June 2015
sutherl and
salt shaker
®
Shaking things up in state and local tax.
Residence Precedence? California State Board of Equalization
Considers Issuing Formal Opinion in Taxpayer-Favorable
Residency Ruling
By Robert P. Merten III and Timothy A. Gustafson
The California State Board of Equalization (BOE) has issued a rare ruling on residency
topics, finding in favor of individual taxpayers on two issues. First, the BOE found that the
taxpayers established domicile in Washington three months earlier than the Franchise Tax
Board claimed, because they purchased a fully furnished $2.8 million home, registered
to vote, registered automobiles and obtained driver’s licenses in the state. Although the
taxpayers only spent six days in Washington and 64 days in California during the pertinent
time frame, they sufficiently established that their time spent in California was only for
a “temporary or transitory purpose” between post-retirement trips. Second, the BOE
concluded that the taxpayers were not liable for $3.7 million in California income tax on
payments from a California partnership made to liquidate the newly retired taxpayer’s
partnership interest because such payments were non-taxable distributions as opposed
to taxable distributive shares or guaranteed payments with a California source. Because
the amount at issue was more than $500,000, the BOE must follow its ruling with a written
decision. The BOE is currently considering whether the written opinion should take the
form of a precedential formal memorandum or a non-precedential summary decision. If the
former, then taxpayers will be provided with official BOE California residency guidance for
the first time in years. Appeal of Michael J. and Mary E. Bills, Cal. St. Bd. of Equal. (heard
May 28, 2015).
In This Issue
Current Developments
1
SALT Pet of the Month
2
Recently Seen and Heard
5
Come See Us
6
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latest content!
A Proposed Assessment Is Not an Assessment for Statute of Limitations Purposes in Florida
By Zachary T. Atkins and Open Weaver Banks
In a closely followed case, a Florida district court of appeal
held that a proposed assessment is not an assessment for
statute of limitations purposes. The Florida Department of
Revenue generally has three years to “determine and assess”
any tax, penalty or interest due. The Department has long
believed that issuing a notice of proposed assessment prior to
the expiration of the three-year period satisfies the statute. After
conducting a sales and use tax audit, the Department issued a
notice of proposed assessment approximately two months before
the expiration of the agreed-upon, extended statute of limitations
period. The notice indicated that the proposed assessment would
become a final assessment after 60 days unless the taxpayer
submitted an informal protest. The taxpayer did not submit
an informal protest but instead filed a complaint against the
Department challenging the validity of the assessment on the
grounds that it did not become final prior to the expiration of
the statute of limitations. Although the statutory term “assess”
was not defined in the general statute of limitations, the court
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looked to a separate provision in the tax statutes that tolls the
“statute of limitations upon the issuance of final assessments”
if the taxpayer follows certain informal conference procedures.
In finding the Department failed to issue a timely assessment,
the court concluded that the legislature could have used the
broader term “assessments” if it believed that a proposed
assessment was an assessment for statute of limitations
purposes. Separately, the taxpayer and the Department had
agreed to extend the statute of limitations period for the tax
periods under audit to March 31, 2011. The district court of
appeal rejected the trial court’s conclusion that the written
agreement extended the statute of limitations period with
respect to the first sales and use tax period to March 31, 2011,
and the statute of limitations for each subsequent period by
another month thereafter. Thus, the agreed-upon date applied
to all of the tax periods under audit. Verizon Bus. Purchasing,
LLC v. State of Fla., Dep’t of Revenue, No. 1D14-3213, 2015
WL 3622356 (Fla. 1st DCA June 11, 2015).
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SALT PET OF THE MONTH
Pico
Meet Pico, the four–year-old Terrier mix
belonging to Sutherland State and Local
Tax Associate Stephanie Do and her
husband, Ben. They adopted this sweet
girl over Christmas three-and-a-half years
ago when she was left at a Baltimore fire
station as a puppy.
Stephanie and Ben were told that their
new puppy would become a large dog so
they held off on naming her. When they
realized that their pup had maxed out at
25 to 30 pounds and was not going to be a
big dog, Ben, a chemical engineer, named
her “Pico” – a metric measurement for one
trillionth – i.e., really small.
Pico is a very fast and agile girl who is
known for scaling six-foot fences and
climbing trees in her pursuit of squirrels.
She loves to accompany her parents on
long hikes and runs, and if she had it her
way, this sociable girl would spend every
waking moment with her mom and dad.
When she’s not busy chasing squirrels,
she enjoys playing with/destroying her
toys. Her favorite toys are the stuffed
ones; she likes to poke a hole in them
and then tear out all of the stuffing.
Pico is honored to be featured as Pet
of the Month!
SALT Pet of the Month: It’s Your Turn!!
