ORGANIZATION FOR INTERNATIONAL
INVESTMENT
STATE AND LOCAL TAX DEVELOPMENTS
Case and Controversy Update
Thursday May 1, 2008
Richard A. Leavy
Mayer Brown LLP
1675 Broadway
New York, New York 10019
(212) 506-2310
rleavy@mayerbrown.com
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Richard A. Leavy – Biography
Richard Leavy is partner in the Tax Transactions practice group of Mayer Brown LLP, resident in
the New York office. Richard's practice includes all areas of state and local taxation,
concentrating on transactional analysis and planning. Prior to joining Mayer Brown in 2007,
Richard was an equity partner at another prominent international law firm (1998–2007). During
the 1995–1996 term, Richard served as judicial intern to The Honorable Leonard I. Garth, US
Court of Appeals for the Third Circuit. Richard holds an LLM in Taxation from New York
University School of Law, a JD from Rutgers School of Law – Newark, and an undergraduate
degree in political science from Rutgers College. Richard is admitted to practice in New York and
New Jersey.
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I.
II.
III.
IV.
Recently Decided United States Supreme Court State Tax Cases
Pending United States Supreme Court State Tax Cases
State Tax Cases Denied Review by the United States Supreme Court
Recently Decided State Tax Cases
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A. RECENTLY DECIDED UNITED STATES SUPREME COURT STATE TAX CASES
1. Permanent Mission of India to the United Nations v. City of New York, United States
Supreme Court Dkt. No. 06-134, June 14, 2007.
a. Under New York law, real property owned by a foreign government is exempt from
taxation when used exclusively for diplomatic offices or quarters for ambassadors or
ministers.
b. New York City levied property taxes against the Mission for that portion of its diplomatic
office buildings used to house lower level employees and their families.
c. The Mission claimed that the Foreign Sovereign Immunities Act of 1976 (FSIA) provided
protection from suit by the City.
d. The Court held that the FSIA does not immunize a foreign government from a law suit
to declare the validity of tax liens on property held by the sovereign for the purpose of
housing its employees.
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A. RECENTLY DECIDED UNITED STATES SUPREME COURT STATE TAX CASES
B. CSX Transportation, Inc. v. Georgia State Board of Equalization, Dkt. No. 06–1287,
December 4, 2007.
a. The 4-R Act bars states from discriminating against railroads when levying property
taxes and provides an exception to the general rule of the federal Tax Injunction Act, 28
U.S.C. §1341 against interference with matters of state taxation.
b. Federal courts may provide redress under the 4-R Act if the ratio of assessed value to
true market value of rail transportation property exceeds by at least 5% the ratio of
assessed value to true market value of other commercial and industrial property in the
same assessment jurisdiction.
c. In order to evaluate an assessment ratio under the 4-R Act, federal courts must
calculate the true market value of in-state railroad property, which requires a court to
"look behind" a state's choice of valuation methods.
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II. PENDING UNITED STATES SUPREME COURT STATE TAX CASES
1. Kentucky Department of Revenue v. Davis, United States Supreme Court Dkt. No. No. 06666, Argued November 5, 2007.
a. Under Kentucky law, interest earned on Kentucky state and local bonds is exempt from
state income tax and interest earned on out-of-state bonds is subject to Kentucky state
income tax (this is the law in more than 40 states).
b. The plaintiffs filed a class action suit claiming that the Kentucky law taxing interest
earned on out-of-state bonds violates both the commerce clause and the equal
protection clause.
c. The trial court granted summary judgement in favor of the Kentucky Department of
Revenue, the appeals court reversed holding that the law discriminates in violation of
the dormant commerce clause and is facially unconstitutional, and the Kentucky
Supreme Court refused to hear the case.
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II.
PENDING UNITED STATES SUPREME COURT STATE TAX CASES
B. MeadWestvaco Corp v. Illinois, United States Supreme Court Dkt. No. No. 06-666, Argued
November 5, 2007.
a. The petitioner, a non-domiciliary of Illinois, sold its interest in LexisNexis, another nondomiciliary of Illinois, and reported the gain from the sale as nonbusiness income not
apportionable to business income in Illinois (and therefore not subject to tax in Illinois).
b. The Illinois Department of Revenue characterized the gain as apportionable business
income subject to tax in Illinois.
c. Meadwestvaco claimed that Illinois should not tax the sale because LexisNexis was a
non-unitary business held for investment purposes.
d. Both the Cook County Circuit Court and Illinois Appellate Court disagreed and held that
the tax was proper because Meadwestvaco's investment in LexisNexis served an
operational (rather than investment) function.
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III. STATE TAX CASES DENIED REVIEW BY THE UNITED STATES SUPREME COURT
1. General Electric Co. v. Commissioner, New Hampshire Department of Revenue
Administration, United States Supreme Court Dkt. No. 06-1210, petition for certiorari denied
October 29, 2007.
a. Facial discrimination challenge to the New Hampshire business profits tax (BPT) under
the Commerce Clause based on the limitation on the deduction provided for dividends
received from foreign subsidiaries so as to only allow the deduction to the extent that
the foreign subsidiary conducts income-generating business in the state.
b. The taxpayer challenged the constitutionality of the state's tax regime arguing that the
denial of the deduction for dividends received from foreign corporations not doing
business in the state facially discriminates against foreign commerce.
