State Tax Highlights

NEWS

Airbnb Update
Online home-sharing company Airbnb Inc. announced May 18 that it will begin collecting and remitting sales and hotel occupancy taxes in North Carolina as of June 1. Airbnb will collect and remit the 4.75 percent sales tax statewide as well as local sales and hotel occupancy taxes in four counties in the state, all of which have different tax rates. There is no statewide hotel occupancy tax in North Carolina. All 157 counties and municipalities in the state impose a local occupancy tax of at least 1 percent, according to the North Carolina Restaurant and Lodging Association.

North Carolina will be only the second state in which Airbnb collects a statewide tax. The company began collecting and remitting a state lodging tax in Oregon in September 2014. Airbnb also collects and remits occupancy taxes on behalf of its guests in several cities, including the District of Columbia; Chicago; San Francisco; Portland, Oregon; Malibu, California; and San Jose, California. 
   

Direct Marketing Association v. Brohl Update
On May 13, 2015, Colorado filed a supplemental brief in the Tenth Circuit Court of Appeals, arguing that its remote retailer sales tax notice and reporting requirement does not violate the commerce clause or Quill because it does not constitute economic protectionism. The state also argued that the case is not barred by comity because the state waived it as a jurisdictional bar. 


On May 20, 2015, nine state and local government interest groups filed an amicus brief in the Tenth Circuit Court of Appeals supporting Colorado's sales and use tax information reporting regime. The brief argues that the inability of states to assess and collect sales and use tax on electronic commerce has had real consequences for states and local governments that are not able to provide dollars necessary to adequately fund education, infrastructure, public safety, and other government services.

On May 19, 2015, group of interested law professors filed an amicus curiae brief in the Tenth Circuit Court of Appeals supporting Colorado's sales and use tax reporting regime, arguing Quill does not preclude the regime. They argue that the statute serves important purposes for which there is no alternative, other than the one foreclosed by Quill.

U.S. SUPREME COURT UPDATE

Decision Issued

Comptroller of the Treasury v. Wynne, U. S. Supreme Court Docket No. 13-485. On May 18, 2015 the Supreme Court in a 5-4 decision held that Maryland’s personal income tax regime violated the dormant commerce clause of the U.S. Constitution when it denied a county income tax credit for income a couple received from an investment in an out-of-state S corporation.

Maryland's personal income tax on state residents consists of a "state" income tax at a rate set by state and a "county" income at a rate set by the local jurisdictions. Residents who pay income tax to another jurisdiction for income earned in that other jurisdiction are allowed a credit against the "state" tax but not the "county" tax. The taxpayers in this matter were Maryland residents who earned pass-through income from a Subchapter S corporation that earned income in several States and claimed an income tax credit on their 2006 Maryland income tax return for taxes paid to other States. The Maryland State Comptroller of the Treasury (Comptroller) allowed the taxpayers a credit against the state portion of their income tax but not against the county portion and assessed a tax deficiency. The Maryland Court of Appeals held that the tax unconstitutionally discriminated against interstate commerce.

The opinion, authored by Justice Alito, invoked the dormant Commerce Clause which precludes states from discriminating between transactions on the basis of some interstate element. The court cited its cormant Commerce Clause cases, particularly J. D. Adams Mfg. Co. v. Storen, 304 U.S. 307, 311, Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434, 439, and Central Greyhound Lines, Inc. v. Mealey, 334 U.S. 653, 662, which all invalidated state tax schemes that might lead to double taxation of out-of-state income and that discriminated in favor of intrastate over interstate economic activity. The opinion noted that these three cases involved a tax on gross receipts rather than net income, and a tax on corporations rather than individuals, but said the court’s decisions have previously rejected the formal distinction between gross receipts and net income taxes and stated there was no reason the dormant Commerce Clause should treat individuals less favorably than corporations. The court also said that the state’s tax scheme does not avoid dormant Commerce Clause scrutiny simply because the state has the jurisdictional power under the Due Process Clause to impose the tax. The opinion said that the state income tax code failed the “internal consistency” test, a test that assumes that every state has the same tax structure and aids the court in identifying tax schemes that discriminate against interstate commerce. The opinion said that Maryland failed that test because if every state adopted its structure for income tax, interstate commerce would be taxed at a higher rate than intrastate commerce. The court found that Maryland’s tax scheme operates as a tariff, a fatal flaw when examining whether it violates interstate commerce.

The principal dissent was authored by Justice Ginsburg and began with the statement that the majority’s decision veers from a principle of interstate and international taxation repeatedly acknowledged by this Court that a nation or State may tax all the income of its residents, even income earned outside the taxing jurisdiction, a principle stated in the 1995 case Oklahoma Tax Comm'n v. Chickasaw Nation. The opinion stated that nothing in the Constitution or in prior decisions of the Court dictates that either the domiciliary State or the source State must recede simply because both have lawful tax regimes reaching the same income. The dissent noted that states often permit their residents to take credits for income taxes paid to other states, but do so because of tax policy, not because the Constitution requires them to do so. The issue was about policy choices and whether a state favored taxing all of its residents the same or preventing the incidence of double taxation.

Justice Scalia also penned a dissent, although he joined with Justice Ginsberg’s dissent. His dissent described the negative Commerce Clause as a judge-invented rule under which judges may set aside state laws that they think impose too much of a burden upon interstate commerce. Scalia said that the fundamental problem with the negative Commerce Clause cases is that “the Constitution does not contain a negative Commerce Clause. It contains only a Commerce Clause. . . the real Commerce Clause adopted by the People merely empowers Congress to ‘regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.’ The Clause says nothing about prohibiting state laws that burden commerce. Much less does it say anything about authorizing judges to set aside state laws they believe burden commerce.”

NOTE: The Tuesday afternoon legal breakout session at FTA’s annual conference in Minneapolis will include a discussion of the Wynne case, as well as CSX v. Alabama and Direct Marketing Assn. v. Brohl, both decided by the Supreme Court earlier this year. Representatives for each of the three states will discuss their cases and the decisions and two members of the practitioner community will provide their insight into the ramifications of these decisions. There is still time to make your reservation to attend the conference.

FEDERAL CASES OF INTEREST

  
No cases to report.

DECISION HIGHLIGHTS

Sales and Use Tax Decisions

Bank Statements Are Suitable Records in Sales Tax Audit
The Louisiana Court of Appeal, Third Circuit ruled that monthly deposit slips and bank statements provided by the taxpayer in a sales tax audit were suitable records for tax determination. The court said the taxpayer was not required to keep Z-tapes from cash registers in order to provide suitable records.

Taxpayers are two clubs owned by the same individual and were selected for a four-year sales and use tax audit by the state parish in which they are located. Both enterprises were cash businesses. One was open only two days per week and catered to the college crowd. The other business was smaller and catered to an older crowd. At the end of each business night the managers of each business would count the cash taken in and compare that count to the amount reflected on the registers' tapes known as "Z-tapes." The cash was then placed in a safe, on-site, and deposited in the bank on Mondays. From the beginning of these business operations until the audit was initiated, a period of some twenty years, the owner routinely provided the deposit receipts and bank statements of these businesses to his CPA as his records for the preparation of federal, state, and local sales tax returns. The state conducted its own sales and use tax audit in 2008, used taxpayer’s records and found no additional taxes due.

Taxpayer provided the monthly deposit slips and bank statements to the Parish Collector's auditor as well as copies of the clubs' federal and state tax returns, but the Collector refused to accept such information as sufficient business records. The Collector argued that the clubs were required to keep their "Z-tapes" from the registers for the required period of time as suitable records. The court pointed out that the statutory provision regarding required records refers only to "suitable records," "other books of accounts," and "other information as may be required by the collector" and said that those phrases are all ambiguous, ill-defined terms which give no clear instruction to the taxpayer as to what specific records and/or documents will be acceptable, let alone required, to determine taxes owed in the event of an audit. The court further noted that the Collector could have easily published a list of required records/documents but did not do so until after its assessment of these businesses. The court noted further that the state Department of Revenue, the United States Internal Revenue Service, and the Collector had been satisfied for some twenty (20) years with the taxpayer's filings based only on the very records he supplied to the Collector in this audit. The trial record disclosed that the Collector was aware that taxpayers had previously expressed concern as to what constituted “suitable records” for audit purposes and the Collector offered no evidence or testimony of any actual lists that it had ever published prior to these audits detailing suitable records.

