State Tax Highlights
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STATE TAX HIGHLIGHTS
A summary of developments in litigation.
 
Published biweekly by the Federation of Tax Administrators

 
August 28, 2020 Edition
 
 
NEWS
 
 
Texas Court Approves Service for Lawsuits Over Social Media
 
The Texas Supreme Court announced changes to the Texas Rules of Civil Procedures that will allow lawsuits in the state to be served over Facebook, Twitter, email and other social media sites or technology in circumstances where traditional means of service have failed.
 
 
U.S. SUPREME COURT UPDATE
 
No cases to report.
 
FEDERAL CASES OF INTEREST
 
 
State Cannot Tax Intangible Property of Railroad
 
The U.S. Court of Appeals for the Ninth Circuit held that the Oregon Department of Revenue's (DOR) inclusion of a railroad's intangible personal property, including accounting goodwill, when valuing the company's property discriminated against the railroad in violation of the federal Railroad Revitalization and Regulatory Reform Act of 1976 (4-R Act).
 
Oregon law generally taxes real and tangible personal property situated within its borders, but certain commercial and industrial entities, including railroads and other interstate concerns, must also pay taxes on their intangible personal property. For the first time in 2017, the state’s Department of Revenue (DOR) began including the taxpayer’s intangible personal property in the railway's property value assessments, which resulted in a tax liability thirty percent higher than the previous year. The taxpayer filed suit under the 4-R Act alleging the tax on its intangible personal property was another tax that discriminates against a rail carrier. The district court ruled that the taxpayer could challenge the property tax under 49 U.S.C. § 11501(b)(4), that the proper comparison class for the taxpayer was the state’s commercial and industrial taxpayers, and that the intangible personal property tax assessment discriminated against the taxpayer in violation of the 4-R Act. The district court concluded that the taxpayer’s challenge to the state’s tax scheme under 49 U.S.C. § 11501(b)(4) was not barred by prior case ACF, which held railroads could not challenge as discriminatory a generally applicable property tax to which some non-railroad property, but not railroad property, was exempted.  In making that decision, the district court rejected an argument of DOR for nearly three decades that railroads may not challenge property taxes under § 11501(b)(4). The district court also rejected an argument DOR raised for the first time at oral argument: that the taxpayer failed to establish the state’s centrally assessed taxpayers are isolated and targeted enough to show discrimination.  DOR filed this appeal.
 
Congress adopted the 4-R Act to restore railroads' financial stability. Under the Act, states may not “unreasonably burden and discriminate against interstate commerce” by doing any of the Act’s enumerated acts, including, in pertinent part, impose another tax that discriminates against a rail carrier providing transportation subject to the jurisdiction of the Board under the Act.  All real and tangible personal property, but not intangible personal property, situated within Oregon is subject to assessment and taxation by county assessors. The property of railroads and thirteen other industries is, however, centrally taxed by the state’s DOR and those industries pay taxes on their intangible personal property in addition to their tangible property. Intangible personal property includes accounting goodwill, and in 2010, the taxpayer acquired about $14.8 billion accounting goodwill when Berkshire Hathaway overpaid for all of the taxpayer’s remaining shares.  From 2011 to 2016, DOR did not include the accounting goodwill in its calculation of the taxpayer maximum assessed value (MAV), but in 2017, DOR included the $14.8 billion goodwill, as well as $637 million of other intangible personal property, in its calculation of the taxpayer’s real market value (RMV) and MAV, which increased the taxpayer’s assessed value and tax liability by approximately 30 percent. 
 
The court began its analysis by examining ACF.  In ACF, a group of railway car leasing companies sued under 49 U.S.C. § 11501(b)(4) to challenge Oregon's assessment of taxes upon their railroad cars, considered tangible personal property in Oregon. The ACF plaintiffs complained the tax was discriminatory because it exempted certain classes of commercial and industrial property while taxing railroad cars in full. Because subsections (b)(1)–(3) of the 4-R Act prohibit certain types of discriminatory property tax practices, DOR reasoned that Congress must have intended subsection (b)(4)'s “another tax” to refer to non-property taxes.
The court rejected DOR’s preferred statutory construction and upheld the tax on other grounds. First, the court in ACF  reasoned that “commercial and industrial property” was the proper comparison class for purposes of determining whether tax treatment was discriminatory. The statute defines “commercial and industrial property” to be property devoted to a commercial or industrial use and subject to a property tax levy and the court reasoned that “subject to” meant property that was taxed as opposed to taxable. The court said a railroad cannot generally claim discrimination if it is forced to pay a generally applicable tax from which some of its comparators are exempted. 
 
