09.30.2013 Southeast State & Local Tax: Important Developments - September 2013


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.



  • Department Upholds “Bright Line” Test.  The Department of Taxation confirmed that a corporation domiciled outside of Virginia was exempt from Virginia income tax on its ownership interest in a Virginia limited partnership because it satisfied the “bright line” test in Va. P.D. 99-1. Under the “bright line” test, no partnership attribution of apportionment factors is required if the taxpayer satisfies a four-prong test.  The Department also ruled that the bright line test does not apply to qualified pension trusts, which are subject to Virginia income tax on income generated by the limited partnership from Virginia sources.  P.D. 13-169 (2013).
  • 2013 Legislative Summary.  The Department of Taxation published a helpful reference guide to state and local taxation legislation enacted by the 2013 Session of the Virginia General Assembly, including the reconvened session on April 3, 2013.  The summary includes a description of enacted legislation affecting state taxes administered by the Department and local taxes for which the Department administers or provides advisory assistance.  P.D. 13-164(2013).


  • Purchases from Amazon Now Subject to Virginia Tax.  Effective September 1, 2013, Virginia requires out-of- state dealers to register and collect Virginia sales and use tax for sales made into Virginia if they are part of a commonly controlled group in which a person or entity maintains a distribution center or warehouse in Virginia that facilitates delivery of the tangible personal property sold by the dealer.  Virginians will now pay sales tax on purchases from Amazon and other out-of-state retailers required to collect and remit Virginia sales tax. P.D. 13-166 (2013).
  • Industrial Manufacturing Exemption Denied for Machinery Purchased by Taxpayer for Use by Sister Corporation.  The Department of Taxation ruled that the industrial manufacturing exemption under Va. Code § 58.1-609(3)(2) did not apply to machinery and tools purchased by the taxpayer for its sister corporation.  The sister corporation did not have any employees; did not own any equipment, and paid a management fee to use the taxpayer’s employees.  The Department ruled that the exemption only applies to purchasers who are industrial manufacturers or processers.  As there was no evidence that the taxpayer used the machinery to manufacture or process products, it could not claim the industrial manufacturing exemption.  P.D. 13-152 (2013).


  • Va. Supreme Court Rules that Court Clerk Lacks Standing to Enforce Real Estate Transfer Tax.  The Virginia Supreme Court accepted a certified question of law from the U.S. District Court for the Eastern District of Virginia and ruled that a court clerk does not have statutory standing to initiate a lawsuit in his official capacity to enforce the real estate transfer tax on the recording of instruments.  The Supreme Court ruled that the Department of Taxation has exclusive authority to enforce the collection of real estate transfer taxes. Small v. Federal National Mortgage Association, Va. S. Ct., Dkt. No. 130317 (Aug. 12, 2013).


  • Credit Denied to Non-Resident for Taxes Paid to Maryland on Virginia Source Income.  The Department of Taxation ruled that the taxpayer, a Maryland resident who had income from Virginia sources, was not entitled to a tax credit against her Virginia tax liability for taxes paid to Maryland. Under Va. Code § 58.1-332(B), a non-resident of Virginia is permitted a credit against income from Virginia sources only when their state of residency provides a substantially similar credit to Virginia residents.  Currently, only residents of Arizona, California, Oregon and Washington, DC may qualify for this credit.  P.D. 13-150.


  • 2013 Legislative Changes.  The Department of Revenue issued a release concerning changes made to the sales and use tax provisions by the 2013 Session of the General Assembly.  The release summarizes (i) the sales and use tax rates for various items, (ii) new transactions subject to the sales and use tax as a result of tax modernization efforts, (iii) information for various sales and use tax exemptions repealed by the General Assembly and (iv) information regarding miscellaneous items.   NC Dept. of Rev., 2013 Sales and Use Tax Changes (Aug. 12, 2013).


  • Seven-Month Extension for Combined Reporting Filers.  The District of Columbia Office of Tax and Revenue issued guidance concerning filing extensions sought by calendar or fiscal year taxpayer that is a member of a combined group and required to report income derived from the activities of the group in a combined report.  For tax years beginning after December 31, 2010, the taxpayer will receive a seven (7) month extension from the due date instead of the six (6) month extension generally allowed to filers if the request for an extension is made on or before the return's due date.  The extension will not extend the date for paying the tax due.  For tax years 2011 and 2012, an extension to file for six (6) months will be considered an extension for seven (7) months. See DC OTR Notice 2013-04 (2013).


  • Amendments to Provisions for Sales and Use Tax on Lease Payments. The Maryland Comptroller's Office adopted amendments to the lease of tangible personal property provisions that clarify that the tax applies to the entire lease payment if (i) the lease includes a service charge, (ii) the dominant purpose of the transaction is to obtain the tangible personal property, and (iii) the service is a mandatory charge imposed by the vendor as a condition of renting the item or is incidental and is not the dominant purpose of the transaction. The tax does not apply to a service charge if the dominant purpose of the transaction is to obtain a service, and the provision of the tangible personal property is incidental to the service. See Md. Regs. Code (Effective Aug. 19, 2013.)
  • Amendments to Provisions for Refunds of Sales and Use Tax.  The Maryland Comptroller's Office has adopted several amendments to the refund claim provisions. The amendments provide procedures for the Comptroller to follow, depending on whether the amount of taxes previously paid on a return was subject to a collection discount.  The amendments also provide that a vendor who absorbed the tax on a retail sale or use may claim a refund of tax, penalty, or interest erroneously paid in excess of the amount properly and legally payable to the Comptroller. See Md. Regs. Code (Effective Aug. 19, 2013).