The court found that the taxpayer did what he and his CPA had done for years, and what he reasonably understood to be sufficient books and records, which included bank statements and deposit slips. If the Collector required businesses such as these clubs to keep their "Z-tapes" then it could have promulgated such a requirement or at least informed taxpayers in writing that only this record would constitute a "suitable record" for tax purposes and it did not. The court said it was unfair to ambush the taxpayer after-the-fact and demand only the production of "Z-tapes" as proof of total sales. The court also noted that the statute does not grant the Collector in this circumstance the authority to make an arbitrary estimate of the clubs' retail sales during the disputed periods. The statute provides that the collector may make an estimate of the retail sales of a vendor if the vendor makes a grossly incorrect report or a report that is false or fraudulent. The court pointed out that the Collector here did not comply with the statutory requirement to notify the taxpayer in writing of the sampling procedure the collector intends to utilize to produce a sample that reflects the normal conditions under which the business was conducted for the period of the audit. There was no evidence that the taxpayer had agreed in advance with a sampling procedure and methodology. In addition, the auditor admitted at the lower court trial that the “Z-tapes” used in the sampling were for a period for one of the clubs after it was rebuilt into a much larger facility with much greater capacity than the old club. The auditors also used the information on alcohol purchased from distributors in the sampling, but admitted at the lower court trial that the used a straight 300% markup in determining sales subject to tax, without taking into account any special sale prices that were frequently promoted. The court rejected the Collector’s argument that the trial judge error in concluding that the Collector failed to meet the statutory requirements in conducting these audits. The taxpayer provided sufficient records in light of the lack of any notice from the Collector throughout many years that the only records sufficient to show revenue would be "Z-tapes."

The court also held that the trial court did not abuse its discretion in concluding the Collector failed to carry its burden to prove the evidence it asserted was newly discovered was not discoverable earlier by due diligence in its denial of the Collector’s motion for a new trial. The Collector was aware during the audit that the taxpayer made payments to bands, bouncers, and sheriff's deputies but it made no effort to timely procure the evidence it asserted was a basis for a new trial. The court said that the evidence was discoverable by due diligence before the final audit assessment was issued and litigated. Yesterdays of Lake Charles Inc. v. Calcasieu Parish Sales and Use Tax Dep't, Louisiana Court of Appeals, 14-413; 14-414. Undated
  

Individual Is Not Liable for Sales and Use Taxes
The Louisiana Court of Appeal, Fifth Circuit held that the sheriff's revived judgment for payment of sales and use taxes for the operation of a business within the parish against the appellant was improper. The court said the appellant was not a party to an earlier consent judgment.

The Sheriff of a parish in the state filed a Rule for Taxes against a business and its owners, seeking to collect sales and use taxes levied by the parish against the business and owners. The following facts are gleaned from the record before us. One of the individuals filed an answer denying the allegations and asserting that he did not operate a business that collected sales and use tax during the relevant period. Subsequently, the Sheriff entered into a consent judgment with the other individual and the business entity in which they agreed to sole liability for the judgment. The judgment, however, reserved the right for the Sheriff to pursue the individual who filed the answer denying liability. Almost ten years later the successor sheriff filed an ex-parte Motion to Revive Consent Judgment, alleging the taxpayers and both owners originally assessed failed to satisfy the consent judgment. The trial court granted the motion as to all three parties.

The owner who originally denied liability appealed this action, contending that the trial court could not revive a judgment against him because he did not consent to the judgment and the judgment did not reflect that he was a judgment debtor. He also argued that, despite the sheriff s reservation of rights against him, neither of the sheriffs involved filed any further pleadings against him to pursue those rights. The statute of limitations for a money judgment rendered by a trial court in the state is 10 years if no appeal is taken or, if an appeal is taken, 10 years from the date the judgment becomes final. The judgment may be revived at any time within that period by an interested party. The sheriff sought to revive the judgment within the 10-year period. Since the individual who appealed his liability was not a party involved in the original judgment, the court held that the judgment could not be revived as to him. Lee v. Fazzio, Louisiana Court of Appeals, No. 14-CA-945. 5/14/15
   

Court Partially Invalidates Regulations on Sales Tax Refund Claims
The Texas Court of Appeals, Third District held that a taxpayer services firm had standing to bring a challenge to the comptroller's rules on sales and use tax refunds. The court invalidated the rules addressing documentation necessary to file refund claims, but upheld provisions on refund hearings and denials.

Appellee is a tax services firm that files and pursues sales and use tax refund claims on behalf of its clients as part of its business. In 2012 it sued the Comptroller seeking declaratory relief and claiming that subsection (a)(4) of the 2011 rule, 36 Tex. Reg. 3670, was facially illegal and invalid. The complaint concerned the nine categories of transactional detail subsection (a)(4)(A) of the 2011 rule required to be filed at the time a refund claim was filed that the appellee contended imposed additional burdens and restrictions on refund claims in excess of the provisions of the state tax code. The 2011 rule was amended in 3013 and the appellee amended its petition to include claims for declaratory relief challenging subsections (a)(4), (b)(10), and (e) of the 2013 rule.

Appellee challenged the requirements to provide nine categories of transactional detail in subsection (a)(4)(C) and supporting documentation in subsection (a)(4)(E) at the time the claim is initially filed and also challenged the effect of these requirements on the tolling provision in subsection (b)(10) and a taxpayer's ability to introduce evidence at an administrative hearing in subsection (e)(3). The lower court found in favor of the appellee and the Comptroller filed this appeal.

The Comptroller argued on appeal that the appellee failed to prove a cognizable injury, contending that there was no evidence that Ryan had filed claims in its own name that were affected by the rule and that Ryan's only injury that was supported by evidence was that the rule could adversely affect Ryan's "contingent-fee arrangements." The Comptroller argued injury based on this type of arrangement is insufficient as a matter of law to confer standing. If a plaintiff lacks standing to assert his claims, the court lacks jurisdiction and must dismiss the claims.

The court found that the appellee presented evidence that it is a taxpayer, taxpayer representative, and assignee with the legal right pursuant to the statute to file refund claims in its own name and as an assignee of its clients' claims. Its clients also sign powers of attorney to authorize it to file and pursue refund claims. Therefore, the court noted that the appellee invests its own resources to pursue refund claims and found that the appellee established the requisite injury to bring its rule challenge.

The court also rejected the Comptroller’s argument that the appellee lacked standing because it failed to show that a favorable judicial decision would redress its alleged injury, finding that the appellee need not prove to a mathematical certainty that the requested relief will remedy his injury. Instead, appellee must simply establish a substantial likelihood that the requested relief will remedy the alleged injury in fact. The court also rejected the Comptroller’s argument that the trial court did not have jurisdiction of the appellee’s challenge to the 2011 rule because it is moot, pointing to the Comptroller’s “judicial admission” during the trial that claims filed under the 2011 rule will be handled under the procedures of the 2013 rule and that the tolling provision of the 2013 rule retroactively fixes any damages the appellee might have incurred. The court said that based on the record it could not find that the Comptroller mooted the claim by filing the “judicial admission.”

The court note that appellee does not dispute that the nine categories of transactional detail required in subsections (a)(4)(A) of the 2011 rule and (a)(4)(C) of the 2013 rule and supporting documentation required in subsections (a)(4)(C) of the 2011 rule and (a)(4)(E) of the 2013 rule must be produced during the administrative process in order for a claimant to be entitled to a refund. The crux of the dispute then is when the transactional detail and supporting documentation must be submitted to the Comptroller to support a refund claim.

The Comptroller argued that the legislature unambiguously authorized the Comptroller to require the transactional detail and supporting documentation at the initiation of a refund claim and that, even if there is ambiguity, these requirements reasonably resolve any statutory ambiguity.

