Zack Atkins Suzanne Palms State and Local Tax Updates 2015 Tax Education Series August 18, 2015 Atlanta, Georgia 1
Agenda U.S. Supreme Court Income tax Sales and use tax Property tax Other fun stuff 2
U.S. SUPREME COURT 3
Tax Injunction Act/CO Direct Marketing Association TIA does not bar federal court jurisdiction over a suit brought by non-taxpayers to enjoin state informational notice and reporting requirements Assessment, levy, or collection does not refer to information notices or private reports of information relevant to tax liability Kennedy and Quill what does it mean going forward? Direct Mktg. Ass n v. Brohl, 135 S. Ct. 1124 (Mar. 3, 2015) 4
Discrimination/AL CSX Transportation A rail carrier can show discrimination under 49 U.S.C. 11501(b)(4) by demonstrating that it is subject to differential tax treatment from its competitors The tax disparity is permissible if the competitors are subject to another roughly comparable tax from which the rail carrier is exempt or if the state offers another sufficient justification CSX Transp., Inc. v. Ala. Dep t of Revenue, 135 S. Ct. 1136 (Mar. 3, 2015) 5
INCOME TAX 6
Interest Expense/MA MassMutual ATB held that intercompany loans were bona fide debt and related interest expense was deductible for excise tax purposes Notes were bona fide debt based on a 17-part test, and they were issued for a valid business purpose improving the parent s risk-based capital score (which allowed the parent to carry a lower regulatory reserve) Department argued that the notes did not constitute genuine indebtedness because a commercial bank would not lend money to a third-party debtor on the same terms, but the ATB rejected those comparisons because the parent operated under a different lending model than commercial banks Interest expense satisfied unreasonable exception to the state s related party addback requirement Mass. Life Ins. Co. v. Comm r of Revenue, Nos. C305276 & C305277, 2015 WL 3669744 (Mass. App. Tax Bd. June 12, 2015) 7
COP/Seattle Wedbush Securities For local B&O tax purposes, service income is sourced to the city if (i) the customer location is in the city, (ii) the preponderance of incomeproducing activity is in the city based on COP and taxpayer is not taxable in the customer location, or (iii) the income-producing activity is performed in the city and the taxpayer is not taxable in the customer location Taxpayer was a broker-dealer with a Seattle office City prevailed on argument that customer location is the place where physical contact occurs; taxpayer did not have physical contact with customer, and income-producing activity occurred in Seattle Wedbush Secs., Inc. v. City of Seattle, No. 71932-7-I, 2015 WL 4726868 (Wash. Ct. App. Aug. 10, 2015) 8
COP (or Not)/SC DISH and DIRECTV If the income-producing activity is performed partly inside and partly outside the state, sales are attributable to South Carolina to the extent the income-producing activity is performed within the state DISH: South Carolina is not a strict COP state; the location where the income-producing activity is performed is what matters DIRECTV: Infrastructure for producing and collecting programming content and transmitting signals, though necessary, was merely incidental to the income-producing activities DISH DBS Corp. v. S.C. Dep t of Revenue, No. 14-ALJ-17-0285-CC (S.C. Admin. Law Ct. Feb. 10, 2015) DIRECTV, Inc. v. S.C. Dep t of Revenue, No. 14-ALJ-17-0158-CC (S.C. Admin. Law Ct. May 12, 2015) 9
Location of Performance/NY Expedia New York generally sources service receipts based on location of performance and other business receipts based on market Travel reservation facilitation receipts and online advertising receipts were service receipts and must be sourced to the location where the services were performed ALJ rejected Department s position that a service requires human involvement at the time the transaction is consummated Taxpayer successfully demonstrated that the services were performed at its headquarters, data centers, and call centers rather than the location of its customers modems In re Expedia, DTA Nos. 825025 & 825026 (N.Y. Div. Tax. App. Feb. 5, 2015) 10
SALES AND USE TAX 11
Services as TPP/LA Cox Communications Parish attempted to tax sales of video-on-demand and pay-perview programming as sales of tangible personal property Court said that video-on-demand and pay-per-view programming are either nontaxable services or exempt cable television services; either way, they cannot be taxed Normand v. Cox Commc ns La., Inc., No. 14-CA-563 (La. Ct. App. Dec. 23, 2014) 12
