcing legislation was signed by Mayor Muriel Bowser on January 13, it will expire on April 13.  Important to DC franchise taxpayers, this date is before the September 15 deadline for extended filers.

The second piece of legislation was introduced on a “temporary” basis.  Unlike emergency legislation, temporary legislation simply bypasses assignment to a committee but must still undergo a second reading, mayoral review and the 30-day congressional review period.  The review period is 30 days that Congress is in session (not 30 calendar days).  Because the temporary Act is still awaiting Mayor Bowser’s approval at the moment, which is due by this Friday (February 6), it will not become effective until after the 2014 DC Franchise Tax regular filing deadline of March 15—even if it is approved by the Mayor and not subjected to a joint-resolution by Congress.  Neither the House nor Senate is in session the week of February 15, which pushes the 30-day review period to roughly April 1 (assuming it is immediately submitted to Congress).  However, once passed, [...]

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More Tax Money for the City of Chicago in 2015: Broader Bases, Increased Rates and Lesser Credit

by | Jan 8, 2015 | , , , , ,

The City of Chicago’s (City’s) 2015 budget includes a number of changes to taxing ordinances found in titles 3 and 4 of the Chicago Municipal Code.  The City of Chicago Department of Finance has notified taxpayers and tax collectors of the amendments, effective January 1, 2015, via a notice posted on its website.  The text of the amendments can be found on the Office of the City Clerk’s website.  The amendments, designed to bolster the City’s coffers, affect multiple City taxes by enlarging tax bases, increasing tax rates and tightening credit mechanisms.  The amendments include:

  • Hotel Accommodations Tax(Section 3-24-020(A))
    • The definition of “operator” (the tax collector) was amended to include: (1) any person that receives or collects consideration for the rental or lease of hotel accommodations; and (2) persons that facilitate the rental or lease of hotel accommodations for consideration, whether on-line, in person or otherwise.
    • A definition of “gross rental or leasing charge” (the tax base) was added that excludes “separately stated optional charges” unrelated to the use of hotel accommodations.
  • Use Tax for Non-titled Personal Property(Section 3-27-030(D))
    • A credit is available for sales and use “tax properly due” and “actually paid” to another municipality against the City’s 1 percent use tax imposed on the use in the City of non-titled tangible personal property that was purchased outside of the City.  The added definitions of “tax properly due” and “tax actually paid” exclude other municipal taxes that are rebated, refunded, or otherwise returned to the taxpayer or its affiliate.
  • Personal Property Lease Transaction Tax
    • The exemption from the tax for a “car sharing organization” (i.e., Zipcar) was eliminated.  (Sections 3-32-020(A) (definition) and 3-32-050(A)(13) (exemption))
    • The definition of “lease price” or “rental price” (the tax base) was amended to exclude nontaxable, separately-stated charges only if they are optional.  (Section 3-32-020(K))
    • The tax rate was increased from 8 percent to 9 percent.  (Section 3-32-030(B))
  • Amusement Tax
    • The amusement tax was amended to be imposed on the full charge paid for the privilege of using a “special seating area” such as a luxury suite or skybox (Section 4-156-020(F)).  Credit against this tax is available in the amount of any other taxes the City imposes on the same charges (for example, food and beverage charges) if the taxes are separately-stated and paid.  Previously, tax was imposed on 60 percent of the charge for a special seating area and did not include a credit mechanism.
    • Credit against the amusement tax was eliminated for franchise fees paid to the City for the right to use the public way or to do business in the City.  (Section 4-156-020(J))
    • The amendments eliminated the additional tax imposed on ticket sellers (Section 4-156-033).  The tax was imposed on sellers selling tickets from a location other than where the taxable amusement occurs on the amount of the service fee (as distinguished from the taxable admission charge).  Now, all ticket sellers must [...]

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Currency Conversion Concerns: New York Issues Guidance on Virtual Currencies

by | Dec 23, 2014 | , , , , ,

On December 5, 2014, the New York Department of Taxation and Finance (Department) released TSB-M-14(5)C, (7)I, (17)S.  This (relatively short) bulletin sets forth the treatment of convertible virtual currency for sales, corporation and personal income tax purposes.  The bulletin follows on a notice released by the Internal Revenue Service (IRS) in March of this year, Notice 2014-21.

The IRS Notice indicates that, for federal tax purposes, the IRS will treat virtual currency as property, and will not treat it as currency for purposes of foreign currency gains or losses.  Taxpayers must convert virtual currency into U.S. dollars when determining whether there has been a gain or loss on transactions involving the currency.  When receiving virtual currency as payment, either for goods and services or as compensation, the virtual currency is converted into U.S. dollars (based on the fair market value of the virtual currency at the time of receipt) to determine the value of the payment.