2. Florida Department of Revenue v. Piccadilly Cafeterias, Inc., United States Supreme Court,
Dkt. No. 07-312, petition for certiorari granted December 7, 2007.
a. After bankruptcy petition filed under Chapter 11, the court approved a sale of the
corporation's assets and held that the sale was exempt from stamp taxes under
§1146(c), even though the sale was made prior to the corporation's global settlement
and prior to any plan confirmation.
b. The Florida Department of Revenue asserted that §1146(a) (previously numbered as
§1146(c)) of the federal Bankruptcy Code, which exempts from stamp or similar taxes
any asset transfer under a plan confirmed under §1129 of the Code, does not apply to
the transfer of assets made prior to the Chapter 11 plan confirmation.
c. The bankruptcy court, district court, and 11th Circuit all held that §1146(c) allows a tax
exemption for pre-confirmation transfers.
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III.
STATE TAX CASES DENIED REVIEW BY THE UNITED STATES SUPREME COURT
C. Ford Motor Co. v. Seattle, United States Supreme Court Dkt. No. 07-623, petition for
certiorari denied February 19, 2008.
a. Seattle and Tacoma each impose a "business activity" tax on a company's gross
receipts from wholesale sales.
b. Ford Motor Co. asserted that the cities of Seattle and Tacoma, Washington
unconstitutionally taxed wholesale activity occurring outside the jurisdictional
boundaries of the cities.
D. Lanco, Inc. v. Director, Division of Taxation, United States Supreme Court Dkt. No. 06-1236,
petition for certiorari denied June 18, 2007.
a. Lanco was a Delaware corporation with no officers, employees, or real or tangible
personal property in New Jersey. However, Lanco owned and licensed intangibles to
its affiliate in New Jersey.
b. In a decision affirmed by the New Jersey Supreme Court, the Appellate Division of the
Superior Court held that that Quill's physical presence nexus requirement is not
applicable to income tax and that the New Jersey Corporation Business Tax may be
constitutionally applied to income derived by plaintiff from licensing fees attributable to
New Jersey.
E. FIA Card Services NA, f/k/a MBNA America. Bank NA, v. Tax Commission, No. 06-1228,
petition for certiorari denied June 18, 2007.
a. West Virginia's statute imposes a tax on financial institutions based on the amount of
the financial institutions' economic activity with respect to West Virginia customers.
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III.
STATE TAX CASES DENIED REVIEW BY THE UNITED STATES SUPREME COURT
2. In a decision affirmed by the West Virginia Supreme Court, the Circuit held that the
corporate net income and business franchise taxes had been properly imposed on
MBNA, since the gross receipts attributable to a West Virginia source far exceeded the
statutory threshold for nexus and concluded that MBNA had substantial nexus with the
state for the years in question such that imposition of the corporate income and
business franchise taxes was proper.
3. The Court rejected the "bright-line physical presence test" established in Bellas Hess
and adhered to in Quill because the taxes at issue in this case were not sales and use
taxes. Specifically, the Court found as a matter of law that physical presence was not
required to establish substantial nexus to satisfy the Commerce Clause when imposing
corporate net income and business franchise taxes.
4. In reaching its decision, the Court focused on the many benefits MBNA was deemed to
receive from the state, such as the banking and consumer credit laws and access to
the state's courts, all of which enabled MBNA to generate income from West Virginia
customers. The Court noted in particular that because MBNA extends substantial
unsecured credit to citizens of West Virginia, the fact that MBNA had access to West
Virginia courts was essential to its business operations.
F. Fluor Enterprises, Inc. v. Michigan Department of Treasury, United States Supreme Court
Dkt. No. 07-149, petition for certiorari denied October 9, 2007.
a. A taxpayer challenged the Michigan single business tax apportionment statute as
violating the Commerce Clause by classifying receipts for services rendered outside
Michigan as Michigan sales.
b. The corporation's employees performed engineering and architectural services outside
of Michigan that were related to real estate improvement projects constructed in
Michigan, thereby constituting "services performed" for "construction activities" that
took place within Michigan.
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IV. RECENTLY DECIDED STATE TAX CASES - Alabama
1. Alabama
a. Graduate Supply House, Inc. v. Alabama Department of Revenue, Alabama Department
of Revenue, Administrative Law Division, No. S. 05-751, November 20, 2007.
i. The physical presence of the taxpayer's income-producing property in Alabama
established substantial nexus and taxability.
ii. Even if the in-state company's representatives were not deemed to be agents, the
caps and gowns that were being rented in Alabama from which it derived
substantial income created nexus.
b. Garrison v. Alabama Department of Revenue, Alabama Department of Revenue,
Administrative Law Division, No. INC. 07-699, November 1, 2007.
i. A faxed notice of appeal does not constitute a proper filing of an appeal, absent an
agency rule to the contrary.
ii. The taxpayer's attorney sent a faxed letter that to the Alabama Income Tax
Division's Individual Hearing Section, which was docketed by the Administrative
Law Division as an appeal of a personal income tax assessment.
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IV.
RECENTLY DECIDED STATE TAX CASES - Alabama
3. Alabama Department of Revenue v. Hoover, Inc., Alabama Court of Civil Appeals, Dkt.
No. 2060142, August 31, 2007.
i. Collateral estoppel barred the Alabama Department of Revenue from relitigating
the issue of whether sufficient justification existed for a sales tax scheme that the
Alabama Supreme Court had previously held to be facially discriminatory against
interstate commerce.
ii. In 2006 the Alabama Supreme Court determined that Alabama's policy of
imposing Alabama sales tax on sales of products delivered in Alabama to out-ofstate governmental entities, while exempting sales of products delivered in
Alabama to Alabama state and local governmental entities, violated the federal
Commerce Clause.
iii. Even though the case concerned different tax years and different sales tax
assessments, it involved the same fundamental issues so the principle of
collateral estoppel applied because inasmuch as the issue was identical to the
issue litigated in the prior action, the issue was actually litigated in the prior
action, the resolution of the issue was necessary to the prior judgment, and the
same parties were involved in both actions..
