09.04.2014 Southeast State & Local Tax: Important Developments - August 2014
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 important tax developments around the Southeast.
U.S. SUPREME COURT
The United States Supreme Court has granted petitions for writ of certiorari in three state and local tax cases for its October Term 2014.
Comptroller of the Treasury v. Wynne. In Wynne, the U.S. Supreme Court will consider whether a state or locality has to allow a credit for taxes paid on income earned in other states. Previously, the Maryland Court of Appeals ruled that the federal Commerce Clause is violated by Maryland’s failure to allow a credit against Maryland county taxes for income earned in another state and taxed in that state. This decision may have a significant impact on a locality’s ability to collect revenue. While most states provide full credits for income taxes paid to other states, many local jurisdictions do not.Comptroller of the Treasury v. Wynne, 431 Md. 147 (Md. Ct. App. 2013); cert. granted U.S. Dkt. 13-485 (May 27, 2014).
Alabama Department of Revenue v. CSX Transportation, Inc. In CSX Transportation, the U.S. Supreme Court will consider whether a state discriminates against a rail carrier in violation of 49 U.S.C. § 11501(b)(4) when the state generally requires commercial and industrial businesses to pay a sales-and-use tax but grants exemptions from the tax to the railroads' competitors. While the case is specific to rail carriers, the case could be instructive for challenges of current or potential future federal laws that prohibit discriminatory state taxation. Alabama Department of Revenue v. CSX Transportation, Inc., 720 F.3d 863 (11th Cir. 2013); cert. granted U.S. Dkt. 13-553 (July 1, 2014).
- Direct Marketing Association v. Brohl. In Direct Marketing, the U.S. Supreme Court will consider whether the federal Tax Injunction Act (“TIA”) prohibits third-party, non-taxpayer plaintiffs from challenging a state tax information reporting requirement in federal court. It is doubtful that the Court will consider the broader question of whether Colorado’s use tax reporting requirements are constitutional. It is expected that the Court’s decision will clarify protections provided by the TIA and be instructive to out-of-state taxpayers on nexus issues. Direct Marketing Ass’n v. Brohl, 735 F.3d 904 (10th Cir. 2013); cert. granted U.S. Dkt. 13-1032 (July 1, 2014).
- Worker Classification Task Force Established. On August 14, 2014, Virginia Governor Terry McAuliffe signed Executive Order 24 to establish an inter-agency task force on worker misclassification and payroll fraud. The task force is a response to a 2012 report of the Joint Legislative Audit and Review Commission finding that one-third of audited employers in certain industries misclassify their employees. As part of the initiatives, the task force will review statutes, regulations and enforcement practices related to worker misclassification and payroll fraud. The task force’s findings may have a significant impact on ensuring taxpayers’ compliance with Virginia payroll and employment tax laws. See Va. EO-24 (Aug. 14, 2014).
Qualified Equity and Subordinated Debt Investments Credit. Virginia taxpayers are permitted a credit equal to 50% of the cash investment in a qualified business in the form of equity or subordinated debt. The aggregate amount of the credit that may be used per taxable year by the taxpayer cannot exceed the lesser of the tax imposed for the tax year or $50,000. The tax credit cap will increase to $5 million for Taxable Year 2014 and remain at the statutory cap of $5 million for future years, unless the General Assembly takes future action. Certain procedures and filings must be made in order to claim the credit. Va. P.D. 14-115.
- Conservation Easements. In Va. P.D. 14-7, the Department of Taxation rejected a taxpayer’s appraisal of a conservation easement and held that the individuals who purchased the credit from the taxpayers were liable for additional taxes. The Department concluded that a third-party appraisal commissioned by the Department more accurately reflected the value of the easement. The taxpayers have challenged the ruling in Valley Medical, et al. v. Va. Dept. of Tax., Cir Ct. of Loudoun, Dkt. No. 86252. Va. P.D. 14-125.
