Nationwide State Tax Case Developments

Transcription

1 Carley Roberts, Partner Dan Schlueter, Partner Marc Simonetti, Partner TEI Detroit Dearborn, Michigan March 26, 2014 Nationwide State Tax Case Developments

2 MULTISTATE TAX COMPACT LITIGATION 2

3 The Multistate Tax Compact: State of Play Gillette Company v. Franchise Tax Board, No. A (Cal. Ct. App. Oct. 2, 2012) (MTC is a valid compact; compact law supersedes conflicting state law) (appeal to the California Supreme Court presently pending). IBM v. MDOT (Mich. Ct. App., Nov. 20, 2012) (the MTC is not a binding contract; enacting a conflicting statute might arguably be an improper way to repeal the Compact, but not an impermissible one) (Michigan Supreme Court granted the taxpayer s application to appeal the Court of Appeals decision. Oral arguments held on January 15, 2014). Anheuser-Busch, Inc. v. MDOT (Mich. Ct. Cl. June 6, 2013) (the Compact is a binding compact that cannot be repealed by a conflicting statute ). Health Net, Inc. v. Dep t of Revenue (pending case in Oregon in which the taxpayer contends it has a right to use MTC election). Graphic Packaging Corp. v. Comptroller of Public Accounts (Travis County Dist. Ct. Sept. 27, 2012) (pending case in which the taxpayer contends it has a right to apportion its income to Texas pursuant to MTC law). 3

4 CORPORATE FILING METHOD 4

5 Corporate Filing Method: California ComCon Production Services I, Inc. v. California Franchise Tax Bd., Case No. BC (Los Angeles Superior Ct. Mar. 6, 2014) The LA Superior Court held that Comcast was not unitary with its 57% owned subsidiary, QVC. The Court found for Comcast and held that the evidence presented at trial demonstrated that none of the unitary tests were satisfied. The court also found for the state and held that Comcast s receipt of a $1.5 billion termination fee constituted business income. 5

6 Corporate Filing Method: Alaska Tesoro Corp. v. Alaska, Dkt. No. S (Alaska Oct. 25, 2013) Supreme Court of Alaska held that a taxpayer was a unitary business and thus its worldwide income was subject to Alaska s three-factor apportionment formula. Tesoro filed a petition for writ of certiorari on February 24, 2014 with the U.S. Supreme Court. 6

7 NEXUS DEVELOPMENTS 7

8 Click-Through Nexus Amazon.com, LLC v. New York Dep t of Taxation and Finance; Overstock.com, Inc. v. New York Dep t of Taxation and Finance, N.Y. Lexis 542 (N.Y. Ct. App. Mar. 28, 2013) New York Court of Appeals upheld the constitutionality of New York s click-through nexus law Discretionary appeal to U.S. Supreme Court being sought Performance Marketing Assn., Inc. v. Hamer., Dkt. No (Ill. Oct. 18, 2013) The Illinois Supreme Court upheld an Illinois circuit court decision and determined that the Illinois click-through nexus statute was preempted by federal law. 8

9 Click-Through Nexus 9

10 Use Tax Reporting Direct Marketing Assoc. v. Colorado Dep t of Rev., Case No. 13CV34855 (Denver Dist. Ct. Feb. 18, 2014). A Colorado state district court issued a preliminary injunction preventing the Colorado Department of Revenue from enforcing Colorado s out-of-state seller use tax reporting statutes and related regulations. Previously, the Tenth Circuit Court of Appeals dismissed a federal district court s grant of a permanent injunction against the Colorado Department of Revenue that prevented the Department from enforcing Colorado s use tax notice and reporting requirements. Direct Mktg. Ass'n v. Brohl, 2013 U.S. App. LEXIS (10th Cir. Aug. 20, 2013) Oklahoma customer notice of use tax when ordering South Carolina (limited) South Dakota customer notice of use tax when ordering Tennessee (limited) Vermont (repealed once click-through enacted) 10

11 Income/Franchise Tax Nexus United Parcel Service Inc. v. Indiana Dep't of State Revenue, No. 49T TA-24 (Ind. T.C. Sept. 16, 2013) Indiana Tax Court held Indiana does not apply an economicpresence nexus approach to its corporate income tax. Scioto Ins. Co. v. Oklahoma Tax Comm n, 279 P.3d 782 (Okla. 2012) Oklahoma Supreme Court held out-of-state holding company does not have nexus in OK despite licensing IP to affilliate located in state. Griffith v. ConAgra Brands Inc., 728 S.E.2d 74 (W. Va. 2012) West Virginia Supreme Court of Appeals held out-of-state holding company does not have nexus in WV despite the fact its licensed IP was displayed on products sold in WV. 11