The court held that the statutory scheme, from the filing of a refund claim to a suit for refund, is designed so that the Comptroller is aware of the legal basis for the refund claim but then gives the taxpayer a period of time to prove its claim. The transactional detail and supporting documentation will be required to prove a refund claim during the administrative process, but the rules' requirement that this information be filed at the initiation of a refund claim is unjustified by the wording of the statute and inconsistent with the overall statutory scheme.

With regard to the tolling provision in the regulations, the court noted that the appellee’s challenge to that provision concerned only the consequences of the transactional detail and supporting documentation requirements in subsections (a)(4)(C) and (E) on tolling and its challenge to subsection (e) concerned a taxpayer's ability to introduce evidence at an administrative hearing. The court found that all but one sentence in subsection (e) tracks or follows from statutory language. Because the last sentence references and affirms the supporting documentation requirement in subsection (a)(4)(E), the court concluded that the sentence is illegal and invalid for the reasons stated above. Hegar v. Ryan LLC, Texas Court of Appeals, No. 03-13-00400-CV. 5/20/15

Personal Income Tax Decisions

No cases to report.

  
Corporate Income and Business Tax Decisions

Movie Auditorium Costs Should Be Included in COGS Deduction
The Texas Court of Appeals, Third District held that costs associated with a movie theater's square footage of its auditoriums are direct costs of producing its product for the costs of goods sold deduction, rejecting the comptroller's argument that only sound and projection systems are used for production.

The taxpayer is in the movie theater business, primarily exhibiting films and other content to its customers. For the tax years at issue here, taxpayer computed its taxable margin for purposes of calculating its state franchise tax by subtracting its cost of goods sold (COGS) from its total revenue. It included its costs of exhibiting films and other content as COGS for those years, which the Comptroller disallowed as a result of an audit. At the lower court the parties disputed whether the taxpayer’s product amounted to a “good” as that term is defined in the state. The court determined that the taxpayer was entitled to include the costs to exhibit films to its customers in its Cost of Goods Sold subtraction. The parties reached an agreement delineating the majority of exhibition costs that the taxpayer could include in the COGS subtraction but were unable to agree about certain facility-related costs, such as rent and depreciation, associated with the square footage of the taxpayer’s movie theater auditoriums.

The taxpayer argued that the costs associated with the entire square footage of its auditoriums should be included in the COGS calculation, but the Comptroller contended that the only costs that should be included were costs associated with the square footage occupied by the speakers and the screens in the auditoriums. The lower court agreed with the Comptroller’s position and ordered refunds based on the corresponding stipulated amounts for the years at issue.

Both parties filed an appeal. The Comptroller argued that exhibiting films does not constitute a “good” because the taxpayer does not sell tangible personal property, but intangible property, i.e. a film-watching service. The court turned to the plain and common meaning of the term “tangible personal property” which the statute defined to include personal property that can be seen or that is “perceptible to the senses” in any other manner. The court also applied the common and ordinary meaning of “intangible property” in considering the Comptroller’s argument. The court held, after applying the plain meaning of "tangible personal property" as that phrase is defined in the statute and viewing the evidence under the applicable standard of review, that the evidence was legally sufficient to support the trial court's finding of fact. In effect, the court ruled that a movie can be viewed as tangible personal property under the law because it is perceptible to the senses. The court said that the trial court did not err in concluding that the taxpayer was entitled to include its exhibition costs in its COGS subtraction.

The taxpayer appealed the trial court's ruling that only its costs associated with the square footage housing the speakers and screens in its auditoriums qualified as COGS under the statute, arguing that the undisputed evidence conclusively proved that costs associated with the entire auditorium were direct costs of producing the films the taxpayer sells to its customers. The taxpayer argued that is used the entire auditorium space in production as defined in the tax code. The court concurred with the taxpayer’s argument that the trial court erred by deferring to the Comptroller's interpretation of the statute because the code section that defines "production," is not ambiguous. According to the taxpayer its evidence presented at trial established that the auditorium is integral to the visual and acoustic production and that it uses the entire auditorium space in "production" as that term is defined in the statute. Testimony at the lower court trial spoke to the taxpayer’s improvement of its film product in its auditorium space, with testimony about the sight, sound and lighting in the space to create a unique audio and visual experience. The testimony specified that there are many of different technical elements that go into the design and the eventual implementation inside each theater auditorium.

The court rejected the Comptroller’s argument that auditoriums are consumption space and do not qualify as production space, saying that these two spaces are not mutually exclusive, and pointing out that the definition of production in the statute does not reference or exclude costs that are also associated with consumption space. The court found that the taxpayer established that its costs associated with the square footage of its auditoriums are direct costs of producing its product, and the Comptroller failed to present controverting evidence. American Multi-Cinema Inc. v. Hegar, Texas Court of Appeals, No. 03-14-00397-CV. 4/30/15

Property Tax Decisions

Charitable Exemption Denied for Assisted Living Nonprofit Organization
The Michigan Court of Appeals denied a charitable exemption from property taxes for a nonprofit organization providing adult foster care services, saying that the taxpayer offered its services on a discriminatory basis. The court further found that the taxpayer failed to prove its fees for services were not more than necessary.

The taxpayer is a 501(c)(3) tax-exempt organization that owns and operates several adult-foster care and assisted living facilities in the state, including the one at issue in this matter. Petitioner's articles of incorporation and by-laws indicate that it was organized to provide home healthcare services and "other senior lifestyle services to the general public." Petitioner subscribes to a faith-based philosophy in its operation, although it is not affiliated with any specific denomination or church. Taxpayer maintains an "income-based program" whereby a resident's monthly charge is reduced to a level based on the amount of their income. Applicants for the program are required to show that they have the ability to pay some amount toward their living arrangement and care (even if it is solely from Medicaid or Medicare). Taxpayer does not provide free housing and care and has not admitted any resident who has not had some ability to pay.

The lower court ruled that taxpayer was not entitled to a charitable exemption under the statute based on the factors set forth in Wexford Med Group v. City of Cadillac, 474 Mich 192, 215; 713 NW2d 734 (2006), finding that taxpayer offered its charity on a discriminatory basis, that it had not met its burden to prove that the fees it charged were not more than what was needed for its successful maintenance, and that its overall nature of operation was commercial.

The court noted that it is well settled that a petitioner seeking a tax exemption bears the burden of proving, by a preponderance of the evidence, that it is entitled to the exemption and tax exemptions must be strictly construed in favor of the taxing body because exemptions upset the desirable balance achieved by equal taxation. The state statute provides an exemption for real or personal property owned and occupied by a nonprofit charitable institution while occupied by that nonprofit charitable institution solely for the purposes for which that nonprofit charitable institution was incorporated. While the statute does not provide a definition of charitable the Wexford case set forth six factors to consider when determining whether an organization is a "charitable institution," including the fact that a charitable institution does not offer its charity on a discriminatory basis by choosing who, among the group it purports to serve deserves the services. The court said that such an institution serves any person who needs the particular type of charity being offered.

This does not mean, however, that a charity has to serve every single person regardless of the type of charity offered or the type of charity sought. Rather, a charitable institution can exist to serve a particular group or type of person, but the charitable institution cannot discriminate within that group.

In the case at hand, the taxpayer’s purpose is to provide home health care services and other senior lifestyle services to the general public. When one of the taxpayer’s residents is unable to pay the alleged below-market costs, his or her eligibility for Medicaid qualifies the resident for the taxpayer’s income based program, although that amount is far less than the amount the taxpayer otherwise charges other residents. The record shows that the taxpayer does not discriminate among its residents eligible for its income based payment program.

The court, however, took issue with the taxpayer’s stated scope of its charity care policy, noting that the policy is not broadly defined as offering a reduced rate to all applicants unable to pay the standard market costs for this type of facility. To be eligible for the income based policy, one must first be a resident, and to be a resident, one must have the ability to pay at the outset. In order to be eligible for the income based program, one must have been able to pay, at some point, more than what government assistance would offer. The court noted, in fact, that the taxpayer has never admitted any resident who did not in the beginning have the ability to pay its standard rate. The court said that while it was true that the taxpayer did not discriminate among its residents who are eligible for the income based program, entry into this charity is conditioned upon the taxpayer’s residency requirements, which in turn, are conditioned on the ability to pay. The court said that, given the taxpayer’s own narrow definition of charity-based activity, the taxpayer cannot clear the discriminatory basis hurdle of Wexford.