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IV.
RECENTLY DECIDED STATE TAX CASES - Alabama
4. Surtees v. VFJ Ventures, Inc., Alabama Court of Civil Appeals, No. 2060478, February
8, 2008.
i. The Alabama Court of Civil Appeals held the disallowal of deductions under
Alabama's addback statute for royalty payments a manufacturing corporation
made to certain related intangible management companies proper.
ii. Because the statute provides that the addback requirement does not apply if it
would be "unreasonable," but does not define the term, the higher court gave
deference to the consistent agency interpretation that an addback would be
unreasonable if the resulting tax would be out of proportion to the corporation's
activities in Alabama.
iii. To construe the unreasonableness exception as requiring only a showing of a
business purpose or economic substance would render the rule ineffective
5. Tate & Lyle Ingredients Americas, Inc. v. Alabama Department of Revenue, Alabama
Department of Revenue, Administrative Law Division, No. CORP. 07-162, January 15,
2008.
i. An out-of-state corporation was not subject to Alabama corporate income tax on
the gain it realized from selling its one-third stock interest in a European company,
despite the fact that the two companies were in the same general line of business
(i.e., selling cereal sweeteners) and were owned by the same holding company.
ii. The assertions that the companies were unitary and operationally related were
found to be speculative and unsupported by the evidence.
iii. The determining question was whether there was a flow of value between the
companies, as evidenced by functional integration, centralization of management,
and economies of scale.
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IV.
RECENTLY DECIDED STATE TAX CASES - Arizona
B. Arizona
a. Arizona Department of Revenue, Case No. 200600082-C, Decision of Hearing Officer,
June 15, 2007 (released August 2007).
i. Gain from sales of assets and property by holding companies that were members
of a taxpayer's affiliated group and included in the taxpayer's consolidated
Arizona corporate income tax return were held to be apportionable business
income since the business of the holding companies was to hold the assets and
property sold.
ii. Royalty income from patents held by holding companies was business income
where the business of the holding companies was to hold the patents.
2. Richardson v. Arizona Department of Revenue, Arizona State Board of Tax Appeals,
No. 1949-06-I, July 18, 2007 (released October 2007).
i. An Arizona law imposing personal income tax on a taxpayer's income from out-ofstate municipal bond interest, while excluding Arizona municipal bond interest
from tax, was held not to violate the Commerce or Equal Protection Clauses of
the United States and Arizona Constitutions, or the Uniformity Clause of the
Arizona Constitution.
ii. The Board of Tax Appeals based its decision on (i) having no authority to
recognize an administrative class refund claim or class action on behalf of the
taxpayer and other similarly-situated taxpayers and (ii) having no authority to
declare a statute unconstitutional (although it could apply constitutional doctrines
to resolve claims).
3. Southwest Airlines Co. v. Arizona Department of Revenue, Arizona Court of Appeals
Dkt. No. 1 CA-TX 07-0002.
i. Personal property tax was properly imposed on avionics software installed in
flight computers aboard the taxpayer's aircraft in Arizona.
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IV.
RECENTLY DECIDED STATE TAX CASES - Arkansas
C. Arkansas
a. Citifinancial Retail Services Division of Citicorp Trust Bank, FSB v. Weiss, Arkansas
Supreme Court, No. 07-551, January 17, 2008.
i. A company that provided financing on consumer retail purchases was not a
"taxpayer" under the Arkansas bad debt statute and therefore was not entitled to
claim a refund of sales taxes that it had paid to retailers on credit accounts on
which consumers defaulted, even though it was an assignee of the retailer.
ii. To qualify for a refund under the bad debt statute, a person must be liable for
remitting sales tax on the purchase.
iii. Although the financing company paid the sales tax to the retailer, the retailer
remained the person liable for reporting and remitting the sales tax to the state.
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IV.
RECENTLY DECIDED STATE TAX CASES - California
D. California
a. General Mills, Inc. & Subsidiaries v. Franchise Tax Board, California Superior Court for
the County of San Francisco, No. 439929, September 26, 2007.
i. Receipts from a taxpayer's sales transactions in the commodity futures market
could not be treated as "gross receipts" in calculating the taxpayer's sales factor
for California corporation franchise and income tax apportionment purposes.
ii. The court held that although a party realized the same gross profits from a futures
contract as from a cash market sale, the economic reality of a futures transaction
was significantly different from that of a cash market sale and justified disparate
treatment for apportionment purposes.
iii. Some of the factors deemed relevant included (i) the rarity of an actual purchase
or sale of a commodity, (ii) the ability of either party to unilaterally decide to offset
the contract, (iii) the primary function of the contracts as a way to expose parties
to price fluctuations, (iv) the claiming of gross receipts equal to the nominal price
of a grain futures contract and the amount realized from the sale of products
resulting in double-counting of futures transactions in a manner that did not fairly
reflect actual business gains, (v) .the GAAP recording of gains and losses
resulting from hedging activities, and not gross sales, and (vi) the lack of a profit
motive (the hedging motive).
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IV.
RECENTLY DECIDED STATE TAX CASES - California
2. Barnesandnoble.com LLC v. State Board of Equalization, California Superior Court,
San Francisco County, Case No. CGC-06-456465, October 11, 2007, filed October 12,
2007.
i. The use by a brick-and-mortar company of coupons in its shopping bags to
provide a discount on any one online purchase from its Internet retailer sister
company (taxpayer) did not create nexus sufficient to impose California use tax
registration, collection and remittance obligations.
ii. The court held that the concept of agency requires something significantly more
than the passive distribution of coupons and the agent must have the authority to
bind the principal.