Lease Tax/Amusement Tax/Chicago Chicago taxes cloud computing, streaming services On June 9, the Chicago Department of Finance ruled that the city s lease tax applied to cloud computing services On the same day, the Department ruled that online gaming, streaming audio, and streaming video services were subject to the city amusement tax Effective date of September 1, 2015, but the city recently delayed the effective date of the imposition of the lease tax on cloud computing services to January 1, 2016 City of Chicago, Department of Finance, Personal Property Tax Ruling No. 12 (June 9, 2015) City of Chicago, Department of Finance, Amusement Tax Ruling No. 5 (June 9, 2015) 13
Qui Tam and False Claims Act/NY Sprint Nextel New York revised its FCA in 2010 to permit whistleblower claims it s the only one of its kind that expressly covers tax fraud Whistleblower (and then the state attorney general) alleged Sprint failed to collect $130M in tax; sought treble damages and other penalties What s the proper avenue for resolving a dispute over the meaning of an ambiguous tax statute? Oral argument September 9 People v. Sprint Nextel Corp., 114 A.D.3d 622 (1st Dep t 2014) 14
Class Actions Class actions affect everyone Costco/CA: allegedly overcollecting by applying tax on pre-discount prices Illinois cases: allegedly failing to collect tax on shipping and delivery charges Papa John s/fl: allegedly failing to collect tax on delivery fees Wal-Mart/OH: allegedly failing to refund tax in full to customers who return items to a store in a lower-tax jurisdiction Whole Foods/IL and NY: allegedly overcollecting by applying tax on prediscount prices 15
PROPERTY TAX 16
Sale-Leaseback Transactions/GA SJN Properties Taxpayer filed class action lawsuit against the county board and chief appraiser challenging the board s method of valuing bond transaction leasehold estates and attacking tax-exempt status of property owned by county development authority Georgia Supreme Court rejected challenge to tax-exempt status of property owned by county development authority Claims for injunctive relief were barred by sovereign immunity; claims for declaratory relief were improper SJN Props., LLC v. Fulton Cty. Bd. of Assessors, 296 Ga. 793, 770 S.E.2d 832 (2015) 17
Proposition 13/CA Proposed amendment to Proposition 13 Legislation has been introduced to amend Proposition 13, which caps increases in assessed value of real property, other than stateassessed real property and possessory interests, to 2% annually Senate Constitutional Amendment 5 aims to have commercial and industrial properties assessed at fair market value If it passes the legislature, the measure will be on the ballot next year 18
OTHER FUN STUFF 19
Disclosure of Tax Incentives GASB Statement No. 77 (Aug. 2015) GASB approved a rule that will require government officials to show the value of property, sales and income tax abatements, effective for periods beginning December 15, 2015 Tax abatement defined as [a] reduction in tax revenues that results from an agreement... in which (a) one or more governments promise to forgo tax revenues to which they are otherwise entitled and (b) the individual or entity promises to take a specific action after the agreement has been entered into that contributes to economic development or otherwise benefits the governments or the citizens of those governments. Will require (1) brief description of abatement, (2) gross dollar amount of taxes abated, and (3) commitments made by the government, other than tax abatements, as part of a tax abatement agreement 20
Assessments/FL Verizon Business Purchasing Department generally has three years to determine and assess any tax, penalty or interest due Department issued a notice of proposed assessment approximately two months before the expiration of the agreed-upon, extended statute of limitations period; the notice indicated that the proposed assessment would become a final assessment after 60 days unless the taxpayer submitted a protest The First DCA held that a proposed assessment is not an assessment for statute of limitations purposes, which meant that the actual assessment was made after the statute of limitations period expired Verizon Bus. Purchasing, LLC v. State of Fla., Dep t of Revenue, No. 1D14-3213, 2015 WL 3622356 (Fla. 1st DCA June 11, 2015) 21
Combined Reporting/AL Alabama combined reporting bill dies If enacted, Senate Bill 51 would implement mandatory combined reporting Estimated to bring in an additional $30 million annually beginning in FY 2016 Bill died in the Alabama Legislature s first special session, which adjourned August 11; however, the bill passed the Senate Finance and Taxation Education Committee on a 9-5 vote 22
Parting Thoughts Zack Atkins (404) 853-8312 zachary.atkins@sutherland.com Suzanne Palms (404) 853-8074 suzanne.palms@sutherland.com 23
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