The lower court rejected the lower court’s finding that the taxpayer’s charges for services were more than what was necessary for its successful maintenance because the taxpayer successfully established that its revenue for the years in question was insufficient to cover its costs. The court said the comparison of the taxpayer’s rates to others’ in the community was not a proper benchmark for the determination. The court also said the lower court erred in its determination that the taxpayer’s overall nature in running the facility was not charitable. However, because on the taxpayer could not establish that it did not offer its charity on a nondiscriminatory basis, the court held that the taxpayer was not a charitable institution within the meaning of Wexford, and that it was not entitled to the real and property tax exemption for charitable institutions set forth in the statute. Baruch SLC Inc. v Twp. of Tittabawassee, Michigan Court of Appeals, No. 319953. 4/21/15

Other Taxes and Procedural Issues

Court Approves Settlement of Class Action Against Private Auditor
An Alabama circuit court approved a final settlement of a class action suit against a private auditing firm performing audits on behalf of local jurisdictions in the state. The settlement obligates the firm to change business practices for assessment procedures, audit selection criteria disclosures, and related issues. As part of the settlement all class claims against the state taxing jurisdictions were dismissed. The settlement also acknowledged that the private auditing firm has the general statutory authority under the code to enter assessment on behalf of the taxing jurisdictions with whom it has an active contract and may conduct audits or examinations of taxpayer records.

The settlement did not impact any assessments already levied and provided that any audits or examinations currently underway may continue. Pursuant to the settlement, the auditing firm agreed to modify, supplement, and/or maintain its business practices on a going-forward basis in a number of respects. It agreed to provide each taxing jurisdiction with email notifications on a monthly basis containing a summary of the preliminary and final assessments entered against taxpayers. The auditing firm also agreed to make changes to its responsible party assessments to ensure notice is provided to any proposed responsible party and its research of prior tax liens procedures. It further agreed to inform taxpayers of the audit selection criteria resulting in their audit and to remove any reference of the company’s expected ratio of dollars collected to dollars billed to the taxing jurisdictions. The company also agreed to make changes to practices regarding jurisdictions that “opt-out” of an audit. The settlement also required the company to adequately separate its audit function from its discovery and collection practice and to change the manner in which it conducts administrative appeals of the assessments and its issuance of subpoenas on behalf of the jurisdictions. Washer & Refrigeration Supply Co. Inc. v. PRA Gov't Servs. LLC, Alabama Circuit Court, CV-2010-903417. 5/6/15
  

Personal Representative Liable for Estate's Property Taxes
The Indiana Court of Appeals held that the personal representative of an estate is personally liable for the estate's property taxes that become due and payable before the estate is settled. The court also held, however, that the lower court erred by ordering the representative to pay for repairs on the property.

Decedent died in 2007 survived by four children. Her will excuted in January 2005 was probated and one of the surviving children filed a will contest, arguing that the will executed in May 2005 was the decedent’s true and proper will. Subsequently, all parties entered into an agreement regarding disposition of the estate that provided that a will executed by the decedent in 1997 would be enforced. The terms of the agreement provided that the surviving child who contested the will would receive Decedent's farmhouse and five acres of surrounding land and make payment of the value of that property to the estate, most of the farmland would be sold off to settle claims against the estate, and the decedent’s son who had been appointed as the personal representative would continue as personal representative.

Estate claims at that time included $186,417.00 in accrued attorney's fees, that represented over 40% of the value of the estate. When the personal representative filed a final account for the estate and petitioned to close the estate and distribute the assets, the surviving child who originally contested the will objected that the taxes of approximately $5,000 due on the farmhouse had not been paid. The lower court ruled that the personal representative was responsible for the payment of the property taxes, reimbursement of repair costs on the farmhouse and attorney’s fees payable to the child contesting the will.

The personal representative argued that the estate should not be required to pay property taxes that came due after his filing of the final account, which occurred on December 7, 2012. Upon decedent’s death, the farm passed to the personal representative by operation of state statute that provides, among other things that the personal representative shall pay the taxes until the estate is settled or until the property is delivered to the distributees.

The court held that the relevant statutory authority clearly indicates that the personal representative is liable for property taxes that become due and payable before the estate is settled and found that the personal representative had failed to establish that the trial court’s order was clearly erroneous. The court also held that, with regard to the repairs of the farm, there was a lack of evidence that any of the damage at issue occurred during the personal representative’s “possession” of the property and that there was no evidence that any part of the farm was ever under the representative’s control. The court found that the lower court erred in ordering the estate to pay the repairs. Finally, the court reversed the lower court’s ruling awarding attorney’s fees to the child’s contesting the estate. Jones v. Schaefer, Indiana Court of Appeals Case No. 29A02-1410-ES-736. 5/15/15

The State Tax Highlights is a publication of the Federation of Tax Administrators for its members. If you have any comments on this publication, please send them to Linda Tanton at [email protected].

NEWS

Meet Us In Minneapolis!
Hope you have already made your reservations for the FTA Annual Conference June 15 through 18 in Minneapolis, but there’s still time to do so if you have procrastinated. We have a robust agenda planned that you can access at http://www.taxadmin.org/am/.

The legal breakout sessions are scheduled for Tuesday and Wednesday afternoons and will include the following topics:

Transfer pricing: Greg Matson, Deputy Director at MTC has agreed to speak about what MTC is doing in this area with the states and representatives from Connecticut and Alabama have been invited to participate.

Nexus: Steve Roll of BNA will provide an overview of BNA’s 2015 survey results on nexus rules from the states.

Supreme Court Cases: This has been a busy year for state tax cases before the Supreme Court and we have representatives from each state that argued a case to speak about their case and the ramifications from the decisions. Shirley Sicilian from KPMG and a representative from the Sutherland firm will provide insight from the practitioner viewpoint.

What’s going on in tobacco and motor fuel? Cindy Anders-Robb of FTA will give us an update.

Amicus briefs—when and why? —Helen Hecht, general counsel for MTC and Christine Mesirow of Ohio will provide their insights.

Marijuana: What I wish I’d known when this all began and what’s new for states in this growing field. Eric Johnson from Colorado and Cindy Anders-Robb from FTA have agreed to impart their knowledge.

Update on other significant court cases: Marilyn Wethekam with Horwood Marcus & Berk will be presenting with Helen Hecht of MTC.

Hope you can join us for the fun!

U.S. SUPREME COURT UPDATE

Petition for Certiorari Filed
California Franchise Tax Board v. Hyatt, U S Supreme Court Docket No. 14-1175. Petition for certiorari filed 3/23/15. As reported in earlier editions of State Tax Highlights, Mr. Hyatt sued the FTB in Nevada state court for various torts arising out of the conduct of the FTB's auditors during their audit of his 1991 and 1992 California state income tax returns. Hyatt asserted that he had moved to Nevada in the fall of 1991. the Nevada Supreme Court rejected many of the taxpayer’s claims, it found that there was sufficient evidence to support the jury's findings that the FTB made false representations to the taxpayer regarding the audits' processes and that he relied on those representations to his detriment and damages resulted. The court upheld the jury's award of nearly $1.09 million in special damages to him on his fraud claim. [See FTA Analysis]

On April 21, 2015, the Multistate Tax Commission filed an amicus brief urging the grant of certiorari in support of the California Franchise Tax Board. MTC argues that courts should apply other states' sovereign immunity rules because private lawsuits that could interfere with or disrupt collection efforts threaten states' interest in revenue collection.

FEDERAL CASES OF INTEREST

  
No cases to report.

DECISION HIGHLIGHTS

Sales and Use Tax Decisions

DOR's Use Tax Justification in Yacht Sale Case Rejected
The Mississippi Supreme Court held that the state has the burden of proving that use tax is applicable to transactions. The court also said that a taxpayer’s use of a broker in a casual sale did not make a sale taxable, calling the Department of Revenue’s (DOR) position in the case was arbitrary and capricious.

