08.21.2013 Southeast State & Local Tax: Important Developments - August 2013
BY: STEPHANIE LIPINSKI GALLAND & KYLE H. WINGFIELD
The Williams Mullen Southeast State and Local Tax (SESALT) team is pleased to provide you with a comprehensive recap of recent legislation around the U.S.
CORPORATE INCOME TAX
- Franchise Fee Deduction Permitted. The Department of Taxation ruled that the taxpayer, an out-of-state partnership, was permitted a deduction for franchise fees paid to its parent because the rates charged by the parent were reasonable when compared to arm’s-length transactions between unrelated parties. However, the Department upheld the auditor’s adjustment to the add-back exception for intangible expenses because the taxpayer did not follow prescribed procedures for claiming the business purpose exclusion. The Department also noted that it currently is in litigation regarding the “subject to” add-back exception and advised that the taxpayer may be able to file a protective claim. P.D. 13-140.
SALES AND USE TAX
Vending Machine Rental Subject to Use Tax. The Department of Taxation ruled that the taxpayer, a retailer that sells products from vending machines, was subject to use tax on payments it made to vendors of the vending machines. The taxpayer did not provide documentation that it had included sales tax in its payments to the vendors. The Department also concluded that under the “true object” test, the taxpayer’s payments were for tangible personal property, not exempt services. P.D. 13-126.
- Adjustment Denied for Use Tax Paid on Audit Sample. The Department of Taxation denied an adjustment for sales tax not collected by the taxpayer on transactions occurring during the audit sample of its laundry services business. The taxpayer presented evidence that one of its customers paid use tax on purchases during the audit period. The Department concluded that, although tax may have been paid by the customer on some of the transactions, there were likely other transactions outside the sample period in which no Virginia tax was paid. Consequently, the Department ruled that the audit sample was a valid representation of the audit period and denied any adjustment. P.D. 13-127; P.D. 13-133.
RESPONSIBLE OFFICER LIABILITY
Officer Liable for Corporate Tax Debt. The Department of Taxation held that the president of a restaurant was liable for the unpaid taxes of the restaurant between 2010 and 2011. When the president became aware of the unpaid taxes, he hired a new general manager and entered into a payment plan with the Department. The Department ruled that the president placed a duty upon himself to pay the liabilities when he entered into the payment plan, signed checks to the Department under the plan and continued to operate the restaurant. By not carrying through with the payment plan, the president acted willfully and was personally liable for the unpaid taxes of the restaurant as a responsible officer. P.D. 13-128.
- Officer Not Liable for LLC’s Unpaid Taxes. The Department of Taxation ruled that the sole officer and 100% shareholder (the “Officer”) of a limited liability company (the “LLC”) was not liable as a responsible officer for the LLC’s unpaid sales and use taxes. The Officer was not actively involved in the LLC’s business affairs and did not become aware of the LLC’s unpaid tax liabilities until after the Department completed its audit (18 months after the LLC ceased doing business). The Department ruled that the Officer did not willfully fail to collect or pay taxes and, therefore, was not liable as a responsible officer for the LLC’s unpaid taxes. P.D. 13-143.
- New Guidance Regarding Exemption Certificates. The Department of Taxation ruled that an incorrect registration number does not invalidate a sales and use tax exemption certificate if the Department is able to identify the customer based upon the information provided on the certificate. However, a certificate is invalid if it does not state the basis for which the exemption is claimed (e.g., purchase for resale). The Department also noted that exemption certificates obtained after the start of an audit are subject to greater scrutiny. P.D. 13-131; P.D. 13-132.
- Guidance Regarding Household Employer Annual Withholding. Legislation enacted in 2012 permits employers of household employees to file payroll and tax reports and to pay unemployment taxes on an annual basis with the Virginia Employment Commission for wages paid after December 31, 2012. Household employers may file annually, regardless of the amount of total payroll. The Department issued guidance to household employers on how to register and which forms to use in order to file and pay withholding tax annually. P.D. 13-146.
TOBACCO PRODUCTS TAX
- Promotional Items Subject to Tobacco Products Tax. The Department of Taxation ruled that the tobacco products tax applies to promotional tobacco products given away on the sale of other tobacco products. The tax applies to tobacco products given away in two-for-one promotional offers (e.g., moist snuff) and also to free samples of tobacco (e.g., snus) provided on the sale. The Department also ruled that, for purposes of calculating the tax, the manufacturer’s sales price does not include any cash discounts allowed or taken. P.D. 13-144; see also P.D. 10-276.