3. County of Los Angeles v. Superior Court of Los Angeles County, California Court of
Appeal, Second Appellate District, B198118, January 24, 2008
i. A challenge to county utility user tax could be certified as a class action despite
both a state law restriction on class actions for tax refunds and the failure of
individual class members to comply with either the state's Government Claims Act
or the county's claims ordinance.
ii. The class was required to show some compliance with each claims requirement
and substantial compliance with all the requirements, and the county had not
contended that the class failed to meet the substantial compliance test.
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IV.
RECENTLY DECIDED STATE TAX CASES - Delaware
E. Delaware
a. Lehman Bros. Bank, FSB v. State Bank Commissioner, Delaware Supreme Court, No.
656, 2006, November 7, 2007.
i. A federally chartered savings bank, with its principal office and a small staff of
employees in Delaware, was held to be liable for Delaware franchise tax
assessments, even though most of the bank's employees, including senior
management, were located in New York because the bank was domiciled in
Delaware for franchise tax purposes.
ii. The tax was held not to violate the Commerce or Due Process clauses of the
United States Constitution because the bank had the requisite minimum contacts
with Delaware and received state benefits and protections.
iii. The Delaware Bank Commissioner was found to have abused his discretion when
he refused to abate penalties for additional tax without providing an explanation
for the three-year delay in notifying the bank of the tax deficiency.
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IV.
RECENTLY DECIDED STATE TAX CASES - Florida
F. Florida
a. City of Tampa v. Addison, Florida Court of Appeal, Second District, No. 2D06-3168,
August 8, 2007.
i. Challenge to the constitutionality of the occupational license tax as applied to
attorneys practicing law in Tampa.
ii. An order of class certification was affirmed for members of the Florida bar
challenging the constitutionality of the city of Tampa's occupational license tax
because the city's objections were without merit.
b. Technical Assistance Advisement, No. 07C1-007, Florida Department of Revenue,
October 17, 2007.
i. An out-of-state financial services processing company was held to have
established a taxable nexus with Florida for corporate income tax purposes based
on business dealings with unrelated authorized vendors.
ii. The taxpayer did not maintain real or tangible personal property or employ
personnel or agents in Florida but was licensed by the Office of Financial
Regulation.
iii. "Doing business "in Florida means actively engaging in any transaction for the
purpose of financial gain; physical presence is not required to impose the state's
corporate income tax.
iv. The presence of the unrelated vendors was sufficient to create corporate income
tax nexus, because without them, the taxpayer could not operate its business in
Florida.
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IV.
RECENTLY DECIDED STATE TAX CASES - Florida
3. Golden West Financial Corp. v. Florida Department of Revenue, Florida District Court
of Appeal, First District, No. 1D07-0135, February 19, 2008.
i. Florida Rule 12C-1.-13(14)(j) purports to prohibit a deduction for a NOL carryover
sustained in a prior taxable year for which a Florida consolidated return was not
filed and Florida corporate income tax returns were not filed for all members of
the group.
ii. The corporate income tax separate return limitation year (SRLY) rule applied to
net operating losses (NOLs) was held to be invalid because it impermissibly
"enlarges, modifies, or contravenes the specific provisions" of the two enabling
statutes and, therefore, it is a prohibited invalid exercise of delegated legislative
authority.
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IV.
RECENTLY DECIDED STATE TAX CASES - Idaho
G. Idaho
a. Decision No. 19311, Idaho State Tax Commission, July 30, 2007.
i. Income from the sale of a subsidiaries' stock and minority interests in several
partnerships was held to constitute apportionable business income for Idaho
corporate income tax purposes.
ii. The existence of a unitary business demonstrated that the subsidiaries served an
operational rather than an investment function and served as the necessary
predicate to apportioning the gain.
iii. The subsidiaries furthered the parent's delivery of integrated service packages to
its customers to expand its markets by providing installation and maintenance
services, materials and supplies, managerial, technical, accounting, and
administrative services to the parent company's operating subsidiaries.
iv. The subsidiaries had previously been included in the parent corporation's
combined reports.
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IV.
RECENTLY DECIDED STATE TAX CASES - Idaho
2. Decision No. 19853, August 16, 2007.
i. The sale of an ownership interest in a former subsidiary was held to be
apportionable business income for Idaho corporate income tax purposes.
ii. The prospective agreement entered into by the seller and the purchaser of the
subsidiary guaranteeing the continued supply of the former subsidiary's products
and a no-competition clause in the sale agreement demonstrated that the sold
subsidiary was not a passive investment and could not rebut the strong
presumption that income from stock or other securities is business income.
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IV.
RECENTLY DECIDED STATE TAX CASES - Illinois
H. Illinois
a. State ex rel. Beeler v. Ritz Camera, Illinois Appellate Court, First District, No. 1-051059, October 5, 2007.
i. The original complaint was a qui tam action filed under the Illinois Whistleblower
Reward and Protection Act by a private law firm alleging that numerous retailers
with out-of-state operations failed to collect and remit Illinois use tax on goods
sold to Illinois residents over the Internet and/or through catalogs. The Attorney
General later intervened and prosecuted the matter on the State's behalf.
b. A joint motion to dismiss filed by the defendant retailers was denied by the trial
court, the interlocutory appeal was denied by the Appellate Court, and the
Supreme Court directed the Appellate Court to answer the six certified questions
prior to proceeding:
i. If a remote retailer does not collect and remit use tax on sales to Illinois
customers, can it make a knowingly false record or statement, as required to
create liability under the Illinois Whistleblower Act?
ii. Does the Whistleblower Act require the existence of an actual record or
statement to support a claim or can the failure to keep a record be
actionable?
iii. Can documents memorializing a purchase (i.e. invoices or packing receipts)
that show that tax is "$0.0" or in some other way that tax is not being
collected be considered "false" under the Act where the retailer that created
those documents does not collect tax?
iv. Is it necessary that a false statement be submitted to or actually relied upon
by the State?