12 Income/Franchise Tax Nexus Village Supermarket of Pennsylvania v. Division of Taxation, No (N.J. T.C. Oct. 23, 2013) The Tax Court found that a Pennsylvania corporation had nexus with New Jersey by virtue of its interest in a New Jersey limited partnership. Comptroller of the Treas. v. Gore Enter. Holdings, Inc., 209 Md. App. 524, 60 A.3d 107 (Md. Ct. Spec. App. 2013) The Maryland Court of Special Appeals held that out-ofstate holding companies with no physical presence in Maryland were subject to corporate income tax based on unitary nexus. On appeal to Maryland Ct. of Appeals. 12

13 Economic Nexus Are Quantitative Thresholds Constitutional? L.L. Bean, Inc. v. Levin, No (Ohio Bd. Tax App. Mar. 7, 2014) The Ohio Board of Tax Appeals sustained the Department of Taxation s assessment of L.L. Bean for the commercial activity tax based on the statutory bright-line presence test (taxable gross receipts of at least five hundred thousand dollars), even though L.L. bean had no physical presence in Ohio. California Corporate Franchise Tax Eff. Jan A person is a taxpayer doing business in the state if: Sales in state exceed the lesser of $500,000 or 25% of the taxpayer s total sales; Property in state exceed the lesser of $50,000 or 25% of the taxpayer s total property; or Sales in state exceed the lesser of $50,000 or 25% of the taxpayer s total payroll. Does the U.S. Supreme Court s continuous and systematic (Goodyear Dunlop, 131 S.Ct (2011)) and purposefully directed activity (J. McIntyre Machinery, 131 S.Ct (2011)) requirements allow for only a quantitative threshold? 13

14 APPORTIONABILITY 14

15 Apportionment: Throwout Whirlpool Properties Inc. v. Director, Docket No (N.J. T.C. Oct. 22, 2013). Constitutionality of New Jersey s throwout provision asapplied is presently being challenged in New Jersey Tax Court. In 2011, the New Jersey Supreme Court held that the State s throwout rule was facially constitutional but narrowed the application of the rule to untaxed receipts from states that lacked jurisdiction to tax the corporation. Lorillard Licensing Co. LLC v. Div. of Taxation, (N.J. Jan. 1, 2014) Court held nexus standard used by NJ must be applied to other states (NJ is an economic presence state Lanco) 15

16 Apportionability: Pennsylvania Glatfelter Pulpwood Co. v. Commw., 61 A.3d 993 (Pa. 2013) Pennsylvania Supreme Court affirmed earlier decision and held that taxpayer s gain from sale of timberland in Delaware was apportionable business income under the socalled functional test In short, court rejected taxpayer s Commerce Clause challenge and determined that 142% of gain being taxed is constitutional 16

17 Apportionability: Arizona Ariz. Rev. Stat (1) defines business income as: income arising from transactions and activity in the regular course of the taxpayer s trade or business and includes income from tangible and intangible property if the acquisition, management and disposition of the property constitute integral parts of the taxpayer s regular trade or business operations. Harris Corp. v. Ariz. Dep t of Rev, Dkt. 1 CA-TX (Ariz. Ct. App. Nov. 26, 2013) Arizona Court of Appeals held state s statutory test for business income consisted of both a transactional and a functional test Court determined that taxpayer had business income from contribution of assets to a joint venture, from the sale of one of its business lines, and from royalties received from patent rights 17

18 Apportionability: Arizona First Data Corp. v. Ariz. Dep t of Rev., Dkt. 1 CA-TX (Ariz. Ct. App. Nov. 26, 2013) Decided on same day as Harris. Court relied on its decision in Harris in determining that the Arizona definition of business income consists of both a transactional and a functional test, and that gain need only meet one of those tests to qualify as business income Taxpayer, upon the sale of a wholly owned subsidiary, elected to treat transaction as a IRC 338(h)(10) liquidation through which it would not have to recognize gain on sale, as subsidiary would recognize the gain Court cited Harris for proposition that AZ s business income definition does not contain a liquidation exception, although Arizona corporate Tax law accepts 338(h)(10) elections Concerned with a lack of symmetry between taking depreciation and deductions against income and refusing to recognize business income upon sale of an asset Court held subsidiary was part of the unitary group and recognized gain and, therefore, taxpayer must recognize gain as business income and apportion part of that gain to Arizona 18