DOR arguedthat railroads may not challenge any property taxes under 49 U.S.C. § 11501(b)(4) and believes that CSX Transportation, Inc. v. Alabama Department of Revenue (CSX I), 562 U.S. 277 (2011) supports that position, but the court concluded that nothing in CSX I closed the door ACF left open and that under § 11501(b)(4), railroads may challenge discriminatory property taxes, even those masquerading as tax exemptions.
The court reviewed a number of other cases that it said uniformly support the taxpayer’s position that it may challenge a discriminatory property tax under 49 U.S.C. § 11501(b)(4).
 
The court then rejected DOR’s argument that its intangible personal property tax was “generally applicable” and that the taxpayer’s challenge was no more than a demand for exemptions offered to other taxpayers, like the unsuccessful challengers in ACF, agreeing with the lower court’s description of the state’s “property tax law as two systems: one that taxes intangible personal property and one that does not tax intangible personal property.”
The court said the state’s statutory scheme cannot create an intangible personal property tax exemption because it never creates a generally applicable intangible personal property tax, from which to grant exemptions.  Instead, the statute creates a tax on real and tangible personal property that is generally applicable to all Oregon taxpayers.   A separate rule applies to centrally assessed taxpayers, who in addition to real and tangible personal property, must also pay taxes on their intangible personal property. 
 
Finally, the court concluded that the taxpayer had proven that its tax treatment violated the 4-R Act.  The court agreed that the appropriate comparison class is the state’s commercial and industrial taxpayers and noted that only the centrally assessed taxpayers in that class were subject to tax on the intangible property.  The court found that there was not sufficient justification for this disparate treatment. BNSF R.R. Co. v. Oregon Dep't of Revenue, U.S. Court of Appeals for the Ninth Circuit, No. 19-35184; D.C. No. 3:17-cv-01716-JE.  7/8/20
 
 
 
DECISION HIGHLIGHTS
 
Sales and Use Tax Decisions
 
Telecom Company Not Double-Taxed
 
The Nebraska Supreme Court found that a company that builds, maintains, repairs, and removes mobile telecommunication towers and equipment must pay sales or use tax on building materials and also remit sales tax when billing customers when the same materials are furnished, installed, or connected.  The court found that the two taxes are on different activities and do not constitute double taxation.
 
The taxpayer builds, maintains, repairs, and removes mobile telecommunication towers and equipment. Specifically, it erects towers, builds lines and antennas, and installs roads and fences for wireless tower sites. At some sites, its work includes installing backup generators attached to concrete foundations, the purpose of which is to allow the telecommunications tower to operate during a power outage. The taxpayer has paid sales tax or use tax as a consumer when it purchases building materials, under what the statute refers to as an Option 2 taxpayer.
 
The state’s Department of Revenue (DOR) performed an audit of the taxpayer and determined there was a deficiency.  The taxpayer sought a redetermination of that deficiency and a hearing was held and the Commissioner subsequently denied the taxpayer’s petition finding that the taxpayer owed taxes on gross income from providing, installing, constructing, servicing, or removing property used in conjunction with mobile telecommunications services. The taxpayer appealed to the district court which upheld the assessment, reasoning that the plain language of § 77-2701.16 applied to Option 2 contractors under § 77-2701.10 and that such a taxing structure did not constitute double taxation. The taxpayer filed this appeal, arguing that the lower court erred in concluding that the taxpayer must pay sales or use tax on building materials purchased by it and must also remit sales tax on gross receipts earned from the “furnishing, installing, or connecting” of mobile telecommunications services.
 
Under § 77-2701.10 of the state statute,  a contractor may opt to be taxed as the retailer or as the consumer of building materials. Option 1 contractors are taxed as retailers and Option 2 and “Option 3” contractors are taxed as consumers.  DOR is not permitted to “prescribe any requirements . . . restricting any person's election”  and a contractor can change its status with permission of the Commissioner. In addition to sales tax on building goods, gross income from installing or connecting mobile telecommunications services is also taxable under § 77-2703 which imposes a sales or use tax on gross receipts of “any person involved in the connecting and installing of the services” defined in § 77-2701.16(2).
 
The court said relevant to this appeal, § 77-2701.16(2)(e) defines gross receipts as the gross income received from the provision, installation, construction, servicing, or removal of property used in conjunction with the furnishing, installing, or connecting of any public utility services specified in subdivision (2)(a) or (b) of this section. There is an exception when the taxpayer is acting as a subcontractor for a public utility if the contractor has elected to be treated as a consumer of building materials under subdivision (2) or (3) of section 77-2701.10 for any such services performed on the customer's side of the utility demarcation point. The Nebraska Administrative Code specifically deals with Option 2 contractors in the area of telephone, cable satellite services, and other utilities, including mobile telecommunications services, and provides that the contractor must charge sales tax in certain situations.
 
