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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: 30-Day Amendments

by | Feb 23, 2015 | ,

On Friday, February 20, 2015, Governor Andrew Cuomo’s office released the 30-Day Amendments to the 2015–2016 New York State Executive Budget Legislation (Budget Bill).  This year, instead of the usual set of corrections and minor changes to the Budget Bill, the 30-Day Amendments focused primarily on the governor’s five-point ethics reform plan, with only very few corrections and minor changes included with respect to the Revenue Bill.  Those few corrections and changes focused on credits and incentives (e.g., technical corrections and clarifications to the New York State School Tax Relief (STAR) Program, the real property tax credit, the Brownfield Cleanup Program, and the credit for alternative fuel and electric vehicles) leaving any changes to the proposed sales tax provisions, corporate franchise tax technical correction provisions and New York City conformity provisions to the legislative process.  Please see our On the Subject related to the Budget Bill’s proposed significant changes to New York’s sales and use tax statutes.



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Inside the New York Budget Bill: Proposed Sales Tax Amendments

by | Feb 16, 2015 | ,

Governor Andrew Cuomo’s 2015–2016 New York State Executive Budget Bill proposes several significant changes to New York’s sales and use tax statutes. Several of these changes, while touted by the governor as “closing certain sales and use tax avoidance strategies,” are much broader and, if enacted, will have a significant impact on the sales and use tax liabilities resulting from routine corporate and partnership formations and reorganizations.

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Arizona’s 2015 TPT Amendments Have 99 Problems, but Origin Sourcing ain’t One

by , and | Jan 29, 2015 | , , , ,

Actually, there are really only two issues, but they are big issues.

Arizona’s Transaction Privilege Tax has always been an anomaly in the traditional state sales tax system.  Contrary to some commentators, however, the recent amendments do not, and could not, impose an origin tax on Arizona retailers for remote sales delivered out-of-state.  That is not to say that these amendments are benign.  Oddly, the amendments provide incentives for Arizona residents shipping items out-of-state to purchase these items over the internet rather than visit Arizona retailers in person.  Furthermore, these amendments create complexities for Arizona vendors shipping to foreign jurisdictions.   Finally, these amendments create additional administrative problems for retailers that are difficult to address with existing software and invite double taxation problems that should not exist in a transaction tax world.

Background: Arizona Transaction Privilege and Use Tax

For retail sales, Arizona, like most states, has two complementary transaction-based taxes, but each tax is imposed on a different entity.  The first tax, the Transaction Privilege Tax (TPT), is imposed directly on the retailer.  Ariz. Rev. Stat. § 42-5001.13.  A retailer will be subject to the TPT on the gross proceeds from a sale if “the location where the sale is made” is Arizona.  Ariz. Rev. Stat. § 42-5034.A.9.  A retailer subject to the TPT is allowed but not required to collect the amount of TPT it owes from its customers.  Ariz. Admin. Code §§ 15-5-2002, 15-5-2210.

The second tax, the Arizona Use Tax, complements and backstops the TPT.  The Use Tax is imposed on the use, storage or consumption in the State of tangible personal property purchased from an out-of-state retailer.  Ariz. Rev. Stat. § 42-5155.  Generally, the purchaser is liable for payment of Use Tax to the State, but a retailer is required to collect Use Tax from a purchaser if the retailer meets the constitutional nexus provisions.  Ariz. Rev. Stat. §§ 42-5155, 42-5160.  Use Tax is imposed only on transactions where TPT has not been imposed, i.e., a transaction is subject to either TPT or Use Tax, but not both.  Ariz. Rev. Stat. § 42-5159.A.1.

The State and its courts have been clear that, while the location of the transfer of title or possession is relevant to the inquiry as to where the sale is made, it is the totality of the retailer’s business activities that identifies the location that may tax the proceeds.  Exactly where that line is drawn, however, is not as clear.  The Arizona Department of Revenue (DOR) has taken the position that, unless an exemption applies, a seller is subject to the tax if a purchaser buys a product at a store, even if the purchaser does not take possession in the state, and the product is shipped to a location outside of the state.  The DOR is apparently taking the position either that the title transfers in the store, which cannot always be the case (a retailer could easily specify that title transfers to the customer outside the store, particularly if the retailer [...]