In response to many requests, the Sutherland SALT practice invites you to submit your pet (or pets) as candidates for
SALT Pet of the Month. Please send us a short description of why your pet is worthy of such an honor, along with a
picture or two. Submissions should be directed to Stephanie Fulps at [email protected].
sutherl and asbill & brennan Llp
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All Sales Final: Indiana Merchandise Return and Coupon
Creation Services Not Taxable
By Charles C. Capouet and Madison J. Barnett
The Indiana Department of Revenue determined that a taxpayer’s sales of merchandise
return-related services to retailers are not subject to Indiana sales and use tax. The
Department addressed the taxability of three services: (1) the Merchandise Authorization
Service (MAS), which utilizes the taxpayer’s proprietary database and risk-scoring
computer model to determine whether a retailer-client should accept its customers’
merchandise returns; (2) the Discount Coupon Service, which generates coupons for
its retailer-clients’ customers when they make returns; and (3) the product integration
services. The Department ruled that the taxpayer’s MAS and Discount Coupon Service
were non-taxable services and did not constitute taxable tangible personal property,
specified digital products, prewritten computer software or telecommunication services.
Also, the MAS was not subject to Indiana sales tax because it was a customized
information service. Further, the Discount Coupon Service was a non-taxable
service because the coupons were customized to each of the retailer’s customers,
the customers did not pay fees for individual coupons, and the fee was based on a
percentage of sales generated by transactions in which the coupon is redeemed. Finally,
the product integration services were non-taxable because they were professional or
personal services not transferred in conjunction with tangible personal property. Ind.
Revenue Ruling No. 2013-05ST (May 27, 2015).
Software Training Not Subject to Indiana Sales and Use Tax
By Charles C. Capouet and Andrew D. Appleby
The Indiana Department of Revenue found that software training
is not subject to sales and use tax because it does not constitute
tangible personal property. The Department audited the taxpayer
and assessed additional use tax on its purchase of a software
license agreement. Nearly half of the software license agreement’s
cost was for remote software training. Following a protest and a
hearing, the Department found that the training expenses were
not subject to Indiana sales or use tax because: (1) the cost of
the training was billed separately from the cost of the software,
(2) the training expenses were accounted for separately in the
purchaser’s dealings with the vendor, and (3) the cost paid for
the training does not represent the purchase of “tangible personal
property.” Ind. Letter of Findings No. 04-20140684, Ind. Dep’t of
State Revenue (May 27, 2015).
More Than Just a Little Bit - New Jersey Division of Taxation Says Convertible Virtual
Currency Transactions, Like Bitcoins, Are Subject to State Sales and Use Tax, Corporation
Business Tax and Gross Income Tax
By Robert P. Merten III and Prentiss Willson
The New Jersey Division of Taxation has issued a technical
advisory memorandum (TAM) explaining New Jersey’s tax
position that transactions involving convertible virtual currency—
“electronic/digital money” with an equivalent or substitute value in
real currency, such as bitcoins—are subject to state tax liability,
including sales and use tax, corporation business tax and gross
income tax. For purposes of the sales and use tax, the Division
of Taxation will treat convertible virtual currency transactions as
barter transactions, where both transacting parties give something
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of value to the other in order to receive something in value in
return. As such, sales or use taxes will be due from both parties
to the transaction. For purposes of the corporation business tax
and the gross income tax, New Jersey is following the Internal
Revenue Service’s lead towards treating convertible virtual
currency like property, such that taxpayers will realize gains or
losses on sales or exchanges of convertible virtual currency. The
full New Jersey TAM can be found here.
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Found in Translation: Online Drop Shipment Facilitation Service Not Subject to New York
Sales and Use Tax
By Evan M. Hamme and Open Weaver Banks
The New York State Department of Taxation and Finance released
an advisory opinion explaining how it will treat drop shipment
facilitation services for sales and use tax purposes. The petitioner
uses proprietary software to create an Internet-based “hub”
through which a web-based merchant orders products from a
supplier and directs the supplier to ship the product directly to the
end customer (i.e., drop shipments). The Department’s analysis
focused on two components of the services: (1) transmitting
information between merchants and suppliers (the transmission
component); and (2) translating merchant data into a format
compatible with the supplier’s computer systems (the translation
component). Finding that the translation component is more
valuable to merchants than the transmission component, because
merchants could easily transmit information to suppliers through
traditional means (e.g., mail or fax), the Department determined
that the primary function of the services is the translation
component. Further, since the translation component constitutes
data processing, the Department concluded that the drop
shipment facilitation services are not subject to sales and use tax.
N.Y. Advisory Opinion, TSB-A-15(20)S (May 26, 2015).