The court rejected the taxpayer’s argument that there is a conflict between §77-2701.10(2), allowing it to pay sales tax as a consumer, and § 77-2701.16(2)(e), requiring it to pay tax on the gross receipts it earned in the “furnishing, installing, or connecting” of mobile telecommunications services using those previously taxed goods. The court reviewed the rules of statutory construction, noting that an appellate court will not resort to interpretation to ascertain the meaning of statutory words that are plain, direct, and unambiguous. A collection of statutes pertaining to a single subject matter are in pari materia and should be conjunctively considered and construed to determine the intent of the Legislature, so that different provisions are consistent, harmonious, and sensible.  The court said that together, § 77-2703(1) and § 77-2701.16(2) apply to “any person involved in [the] connecting and installing” of mobile telecommunications services. There is an exemption for the gross income of certain Option 2 and Option 3 contractors in § 77-2701.16(2)€ that is applicable to “services performed on the customer's side of the utility demarcation point.”  The court noted that the taxpayer did not assert on appeal that any of its services were performed on the customer's side of the demarcation point, and thus this exception is not applicable to it. The court further noted that the very existence of this exception showed that Option 2 contractors were intended to be taxed under both §§ 77-2701.10 and 77-2701.16.  The court also said its conclusion was reinforced by DOR’s regulations, which provide that an Option 2 contractor pay a sales tax on its purchase of “wire, cable, outlets, and other property used to install or construct . . . mobile telecommunications services,” and agency regulations properly adopted have the effect of statutory law.
 
The taxpayer also  contended that the taxation under 77-2701.10 and 77-2701.16 constituted impermissible double taxation.  The court pointed out that it had previously held that there is no double taxation unless both taxes are of the same kind and have been imposed by the same taxing entity, for the same taxing period, for the same taxing purpose, and upon the same property or the same activity, incident, or subject matter.  In addition, double taxation is not unconstitutional or prohibited, although it is the court’s policy to guard against it, unless it is
unreasonable, confiscatory, or discriminatory. A tax is confiscatory if it is established that it is so high as to effectively prohibit a taxpayer from engaging in a particular business.  DOR contended that two different activities are subject to tax here, the sales or use tax on the taxpayer’s purchase of building materials, and the sales tax on the gross receipts from the “furnishing, installing, or connecting” of mobile telecommunications services. The court concluded that the taxpayer was not subject to double taxation in this case, citing its decision in Anthony, Inc. v. City of Omaha.   In that case, the court discussed the legal incidence of a sales tax and of an occupation tax. The court pointed out that the taxpayer purchased building goods and voluntarily, and for business reasons, elected to pay a sales tax as a consumer of those building goods. That sales tax is part of the taxpayer’s purchase price and it is the obligation of the retailer of those goods to remit the tax to the State.  With regard to the sales tax on the taxpayer’s gross receipts, the taxpayer’s customers are the consumers and the sales tax is part of the purchase price.  It is the taxpayer’s obligation to remit the tax to the State.
The court concluded that this situation presented no double-taxation.
 
The taxpayer also argued that the district court erred in finding that certain portions of the deficiency determination were not used in conjunction with the “furnishing, installing, or connecting” of mobile telecommunications services, relying primarily that it relied on 2008 correspondence from DOR when it did not collect sales tax on the now-challenged items, with the exception of the backup generators. The court agreed with DOR that the generators were installed “in conjunction with” the “furnishing, installing, or connecting” of mobile telecommunications services, finding that while a generator and its fuel may not be critical to the usual operation of mobile telecommunications services, those items are necessary to the uninterrupted operation of such a service.
 
Finally, the taxpayer claimed the evidence showed that all of its records for the audit period were available to DOR and that DOR therefore erred in estimating its deficiency based on the 2014 tax year. The court said, however, that the issue was not that the taxpayer did not provide access to the DOR at the time of the audit, but that it now challenges that deficiency without offering documentation to prove its assertion that DOR’s determination was wrong.
Diversified Telecom Servs. Inc. v. State of Nebraska, Nebraska Supreme Court, No. S-19-883.  8/14/20
 
Court Affirms Prior Order
 
The Illinois Appellate Court, First Judicial District, issued an opinion affirming its previous decision in which it rejected a taxpayer’s claims contesting its liability for retailers' occupation tax on select sales of appliances.  See the FTA’s legal database for a discussion of that earlier decision.
 
The taxpayer is a retailer of, among other things, consumer electronics and appliances. It also sometimes installs appliances in the purchasers' homes and if in the taxpayer’s opinion the installed appliance is “incorporated into, and permanently affixed to, real estate,” then it does not collect sales tax.  The Department of Revenue (DOR) sent the taxpayer a Notice of Proposed Liability for sales taxes on applies the taxpayer had exempted from the tax.  The taxpayer paid the assessment and filed an appeal.  The circuit court found for DOR and the taxpayer filed an appeal to this court.
 