The taxpayer in this case is a resident of the state who purchased a yacht in Florida from an Ohio resident who was not in the business of buying or selling boats. The Ohio resident used a yacht broker who provided marketing services. The taxpayer did not pay sales tax in Florida or the Mississippi use tax. Taxpayer argued that the sale qualified as a casual sale and was, therefore, not subject to the state’s use tax. He further argued that the yacht broker was used by the seller for marketing purposes only and had not authority to negotiate on the seller’s behalf and did not have title, possession or control over the vessel at any time. DOR argued that the sale was a retail sale and the purchaser owed the state’s use tax. DOR also argued that all brokered sales are taxable under state law and that the taxpayer had the burden to show he was entitled to an exemption. The lower court ruled in favor of DOR.

Citing prior case law, the court first found that under state law, DOR carries the burden to establish that a particular transaction falls within its statutory power to tax. In addition, taxes such as the use tax are to be strictly construed against the taxing authority. Once DOR has established that a particular transaction is subject to tax, it then becomes the taxpayer’s burden to prove that it is entitled to a particular exemption, but because in this case the casual sales exception is an exclusion from the tax and not an exemption, the court found that the lower court applied the wrong legal standard and DOR had the burden to prove that the taxpayer’s boat purchase was within the state’s statutory authority to tax.

DOR acknowledged that casual sales are not subject to the use tax, it argued that any broker involvement prevents a sale from being a casual sale. The court noted that the fact that taxpayer’s boat purchase qualifies as a sale under the definition of sale and thereby constitutes a taxable event is alone insufficient to impose a tax, finding that the taxable event is nothing more than a condition precedent required before a specific tax can be levied on a transaction. The court rejected DOR’s argument that the boat was sold in the ordinary course of the broker’s business, noting that DOR admitted that the seller, and not the broker, sold the boat.
The court found that DOR failed to meet its burden of showing that the taxpayer’s purchase was subject to use tax and not excluded as a casual sale. It also found that DOR’s arguments to the contrary were arbitrary and capricious. The court said that it was abundantly clear from the record that the buyer and seller were not in the boat trade and that the broker’s marketing service did not make this transaction something other than a casual sale. Castigliola v. Dep't of Revenue, Mississippi Supreme Court, No. 2013-SA-01574-SCT. 4/30/15

Personal Income Tax Decisions

Cleveland's Nonresident Professional Athlete Income Tax Violates Due Process
The Ohio Supreme Court held that the city of Cleveland's income tax assessments on a professional athlete's income based on games played in the city violated the due process clause finding that the games-played allocation method does not accurately reflect the percentage of work done in the city by an athlete. The calculation reaches income not earned in the city.

The taxpayer is a former linebacker for the Chicago Bears of the National Football League (NFL) and challenged the method by which Cleveland's municipal income tax was imposed on his earnings during tax years 2004, 2005, and 2006. In each of those seasons, the Bears played one game in Cleveland, and the taxpayer was present in Cleveland two days for each game. The taxpayer argued that the games-played method of allocating income dramatically overstates his Cleveland income, because his compensation as an NFL player included earnings not only for the games he played, but also for the training, practices, strategy sessions, and promotional activities he engaged in. The taxpayer filed applications for refunds for overpayment of income taxes for the years in question.

The record established below showed that the taxpayer had at least 157 work days in 2004, 165 days in 2005, and 168 days in 2006 under his NFL contract with his team, beginning with mini camp, preseason training camp and the regular season of 16 games. The affidavit presented by the taxpayer also established that in each of those years, his team played one game in Cleveland, Ohio, traveling to the City the day before the game and leaving the City the same day on which the game was played. The taxpayer was present for each of those games. A representative from the NFL testified that the compensation the taxpayer received is paid for a number of services performed during those work days and not just for games played. According to testimony a player’s standard contract provides for a stated yearly base salary (paragraph 5 compensation), paid in weekly or biweekly installments during the regular season, plus an additional compensation based on a player’s specific contract, for performance bonuses, signing bonuses and roster bonuses. Termination of a player during the season would lead to the prorated forfeiture of the paragraph 5 compensation, but already earned bonuses would not be affected. The taxpayer’s 2006 contract was for the term 2006 through 2011 and his paragraph 5 compensation started at $585,000 and reached $1.8 million by 2011. He was also entitled to a roster bonus for 2006 in the amount of $4.5 million, compensating him for being a member of the roster as of July 10, 2006.

The City of Cleveland imposes a 2 percent tax on the income that is allocable to Cleveland. A regulation promulgated under the city ordinance sets forth a games-played method to allocate the income of a nonresident professional athlete such as the taxpayer. As a result, Cleveland taxes the one game that the taxpayer played in Cleveland each year in proportion to the total number of games the Bears played during the year, approximately 20 preseason and regular-season games in a non-playoff year, with the result that 5 percent of the taxpayer’s income each year would be allocated to the city’s income tax computation. The court pointed out that many municipalities that have chosen to tax professional athletes do so on the basis of the allocation of the "duty-days". This computation in the current case would have resulted in an allocation of income of approximately 1.27 percent of the taxpayer’s income in 2004, 1.21 percent in 2005, and 1.19 percent in 2006.

The taxpayer looked at the various definitions of wages in both the federal and state statute and argued that the state law required that employee wages be treated as having been earned for all services performed by an employee for his or her employer, and that the City’s apportionment formula that treats him as being paid only to play in games is contrary to the to the state code. The court found, however, that the definition of wages referenced by the taxpayer do not specifically address how to apportion or allocate wage income among the various jurisdictions in which the income has been earned. The court said that municipal home-rule authority to impose taxes may be limited only by a provision of state law that expressly imposes the restriction, citing Cincinnati Bell Tel. Co. v. Cincinnati, 81 Ohio St.3d 599, 605, 693 N.E.2d 212 (1998).

The court then turned to the taxpayer’s argument that the allocation method had been unconstitutionally applied to the taxpayer. The court rejected the City’s argument that the taxpayer had waived his constitutional claims by filing an appeal with the Board of Tax Appeals (BTA) rather than the common pleas court that has jurisdiction to hear constitutional issues, pointing out that the court has previously ruled that constitutional issues may be raised before the BTA for later determination by the courts.

The taxpayer raised an equal protection argument because other taxpayers that he claims are similarly situation are provided an exemption from the City’s income tax, citing the twelve-day grace period in the statute and the fact that he was in the city for only two days in each taxable year. The twelve-day rule cited, also referred to as the occasional entrants rule, provides that a municipal corporation shall not tax the compensation paid to a non-resident for personal services performed in the municipality on twelve or fewer days in a calendar year, but explicitly excludes individuals who are professional entertainers or professional athletes, among others. The court found that excluding entertainers and athletes from the 12-day grace rule did not violate the equal-protection clause, citing the fact that both groups are typically highly paid and their events incur much larger public burdens relating to police protection and traffic and crowd control than do other occasional entrants justify the exclusion. The court pointed out that the state’s cities had already been imposing local taxes on entertainers and athletes when the state legislature enacted the 12-day grace period and it held that imposing a limit on local taxation while protecting the cities’ interest in collecting existing taxes constituted an adequate rational basis for the legislature’s actions. The court did find, however, that the games-played method of determining the tax base failed to afford due process when applied to NFL players like the taxpayer. Citing prior case law the court said that local taxation of a nonresident's compensation for services must be based on the location of the taxpayer when the services were performed. Due process requires an allocation that reasonably associates the amount of compensation taxed with work the taxpayer performed within the city. The games-played method reached income that was performed outside of the City and resulted in the City’s income tax as applied being extraterritorial, imposing the City’s tax on compensation earned while the taxpayer was working outside the City. The court noted that the duty days method properly includes as taxable income the compensation earned in the City by accounting for all the work for which the taxpayer was paid. Because the due process analysis was dispositive, the court declined to address the taxpayer’s Commerce Clause argument. Hillenmeyer v. Cleveland Bd. of Review, Ohio Supreme Court, Slip Opinion No. 2015-Ohio-1623; No. 2014-0235. 4/30/15

NOTE: On May 11, 2015 the City of Cleveland filed a motion for reconsideration with the court arguing that the city's games-played method for assessing nonresident NFL player income did not violate due process and should be upheld under U.S. Supreme Court precedent.
   