SALES AND USE TAX
Manufacturing Exemption. The Department of Taxation held that cleaning chemicals used by a manufacturer of printing inks did not qualify for the manufacturing exemption to the retail sales and use tax under Va. Code §58.1-609.3(2). Citing previous rulings from the Commissioner and decisions from the Supreme Court of Virginia, the Department concluded that the printing chemicals were not used “directly” in the manufacturing process, as required by the statute, because production must stop before the cleaning chemicals could be used. Va. P.D. 14-114.
- Communications Sales and Use Tax. The Department of Taxation held that a taxpayer-provider of mobile communications services was subject to sales tax on activation fees charged to customers who entered into a service agreement for Internet access. Upon subscribing to a plan, a customer would purchase Internet access service for a particular term in exchange for an upfront activation charge and monthly plan charges. The Department held the Virginia Communications Sales and Use Tax Act and the Internet Tax Freedom Act did not bar the Commonwealth from assessing sales taxes on such services. VA PD 14-131; see also VA PD 14-130.
Occupancy Taxes. Occupancy Taxes. The North Carolina Court of Appeals held that the trial court did not err in concluding that the taxpayers, 11 online travel companies, were not subject to the occupancy tax imposed by Wake, Dare, Buncombe, and Mecklenburg Counties (the “Counties”) for periods prior to January 1, 2011. The taxpayers are web-based companies that allow customers to research and book travel reservations online at a discounted rate. The court held that each County’s respective occupancy tax did not apply to the taxpayers because they are not retailers subject to the state sales tax. Wake County v. Hotels.com, N.C. Ct. App., Dkt. No. COA13-594 (Aug. 19, 2014).
- Individual Income Tax. The North Carolina Business Court reversed an administrative decision that the taxpayers were domiciled in North Carolina and, therefore, overturned a $10 million tax assessment against them. The taxpayers moved to Florida in January 2006. The Department of Revenue assessed $10 million in income and gift taxes against the taxpayers on income and gifts made in connection with the sale of a majority interest in a closely held business in February 2006. The Business Court held that the taxpayers showed intent and took concrete steps to move to Florida in January 2006, prior to the sale of the majority interest in the business. Fowler v. North Carolina Dept. of Revenue, N.C. Super. Ct., Dkt. No. 13 CVS 10989 (Aug. 6, 2014).
Property Taxes. The North Carolina Court of Appeals reversed the North Carolina Property Tax Commission, which had granted the taxpayer an exemption from property taxes, because the property was not wholly and exclusively used for educational or scientific purposes. While the County did not dispute that educational and scientific activities occurred on the property, it contended that substantial retail, commercial, recreational, lodging and office uses also occurred on the property. The taxpayer was under the impression that a conservation easement would allow for the continuance of commercial activities. The court held that, while that assumption may be valid for purposes of the easement and maintaining the IRC § 501(c)(3) status, it is not sufficient to meet the statutory requirement that the real property must be “wholly and exclusively used for educational and scientific purposes.” In re Grandfather Mountain Stewardship Foundation, Inc., N.C. Ct. App., Dkt. No. COA13-1447 (Aug. 19, 2014).
- Corporate Income Tax. The Maryland Court of Appeals held that a Maryland parent corporation’s out-of-state subsidiaries were subject to Maryland income tax relating to various transactions involving the parent’s trademark licensing rights that shifted income away from the parent to its subsidiaries. The Comptroller assessed taxes against the subsidiaries. The Maryland Tax Court affirmed, finding that the subsidiaries lacked economic substance separate from the parent. The Maryland Court of Appeals affirmed appeals to the circuit court and special court of appeals, holding that the taxpayer did not satisfy its burden to show that the Comptroller’s assessment was wrong. NIHC, Inc. v. Comptroller of the Treasury, No. 63 (Md. Ct. App. 2014).
DISTRICT OF COLUMBIA
- Offer In Compromise. The District of Columbia Office of Tax and Revenue has updated Form OTR-10 Booklet, Offer in Compromise. The booklet describes what constitutes an offer in compromise and covers the following topics: (i) eligibility; (ii) important facts, (iii) payment options, (iv) calculating the amount of an offer and (v) instructions for submitting Form OTR-10 and other important forms. See updated Form OTR-10.