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IV.
RECENTLY DECIDED STATE TAX CASES - Illinois
v. Does the use of the Whistleblower Act to enforce the sales and use tax laws
improperly deprive taxpayers of the specific rights and privileges afforded
them under the Protest Monies Act, the Taxpayer's Bill of Rights, and/or the
statutory administrative procedures, such that the Act cannot be used to
enforce the collection of taxes due the State?
vi. Is the Illinois Department of Revenue the sole entity authorized by the Illinois
General Assembly to assess and collect use tax?
vii. Does the Illinois Whistleblower Act apply to alleged tax liabilities under the
Use Tax Act?
viii. (a) Does the Whistleblower Act violate the Attorney General clause of the
Illinois Constitution, Article V, Section 15, by improperly usurping the
exclusive authority of the Attorney General to initiate and conduct litigation
on behalf of the State? (b) Does the Illinois Whistleblower Act, as applied to
tax matters, violate either the Attorney General clause or the Executive
Compensation clause of the Illinois Constitution, Article V, Sections 15 and
21?
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IV.
RECENTLY DECIDED STATE TAX CASES - Indiana
I. Indiana
a. Letter of Findings No. 06-0377, Indiana Department of Revenue, December 26, 2007.
i. Forcing the taxpayer to file a combined corporate adjusted gross income tax
return was justified based on the substantial artificial loss created by selling
accounts receivable at a discount, which distorted the taxpayer's Indiana income
and expenses.
ii. Combination was permissible because the subsidiary did not qualify as a financial
institution inasmuch as 80% of the subsidiary's gross income did not arise from
the enumerated financial institution activities.
b. Letter of Findings No. 04-0262, Indiana Department of Revenue, December 26, 2007.
i. Income received by a rail transportation service provider from providing liability
coverage was held to be "revenue from Indiana transportation" services, properly
apportioned on the basis of mileage.
ii. The allocation of all of the income to Indiana because the revenues were earned
from the taxpayer's corporate office located in Indiana and the employees who
performed the activities relating to the income were located in Indiana was
improper.
iii. The exclusion of the taxpayer's parent corporation from the consolidated return in
was held to be permissible, even though the parent corporation had nexus,
because inclusion resulted in a 120% decrease in taxpayer's adjusted gross
income.
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IV.
RECENTLY DECIDED STATE TAX CASES - Indiana
3. Letter of Findings No. 06-0511, Indiana Department of Revenue, January 30, 2008.
i. Royalty fees paid to an out-of-state related entity were properly deducted from
gross income in computing its Indiana adjusted gross income tax.
ii. The royalty fees were paid in exchange for the right to employ certain trademarks
and logos and deducted those fees on its Indiana tax returns and there was no
evidence that the royalty payments constituted an abusive tax avoidance scheme.
iii. There was no loan of the royalties back to the taxpayer or other return of the
royalties in the form of dividends.
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IV.
RECENTLY DECIDED STATE TAX CASES - Kansas
J. Kansas
a. Opinion No. 2007-38, Kansas Attorney General, November 30, 2007.
i. Proposed Kansas property tax legislation providing for different rates of taxation
based on whether the real property is owned by a private resident or a
commercial home builder.
ii. The proposed legislation was held to violate the uniform and equal provisions of
the Kansas Constitution since property of the same type must be valued using the
same method and not be based on who owns the property.
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IV.
RECENTLY DECIDED STATE TAX CASES - Kentucky
K. Kentucky
a. Kentucky v. Autozone Development Corp., Kentucky Court of Appeals, No. 2006-CA002175-MR, October 12, 2007.
i. A captive REIT doing business in Kentucky was allowed to claim a deduction for
dividends paid.
ii. The Kentucky Department of Revenue argued that deductions from gross income
are strictly limited to those taken for federal income tax purposes.
iii. Effective January 1, 2007, no deduction is allowed for dividends paid by a captive
REIT.
b. AT&T Corp. v. Kentucky Finance and Administration Cabinet, Kentucky Board of Tax
Appeals, File No. K01-R-18 (Order No. K-19978), January 4, 2008.
i. A New York company doing business in Kentucky was required to include all
members of its affiliated group in the return, not just subsidiaries with Kentucky
nexus.
ii. A Kentucky consolidated return must include all members of the affiliated group
included in the federal consolidated return, unless members are specifically
exempt from taxation.
iii. The consolidated return election treats all of the members of the affiliated group
as a single corporation for income tax purposes.
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IV.
RECENTLY DECIDED STATE TAX CASES - Kentucky
3. Kentucky Revenue Cabinet v. Asworth Corp., Franklin Circuit Court, Kentucky, No. 06CI-00288, December 4, 2007.
i. An out-of-state corporation was held to have sufficient nexus with Kentucky for
corporation income tax purposes even though the corporation had no physical
presence in Kentucky.
ii. The derivation of income from the ownership of partnership interests in
partnerships doing business in Kentucky satisfied the substantial nexus
requirement of the Commerce Clause.
iii. A definite link or minimum connection as is required by the Due Process Clause
was satisfied by the corporation's interest in partnerships doing business in
Kentucky that resulted in a substantial amount of distributive income from in-state
activities.
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IV.