The Sun Shines on Taxpayers: New York State Tax Appeals Tribunal Grants Appeal in
Combined Reporting Case
By Nicole Boutros and Andrew Appleby
In yet another taxpayer victory, the recently reconstituted New
York State Tax Appeals Tribunal determined that the New York
State Department of Taxation and Finance improperly denied
the taxpayers’ amended returns, which were filed on a combined
basis for the 2005 and 2006 tax years (i.e., prior to the 2007 and
2014 law changes). At the lower level, the administrative law judge
(ALJ) found that the group did not satisfy the combined reporting
filing requirements because it failed to prove the existence of a
unitary business and failed to prove that filing on a separate return
basis resulted in a distortion of the group’s income (a required
element for the tax years at issue).
In reversing the ALJ decision, the Tribunal applied the
Mobil 3-factor unitary test (functional integration, centralized
management and economies of scale) to determine that the
entities were engaged in a unitary business. Specifically, the
Tribunal found that the entities (1) were functionally integrated
by engaging in the same activity of selling software and related
services (in the same or related lines of business), despite the
differences between the specific products and services; (2) had
centralized management through the corporate strategic planning,
budgeting and central office functions (accounting, tax, insurance,
legal, human resources, purchasing, marketing and technology);
and (3) obtained economies of scale through consolidated
purchasing (achieving “significant discounts and reduced costs”),
consolidated debt service (subsidiary guarantees, factoring
receivables and negative borrowing covenants), and cross-selling
of products and services.
Further, the Tribunal determined that distortion resulted from
separate filings because the parent: (1) provided the centralized
management functions to the subsidiaries without reimbursement;
(2) provided the centralized cash management system without
reimbursement and access to interest free loans; and (3)
benefited from reduced borrowing costs because of factoring the
receivables. The Tribunal acknowledged that many of the factors
that demonstrated a unitary business also gave rise to a distortion
of income. In the Matter of the Petitions of SunGard Capital Corp.
& Subsidiaries et al., DTA Nos. 823631, 823632, 823680, 824167,
824256 (N.Y. Tax App. Trib. May 19, 2015).
Tyler Pipe II? Washington Court of Appeals Rejects Transactional Nexus Argument,
Upholds B&O Tax on Drop Shipments
By Evan M. Hamme and Madison J. Barnett
The Washington Court of Appeals upheld a broad application of
the Washington Business and Occupation (B&O) tax to sales
between an out-of-state seller and out-of-state purchasers
when the products are delivered in Washington. Although the
taxpayer maintained a research and product development facility
in Washington, none of the activities performed by the taxpayer
at that facility were related to the sales in question. The court
analyzed two types of sales: (1) sales that the taxpayer’s out-ofsutherl and asbill & brennan Llp
state customer directed the taxpayer to ship to the customer’s
customer in Washington (“drop shipment sales”); and (2)
sales made by the taxpayer’s out-of-state office to an out-ofstate customer that were delivered to the customer’s facility
in Washington (“national sales”). First, the court held that both
categories of sales were subject to tax under the B&O imposition
statutes based on the fact that the only transfer of possession
took place in Washington, even if the buyer taking possession
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was not the taxpayer’s customer. The court disregarded two
regulations cited by the taxpayer and interpreted the regulations to
impermissibly narrow the B&O imposition statutes. The taxpayer
then argued that the state could not rely on its nexus with the
taxpayer as an entity, because the state lacked transactional
nexus with both categories of sales. Citing Tyler Pipe, the
court disagreed, holding that case law permits state taxation of
transactions not directly related to a taxpayer’s in-state activities
SUTHERLAND SALT SHAKER®
Page 5
as long as such in-state activities “were significant in establishing
and maintaining a market for [the taxpayer’s] goods in the state.”
The court found that the taxpayer’s in-state market research and
product development were significant in developing the taxpayer’s
Washington market for the goods sold, and that Washington could
therefore constitutionally tax both the drop shipment and national
sales. Avnet, Inc. v. State of Wash., Dep’t of Revenue, No. 451085-II (Wash. Ct. App. Apr. 28, 2015).