The IRS Notice only relates to “convertible virtual currency.”  Virtual currency is defined as a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”  Convertible virtual currency is virtual currency that “has an equivalent value in real currency, or that acts as a substitute for real currency.”

The Department’s bulletin also addresses only convertible virtual currency, and uses a definition identical to the IRS definition.  The Department indicates that it will follow the federal treatment of virtual currency for purposes of the corporation tax and personal income tax.

For sales and use tax purposes, the bulletin states that convertible virtual currency is intangible property and therefore not subject to tax.  Thus, the transfer of virtual currency itself is not subject to tax.  However, the exchange of virtual currency for products and services will be treated as a barter transaction, and the amount of tax due is calculated based on the fair market value of the virtual currency at the time of the exchange.

The Department should be applauded for issuing guidance on virtual currency.  It appears that these types of currencies will be used more and more in the future, and may present difficult tax issues.

However, the Department’s guidance is incomplete.  There are a couple of unanswered questions that taxpayers will still need to ponder.

First, the definition of convertible virtual currency is somewhat broad and unclear.  The Department and the IRS define “convertible” virtual currency as currency that has an “equivalent” value in real currency, but equivalent is not defined in either the IRS Notice or the bulletin.  Many digital products and services use virtual currency or points that cannot be legally exchanged for currency to reward users, and the IRS and the Department should be clearer about the tax treatment of those currencies.

Second, although the Department will follow the federal treatment for characterization and income recognition purposes, the bulletin does not discuss apportionment.  This is likely a very small issue at this point in time, but the Department will, [...]

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New Jersey Tax Court Finds Two Pennsylvania Taxes Are Not Required To Be Added Back

by and | Oct 31, 2014 | , , ,

In a Corporation Business Tax (CBT) case, PPL Electric Utilities Corporation v. Director, Division of Taxation, Dkt. No. 000005-2011 (N.J. Tax. Ct. Oct. 2, 2014), the Tax Court of New Jersey found for the taxpayer and held that the Pennsylvania Gross Receipts Tax and Pennsylvania Capital Stock Tax were not required to be added back in computing New Jersey entire net income.

The case involves a 1993 amendment to the CBT statute regarding adding back taxes deducted in computing federal taxable income.  Prior to 1993, the New Jersey statutes required taxpayers to add-back only certain federal taxes and the CBT in computing New Jersey entire net income.  The amendment added a requirement that taxpayers add-back to federal taxable income taxes paid to states other than New Jersey “on or measured by profits or income, or business presence or business activity.”  N.J.S.A. 54:10A-4(k)(2)(C).  According to legislative history cited by the court, prior to the amendment “corporations which [did] business in several states [paid] a lower effective rate of tax on their New Jersey activities than [did] corporations which only [did] business in New Jersey.”  The court explained that the amendment corrected the inequity “by requiring multi-state taxpayers to add-back state taxes similar to that of the CBT.”

The Tax Court concluded that the Pennsylvania Gross Receipts Tax is not subject to the tax add-back, finding that the tax is:  (1) “based solely on the amount of electricity sold, regardless of whether income or profit is realized from such sales and not based upon the taxpayer’s business presence or business activity in Pennsylvania;” and (2) “passed through to the ultimate consumer of electricity.”  The court held that the Pennsylvania Capital Stock Tax was not subject to the tax add-back because it was in substance a property tax.

Interestingly, the Tax Court found that the New Jersey Division of Taxation’s (Division) interpretation of the tax add-back was not only incorrect but also discriminatory.

The 1993 amendment was passed because previously, solely New Jersey taxpayers were taxed on a higher tax basis than similarly situated multi-state taxpayers . . . .  Here, Taxation’s interpretation of the statute discriminates against multi-state taxpayers because they would be required to add-back the Pennsylvania Corporate Income Tax as well as other non-CBT-type taxes imposed by other states, such as the Pennsylvania Gross Receipts Tax and the Pennsylvania Capital Stock Tax, while solely New Jersey taxpayers are only required to add-back CBT-type taxes.  This court finds that the Legislature did not intend to cure one inequity by imposing another.

Given the number of different types of state taxes in existence, this case may have broad ramifications for multi-state taxpayers subject to the CBT.  We have seen the Division make similar adjustments to other companies on audit and this decision should be helpful in disputing those adjustments.  Additionally, multi-state taxpayers may have refund opportunities for similar taxes that they have previously added back.



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