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Three Strikes…Tax on Cloud Computing Out in Michigan?

by , and | Dec 3, 2014 | , ,

If the Department of Treasury (Treasury) was hoping that the Michigan courts would simply overlook the previous two cloud computing losses this year in Thomson Reuters (previously covered here) and Auto-Owners (discussed here), they appear to have been mistaken.  Last Wednesday’s Court of Claims opinion in Rehmann Robson & Co. v. Department of Treasury marked the third Michigan decision this year to rule that cloud-based services are not subject to use tax in the state.  In Rehmann Robson, the Court of Claims found that the use of Checkpoint (a web-based tax and accounting research tool) by a large accounting firm was properly characterized as a non-taxable information service, despite Treasury’s continued effort to impose use tax and litigate similar cloud-based transactions.  This taxpayer victory comes just six months after the Michigan Court of Appeals in Thomson Reuters found that a subscription to Checkpoint was primarily the sale of a service under the Catalina Marketing test, Michigan’s version of the “true object” test, which looks to whether the use of tangible personal property was incidental to the provision of services when both are provided in the same transaction.  The Thomson Reuters decision reversed a 2013 Court of Claims opinion that granted summary disposition in favor of Treasury’s ability to tax the cloud-based service as “prewritten computer software.”

Analysis

While all three Michigan decisions issued this year reach the same conclusion, the most recent decision makes an explicit effort to affirmatively block any potential avenue Treasury may use to impose the use tax on cloud-based transactions.  For what it’s worth, the Rehmann Robson opinion was written by the same judge who wrote the Auto-Owners opinion released in March 2014, and contained an identical analysis.  Unlike the Thomson Reuters decision that found use of prewritten computer software in the state, but simply found it to be incidental to the nontaxable information services provided under Catalina Marketing, Auto-Owners (and now Rehmann Robson) both undercut the Treasury’s argument before it begins.

First, the court held that there was no tangible personal property transferred because the definition of “prewritten computer software” was not satisfied.  Like many other states, Michigan defines this term as software “delivered by any means.”  The court reasoned that because the accounting firm simply accessed information via the web that was processed via BNA and Thomson Reuter’s own software, hardware and infrastructure, there was no “delivery” under a conventional understanding of the word.  Absent delivery, there was no prewritten computer software for Treasury to impose tax upon.

Second, the Court of Claims went on to note that even if prewritten computer software was delivered, the accounting firm did not sufficiently “use” the software to impose the tax.  Because the accounting firm did not exercise a right or power over the software incident to ownership (other than the ability to control research outcomes by inputting research terms), there was no use.  The court explicitly turned down Treasury’s argument [...]

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Illinois Courts Consistently Enforce Manufacturing Exemption Despite Department of Revenue Opposition

by | Oct 14, 2014 | ,

Illinois courts have issued three taxpayer-friendly manufacturing rulings in 2013 and 2014, underscoring the breadth of the exemption from use tax afforded to equipment and chemicals used in the process of manufacturing.

Cook County Circuit Court Holds Chemicals Effectuate a “Direct and Immediate” Change on a Product Being Manufactured and Thus are Tax-exempt

Most recently, in in PPG Industries, Inc. v. Illinois Dep’t of Revenue, No. 13 L 050140 (Cir. Ct. of Cook County, Ill. Sept. 9, 2014), the Circuit Court of Cook County, Illinois, reversed an administrative determination denying PPG a refund of use tax paid on its purchase of chemicals used in a manufacturing process, on the basis that the chemicals effectuated a “direct and immediate change” on the glass that was being manufactured.  The exemption at issue exempts from tax “chemicals or chemicals acting as catalysts but only if the chemicals or chemicals acting as catalysts effect a direct and immediate change upon a product being manufactured or assembled for sale or lease.”  86 Ill. Admin. Code § 130.330(c)(6); see 35 ILCS 105/3-50(4) (exempt “equipment” includes same).

The Circuit Court opinion found that the Administrative Law Judge’s opinion was clearly erroneous under the facts as presented at the hearing.  The Court rejected the ALJ’s finding that in order to be found to have a “direct and immediate” change on a product being manufactured, there must be a chemical reaction between the chemical for which the tax exemption is sought and the product being manufactured.  The Court determined that the glass being manufactured underwent “an observable direct and immediate physical change as a result of” the chemicals at issue, finding that nothing in the exemption requires that the direct and immediate change relate to a chemical change and not a physical one.  Additionally, the Court characterized a “direct” change as one in which after the chemicals at issue are added to the manufacturing process, “no additional steps or agencies in the manufacturing process intervene or are required to effect vital changes” on the product being manufactured.  It remains to be seen whether the Illinois Department of Review (Department) will appeal the decision.