Recently Seen and Heard
June 3, 2015
TEI New York Chapter
New York, NY
June 12, 2015
ISA Meeting
Boston, MA
Marc Simonetti and Charlie Kearns on the State Tax
Implications of International Transactions
Jeff Friedman and Jonathan Maddison presented on
the Implications of the Wynne Decision
June 3, 2015
COST Mid-Atlantic Regional State Tax Seminar
Basking Ridge, NJ
June 15-18, 2015
TEI Region VIII Conference
Santa Barbara, CA
Andrew Appleby on a Discussion of State Tax Cases,
Issues & Policy Matters to Watch
Jeff Friedman and Michele Borens
on New Technologies: How to Classify/Determine Nexus
and Other Issues
Leah Robinson and Open Weaver Banks on Litigation –
When to Settle; When to Challenge
June 3-7, 2015
TEI Region VII Conference
Hilton Head Island, SC
Eric Tresh and Zack Atkins on State Tax Controversy
Updates
June 9, 2015
EEI Taxation Committee
Hilton Head Island, SC
Eric Tresh on Emerging State and Local Tax Issues
for Electrics
June 10, 2015
The Business Council Annual Conference on
State Taxation
Albany, NY
June 17, 2015
Sutherland State Tax Ladies’ Lunch
New York, NY
Leah Robinson will host
June 18, 2015
FTA Annual Meeting
Minneapolis, MN
Todd Lard on a Discussion of the Three State Tax Cases
Recently Decided by the U.S. Supreme Court
June 30, 2015
IPT Annual Conference
San Diego, CA
Maria Todorova on Know the Ropes: Apportionment Issues
Marc Simonetti on Living With New York State
Corporate Tax Reform: Key Compliance Issues
June 11, 2015
TEI EMEA Chapter 15th Anniversary Conference
Geneva, Switzerland
Maria Todorova on the U.S. Sales Tax System
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SUTHERLAND SALT SHAKER®
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COME SEE US
July 8, 2015
Sutherland State Tax Ladies’ Lunch
New York, NY
September 17-19, 2015
ABA Joint Fall CLE Meeting
Chicago, IL
Leah Robinson will host
Leah Robinson will moderate a State Tax Practitioner
Roundtable
July 13-24, 2015
NYU Summer Institute in Taxation
New York, NY
Marc Simonetti on False Claims, Qui Tam and
Class Actions
Todd Lard on the State Tax Consequences of
International Transactions
Leah Robinson on Sales and Use Taxation and
on Senior Audit Management
July 19-22, 2015
SEATA Annual Conference
Atlanta, GA
Zack Atkins on a Southeast Area Property Tax Update
Scott Wright on an Income Tax Nexus Update
Eric Tresh on the MTC Task Force - 482 and Transfer
Pricing Adjustments
Jonathan Feldman and Madison Barnett on a Litigation
and Legislation Update
September 20-23, 2015
BTI Annual Conference
Colorado Springs, CO
Sutherland SALT will present
September 27-30, 2015
NESTOA Annual Conference
Mystic, CT
Sutherland SALT will present
September 27-30, 2015
IPT Sales Tax Symposium
Indian Wells, CA
Carley Roberts on The Year in Review and on Ask
the Experts – West
Leah Robinson on Cutting Edge Concepts: Applying
Sales Tax Rules to Evolving Businesses
August 6-7, 2015
Georgetown SALT Institute
Washington, DC
Jeff Friedman on Take It With a Grain of SALT: An Interview
with COST and MTC
Madison Barnett on Risking Business: Understanding Tax
Implications of Pass-through Entities
August 12, 2015
Sutherland State Tax Ladies’ Lunch
New York, NY
Leah Robinson will host
August 18, 2015
Sutherland Tax Education Series
Atlanta, GA
Madison Barnett on Credits and Incentives
September 10, 2015
Sutherland SALT Houston Roundtable
Houston, TX
Sutherland SALT will present
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SUTHERLAND SALT SHAKER®
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The Sutherland SALT Team
Michele Borens
202.383.0936
[email protected]
Jonathan A. Feldman
404.853.8189
[email protected]
Jeffrey A. Friedman
202.383.0718
[email protected]
Todd A. Lard
202.383.0909
[email protected]
Carley A. Roberts
916.241.0502
[email protected]
Leah Robinson
212.389.5043
[email protected]
Marc A. Simonetti
212.389.5015
[email protected]
Eric S. Tresh
404.853.8579
[email protected]
W. Scott Wright
404.853.8374
[email protected]
Douglas Mo
916.241.0505
[email protected]
Prentiss Willson
916.241.0504
[email protected]
Open Weaver Banks
212.389.5081
[email protected]
Timothy A. Gustafson
916.241.0507
[email protected]
Charles C. Kearns
202.383.0864
[email protected]
Maria M. Todorova
404.853.8214
[email protected]
Andrew D. Appleby
212.389.5042
[email protected]
Zachary T. Atkins
404.853.8312
[email protected]
Madison J. Barnett
404.853.8191
[email protected]
Nicole D. Boutros
212.389.5058
[email protected]
Stephen A. Burroughs
404.853.8046
[email protected]
Charles C. Capouet
202.383.0865
[email protected]
Stephanie T. Do
202.383.0839
[email protected]
Jessica A. Eisenmenger
202.383.0957
[email protected]
Ted W. Friedman
202.383.0829
[email protected]
Olga Jane Goldberg
713.470.6121
[email protected]
Evan M. Hamme
212.389.5024
[email protected]
Michael J. Kerman
212.389.5085
[email protected]
Jonathan E. Maddison
202.383.0916
[email protected]
Robert P. Merten III
916.241.0512
[email protected]
Suzanne M. Palms
404.853.8074
[email protected]
Michael Penza
212.389.5048
[email protected]
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