The court once again found that the circuit court did not err in finding that the taxpayer’s sale of certain appliances was not exempted from the retail occupancy tax despite its subsequent installation of those appliances and DOR’s imposition of the retail occupancy tax on these sales did not violate the uniformity clause of the state constitution. Best Buy Stores LP v. Dep't of Revenue,  Illinois Appellate Court, First Judicial District, No. 1-19-1680; No. 2017 L 050591.  8/14/20
 
Appliance Sales Subject to Tax
 
The Illinois Appellate Court, First Judicial District, held that sales of appliances were subject to the state's retailers' occupation tax, despite the fact that the appliances were subsequently installed by the seller.  The parties had agreed that the decision in Best Buy Stores LP v. Dep't of Revenue would determine the outcome in this case.
The taxpayer is a wholly owned subsidiary of Best Buy and like its parent company, it is a retailer of kitchen and home appliances. Although the taxpayer operates stand-alone stores in some states, its operations in Illinois are all located within Best Buy stores.  In May 2017, the Department of Revenue (DOR) sent a notice of tax liability to the taxpayer and the taxpayer paid the assessment and filed this complaint arguing that for certain built-in appliances that it installs, it operates as a construction contractor and not a retailer, and is thus exempt from collecting and remitting sales tax on those transactions. In January 2019, the circuit court entered an agreed order holding the taxpayer’s circuit court action in abeyance pending a final ruling in the Best Buy case and providing that the circuit court's ruling in the Best Buy case would “control and determine the final outcome” of the taxpayer’s action. In July 2019, the circuit court entered an order noting that the Best Buy case had been resolved and that the court had rejected Best Buy's substantive claims. As a result, the court denied the relief that the taxpayer sought in its complaint. The taxpayer filed this appeal.  The taxpayer contended that it was appealing the circuit court's order “for the same reasons Best buy appealed” the court's order in the Best Buy case and asked that the court resolve this appeal in a manner that is “consistent with” its substantive resolution of the issues in Best Buy. The parties adopted the arguments set forth in their respective briefs in Best Buy, and they offered no new arguments in favor of their respective positions. Consequently, the court said, it had no reason to depart from its substantive holding in Best Buy. The court, therefore, affirmed the judgment of the circuit court. Pac. Sales Kitchen & Bath Ctrs. LLC v. Dep't of Revenue, Illinois Appellate Court, First Judicial District, 2020 IL App (1st) 191679-U; No. 2017 L 50590.  8/14/20
 
Public Utility's Sales Tax Refund Suit Dismissed
 
The Texas Court of Appeals, Third District, vacated a judgment of the 353rd District Court of Travis County awarding a taxpayer a sales tax refund.  The court dismissed the public utility's tax refund suit, finding that the district court lacked subject-matter jurisdiction over the suit.
The taxpayer is a fully integrated public utility in the business of manufacturing, generating, transmitting, and distributing electricity in west Texas and southern New Mexico.  It believed that it overpaid sales taxes on customer meters, substation meters, and disconnect collars that it bought and used in its business for the period April 2006 to December 2009. The taxpayer contended that each of these types of equipment were “telemetry units that are related to . . . step-down transformers,” as the statute uses that phrase. It also sought a refund of tax on other types of equipment it believed was exempted from the tax and filed a refund application with the Comptroller.
 
The taxpayer and the Comptroller proceeded through the administrative process set forth in the regulations, including a hearing before the Office of Administrative Hearings (OAH).The State argued that the taxpayer first raised any claim for the exemption for telemetry units related to step-down transformers in what the taxpayer called an “Alternative Argument” in a filing before OAH, which the State responded to by objecting to the purportedly new claim. The taxpayer argued that it first raised the claim in its two Statements of Grounds and their supporting schedules. The Administrative Law Judge (ALJ) proposed to deny any refund and the Comptroller adopted that proposal. The ALJ found that the taxpayer’s statement of grounds had not timely raised its claims for refunds under Tax Code section 151.318(a)(4)'s provision about telemetry units that are related to step-down transformers.  The taxpayer filed an appeal to the district court seeking a refund under the exemption for telemetry units related to step-down transformers.  The State argued that the taxpayer had raised this argument too late in the administrative process, but the court denied the State’s argument and the case proceeded to trial on the merits. The trial court found for the taxpayer and awarded it a refund for customer meters and substation meters but denied the refund for the disconnect collars. The State filed this appeal, contending that the trial court lacked subject-matter jurisdiction over the taxpayer’s suit for a tax refund because it allegedly did not timely raise its claim for the exemption for telemetry units related to step-down transformers.
 