Court Strikes Down Cleveland Income Tax on Athlete Not Present in the City
The Ohio Supreme Court held that a nonresident professional athlete who did not travel to the city with his team for a professional football game did not have to pay city income taxes because the city's ordinances and regulations do not allow for such a tax and it would amount to extraterritorial taxation.

The taxpayer is a retired professional athlete. During the taxable year 2008 he was employed by the Indianapolis Colts football team that played one game in Cleveland in 2008. However, because of an injury, the taxpayer did not play in that game and, in fact, did not travel with the team to Cleveland. The Colts withheld the municipal tax from the taxpayer’s wages despite the fact that he was not present, and the taxpayer sought a refund. The City of Cleveland requires a “games-played” method of computing a nonresident professional athlete’s municipal income tax base and the Colts remitted the withholding accordingly.

The evidence in this case parallels that presented in Hillenmeyer v. Cleveland Bd. of Review, Ohio Supreme Court, Slip Opinion No. 2015-Ohio-1623; No. 2014-0235. (4/30/15) Affidavits were presented that discussed the league’s collective-bargaining agreement, individual player contracts and the phases of a player’s work year, including mini camp, preseason training camp and the regular season. One of the affidavits in evidence before the lower court shows the travel manifest relating to the 2008 Cleveland game, a document kept in the ordinary course of business by the Colts; it shows which team members went to Cleveland for the game and the taxpayer was not with the Colts in Cleveland that weekend.

The court noted that none of the taxpayer’s work was performed in the city, nor can his work on the day of the Cleveland game, or on any other day, be attributed to the city, since the evidence shows that the taxpayer was in Indianapolis on game day, engaging in physical rehabilitation in preparation for future games.

The court found that since NFL players are contractually employed to provide services to their employers from the beginning of the preseason through the end of the postseason, and since they are required to undergo rehabilitation for injuries, the taxpayer’s service to his employer encompassed his rehabilitation activity outside Cleveland on the day of the Colts-Browns game in Cleveland in 2008. The language of the City’s regulation, therefore, providing that the entire amount of compensation earned for games that occur in the taxing community is susceptible to municipal tax must be construed to permit the taxation of compensation only when the player was actually present at the game in the City and earning compensation for his presence at that game. The court found that the taxpayer’s absence from Cleveland and his performance of duties elsewhere on the same day raised a strong suggestion that the imposition of Cleveland tax would constitute extraterritorial taxation. Saturday v. Cleveland Bd. of Review, Ohio Supreme Court, Slip Opinion No. 2015-Ohio-1625; No. 2014-0292. 4/30/15

NOTE: On May 11, 2015, the City of Cleveland filed a motion for reconsideration with the court saying that the court's rejection of the city's tax in this case failed to consider the third prong of the local tax ordinance, which says that wages can be taxed if attributable to the city.

  

Corporate Income and Business Tax Decisions

Business Tax Exemption Denied Because Statute Is Ambiguous
The Tennessee Court of Appeals held that a company was not entitled to a business tax exemption for leasing trucks and trailers to a public utility. The court said that while the exemption was ambiguous, the taxpayer failed to meet its burden in proving it was entitled to the exemption.

The taxpayer is a dual-member limited liability company formed under the laws of Tennessee and located in the state. It is the owner of trucks and trailers that it leases to another corporation located in the state that uses the trucks and trailers to provide transportation services in interstate commerce. It is undisputed that the lessee, a common carrier, is a public utility within the meaning of the state code and, accordingly, the Department of Revenue (DOR) has recognized that the lessee is exempt from business taxes pursuant to the state code. 
DOR assessed the taxpayer for business taxes on the income derived solely from its leases to the lessee. The taxpayer argued that it was exempt from the business taxes because it qualified for the exemption in the statute for lessors of public utility property. The court first examined the rules of statutory construction, noting the well-settled rule that laws imposing taxes must be construed strongly against the taxing authority, but that exemptions must be strongly construed against the person claiming the exemption.

The court reviewed the business tax structure in the state and noted that the determination of what classification applies to a particular business is be determined according to the business’s dominant business activity. In this case DOR assessed taxes on the taxpayer’s gross receipts pursuant to the determination that the taxpayer was engaged in the business of making sales, including leases, of new or used motor vehicles. The taxpayer did not dispute that it is in the business of making sales of motor vehicles, but argued that it is entitled to the exemption in the statute as a lessor of public utility property because it leases public utility property to the third party lessee. DOR argued that this exemption only applies to those taxpayers providing services.

The court began with an analysis of the exemption provision to determine whether the exemption language is ambiguous, noting that the exemption applies to taxpayers providing “sales of services.” The court points out that the statute contains definitions of both sales and services and that the term “services” expressly excludes “sales.” As a result, the term “sales of services” used in the exemption is ambiguous and the court found that from the statute’s plain language, they were unable to discern the legislature’s intent. The court said that the taxpayer’s business activity involves the lease of tangible personal property, which constitutes a sale, not a service. The court turned its attention to determining whether the legislature’s action in placing this exemption within the classification of “sales of services” indicated an intent to limit this exemption only to those businesses that are actually rendering services. The court reviewed the canons of statutory construction and the relevant regulations promulgated by DOR and noted that the practical effect of the regulation’s language is to provide that a taxpayer who is exempt from business taxes for one aspect of its activities may still be liable for business taxes on its receipts from sales of tangible personal property. The regulation supports the argument that the exemption at issue is limited to only those persons and entities providing "services." The court also concluded that the legislature only intended to exempt lessors of real property from business taxes, and not lessors of tangible personal property.

The court rejected the taxpayer’s argument that it qualified for the exemption because it is undisputed that it leases tangible personal property to a public utility, citing the doctrine of ejusdem generis in concluding that it appeared that the legislature was thinking of a particular class of persons or objects, namely services, when it created the list of exemptions in that particular section of the statute. The court said that because the other enumerated exemptions related to the provision of services, it must conclude that the exemption for lessors of public utility properties also relates to the provision of services and the taxpayer’s business activity does not constitute a service. Finally, the taxpayer argued that the exemption would be rendered superfluous if it did not apply to the taxpayer and taxpayers similarly situated because the word lease is defined in the statute as the leasing of tangible personal property and not real property. The court said that the taxpayer’s assumption that "lessor" is defined by its counterpart term "lease" creates an inconsistent construction of the statute, putting the exemption provision in direct contravention of at least two regulations. The court declined to define the term "lessor," as contained in the pertinent exemption, as limited by the definition of the term "lease," finding that if the legislature intended to limit the term "lessor" to only those that lease tangible personal property, in contrast to that term's common meaning, they certainly could have done so. Since the legislature did not take that action, the court concluded that they intended the term "lessor" to be defined according to its ordinary meaning.

The court concluded that the taxpayer did not meet its burden in demonstrating that the exemption at issue applies to its business activities because a well-founded doubt exists in the statute's interpretation. NAJO Equipment Leasing LLC v Comm'r of Revenue, Tennessee Court of Appeals, No. W2014-01096-COA-R3-CV. 4/23/15
  

Court Remands Partnership Nexus Case for Fact Finding
The Louisiana Court of Appeals reversed a trial court's grant of summary judgment for the Department of Revenue (DOR) in a franchise tax partnership nexus case. The court found that there were outstanding questions of fact concerning where the taxpayer's commercial domicile and principal place of business were for the years at issue.

The taxpayer is a foreign corporation, organized under the laws of Georgia and was not registered or qualified to do business in Louisiana during the relevant periods. Taxpayer owned 100% of the stock in CMB, Inc. (CMB), a Georgia corporation, as well as 96.76% of the interest in Cami Polymers, L.L.C. (Cami Polymers), a Georgia limited liability company. CMB and Cami Polymers, in turn, owned 0.1% and 99.9% respectively, of the interest in Pinnacle Polymers (Pinnacle), a Pennsylvania joint venture, which owned property and was doing business in Louisiana. Pinnacle was registered as a foreign general partnership in Louisiana, and CMB and Cami Polymers were the general partners. The taxpayer filed Louisiana Corporation Income/Franchise Tax Returns (CIFT returns) for the relevant periods, reporting and paying only its share of flow-through net income earned by Cami Polymers. According to DOR, all of Cami Polymers' income was earned from its share of Pinnacle’s net income, which is earned by conducting business and owning property in Louisiana. The taxoayer reported no franchise tax in its CIFT returns for the relevant periods, contending that it had no franchise tax nexus. DOR issued a proposed assessment for franchise taxes due and the taxpayer appealed, asserting that it was not subject to the state franchise tax jurisdiction, because it did not exercise its corporate charter in the state, it did not own any property in the state, it had no employees in the state, and it did not transact any business in the state. The lower court granted DOR’s motion for summary judgment and the taxpayer filed this appeal.