Illinois Appellate Court Finds Gas Leasing Corporation Owes No Tax on Hazmat Fees or Cryogenic Systems 

On September 5, 2013, the Illinois Appellate Court issued a ruling in favor of ILMO Products Co. (ILMO), holding that ILMO did not owe Retailers’ Occupation Tax on the hazmat fees it charged in connection with its rentals of high pressure gas cylinders because the fees were part of a nontaxable rental and were not a taxable sale of gas.  ILMO Prods. Co. v. Ill. Dep’t of Revenue, 2013 IL App (4th) 120973-U (Sept. 5, 2013).  The Appellate Court also held that ILMO did not owe use tax on its purchase of cryogenic systems because the systems primarily were used as part of a manufacturing process.

The Appellate Court resolved the hazmat fee issue based on the parties’ pre-trial stipulations that the hazmat fee was a [...]

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In Case We Didn’t Know the Difference Between “Big” and “Little” Cigars, the New York State Tax Department Tells Us What it is

by | Sep 5, 2014 | ,

The New York State Department of Taxation and Finance has addressed one of the major issues in tax administration:  defining the difference between “big” and “little” cigars.  Tax Bulletin TP-530 (August 28, 2014).  First, the Department has defined “cigar.”  A cigar is any roll of tobacco wrapped in leaf tobacco or in any substance containing tobacco.  A “little” cigar is a cigar that has all of the following characteristics:  (1) it is a “roll” for smoking made with any amount of tobacco, (2) the cigar wrapper contains some amount or form of tobacco that is not “natural leaf tobacco,” and (3) the product must either weigh four pounds or less per 1,000 cigars or have a filter made of cellulose acetate (i.e., a cigarette-type filter) or any other integrated filter.  A “natural leaf tobacco wrapper” that can prevent a cigar from being classified as being “little” is any wrapper made from one or more natural tobacco leaves.  An example of a substance commonly used to wrap cigars that contains tobacco but is not “natural leaf tobacco” is “homogenized tobacco leaf,” which is made from “tobacco scraps that are pulverized, mixed with other products and rolled into sheets that can be used to wrap cigars.”

The importance of the ruling is that little cigars are taxed at the same rate as cigarettes, which is lower than the rate on big cigars.

This is probably the most important tax development to come along since the Internal Revenue Service released Revenue Ruling 63-194, 1963-2 C.B. 670, explaining the requirements that a martini would have to meet to be considered a “dry martini” for tax purposes.

The McDermott State and Local Tax Practice Group is well positioned to advise clients on these important issues.  Although none of us smoke cigars, our Firm’s real estate and corporate departments are well stocked with cigar smokers so we have access to the necessary expertise to advise our clients.



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The Illinois Two-Step: Final Sales Tax Sourcing Regulations May Cause Sales to be Sourced outside the State

by | Aug 8, 2014 | , ,

Localities expecting more tax dollars due to the elimination of the controversial order acceptance test may be sorely disappointed.  Application of the final sales tax sourcing regulations, effective as of June 25, 2014 (see 38 Ill. Reg. 14292), may actually increase the number of sales that are sourced outside of the state, such that more sales are subject to the 6.25 percent Use Tax rate instead of the higher Retailers’ Occupation Tax rates that include additional local rates.

Background: Moving from a Test Favoring In-State Sourcing to a Neutral Approach

In previous posts we provided the background on the litigation and policy factors driving this new regulation. See Illinois Department of Revenue Intends to Extend Its Multifactor Post-Hartney Sourcing Regulations to Interstate Transactions; Illinois Regional Transportation Authority Suffers A Setback In Its Sales Tax Sourcing Litigation. Suffice it to say that Illinois sales tax sourcing has been a contentious issue. But Illinois local government units may now find that the revenue impact of these new regulations is worse that the sourcing issues that they attempt to cure: Where the previous regime had tended to source sales to Illinois if part of the retailing activity occurred in the state, the new regulations treat in-state and out-of-state locations equally and attempt to source sales to the location with the best claim on the retailing activity.

Step One: Can a Location Claim at Least Three of Five Primary Selling Activities?

The first part of the test looks to five primary selling activities. If at least three of the primary selling activities occur in one business location, then the sales are sourced to that location. See 86 Ill. Admin. Code 220.115(c)(1), (2). (Note: These sourcing regulations are codified in parallel under several chapters of the Illinois Administrative Code. See 86 Ill. Admin. Code 220.115, 270.115, 320.115, 370.115, 395,115, 630.120, 670.115, 690.115, 693.115, 695.115. For convenience we will cite to 86 Ill. Admin. Code 220.115, but parallel provisions exist in the other regulations.) The primary activity factors are as follows:

Broadly speaking, the primary selling activities would likely result in headquarters-based sourcing as long as the business has a centralized headquarters with personnel that have the authority to bind the seller and personnel issuing invoices and processing payments. Additionally, there appears to be an overlap between the first two activities: If salespersons have authority to bind the retailer to a sale, then it would seem that the second factor, where the binding action takes place, would also be implicated.