Tax Reform Signed into Law. On July 23, 2013, Governor Pat McCrory signed L. 2013, H998 (N.C. 2013) into law, which provides for comprehensive tax reform in North Carolina. Highlights from the legislation include (i) reducing and simplifying the 3-tiered state personal income tax from the current maximum rate of 7.75% and minimum rate of 6% to 5.8% in 2014 and 5.75% in 2015; (ii) increasing the standard deduction for all taxpayers; (iii) increasing the state child tax credit for families making less than $40,000 per year; (iv) offering a $20,000 combined maximum deduction for mortgage interest and property taxes; (v) making charitable contributions fully deductible; (vi) protecting all Social Security income from state taxes; (vii) reducing the corporate income tax rate from 6.9% to 6% in 2014 and then to 5% in 2015; (viii) capping the gas tax; (ix) eliminating North Carolina’s estate tax; and (x) preserving the sales tax refund for nonprofits. If the state meets revenue targets (i.e., it tax revenue grows due to a growing economy), the corporate income tax rate will drop to 4% in 2016 and 3% in 2017. See Governor McCrory Signs Tax Reform Into Law, Office of North Carolina Governor Pat McCrory (July 23, 2013).
- Guidance Issued for Sourcing of Digital Property. The Department of Revenue issued important guidance regarding the sourcing of certain digital property subject to sales and use tax. N.C. Gen. Stat. § 105-164.4(a)(6b) imposes a privilege tax at the general applicable state and local rates of sales and use tax on the net sales or gross receipts derived from audio works, books, magazine, newspapers, reports and other publications, photographs, greeting cards and other digital products. Guidance from the Department provides the sourcing rules for the sale of such property. N.C. Dept. of Rev., Important Notice: Sourcing For Certain Digital Property Subject to Sales and Use Tax (Aug. 12, 2013).
DISTRICT OF COLUMBIA
- Fiscal Year of 2014 Budget Support Emergency Act of 2013. The District of Columbia recently enacted the “Fiscal Year 2014 Budget Support Emergency Act of 2013.” The legislation clarifies combined reporting provisions, repeals and reenacts the Multistate Tax Compact, keeps in effect requirements for electronic submission of withholding statements and repeals the income tax on out-of-state municipal bonds. The legislation also exempts restaurant utilities from sales tax, keeps in effect the 10% use tax rate on liquor, makes provisions for an Internet tax and continues annual certification requirements for real property tax exemptions and abatements. Among other changes, the legislation replaces the fixed motor vehicle fuel tax rate with a rate based on 8% of the average wholesale price of regular unleaded gasoline. The legislation became effective on July 30, 2013 and will expire on October 28, 2013. L. 2013, Act 20-130 (2013).
- Sales and Use Tax – Deal-of-the-Day Coupons. The Maryland Comptroller's Office adopted amendments to the sales and use tax regulations regarding “taxable price” compensation in the form of advertising or promotions, such as with an online deal-of-the-day eCoupon or similar discount. The amendments remove the requirement that the buyer must remain liable for payment of the tax (in the absence of collection by the vendor) in order for the tax to be excluded from the taxable price. Md. Regs. § 03.06.01.08 (Effective Aug., 19, 2013).
- Pass-Through of Infrastructure Credit Denied to Corporate Partners. The South Carolina Supreme Court recently upheld a decision by an administrative law judge (“ALJ”) denying the claims of corporate partners of a partnership to the infrastructure credits earned by the partnership. The court agreed with the ALJ that the credit is only available to corporations, not partnerships. The court rejected the taxpayer’s argument that it was entitled to the credit through a consolidated group because the credit is only available to the taxpayer that is first entitled to claim the credit. Centex International, Inc. v. S.C. Dept. of Rev., S.C. S. Ct., Dkt. No 27288 (2013).
AROUND THE NATION
Multistate Tax Commission Releases Analysis of Marketplace Fairness Act. The Multistate Tax Commission released its analysis of what will be required of SSUTA-member states and non-SSUTA-member states to become compliant and collect sales and use tax from online sellers in the event that the Marketplace Fairness Act becomes law. See Implementation of MFA.
Alabama – Taxpayer Liable for Sales Tax Under Withdrawal Provisions. An administrative law judge (“ALJ”) ruled that a taxpayer, a seller of heavy equipment, was subject to sales tax when it withdrew equipment from its inventory and used it in a for-profit activity, even though the ultimate purchaser of the equipment paid sales tax on the equipment. Warrior Tractor & Equipment Co. v. Ala. Dept. Rev., Ala. Admin. Law Div., Dkt. No. S. 12-821 (July 8, 2013).