A suit for a tax refund must meet the jurisdictional requirements of the tax code. This statutory scheme makes it clear that the trial courts only have jurisdiction over tax refund claims that are first raised in accordance with Tax Code section 111.104 and then appealed in a motion for rehearing under Tax Code section 111.105.  The court said the parties' dispute centers on the first step, Section 111.104, which requires that a refund claim be written and “state fully and in detail each reason or ground on which the claim is founded,” and filed before the expiration of specified periods.  At issue is whether the claim stated “fully and in detail each reason or ground.” The legal basis of the taxpayer’s refund claim is “telemetry units that are related to . . . step-down transformers” in Section 151.318(a)(4), but the State claimed that the taxpayer first raised its claim for the exemption for telemetry units related to step-down transformers in what the taxpayer called an “Alternative Argument” in a November 4, 2016 filing before OAH. The State argued that the taxpayer’s first raising the exemption only then constituted an untimely amendment to its Statements of Grounds. The ALJ agreed with the State, finding that the taxpayer first presented the argument on November 4, 2016, well after its 2012 Statements of Grounds. The taxpayer argued that its two Statements of Grounds and their supporting schedules included a claim for the exemption and these filings put the Comptroller on notice of the legal basis of the claim because they cited Section 151.318 and its subsection (a)(4).  The court said that the taxpayer did not argue that it was advancing refund claims under all of Subsection (a)(4)'s listed categories of equipment, only that citing Subsection (a)(4) sufficed to put the Comptroller on notice of a refund claim for telemetry units related to step-down transformers.  The court distinguished at case cited by the taxpayer from the current matter, finding that, on its own, quoting every word of all those subsections did not suffice to put the Comptroller on notice of the legal basis of a refund claim for telemetry units related to step-down transformers. The taxpayer also argued that it cited the statutory section online items in supporting schedules it submitted with the Statements of Grounds, but the court said nothing in the line items reasonably made it any clearer to the Comptroller that the taxpayer was claiming a refund for telemetry units related to step-down transformers. The court said that referencing “meters” was not specific enough because the taxpayer’s trial witness confirmed that not all meters are telemetry units.
The court found that this left the taxpayer without a refund claim that “state[d] fully and in detail” a claim for exempt telemetry units related to step-down transformers.  Hegar v. El Paso Elec. Co., Texas Court of Appeals, Third District, NO. 03-18-00790-CV.  8/13/20
 
 
Personal Income Tax Decisions
 
No cases to report.
 
 
Corporate Income and Business Tax Decisions
 
Company Allowed to Use Alternative Apportionment
 
The Mississippi Supreme Court affirmed a lower court decision which held that a taxpayer was allowed to use an alternative apportionment method for calculating the company's income for franchise tax purposes.
 
The taxpayer provides cable-network and other related services in various states, including Mississippi. In addition to holding its own operating assets, the taxpayer holds investments in more than fifty subsidiaries that, like it, are engaged in the provision of cable and cable-related services. Because these subsidiaries are engaged in the same type of business as the taxpayer, they are referred to as “unitary subsidiaries.” These unitary subsidiaries provide services primarily outside Mississippi, with only two of the subsidiaries with any connections in Mississippi. In addition to the unitary subsidiaries, the taxpayer also holds minority passive-investment interests in approximately ten “non-unitary subsidiaries” that are not engaged in or related to the provision of cable. These non-unitary subsidiaries hold nonstrategic assets acquired by the taxpayer as a byproduct of previous corporate acquisitions, have no connection to its business of providing cable or cable-related services in Mississippi, and otherwise have no connection with Mississippi.
 
The taxpayer filed Mississippi Corporate Income and Franchise Tax Returns for the 2008, 2009, and 2010 tax years and in calculating its capital base for each year, excluded certain amounts of capital utilizing the holding-company exclusion located on Line 8 of the Mississippi Corporate Franchise Tax Schedules. It attached its calculations used to arrive at these amounts through documentation labeled “Mississippi Holding Company Exclusion — 2009 Tax Year” and “Mississippi Holding Company Exclusion — 2010 Holding Company Exclusion — 2010 Tax Year.” In calculating its apportionment ratios for each tax year, the taxpayer combined the net book value of its Mississippi real and tangible personal property owned at year end with its Mississippi gross receipts and then divided this total by the combination of its everywhere counterparts. It did not include in its apportionment ratios all of Mississippi destination sales as gross receipts in the numerator of the apportionment factor.
In July 2012, the Department of Revenue (DOR) commenced an audit and determined that the taxpayer owed additional corporate franchise tax, finding that its preapportioned capital base and its Mississippi apportionment ratios should be increased for each applicable year.  The increase in the taxpayer’s capital base was attributable to DOR’s disallowance of the holding-company exclusion and the increase in the taxpayer’s Mississippi apportionment ratios was attributable to DOR's inclusion of all of its Mississippi destination sales as gross receipts.
The taxpayer filed an appeal to DOR’s Board of Review (BOR) which upheld the assessment.
The taxpayer filed an appeal to the Board of Tax Appeals (BTA), arguing that DOR’s
franchise-tax assessment did not accurately reflect the true value of its capital employed in Mississippi. The taxpayer presented four alternative franchise-tax computations which the BTA considered and specifically determined that one alternative, referred to as the factor-representation method, showed that the DOR seeks to tax over 340% more out-of-state value than allowed and resulted in a distortion in favor of the state by over-attributing income to the state. The BTA found that the taxpayer had met its burden of proof to overcome the presumption of the correctness of DOR’s assessment, concluding that there was substantial credible evidence that the tax assessment was distortive and did not fairly represent the true value of the taxpayer’s capital in Mississippi.  DOR filed an appeal to the chancery court which found for the taxpayer.  DOR filed this appeal, arguing that the standard of review applied by the chancellor gave deference to the BTA in contradiction to Miss. Code Ann. § 27-77-7 and the court’s precedent.
 