Step Two: If No Location Has a Majority of Primary Selling Activities, then the Headquarters and Inventory Locations Compete for Sourcing Based on Primary and Secondary Factors

Assuming that no single location can claim three primary selling activities, the test then turns to the second step, in which both primary and secondary selling activities are considered in determining whether the sales should be sourced to the headquarters location or the inventory [...]

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Illinois Appellate Court’s Expansive Interpretation of a Taxing Ordinance Swallows a Sale for Resale Exemption

by | Jul 30, 2014 | , , , , ,

The First District of the Illinois Appellate Court, in Ford Motor Company v. Chicago Department of Revenue, 2014 IL App (1st) 130597 (June 27, 2014), recently held that Ford Motor Company (Ford) owes City of Chicago vehicle fuel tax on 100 percent of the fuel it purchased and dispensed into the tanks of cars it manufactured in Chicago, even though Ford offered proof that 98 percent of the fuel was resold to car dealerships around that nation.

The court relied on the language of the taxing ordinance, which imposes tax on the “privilege of purchasing or using, in the City of Chicago, vehicle fuel purchased in a sale at retail.”  The court, focusing only on the first portion of that provision, found Ford “used” the fuel in Chicago, on the basis that “use” is defined to include “dispensing fuel into a vehicle’s fuel tank,” an activity Ford did when it transferred fuel from its storage tanks into the tanks of the cars it manufactured.

For the “sale at retail” element, defined as “any sale to a person for that person’s use or consumption and not for resale to another,” the court rejected Ford’s argument that it resold 98 percent of its purchased fuel to dealerships on the basis that Ford had introduced insufficient proof.  The court disregarded Ford’s sample invoice that included a line item charge for 10 gallons of fuel because a supporting affidavit from Ford did not confirm that the invoiced amount was the amount actually in the tank of that specific car at the time of delivery.  The court then, somewhat presumptively, inferred that the invoiced amount must be the amount that Ford initially dispensed into the car, before consuming some fuel during delivery, so that “the amount invoiced was to reimburse Ford Motor Company for fuel that it purchased and used to produce and prepare its new cars for delivery. …”  Additionally, the court considered Ford’s failure to rebut the City’s evidence that no Ford dealership in Chicago had remitted fuel tax consistent with the conclusion that Ford was not reselling fuel; the court did not cite any authority for the proposition that subsequent tax collection is a necessary element of the statutory “resale” provision.

Ford also raised constitutional concerns that were not considered very seriously by the court.  For example, was there sufficient nexus between the City and Ford’s use of the fuel placed into cars it transferred to dealerships?  Moreover, the court did not consider the conceptual tax issue of pyramiding, as the ultimate vehicle purchaser will presumably pay tax (in almost all locations in the country) on the full price paid for the vehicle, which will cover the cost of the fuel.  In any event, by focusing on the “use” and not the “resale” aspect of the taxing ordinance, the court fails to consider that the ordinance may not apply to Ford at all.



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If At First You Don’t Succeed, Try, Try Again: Illinois General Assembly Sends Revised Version of Click-Through Nexus Law to the Governor for Signature

by and | Jul 30, 2014 | , , , , ,

In 2011, Illinois became one of the first states to follow New York’s lead by enacting “click-through nexus” legislation.  The Illinois law created nexus for any out-of-state retailer that contracted with a person in Illinois who displayed a link on his, her or its website that had the ability to connect an Internet user to the remote retailer’s website, when those referrals generated over $10,000 per year in sales.  Pub. Act 96-1544, §§5, 10 (eff. Mar. 10, 2011) (codified at 35 ILCS 105/2(1.1) and 35 ILCS 110/2(1.1) (West 2010).  On October 13, 2013, the Illinois Supreme Court held that the click-through nexus law violated the Internet Tax Freedom Act (ITFA) by imposing a discriminatory tax on electronic commerce.  Performance Marketing Ass’n v. Hamer, 2013 IL 114496.  The court held that the statute unlawfully discriminated against Internet retailers by imposing a use tax collection obligation based only on Internet referrals but not on print or over-the-air broadcasting referrals.  The court did not reach the question whether the law also violated the Commerce Clause of the United States Constitution (although the trial court had also rejected the law on this basis).