RECENTLY DECIDED STATE TAX CASES - Louisiana
L. Louisiana
a. Firestone Polymers v. Calcasieu Parish School System, Louisiana Appellate Court,
Third Circuit, No. 07-0501, October 31, 2007.
i. The lease tax paid under protest on shipping containers leased out-of-state was
held to have been properly imposed.
ii. The fact that the containers were delivered to the parish created the requisite
taxable moment to justify the imposition
b. Bridges v. Geoffrey, Inc., Louisiana Appellate Court, First Circuit, No. 2007 CA 1063,
February 8, 2008.
i. Substantial nexus in Louisiana was created for a Delaware intangible holding
company based on the receipt of royalty income from an affiliated entity for the
license of trademarks and trade names used in activities in Louisiana.
ii. The company was subject to the corporate income and franchise taxes even
though it had no physical presence in Louisiana.
iii. Good faith to abate the penalties was lacking since the company declined to pay
any corporate income or franchise tax based on the knowledge of the South
Carolina Geoffrey decision.
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IV.
RECENTLY DECIDED STATE TAX CASES - Massachusetts
M. Massachusetts
a. Fleet Funding Inc. et al v. Commissioner of Revenue, Massachusetts Appellate Tax
Board, Feb. 21, 2007.
i. The dividends paid deductions allowable under the Massachusetts corporation
excise tax was denied for dividends paid among two Massachusetts REITs and
two Rhode Island passive investment companies on the basis that they lacked
business purpose and economic substance.
ii. The transactions were characterized as designed to convert interest earned from
real estate loans into tax-free dividends from the Rhode Island passive
investment companies.
b. The TJX Companies, Inc. v. Commissioner of Revenue, Massachusetts Appellate Tax
Board, Nos. C262229-31, August 15, 2007.
i. The formation of subsidiaries to hold trademarks to create deductions for royalties
paid to the subsidiaries under a transfer-and-license-back was characterized as a
sham and the taxpayer was denied a deduction for the royalties paid.
ii. The transactions were held to lack economic substance and have no purpose
other than the creation of tax benefits.
i. The subsidiaries had no control over the intangibles they purported to own.
ii. The subsidiaries did not negotiate the terms of the license agreements.
iii. The business operations did not change as a result of the transfer and
license-back.
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IV.
RECENTLY DECIDED STATE TAX CASES - Michigan
N. Michigan
a. Dickow v. Michigan Department of Treasury, Michigan Tax Tribunal, No. 0329530,
November 27, 2007.
i. A corporate president was found to be liable for Michigan sales, use, and
withholding taxes because he had corporate responsibility for making tax returns
and payments.
ii. The president signed returns and checks in payment of taxes, demonstrating that
he had tax-related responsibility.
b. NSK Corp. v. Department of Treasury, Michigan Court of Appeals, No. 274633, January
29, 2008.
i. The Michigan DOR audited the taxpayer and determined that taxes had been
overpaid, but denied that interest was due on the overpayment identified since no
"claim" for refund was submitted.
ii. The court held that the term "claim" should not be strictly construed and that a
claim is made on the date the DOR is made aware of the taxpayer's claim to a
refund, which is the date of the audit determination letter since the letter
functioned as the "claim."
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IV.
RECENTLY DECIDED STATE TAX CASES – New Jersey
O. New Jersey
a. McKesson Water Products Company v. Division of Taxation, New Jersey Tax Court,
No. 000156-2004, August 13, 2007.
i. Gain from the sale of a subsidiary's stock was held to be nonoperational income
and therefore not subject to the New Jersey corporation business tax.
ii. The taxpayer made an election under IRC section 338(h)(10), which is respected
by New Jersey and required the state to respect all aspects of the deemed sale of
assets and liquidation.
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IV.
RECENTLY DECIDED STATE TAX CASES – New York
P. New York
a. In re Brown, New York Division of Tax Appeals, Administrative Law Judge Unit, DTA
Nos. 821005 and 821012, December 13, 2007.
i. The controller and the general manager of a corporation were held not to be
personally liable for sales and use taxes due, despite the fact that they both pled
guilty to various criminal charges arising from violations of the Tax Law.
ii. Neither the controller nor the general manager was an officer or a director of the
corporation and neither had authority to sign checks.
iii. New York State argued that the corporate veil should have been pierced and that
the individuals should have been collaterally estopped from contesting their status
as responsible officers.
b. In re Bausch & Lomb, Inc., New York Division of Tax Appeals, Tax Appeals Tribunal,
DTA No. 819883, December 20, 2007.
i. The taxpayer was allowed a corporate franchise tax refund claim that was based
on a loss incurred in 1996 from the sale of a subsidiary included in the taxpayer's
combined group.
ii. The add-back of losses from subsidiary capital provided for in Tax Law §208.9(a)
does not apply to the loss incurred by the taxpayer on its sale of stock.
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IV.
RECENTLY DECIDED STATE TAX CASES – New York
3. Univisa, Inc., New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No.
820289, September 20, 2007.
i. Corporations filing separate New York returns must compute their NOL
deductions as if they had filed their federal returns on a separate basis.
ii. NOLs should stay with the subsidiary as they would have if the subsidiary had
filed separate federal income tax returns.
iii. To place the taxpayer in the same position as if it did not file consolidated federal
income tax returns, the use of NOLs of its subsidiary should be denied.
4. Niagara Mohawk Power Corp. v. Town of Moreau Assessor, New York Supreme Court,
Appellate Division, Third Judicial Department, No. 501920, December 20, 2007.
i. The taxpayer's challenge to local property tax assessments were upheld despite
the fact that the presumption of validity of the assessments was rebutted.
ii. The taxpayers failed to meet their burden of demonstrating overvaluation by a
preponderance of the evidence.
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IV.