The court began by findingDOR's assertion that the chancellor erroneously gave deference to the BTA is “of no moment” because the DOR's interpretation of the applicable franchise tax statutes is reviewed de novo.  Next, the taxpayer argued that under the Mississippi franchise-tax statutes, it was permitted to exclude the capital value and apportionment factors attributable to its non-unitary subsidiaries, and to include the apportionment factors of its unitary subsidiaries for purposes of computing the true value of its capital in Mississippi.  DOR, on the other hand, argued that the Mississippi franchise-tax statutes do not provide the taxpayer with an exclusion and do not provide the use of an alternative apportionment method. The taxpayerargued that DOR's franchise-tax assessment did not reflect the true value of its capital employed in Mississippi because it erroneously included the value of its non-unitary subsidiaries in its capital base.  The court noted, however, that the express language of the statute provides no exemptions for the retained earnings of a subsidiary. The intent of the legislature to include the assets of a subsidiary corporation in the parent corporation's franchise tax base was made clear by an amendment in 1988 of the statute which provided that “[t]here shall not be any exclusion of capital by a corporation relating to the stock of another corporation.”  The court noted an exception to that provision in the case of a holding company, but the taxpayer admitted that it did not qualify for the holding company exclusion.
 
The taxpayer argued that it is entitled to exclude its investment in its non-unitary subsidiaries under Mississippi Code Section 27-13-11 (Rev. 2010).  That section provides that if any organization has cause to believe that the calculations required on the return prescribed are not sufficiently informative or do not properly reveal the true franchise or excise tax to be due as measured by the value of the capital of that organization, or shall feel aggrieved at the requirements upon it for information or tax, the organization shall have the right to file with the commissioner a petition and affidavit signed as returns are by this chapter required to be signed, setting forth the facts showing the true value of its capital. The taxpayer asserted that it had the right to present evidence setting forth the facts showing the true value of its capital and the court agreed.  Under Section 27-13-11, DOR's determination of capital is prima facie correct, but such a presumption of correctness can be overcome. The court noted that the BTA found that the taxpayer had overcome the presumption of correctness of DOR's franchise-tax assessment. The court said that the record showed that by including the value of the taxpayer’s non-unitary subsidiaries in its capital, DOR’s computation included billions of dollars in non-unitary assets in the taxpayer’s tax base, assets that represented passive, non-unitary investments with no connection to the taxpayer’s business in Mississippi. The court concluded that the value of the taxpayer’s non-unitary subsidiaries was not “capital employed in the state” nor was it “business that is actually being done or carried on in Mississippi.”  The court found that because these non-unitary subsidiaries had no connection to the taxpayer’s business in Mississippi, it was error to include its investments in them in its franchise-tax base.
 
The court noted the Mississippi franchise-tax statutes were designed to impose a franchise tax on the value of the capital employed in the state and to provide a standard method for computing that capital, but said the franchise-tax statutes also provide a statutory-relief mechanism that can be utilized by a taxpayer when the standard method produces a distortive or an unreasonable result. The court agreed with the BTA and the chancellor that the taxpayer had shown that DOR’s tax assessment produced a distortive or an unreasonable result and did not fairly represent the true value of the taxpayer’s capital employed in Mississippi and the taxpayer demonstrated under Section 27-13-11 that its capital base and apportionment factor should be modified.  Dep't of Revenue v. Comcast of Georgia/Virginia Inc., Mississippi Supreme Court, No. 2019-CA-01134-SCT.  8/13/20
 
 
Property Tax Decisions
 
Animal Rescue Group Loses Appeal Over Exemption
 
The Massachusetts Appeals Court affirmed the Appellate Tax Board's holding that a taxpayer failed to establish that it was entitled to a charitable tax exemption under a state statute for three properties for fiscal years 2012-2015.
The taxpayer, Animal Rescue League of Boston, was formed in 1899 for the purposes of establishing "one or more refuges for and the rescue and relief of suffering or homeless animals and any other charitable or benevolent act for the welfare of animals." These purposes were later expanded to include holding land for "such purposes and trusts as may be expressed in any deed or instrument of conveyance or gift made to . . . [it]." The taxpayer applied to the board of assessors of Bourne for charitable tax exemptions on three parcels of land for fiscal years 2012-2015. The assessors denied those applications, and the taxpayer appealed to the Appellate Tax Board (Board), which denied the applications on the basis that, for fiscal years 2012-2015, the taxpayer did not occupy the parcels for the charitable purposes for which it was organized.  The taxpayer filed this appeal.
 