The court reiterated that summary judgment is granted if the pleadings, depositions, answers to interrogatories, and admissions, together with the affidavits, if any, show that there is no genuine issue as to material fact and that the mover is entitled to judgment as a matter of law. The court's review of a summary judgment is a de novo review, based on the evidence presented to the trial court, to determine whether there is a genuine issue of triable fact.

The state corporate franchise tax is imposed on “taxable capital” and levied on corporations qualified to carry on business in the state or corporations actually “doing business” in the state or exercise their charter within the state. DOR contends that the taxpayer is subject to the franchise tax based on the actions of other entities. It contends that the taxpayer, through its wholly owned subsidiary corporation, CMB, and its limited liability company Cami Polymers, exercised its powers and rights directly in the state and retained continued management rights as a general partner. The court noted, however, that DOR did not provide any evidence to demonstrate how the taxpayer, itself, controlled and conducted business on behalf of Pinnacle Polymers. Instead, it relied on the fact that certain members of the taxpayer’s board of directors were the same as Pinnacle Polymers' venture managers. However, the court said that the fact that certain individuals in these management boards may have been the same does not change the fact that taxpayer and Pinnacle Polymers are separate juridical entities under the law. The court also noted that the record made it clear that CMB and Cami Polymers were, at all times during the relevant periods, the general partners of Pinnacle Polymers. The court rejected DOR’s argument that it should be permitted to use the “single business enterprise” theory to breach the corporate walls between the parent, its subsidiaries and affiliates, finding it inapplicable in the current circumstances. The court said, instead, that the “single business entity” doctrine as used by DOR here was very similar to the “unity of purpose” doctrine that the court rejected in a previously decided case cited by DOR.

DOR argued that the taxpayer owed the state’s franchise tax because its commercial domicile was in the state. Taxpayer argued, however, that it was a Georgia corporation, which listed Atlanta, Georgia, as its principal place of business on its annual corporate filings. In addition, none of the taxpayer’s officers and directors resided in Louisiana; rather, the officers and directors all resided either in Belgium or Connecticut during the relevant periods. Moreover, the taxpayer did not hold any board of directors meetings in Louisiana, nor were any unanimous consents executed in Louisiana during the relevant periods. All decisions concerning the flow of funds to or from the taxpayer were made in Belgium, and no one with an office in Louisiana was involved in the business of the taxpayer. Finally, the court noted that during the relevant periods, taxpayer’s corporate records were kept in Connecticut, not Louisiana.

The court, after a thorough review of the record, found that genuine issues of material fact remained, which precluded the granting of summary judgment in favor of either party. The question of the taxpayer’s principal place of business has been answered in contradictory fashion by the affidavits submitted by the taxpayer, the findings of DOR’s auditor, and the information provided on the taxpayer’s tax returns. The court held that there was no independent evidence to support one finding over another in the record. Bridges v. Polychim USA Inc., Louisiana Court of Appeals, 2014 CA 0307. 4/24/15

Property Tax Decisions

Retroactive Addition of Personal Property to Tax Rolls Disallowed
The Nebraska Supreme Court determined that a county board of equalization could not retroactively place personal property on the 2010 tax roll in 2013 because the statutory authority the board invoked authorized it to retroactively add omitted property only to real property rolls.

State law requires the owner of personal property to compile a list of all its tangible personal property having a tax situs in the state on forms prescribed by the Department of Revenue (DOR) and filed as a personal property return by May 1 each year. The county assessor reviews these returns and changes the reported valuation of any item of taxable tangible personal property to conform the valuation to net book value. The assessor also lists any item of taxable tangible personal property omitted from a personal property return and values the item at net book value.

The taxpayer filed timely filed a personal property tax return for the 2010 tax year. As part of that return, the taxpayer submitted personal property schedules to the county assessor's office identifying numerous items of personal property and the assessor accepted the return. However, the personal property was not placed on the tax rolls in 2010, and no tax was assessed or paid. In October 2013 the taxpayer was sent a notice stating that the personal property identified on the 2010 return was being placed back on the tax rolls for collection, indicating that the property had not been placed on the tax rolls when the return was originally filed due to a clerical error. Taxpayer filed an appeal.

Prior to 1992, personal property and real property in the state was valued at its actual value. A series of federal and state court decisions prompted changes to state’s framework for taxation of personal property. Effective January 1, 1992, personal property, unless expressly exempt from taxation, was to be valued at its net book value.

Under a precursor to the current statutory provision, the county board of equalization had the duty to equalize the valuation of the personal property and real property of the county. The statute further authorized the county board of equalization to add to the assessment rolls any taxable property not included in the tax rolls by the assessor.

In 1997, the legislature changed that section, § 77-1507, significantly in connection with an overhaul of the taxation statutes, and, as a result, the statute no longer contained any mention of personal property. Instead, it provided that the county board of equalization could meet at any time for the purpose of assessing any omitted real property that was not reported to the county assessor and adding it to the rolls after a certain point in the tax year. Although the Board contends that this language applies to personal property, the word "personal" does not appear in the statute as amended in 1999. The statute was later amended several more times, but no reference to personal property was ever reinserted.

The court disagreed with the Board’s argument that the statute allows for correction of clerical errors concerning personal property, citing the plain language of the provision that supports the court’s conclusion that the section at issue here applies only to real property.

The general language of the statute refers only to real property. The court said that the evolution of the provision, § 77-1507, shows deliberate action by the legislature to change the statute from applying to both real and personal property to applying solely to real property. Subsequent amendments to the statute were made, but none of them restored personal property to the section's scope. The court said that the specific language of the statute, which mentions real property four times while never referring to personal property, also demonstrates that it applies only to real property. The court also notes that the regulations in the state’s administrative code also demonstrate that the section at issue here is limited to the correction of clerical errors for real property only. Because the court concluded that the section applied to correction of clerical error concerning real property only, it noted that it did not need to rule on whether a clerical error occurred in this case. Cargill Meat Solutions Corp. v. Colfax Cnty. Bd. of Equalization, Nebraska Supreme Court, 290 Neb. 726; No. S-14-701. 4/17/15
  

Retroactive Repeal of Property Tax Exemption Unconstitutional
The Florida Court of Appeal, First District, held that the legislature's attempt to retroactively repeal a property tax exemption for affordable housing for property owned by a limited partnership was unconstitutional. The court said the taxpayer met the statutory requirements for the exemption.

Appellee is a nonprofit Florida limited partnership that constructed a ninety-two-unit affordable housing project in the state. The county assessor granted the project a tax exemption for the 2012 tax year pursuant to a statutory provision and the taxpayer filed a timely application for renewal of the exemption for 2013. Subsequent to the filing of the application the legislature passed legislation eliminating the tax exemption for affordable housing property owned by limited partnerships retroactively to the 2013 tax roll. The county appraiser then notified the appellee that the property had been disapproved for the exemption for 2013.

The court cited Maronda Homes, Inc. of Fla. v. Lakeview Reserve Homeowners Ass'n, Inc., 127 So. 3d 1258, 1272 (Fla. 2013) in which the state supreme court stated that for the retroactive application of a law to be constitutionally permissible, the Legislature must express a clear intent that the law apply retroactively, and the law must be procedural or remedial in nature. In the matter at issue, the court said that the effect of the law was to eliminate retroactively appellee's entitlement to a tax exemption on January 1, 2013, or impose a new tax obligation on appellee that did not exist on January 1, 2013. The court found that this was not a remedial statute, which operated to further a remedy or confirm rights that already existed, or a procedural law, which provided the means and methods for the application and enforcement of existing duties and rights. It was, instead, a substantive law altering duties and rights by imposing a retroactive tax on previously exempt property.