RECENTLY DECIDED STATE TAX CASES – North Carolina
Q. North Carolina
a. Blinson v. State of North Carolina, North Carolina Court of Appeals, NO. COA06-1258,
October 16, 2007.
i. A challenge to the constitutionality of corporate income, corporate franchise, sales
and use, and property tax benefits and other economic incentives and subsidies
granted to Dell, Inc. was dismissed for failure to state a claim for relief and
because the plaintiffs lacked standing under the state Uniformity of Taxation
Clauses and the federal Dormant Commerce Clause.
ii. The North Carolina Supreme Court had previously held that economic incentives
offered by governmental entities to a private business for the purposes of job
creation and economic development fulfilled a public purpose.
iii. Economic development incentives do not constitute a prohibited exclusive
emolument.
2. Wal-Mart Stores East, Inc. v. Hinton, North Carolina Superior Court, No. 06-CVS-3928,
December 31, 2007.
i. The Department of Revenue was empowered to require a consolidated return and
use combined reporting to determine a multistate unitary business's net income
subject to North Carolina corporation franchise tax to correct the distortion
created by a reorganization undertaken to insert a captive REIT structure.
ii. The reorganization was undertaken to reduce the net income subject to North
Carolina corporation franchise tax by providing a rent deduction for rent paid to
the REIT and a dividends received deduction for dividends paid to the taxpayer by
the out-of-state subsidiary property company from the rental income distributed to
it by the REIT.
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IV.
RECENTLY DECIDED STATE TAX CASES – North Carolina
c. The court found that the reorganization lacked any economic substance based on
the following:
i. The real property mortgages were never transferred to the REIT.
ii. The property transfers to the REIT were never recorded.
iii. The taxes on the properties paid by the taxpayer's parent company.
iv. Neither the REIT nor the property company had any employees and the
management of the affairs of the new entities were undertaken by the former
owner of the property.
v. Transactions were accomplished almost exclusively through bank account
transfers or accounting entries on the parent company's ledgers.
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IV.
RECENTLY DECIDED STATE TAX CASES – Oklahoma
R. Oklahoma
a. In re De-Annexation of Certain Real Property From the City of Seminole, Oklahoma
Supreme Court, No. 102524, December 11, 2007.
i. An Oklahoma trial court ruled that it lacked the authority to rule on a municipal
sales tax refund claim because the merchants failed to exhaust administrative
remedies by first filing the claim with the Oklahoma Tax Commission.
ii. The merchants had sought the refund of sales tax as a part of their challenge to
the annexation of their property (the court invalidated the annexation).
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IV.
RECENTLY DECIDED STATE TAX CASES – Oregon
S. Oregon
a. U-Haul Co. of Oregon v. Department of Revenue, Oregon Tax Court, No. TC-MD
030994B, August 29, 2007.
i. Indemnity payments made by the common parent of an affiliated group of
companies were held to be expenses attributable to business income, and
therefore apportionable, for Oregon corporation excise tax purposes.
ii. The indemnity payments were made for breach of the directors fiduciary duty to
family members who collectively held a minority interest in the common parent.
iii. The indemnity payments satisfied the UDIPTA transactional test for business
income, inasmuch as they were made in the regular course of the taxpayer's
business.
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IV.
RECENTLY DECIDED STATE TAX CASES – Pennsylvania
T. Pennsylvania
a. Legal Letter Ruling No. RTT-07-004, Pennsylvania Department of Revenue, June 7,
2007.
i. The transfer of record of ownership of two real property parcels, from owners of a
Pennsylvania general partnership to the partnership itself, is not a corrective deed
and is subject to the realty transfer tax.
ii. The deed from the owners to the partnership resulted in an actual transfer of title
to, and ownership of, the land and was not an exempt a corrective deed.
b. FedEx Ground Package System, Inc. v. Pennsylvania, Pennsylvania Commonwealth
Court, Nos. 302 F.R. 2003 and 303 F.R. 2003, April 27, 2007, aff'd per curiam Nos. 55
MAP 2007 and 56 MAP 2007, December 27, 2007.
i. To compute Pennsylvania corporate net income tax of a trucking company, the
numerator of apportionment fraction must be limited to Pennsylvania activity,
using average receipts per mile for transporting property in the state multiplied by
the total number of miles that the property is transported in the state.
ii. The method of apportionment utilized by the Pennsylvania Department of
Revenue, computing the numerator by multiplying average receipts everywhere
by Pennsylvania miles, was rejected.
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IV.
RECENTLY DECIDED STATE TAX CASES – Pennsylvania
3. Dechert LLP v. Pennsylvania, Pennsylvania Commonwealth Court, No. 885 F.R. 2004,
January 23, 2008.
i. Canned software license renewals were held to be subject to Pennsylvania sales
tax.
ii. Canned software is tangible personal property, and the definition of "sale at retail"
specifically includes the grant of a license to use or consume tangible personal
property, regardless of the means of delivery.
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IV.
RECENTLY DECIDED STATE TAX CASES – South Carolina
U. South Carolina
a. City of Charleston v. Hotels.Com, LP, United States District Court, District of South
Carolina, Charleston Division, Nos. 2:06-CV-1646-PMD and 2:06-CV-2087-PMD,
November 5, 2007.
i. A federal district court has denied a motion to dismiss a lawsuit brought by two
South Carolina municipalities against online sellers and/or resellers of hotel
rooms (defendants) for failing to remit the full amount of local accommodations
taxes due and owing to the municipalities.
ii. The municipalities assert that this practice violates their Municipal
Accommodations Fee Ordinances, constitutes conversion, and is an unfair or
deceptive trade practice in violation of the South Carolina Unfair Trade Practices
Act.
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IV.