Arizona – Gross Receipts from Deemed Sale of Assets Excluded from Sales Factor. The Arizona Department of Revenue ruled that the gross receipts from the deemed sale of assets under the Internal Revenue Code, including goodwill, should be excluded from the taxpayer’s sales factor. Under Arizona law, gross receipts arising from occasional sales of assets are excluded from the sales factor. Although goodwill is an intangible, the Department concluded there is no logical basis for distinguishing between fixed assets and intangibles. Ariz. Dept. of Rev. Hearing Office Dec. No. 201200235-C (May 31, 2013).
California – Passive LLC Member Files Suit Challenging “Doing Business” Statute. An Iowa corporate taxpayer has filed suit against the California Franchise Tax Board (“FTB”) requesting a refund of taxes, penalties and interest assessed by the FTB. The taxpayer’s sole connection to California is a .02% interest in a California LLC, which is managed by a California corporation. According to the pleadings, the FTB takes the position that the taxpayer is “doing business” as an investor in California and, therefore, is subject to the minimum franchise tax. Swart Enterprises, Inc. v. Franchise Tax Board, Case No. 13CECG02171 (2013).
California – Power Plant’s Intangible Rights Improperly Taxed. The California Supreme Court held that the Court of Appeal erred in upholding the State Board of Equalization's (“SBE”) valuation of a power plant under the replacement cost approach because the SBE directly taxed the power plant's intangible rights (emission reduction credits) in violation of the statutes for purposes of property taxation. Elk Hills Power LLC v. Board of Equalization, Cal. S. Ct., Dkt. No. S194121 (Aug. 12, 2013).
California – Sales and Use Tax Clearance Certificates. The State Board of Equalization (“SBE”) issued a special notice reminding purchasers of a business (or stock of goods) that they could end up paying their seller's sales tax (up to the business purchase price of the business) unless a tax clearance is obtained from the SBE. California SBE Special Tax Notice L-341 (Aug. 1, 2013).
Delaware – Head of Unclaimed Property Retires. Mark Udinski, the head of Delaware’s unclaimed property auditing regime, retired on August 1, 2013. Mr. Udinski’s retirement is notable because Delaware is home to more than half of the publicly traded companies in the United States and collects millions of dollars of unclaimed property through audits. CFO Journal, Delaware Head of Unclaimed Property Retires (July 29, 2013).
Florida – Sourcing of Licensing and Advertising Fees. The Florida Department of Revenue ruled that a corporate taxpayer’s gross receipts from Florida sources included license and advertising fees paid to the taxpayer by its Florida customers. The taxpayer packaged and licensed television content to cable and network operators across the United States and also sold advertisement spots in the programming licensed to such operators. Fla. Tech. Assistance Advisement, 13C1-004 (May 21, 2013).
Illinois –Injunction Prohibits Cook County from Imposing Use Tax. On August 1, 2013, Circuit Court Judge Robert Lopez Cepero issued an injunction barring Cook County from imposing and enforcing the Non-Titled Personal Property Tax. The tax became effective on April 1, 2013 and applies to non-titled personal property purchased outside of the county when first used in the county. Judge Cepero’s injunction bars the county from cashing any checks related to the tax following the June 20th due date. Taxpayers should monitor the status of the injunction as additional return dates approach.
Missouri – Passive Income from Debt Allocated Outside of Missouri. The Missouri Administrative Commission held that passive interest income received on a note by a subsidiary doing business in Missouri from its parent headquartered outside of Missouri was not income from Missouri sources. The Commission reasoned that the loan was held outside of Missouri and the interest was controlled out of state by the parent. AT&T Communications of the Southwest, Inc. v. Director of Revenue, Mo. Adm. Hearing Comm., Dkt. No. 11-1375 RI (2013).
- New York – Extension of Time Granted to File Cert Petitions in Click-Through Nexus Case. On June 14, 2013, Justice Ginsberg granted two taxpayers (Amazon.com and Overstock.com) an extension to file writs of certiorari to the U.S. Supreme Court addressing the constitutionality of New York’s click-through nexus statute. Earlier this year, a New York appeals court held that the statute was constitutional. Overstock.com, Inc. v. N.Y. State Dept. of Tax. and Fin., 2013 WL 1234823 (N.Y. Ct. of Apps., Mar. 28, 2013). Since then, at least four other states (Kansas, Maine, Missouri and Massachusetts) have enacted similar statutes.