The court said that by setting January 1 as the date on which the taxable or tax exempt status of real property is to be determined, the legislature created a constitutionally protected expectation that the substantive law in effect on that date will be used to make the determination.

The dissent said the taxpayer's right to the exemption did not vest until the appraiser ruled on the application, which occurred after the repeal of the exemption. Stranburg v. Panama Commons L.P., Florida Court of Appeals, Case No. 1D14-1671. 4/8/15
  

Local Assessor Can Revise Property Valuation at DOR
The Oregon Supreme Court held that the Tax Court did not err by allowing a local county assessor to amend his valuation increasing the taxpayer's land value in the correction rolls at the Department of Revenue (DOR), saying that the revision was based on the taxpayer's own expert testimony.

Taxpayer owns an apartment complex located in the county. In 2008, the assessor assessed that property for land and improvements, the taxpayer filed an appeal, and the local board of tax appraisals heard the appeal and affirmed the appraisals. Taxpayer filed an appeal of the appraisal of the improvements only to the Tax Court. The original assessment for the land was approximately $1 million and the improvements were assessed at just under $14.8 million for a total assessment of approximately $15.8 million. On appeal, the taxpayer offered evidence of the real market values for both the property as a whole and for the land only, but did not offer direct evidence of a lower real market value for the improvements. Specifically, the taxpayer offered an appraiser's testimony that the real market value for the property as a whole was $12,309,000, while the real market value for the land alone was $5,594,000. Taxpayer then argued that, having established those two values, basic arithmetic led to the conclusion that the correct real market value for the improvements was the difference between the two: $6,715,000. The assessor agreed with the taxpayer’s total assessed value figure. The lower court found that the value of the land was $5 million and concluded, therefore, that the value of the improvements was $7,309,000 and entered an order as to the value of the improvements only since the taxpayer had only appealed that portion of the assessment. As a result, the value of the land was not increased to the $5 million figure in the court’s order and the $1 million figure remained on the tax rolls for the land. The assessor filed a petition with DOR to correct that discrepancy, asserting that the parties had stipulated to a total real market value for the taxpayer’s property that necessarily meant that the original land valuation was erroneous. DOR agreed and revised the land value to $5 million. On appeal by the taxpayer, the Tax Court affirmed the decision of DOR.

The taxpayer in this matter argued that allowing the assessor to seek a correction of a prior valuation amount to an impermissible appeal of the assessor’s own decision. The court said that the taxpayer’s reliance on two prior decisions in making this argument was misplaced, finding that the law expressly authorizes an assessor to seek, and DOR to permit, a corrector of errors on the tax rolls. The court also pointed to DOR’s administrative rule describing the steps to be taken to petition DOR to correct the tax roll. The first step is for the assessor demonstrate that that the assessor has no remaining right of appeal and that an error on the tax rolls is likely and the second step requires the assessor to demonstrate that there is, in fact, an error on the tax rolls. The court found that the assessor had satisfied both of those requirements. In reviewing the cases cited by the taxpayer, the court found that both confirm that an assessor may seek corrections of errors on the tax rolls by other means, including petitioning DOR.

The taxpayer also argued that the effect of the lower court’s decision is to allow "impermissible value shifting" in violation of Nepom v. Dept. of Revenue, 272 Or 249, 536 P2d 496 (1975). The court rejected this argument finding that Nepom announced a limitation on the authority of the body or tribunal reviewing the appeal when only one portion of the assessment was appealed, but it said nothing about the department's supervisory authority later to correct errors in the tax rolls pursuant to the statutory authority.

In its reply brief, the taxpayer raised a new argument that even if it was permissible for the assessor to seek a correction to the tax rolls based on an agreement between the parties indicating likely error, it was not permissible for the assessor to do so here because there was no such agreement. The taxpayer argued that, at best, there was an agreement as to the total value of the property only as a basis for taxpayer’s proposed valuation of the improvements.

The court rejected this argument finding that the administrative rule does not required that the parties “unequivocally agree” that an error existed on the tax rolls, but, instead requires that there is evidence that the parties agreed to "facts" and that the facts they agreed to are ones "indicating likely error. In this case, the parties agreed to that total value. That total value is a fact. And that fact indicates the original land value likely was in error. Willamette Estates II LLC v. Dep't of Revenue, Oregon Supreme Court, 357 Or 113 (2015); S062027. 4/9/15

Other Taxes and Procedural Issues

Court Upholds Natural Gas Excise Tax
The Iowa Supreme Court upheld a geographically based excise tax on natural gas delivery within the state, saying that the tax was rationally related to a legitimate state interest. The court said it passed federal Equal Protection scrutiny and did not violate the state constitution's requirement of uniformity among laws.

The taxpayer operates an ethanol manufacturing plant in the state. The ethanol manufactured is sold primarily through a marketing firm for use as fuel. Taxpayer also produces several byproducts that are marketed for use as feed for livestock. These manufacturing processes consume a high volume of natural gas. Because there are no natural gas producers in the state, the gas comes from out-of-state suppliers through regulated interstate pipelines. Most consumers receive their natural gas from a state-regulated local distribution company (LDC) whose role is analogous to that played by utility companies delivering electricity to consumers. The taxpayer elected to bypass an LDC and connected directly to an interstate pipeline.

The state taxes the delivery of natural gas at variable tax rates depending on volume and the taxpayer's geographic location within the state. Prior to 1998 natural gas utility companies were taxes on property they owned in the state, but the new system replaced that with an excise tax on the delivery, consumption, or use of natural gas with the 52 competitive service areas (CSAs) in the state. Within each CSA a replacement delivery tax is imposed on every person who makes a delivery of natural gas to a consumer in the state. The amount of tax is calculated by multiplying the number of therms delivered into a particular CSA by the delivery tax rate for that CSA. The rate was calculated by DOR based on a mathematical formula set by the statute. The baseline formula can be adjusted each tax year based on the number of therms delivered into the CSA. The statute imposes the replacement tax on consumers who, like the taxpayer here, directly connect and draw natural gas from the interstate pipeline.

The taxpayer filed a claim for refund asserting the replacement tax is unconstitutional because it is based on the CSA in which the taxpayer is located. Taxpayer argued that the tax violated the Equal Protection Clause because it is similarly situated to other directly connected ethanol plants within the state, but is taxed at a different rate than other such plants solely because of its geographic location within a particular CSA. It also contends that the shorter period for appealing the denial of refund claims based on a constitutional objection also violates the Equal Protection Clause.

The court noted that the rational basis standard as applied in equal protection claims is especially deferential in the context of classifications made by complex tax laws. Applying the rational basis analysis articulated in prior case law, the court found alternative rational bases for the natural gas replacement tax structure and concluded that the variable tax rates survived the taxpayer’s equal protection challenge and did not violate the Federal Equal Protection Clause when imposed on a directly connected consumer. The court noted that it had previously said laws relating to taxation must have a uniform operation to meet the requirements of constitutional provisions, but that uniform operation does not necessarily require uniform consequences. For the purposes of the analysis, the court assumed that the taxpayer identified a class of similarly situated taxpayers subjected to allegedly different treatment, satisfying the first step of the analysis. The court then turned to the examination of the legitimacy of the end to be achieved by the statutory provision and the means used to achieve that end. The court reviewed the legislative history of the legislation, noting in particular the objectives the legislature sought to achieve with this proposal, including an explanation for its decision not to impose a single statewide delivery tax rate.

The court concluded the legislature could have rationally believed the replacement tax regime was rationally related to its goals. The court also concluded that the features of the classification system in the new structure were neither over-inclusive nor under-inclusive to an extreme degree. While the tax may not create uniform results, the court found that it operates uniformly in the constitutional sense. The court also rejected the taxpayer’s argument that the natural gas delivery tax framework obstructs interstate commerce or discriminates against it in violation of the dormant Commerce Clause. LSCP LLLP v. Kay-Decker, Iowa Supreme Court, No. 14-0494. 4/10/15

The State Tax Highlights is a publication of the Federation of Tax Administrators for its members. If you have any comments on this publication, please send them to Linda Tanton at [email protected].