RECENTLY DECIDED STATE TAX CASES – Texas
V. Texas
a. Arnett v. Combs, U.S. Court Texas Court of Appeals, Fifth Circuit, No. 06-51103,
November 30, 2007
i. The retention by the Comptroller of surrendered unclaimed property was held not
to be unconstitutional.
ii. A suit was brought in federal district court alleging that the retention of unclaimed
property constituted a taking without just compensation in violation of the Fifth
and Fourteenth Amendments to the United States Constitution.
iii. The district court dismissed the claims for monetary relief on the basis of (i)
Eleventh Amendment immunity and (ii) lack of standing.
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IV.
RECENTLY DECIDED STATE TAX CASES – Virginia
W. Virginia
a. Ruling of Commissioner, P.D. 07-181, Virginia Department of Taxation, November 21,
2007.
i. The location of an employee in the state to promote and sell the taxpayer's
services to Virginia based organizations was held to not create sufficient nexus
with Virginia to impose corporate income tax or a sales and use tax collection
obligation.
ii. The taxpayer was an energy services company that facilitated the sale of unused
electricity back to the energy grid.
iii. The taxpayer had one salesperson working in Virginia, which alone is not an
adequate basis to create corporate income tax nexus.
iv. The taxpayer was held not to be a dealer for sales and use tax purposes because
it did not sell any tangible personal property at retail.
b. Ruling of Commissioner, P.D. 07-164, Virginia Department of Taxation, October 10,
2007.
i. Two trusts were held not to have nexus with Virginia and not subject to Virginia
personal income tax following the relocation of the trust assets and the situs of
trust administration outside of Virginia.
ii. The fact that one trustee was a Virginia resident did not make the trusts resident
trusts for Virginia income tax purposes, so long as the committee of trustees did
not operate in Virginia and was not controlled in Virginia.
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IV.
RECENTLY DECIDED STATE TAX CASES – Virginia
W. Virginia
3. Ruling of Commissioner, P.D. 07-174, Virginia Department of Taxation, November 14,
2007
i. A taxpayer's request for an abatement of an assessment of Virginia corporate
income tax based on the denial of deductions attributable to an intangible holding
company was denied despite the additional documentation and financial
statements the taxpayer submitted.
ii. The Virginia Department of Taxation reiterated its previous holdings in this case
and determined that the additional information offered by the taxpayer did not
establish that the out-of-state subsidiary intangible holding company conducted
its own activities or made loan transactions with the taxpayer at arm's length.
4. Ruling of Commissioner, P.D. 07-197, Virginia Department of Taxation, November 30,
2007.
i. Interest and capital gains passed through from an investment partnership to a
corporate taxpayer were properly allocated because the income in question was
generated through a passive investment with non-unitary payers.
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IV.
RECENTLY DECIDED STATE TAX CASES – Virginia
5. Ruling of Commissioner, P.D. 08-02, Virginia Department of Taxation, January 7, 2008.
i. A telecommunications reseller's service transactions were not taxable by Virginia
for corporate or sales and use tax purposes because no taxable nexus was
created with Virginia.
ii. The taxpayer used a third-party supplier of telecommunications services and
facilities, and, thus, had no property, payroll, or sales in Virginia or its own to
create Virginia numerators or a taxable nexus.
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IV.
RECENTLY DECIDED STATE TAX CASES – Washington
X. Washington
a. Olson v. Sprint Spectrum L.P. d/b/a Sprint PCS, U.S. District Court, Western District of
Washington, No. C06-0592-JCC, February 20, 2008.
i. A federal district court held that a settlement agreement approved by a Kansas
state court in a separate class action precluded a class action against a wireless
telephone company for impermissibly billing Washington business and occupation
(B&O) tax to its Washington customers.
ii. The court found that the plaintiffs were members of one of the settlement classes
created in the prior settlement agreement, had received notice of the prior
settlement, and failed to opt out of the prior settlement class.
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IV.
RECENTLY DECIDED STATE TAX CASES – West Virginia
Y. West Virginia
a. Decision No. 07-100 P, West Virginia Office of Tax Appeals, June 29, 2007.
i. An unexpected substantial increase in taxable income did not constitute the type
of "unusual circumstance" authorizing the waiver of a taxpayer's penalty for the
underpayment of West Virginia estimated personal income tax.
ii. The taxpayer failed to (i) make estimated payments equal to 100% of the tax
liability shown on the prior year's annual return or (ii) file the return and remitting
the balance of tax due by January 31 of the following year.
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IV.
RECENTLY DECIDED STATE TAX CASES – Wisconsin
Z. Wisconsin
a. Louis Dreyfus Petroleum Products Corp. v. Wisconsin Department of Revenue,
Wisconsin Tax Appeals Commission, No. 03-I-132, January 2, 2008.
i. Capital gain income from the sale of an interest in a partnership was held to be
apportionable to Wisconsin.
i. The sale of the partnership interest constituted the sale of rights to specific
partnership property, which was used in the production of business income,
and was therefore apportionable income.
ii. Because its ownership interest in the partnership was the corporation's only
business activity, and the partnership was a general partnership, they (i)
were functionally integrated, (ii) had centralized management, (iii) were in
the same line of business, and (iv) enjoyed economies of scale.
ii. Interest income from a loan to the taxpayer's parent company was not
apportionable to Wisconsin, even though the loan was made with the proceeds
from the sale of the partnership interest.
i. As a result of selling the partnership interest, the corporation no longer had
a unitary or operational connection with the partnership, and the corporation
ceased to have any contacts with Wisconsin.
ii. When the corporation made the loan to the parent company, the interest
income from that loan was not apportionable to Wisconsin because the
Wisconsin taxable nexus was terminated.
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