  • Sourcing of Service Receipts.  The Department of Revenue issued a revenue ruling addressing how a multi-state corporate taxpayer (“ABC”) should source its receipts from engineering services.  One of ABC’s employees lived and worked in South Carolina.  ABC also hired independent contractors that performed engineering services in South Carolina and in other states.  The Department ruled that ABC must apportion its income based upon where the services are performed.  Although the ruling guidance on how ABC should calculate its income from employees working in South Carolina, it does not address how to source receipts related to services by independent contractors.  See SC PLR 13-3 (2013).
  • Exemption for Data Center Equipment and Electricity.    The Department of Revenue issued a revenue ruling explaining the sales and use tax exemption that was enacted by the legislature in 2012 for computers, computer equipment, computer hardware and software, and electricity used in data centers meeting certain requirements.  The ruling defines the term “data center,” describes tangible personal property that qualifies for the exemption, and provides procedures for claiming the exemption.  See SC PLR 13-5 (2013).


  • Illinois – Alternative Apportionment.  On August 16, 2013, Governor Pat Quinn signed legislation that allows the Department of Revenue to retroactively permit or require an alternative apportionment method if the statutory formula does not fairly represent the market for the taxpayer’s goods, services or other sources of business income.  The change applies for tax years ending on or after December 31, 2008.  See H.B. 3157, Leg. 2013 (IL. 2013).
  • Kentucky – COGS. The Kentucky Department of Revenue issued guidance explaining how to calculate the cost of goods sold (“COGS”) for purposes of limited liability entity tax. The guidance also explains that no costs are included in COGS for taxpayers not engaged in manufacturing, producing, reselling, retailing or wholesaling.  For such taxpayers, Kentucky gross profits would only be reduced by returns and allowances attributable to Kentucky gross receipts.KY Tax Alert 5 (Sept. 1, 2013).
  • Missouri – Corporate Income Tax Apportionment.  Missouri Governor Jay Nixon signed three bills that affect Missouri tax law.  House Bill 128 creates a new elective single-factor apportionment formula based on sales for the corporation income tax.  Senate Bill 23 creates various sales and use tax provisions, including a new remote seller affiliate nexus and click-through nexus provision.  House Bill 184 eliminates and replaces certain economic incentives programs with the Missouri Works Economic Incentive Program.  All three bills take effect on August 28, 2013.
  • New York – Gain on Sale of Non-New York Leaseholds Sourced to New York.  A New York ALJ ruled that the taxpayer, a non-resident owner of a New York S corporation operating in several states, was subject to New York income tax on the sale of four Pennsylvania leasehold interests, based on the S corporation’s business allocation percentage.  The fact that the gain resulted from non-New York property was not enough to exclude it from New York source income.  Matter of Steven E. Breitman, DTA No. 824269 (N.Y.S. Div. of Tax App., Aug. 1, 2013).
  • New York – Exception Filed in Knowledge Learning.  In the July 2013 issue of SESALT, we reported on the Matter of the Petition of Knowledge Learning Corp. and Kindercare Learning Centers, Inc., NYS Division of Tax Appeals, ALJ, Nos. 823962; 823963, (June 27 2013), in which a New York ALJ denied two related companies the ability to file combined reports.  The ALJ found that (i) in the absence of supporting documentation, oral testimony did not prove the existence of substantial intercorporate transactions, and (ii) any distortion that might arise on separate returns was not an issue after the statute was amended in 2007.  On July 29, 2013, an exception was filed with the Tax Appeals Tribunal.  Combined filers in New York look forward clarification of these issues.
  • Legislation Introduced to Repeal Harbor Maintenance Tax.  On August 15, 2013, Washington Senators Patty Murray and Maria Cantwell introduced the "Maritime Goods Movement User Fee Act of the 21st Century" to replace the Harbor Maintenance Tax imposed on shippers under §4461 of the Internal Revenue Code.  The legislation would create incentives for shippers to move goods through U.S. ports instead of avoiding U.S. taxes by shipping through Mexican and Canadian ports.  See Bill.
  • Texas – COGS Deduction.  The Texas Comptroller of Public Accounts held that a seller of pre-paid cell phone cards could not claim a cost of goods (“COGS”) deduction on the cost of purchasing the cards because the sale of the cards to its customers were for services.  The COGS deduction is strictly limited to real or tangible personal property.  Although pre-paid calling cards are tangible personal property for sales tax purposes, they are not goods for purposes of the COGS deduction because the customer is paying for services embedded in the card and not the card itself.  TX. Compt. Dec. 108, 113 (July 6, 2013).
  • West Virginia – Sales and Use Tax Nexus.  The Department of Revenue previously ruled that a taxpayer, an Internet mail order sales retailer that otherwise had no physical presence in the state, was not required to collect and remit sales tax as a result of the activities of its wholly-owned subsidiary in West Virginia.  Effective October 1, 2013, new guidance from the Department provides that such retailers and merchants must collect and remit use tax on sales to West Virginia customers.  WV Technical Assistance Advisory 99-002 modified by WV Technical Advisory 2013-002 (2013).