In its recently completed Spring 2014 legislative session, the Illinois General Assembly approved an amendment to the click-through law that was designed to correct the deficiencies found by the Illinois Supreme Court.  SB0352 (the Bill).  The Bill expands the definition of a “retailer maintaining a place of business in this State” under the Illinois Use Tax and Service Occupation Tax Acts (Acts) to include retailers who contract with Illinois persons who refer potential customers to the retailer by providing a promotional code or other mechanism that allows the retailer to track purchases referred by the person (referring activities).  The referring activities can include an Internet link, a promotional code distributed through hand-delivered or mailed material or promotional codes distributed by persons through broadcast media.  The Bill goes on to provide that retailers can rebut the presumption of nexus created by the use of promotional codes or other tracking mechanisms by submitting proof that the referring activities are not sufficient to meet the nexus standards of the United States Constitution.  Presumably, under the principles of Scripto and Tyler, if a remote seller can demonstrate that the Illinois referrals are not “significantly associated” with its ability to “establish or maintain” the Illinois market, the presumption will be rebutted.

As amended, the Bill appears to address the ITFA concerns expressed by the Illinois Supreme Court by not singling out internet-type referrals.  It also attempts to resolve any due process constitutional concerns by providing an opportunity for retailers to rebut the presumption of nexus created by their use of referring activities.  The Bill was sent to the Illinois governor for signature on June 27.  The Bill will take immediate effect upon becoming law.

At present, four other states (Georgia, Kansas, Maine and Missouri) have click-through nexus laws that expressly extend the presumption of nexus to non-Internet based referring activities.  [...]

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State and Local Tax Supreme Court Update: June 2014

by and | Jun 25, 2014 | , , , , , , , , ,

On June 10, 2014, the Supreme Court of the United States distributed three state and local tax cases for a conference to be held on June 26, 2014: Equifax, Inc. v. Mississippi Department of Revenue, Direct Marketing Association v. Brohl, and Alabama Department of Revenue v. CSX Transportation, Inc.  The Supreme Court previously agreed to hear Comptroller of the Treasury v. Wynne and determine whether Maryland’s disallowance of a credit against its county income tax for taxes paid to other jurisdictions violated the Commerce Clause.  We are eager to see if the Court will opt to hear the remaining three cases, clarifying answers to questions in the world of state taxation.

The taxpayer in Equifax filed a petition for a writ of certiorari on February 19, 2014, appealing a decision by the Mississippi Supreme Court.  The state court upheld the Mississippi Department of Revenue’s application of market-based sourcing as an alternative apportionment formula instead of the statutory cost-of-performance sourcing for apportioning the income of Equifax, a credit reporting company.  In making this determination, the court required the Mississippi chancery courts to use a highly deferential standard of review.  The Institute for Professionals in Taxation, the Georgia Chamber of Commerce and the Council On State Taxation filed amicus curiae briefs.

The Direct Marketing Association filed a petition for a writ of certiorari on February 25, 2014.  The Direct Marketing Association seeks review of a decision by the U.S. Court of Appeals for the Tenth Circuit that held that the Tax Injunction Act barred federal court jurisdiction over the Direct Marketing Association’s challenge to a Colorado sales and use tax reporting law.  The law requires remote sellers that do not collect Colorado sales or use tax and have total annual gross sales in Colorado of $100,000 or more to inform the customer at the time of sale of the customer’s use tax obligation, to send annual notices to customers who purchased $500 or more in goods from the seller and to file a report with the state regarding a customer’s total purchases.  An amicus curiae brief was filed by the Council On State Taxation.  If the Supreme Court were to hear Direct Marketing Association v. Brohl, it would likely clarify the holding of Hibbs v. Winn to better clarify the scope of the TIA’s protection.

On October 30, 2013, the Alabama Department of Revenue filed a petition for a writ of certiorari in CSX Transportation.  The Alabama Department of Revenue is challenging the U.S. Court of Appeals for the Eleventh Circuit’s decision that Alabama’s sales tax on diesel fuel discriminates against rail carriers in violation of the Railroad Revitalization and Regulatory Reform Act of 1976 (4-R Act) because motor carriers and interstate water carriers are not required to pay the 4 percent sales tax.  The Supreme Court had previously issued a 2011 opinion stating that the taxpayer could challenge sales and use taxes under the 4-R Act, but the Supreme Court remanded the case to determine whether the tax was discriminatory.  Amicus [...]

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