19 ALTERNATIVE APPORTIONMENT 19

20 Alternative Apportionment: CarMax Auto Superstores West Coast, Inc. v. South Carolina Dep t of Revenue Facts Taxpayer (a retailer) used standard three-factor apportionment to compute its income for a five-year period. Department determined this method did not fairly reflect taxpayer s income and used an alternate method: income from royalty and financing receipts in South Carolina vs. everywhere. Key Issue Who bears burden of proof when invoking alternative apportionment? Court of Appeals Holding Department had to prove by a preponderance of the evidence: Statutory apportionment method did not fairly represent taxpayer s business activities in state; and Department s proposed alternative apportionment method was more reasonable than any competing method. 20

21 Alternative Apportionment: CarMax Auto Superstores West Coast, Inc. v. South Carolina Dep t of Revenue Supreme Court On August 29, 2013, S.C. Supreme Court granted Department s leave for appeal Taxpayer asked Court to determine whether Court of Appeals erred in: (1) determining taxpayer was a unitary business; (2) holding receipts at issue should be sourced to South Carolina; and (3) failing to find a violation of taxpayer s constitutional rights Department requested Court determine whether Court of Appeals erred in determining Department has the burden of proof to show its alternative apportionment formula is more appropriate than any competing methods Case pending 21

22 Alternative Apportionment: Equifax, Inc. v. Mississippi Dep t of Revenue Facts Taxpayer applied cost-of-performance method for sourcing its service provider revenue. Department applied an alternative apportionment method utilizing market-based sourcing. Trial Court Upheld Department s alternative apportionment, holding taxpayer failed to meet its burden and Department s interpretation was not arbitrary or unreasonable. Court of Appeals Reversed trial court for improperly imposing burden on taxpayer and remanded case for determination on merits. Held state bears burden to prove two things: The statutory formula does not fairly represent the taxpayer s business activity in the state; and The state s proffered alternative method is reasonable. 22

23 Alternative Apportionment: Equifax, Inc. v. Mississippi Dep t of Revenue Supreme Court Mississippi Supreme Court reversed Court of Appeals. Held taxpayer bears burden to prove that an alternative apportionment method imposed by state is arbitrary and unreasonable. Court relied on Mississippi APA to determine that Chancery Court must give deference to holdings of Mississippi State Tax Commission. Taxpayer failed to prove that, by applying alternative apportionment, Department promulgated a new rule in violation of the Mississippi APA. Under APA, burden of proof is on taxpayers seeking refunds in Chancery Court. 23

24 Alternative Apportionment: Equifax, Inc. v. Mississippi Dep t of Revenue Motion for Rehearing Equifax filed a motion for rehearing on July 22, Equifax argued that although parties had a full evidentiary hearing at trial, court proceeded under assumption parties had a full evidentiary hearing at administrative agency level, but parties had only a limited stipulation of facts at agency level. COST, Mississippi Economic Council, Mississippi Manufacturers Association, Institute for Professionals in Taxation, and Satellite Broadcasting and Communications Association all filed as amici curiae in support of rehearing. Mississippi DOR filed its response on August 22, Mississippi Supreme Court denied Equifax s motion for rehearing on November 21,

25 Alternative Apportionment: Equifax, Inc. v. Mississippi Dep t of Revenue Equifax SCOTUS Petition Equifax filed a petition for writ of certiorari on February 21, 2014 with the U.S. Supreme Court arguing that the Mississippi Department of Revenue violated due process by rejecting the company s use of a the statutory apportionment formula and assessing interest and penalties under an alternative formula. 25

26 Alternative Apportionment: Equifax, Inc. v. Mississippi Dep t of Revenue Legislative Response to Equifax Mississippi State Senate Finance Chair Joey Fillingane introduced SB 2487 (companion HB 799) in response to Equifax decision. Would require DOR present clear and convincing evidence to invoke Section 18 alternative apportionment, e.g., deviate from COP, or forcibly combine entities from requiring a combined return that includes one or more corporations not subject to state income tax until regulations have been promulgated. Good-faith challenge to constitutionality or legality of a law would preclude DOR from assessing penalties arising from forced combinations. Legislation moving towards conference committee with broad, bipartisan support. 26

27 Questions? Carley Roberts Dan Schlueter Marc Simonetti

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