The case concerns the taxpayer’s use of land which it acquired outright in 1997, with the restriction that they be used "consistent with the charitable purposes manifested in the will and codicils of . . . Ester M. Baxendale." Pursuant to Baxendale's fifth codicil, some land located at 0 Lawrence Island is undevelopable and must exist as a bird sanctuary.For many years, the taxpayer operated a summer camp at 55 and 96 Megansett Road and 0 Lawrence Island at which it taught the humane treatment of animals. It ceased operation of the summer camp in 2008, due to financial reasons and after it ceased operating the summer camp, its use of the parcels was limited to physical inspections and maintenance and to placing no trespassing signs on the parcels. The only evidence of any animal-related activity was of neighbors walking their dogs.
 
The court said the charitable tax exemption under G. L. c. 59, § 5, Third, is available, in relevant part, to a charitable organization that owns the property in question and occupies it for the organization's charitable purposes.  Case law has provided thatin the context of the exemption, occupancy means something more than that which results from simple ownership and possession. Occupancy signifies an active appropriation to the immediate uses of the charitable cause for which the owner was organized and the charitable organization seeking the exemption has the burden of proof to demonstrate that the express terms of the statute, which are strictly construed, apply. The court said that there is no dispute that the taxpayer is a charitable organization within the meaning of the statute or that it owns the parcels. The dispute instead concerns whether it occupied the land located at 55 and 96 Megansett Road and 0 Lawrence Island for its charitable purposes. The taxpayer focused on the natural state of the parcels as benefiting animals and on its intent to reopen the summer camp, but the Board said that the taxpayer was not actively appropriating the parcels for its charitable purposes in fiscal years 2012-2015.  The court agreed.
 
The court distinguished the current case from caselaw cited by the taxpayer, finding that the taxpayer only periodically addressed routine maintenance issues on the parcels and excluded the public through the use of no trespassing signs, finding that this use did not furtherthe charitable purposes for which the taxpayer was organized and was instead consistent with that of a private landowner. In addition, the court found there was simply no evidence that the taxpayer was pursuing funding or taking any other steps, no matter how equivocal, to reopen the summer camp. Animal Rescue League of Boston v. Bd. of Assessors of Bourne, Massachusetts Appeals Court,  No. 19-P-149.  8/12/20
 
University Restaurant Not Exempt
 
The New Jersey Supreme Court found that a high-end restaurant on a nonprofit university campus did not qualify for the nonprofit property tax exemption.  The court concluded that the property lost its exemption because it was effectively leased to the for-profit restaurant and not used for a public purpose.
 
The taxpayer owned and operated a fine dining restaurant named in a Kean University building. In October 2011, the Kean University Foundation, Inc., and the taxpayer entered into a Management Subcontract Agreement (MSA), which conferred on the taxpayer the exclusive right to operate, manage, and control the restaurant. The taxpayer agreed to pay the Foundation an annual “management fee” and a percentage of the restaurant’s gross revenue.
The restaurant began operation in late October 2011 and in August 2012, the Township issued a letter notifying the taxpayer that it would receive a tax bill for the last two months of the 2011 tax year and the entirety of the 2012 tax year. The taxpayer did not challenge those initial assessments but did challenge the 2013 and 2014 tax assessments. The taxpayer filed an appeal to the tax court, which granted summary judgment in favor of the Township.  The Appellate Division reversed, relying on a holistic view of the facts.  The court said the restaurant is located on-campus, University students and their parents regularly dine there, the restaurant provides students and members of the University community “an alternative dining experience,” the taxpayer’s annual management fees were used for scholarships, the University's Board determined that having a critically acclaimed, upscale restaurant on campus enhanced the public's perception of the University as a forward-looking institution, and served as an important recruiting tool,” many of the restaurant's employees are students, and the restaurant uses produce grown on the University grounds and provides the University with compostable waste.  The Township filed this appeal.
 
The court said the issue in this appeal was whether a high-end restaurant operated by a for-profit entity but housed in a building on the Kean University campus qualified for exemption from local property taxation. The statute exempts from taxation property belonging to the State, counties, or municipalities, or their agencies and authorities, that is used for a public purpose. Another provision exempts certain property of various non-profit organizations, including: “all buildings actually used for colleges, schools, academies or seminaries, provided that if any portion of such buildings are leased to profit-making organizations or otherwise used for purposes which are not themselves exempt from taxation, said portion shall be subject to taxation.”
 
The court determined that the arrangement by which the taxpayer operated the restaurant was taxable as a lease or lease-like interest and said the public-benefit-oriented exemption provisions at issue were not intended to exempt the for-profit operator of a high-end, regionally renowned restaurant situated on a college campus, when the overriding purpose of this commercial endeavor was focused on profitmaking. The court found that the taxpayer, as the exclusive operator and manager of the restaurant establishment, must bear its fair share of the local real property tax burden. The court noted that both the Tax Court and the Appellate Division recognized that the subject property was on State property and, as such, fell within the purview of N.J.S.A. 54:4-3.3, but rejected the argument that the demonstration of a “public purpose” was unnecessary here.
 
The court found that the Appellate Division's holistic approach to the public purpose inquiry was mistaken, concluding that the accomplishment of the public purpose must be the paramount factor in an arrangement with a private entity's use of public property. For a tax exemption to apply, any private advantage must be incidental or subordinate and the court found that that was no so in this case. The court rejected the taxpayer’s argument that it was merely a manager and operator of the restaurant facility, not a tenant or lessee. The court concluded that the taxpayer was a for-profit entity, and the restaurant, as contemplated by the MSA, was intended to make a profit, which after all expenses are paid goes to the Taxpayer.  Thus, the court said, the taxpayer’s use of the subject property did not constitute a use for the “college” but rather for itself. Gourmet Dining LLC v. Union Twp., New Jersey Supreme Court, No. 083146; 459 N.J. Super. 323 (App. Div. 2019).  6/30/20
 
 
Other Taxes and Procedural Issues
 
Estate Tax Refund Affirmed
 
The New Jersey Superior Court, Appellate Division, affirmed the tax court’s ruling that the value of a property should not have been included in a decedent’s estate for inheritance tax purposes.  The court found that the heirs only possessed the deed to the property and did not possess any right, title, control, or power over the property.  The court also found that the Division of Taxation’s (Division) notice of assessment sent to the decedent’s heirs was invalid.
 
The decedent deeded his two-family Lodi home to his nieces, Valerie Shedlock and Judith Solan for less than $100 on July 24, 2013. The deed included no provisions giving decedent any right, title, interest, control, or power over the property. On the same date, decedent executed a will devising his entire estate to his nieces, the heirs. After the transfer of the property by deed, decedent continued to live on the property and collect rent from a tenant, which he deposited into a joint savings account he shared with Shedlock. The account was used to pay maintenance expenses on the property. Decedent paid the taxes on the property, and he reported maintenance expenses and the rental income from the tenant on his 2015 federal income tax return. Decedent died on August 29, 2016, more than three years after the July 2013 transfer of his property to the heirs by deed. The heirs filed a New Jersey inheritance tax return for decedent's estate but did not include the property. The Division audited the inheritance tax return and issued a notice of assessment on May 7, 2018, that included the property, which was valued at $425,000 on the date of decedent's death and the heirs paid the taxes and interest due and then filed a complaint in the Tax Court seeking a refund and costs of suit. The Tax Court entered an order invalidating the notice of assessment and refunding the taxes and interest paid, finding that the transfer of the property was not made in contemplation of death, nor was it intended to take effect at or after death. The Division filed this appeal.
 
The Division argued decedent did not completely and irrevocably divest his interest in the property at the time the deed was signed and filed, and that rather, the transfer was intended to take effect at the transferor's death and was subject to the transfer inheritance tax and argued the Tax Court's decision misconstrued the statutory requirement that transfers intended to take effect at or after death are subject to the inheritance tax. The Division asserted the transfer of the property by deed on July 24, 2013, had the effect of a transfer at death because decedent remained in possession of the property and continued to receive rental income from the property.
 
The court said that it recognized that Tax Court judges have special expertise and for that reason their findings will not be disturbed unless they are plainly arbitrary or there is a lack of substantial evidence to support them and the court’s scope of review is limited to determining whether the findings of fact are supported by substantial credible evidence with due regard to the Tax Court's expertise and ability to judge credibility.  The court began its analysis with a review of the rules of statutory construction.
 
After reviewing the plain language of the relevant statute as well as the legislative history, the Tax Court found that it was undisputed by the very terms of the deed of transfer that the decedent retained no interest, right to possession or income in, of, and from the property. The court said that at all times, the heirs had full control over, and the right to the rental income. Decedent only had a right to use the funds in the joint bank account and handled the funds in the joint account to maintain the property.
 
The Division cited Estate of Riper v. Dir., Div. of Taxation, 31 N.J. Tax 1 (Tax 2017) to argue that the decedent retained a de facto life estate in the property, but the court found that case factually distinguishable because there was clear and convincing evidence in that case that the transferors retained an interest in the property.  The court said here that the decedent only received the rental income and remained in the property at the discretion of the heirs.  The court found the transfer of the property was complete and decedent's title was conveyed without any reference to a right to receive rental income or retain a life estate. Accordingly, the court found  that the grantor had completely divested himself of his entire interest in the transferred property and the property should therefore not be included in the decedent’s estate for inheritance tax purposes. Shedlock v. Dir., Div. of Taxation, New Jersey Superior Court, Appellate Division, Docket No. A-5634-18T1; Docket No. 8644-2018.  8/26/20
 
 
 
 
 
 
 
 
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].