1. law, govt and politics
2. legal issues
3. legislation
4. tax laws

National Judicial Update and
Discussion of State Tax Cases
COST Mid-Atlantic Regional State Tax Seminar
Pittsburgh, Pennsylvania
May 7, 2015
Fredrick Nicely
Council on State Taxation
Adam Beckerink
Reed Smith LLP
Robert Weyman
Reed Smith LLP
1
Agenda
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
XI.
XII.
U.S. Supreme Court Developments
Apportionment
Non-traditional Tax Matters
Nexus
Addback
Discrimination & Incentives
Business Income vs. Nonbusiness Income
Combination
Net Operating Losses
Sales & Use Tax
Unclaimed Property
Amnesty Penalties
2
U.S. Supreme Court Developments
Cases at the Court this Term

Comptroller v. Wynne, 64 A.3d 453 (Md. 2013), cert. granted, 134 S. Ct. 2900
(2014).



Direct Mktg. Ass’n v. Brohl, 575 U.S. ___ (2015).




Issue: Does the U.S. Constitution prohibit a state from taxing all the income of its residents—wherever earned—by
mandating a credit for taxes paid on income earned in other states?
Ruling still pending.
Issue: Does the Tax Injunction Act bar federal court jurisdiction over a suit brought to enjoin information notice and
reporting requirements?
Holding: The Tax Injunction Act does not apply. The case is remanded to the 10th Circuit, which has ordered full briefing on
the Commerce Clause issue and the comity issue.
See Kennedy Dissent
CSX Transportation, Inc. v. Alabama Dep’t of Rev., 575 U.S. ___ (2015).


Issue: Does a state discriminate against a rail carrier when it generally requires businesses to pay a sales/use tax, but
grants exemptions from the tax to competitors of the railroads?
Holding: Remanded back to the 11th Circuit. It is proper to compare rail carriers against their competitors, but the
Appellate Court should have considered whether the imposition of other taxes upon the competitors was sufficient to
justify the disparate treatment afforded to railroads.
3
Will Wynne be a win for taxpayers?
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s, A. Yes, Commerce
Clause protection
to all
B. No, Court will
protect MD’s
revenue base
C. The Court will
issue a decision
that not
comprehensible
4
U.S. Supreme Court Developments
Cases Not Taken

Amazon.com, LLC v. Dep’t of Taxation & Finance, 987 N.E.2d 621 (N.Y. 2013), cert. denied, 134 S. Ct. 682 (U.S.
2013).

Equifax, Inc. v. Dep’t of Revenue, 125 So.3d 36 (Miss. 2013), cert. denied, 134 S. Ct. 2872 (U.S. 2014).

McLane Southern, Inc. v. Bridges, 110 So.3d 1262 (La. Ct. App. 2013), cert. denied, 120 So. 3d 270 (La. 2013), cert.
denied, 134 S. Ct. 1033 (U.S. 2014).

Missouri Gas Energy v. Kansas DOR, 313 P.3d 789 (Kan. 2013), cert. denied, No.13-1216 (U.S. Apr. 7, 2014).

Mobility Med., Inc. v. Miss. Dep't of Revenue, 119 So. 3d 1002 (Miss. 2013), cert. denied, 134 S. Ct. 1541 (U.S.
2014).

Tesoro Corp. v. Dep’t of Revenue, 312 P.3d 830 (Alaska 2013), cert. denied, 134 S. Ct. 2697 (U.S. 2014).
5
Has your Company Used the MTC’s 3-Factor Equally
Weighted Apportionment?
g?
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a A. Yes, until a State
says it eliminated it
B. Yes, as long as the
State is a Compact
member
C. The MTC has such
a thing?
6
Apportionment
Multistate Tax Compact Apportionment Cases
•
Gillette Company v. California Franchise Tax Board, No. A130803 (Cal. Ct. App. Oct. 2, 2012)
(MTC is a valid compact; compact law supersedes conflicting state law) (appeal to the
California Supreme Court presently pending). In June 2012, California Legislature formally
withdrew from the Compact.
•
IBM v. Michigan Dept. of Tax. (Mich. S.Ct. Jul. 14, 2014) (two statutory apportionment
provisions could be reconciled and three-factor MTC election still available for both MBT taxes;
did not address “compact clause” issue). In September 2014, legislation signed retroactively
repealing Compact, stating multistate corporations not entitled to use MTC’s incomeapportionment formula as of Jan. 1, 2008. MDOT motion for reconsideration denied Nov. 15,
2014.
•
Graphic Packaging Corp. v. Combs, No. 03-14-00197-CV, Travis Cty. Dis. Ct. (TX 2014);
Holding: did not apply, currently pending appeal at the Third District of Texas Court of Appeals.
•
Health Net, Inc. v. Oregon Department of Revenue, T.C.-MD No. 120649D (filed July 2, 2012);
Holding: did not apply, Oregon Tax Court heard oral argument on the case on July 22, 2014.
•
Kimberly-Clark Corp. v. Comm'r of Rev., MN Tax Ct. Dkt. No.08670 (filed Dec. 12, 2013);
Holding: did not apply, filed a notice of appeal in the Minnesota Tax Court.
7
Apportionment
COP v. Market Sourcing
Dish DBS Corp., No. 14-ALJ-17-0285-cc (S.C. Admin. Law Ct. Feb.
10, 2015).
• South Carolina is not a “strict cost of performance state” and receipts are
assigned to the location of the income-producing activity. Remanded for further
fact finding.
Banc of America Consumer Card Holdings Corp. v. Dir., Div. of
Taxation, No. 012945-2011 (N.J. Tax Ct. filed Aug. 5, 2011).
• Should receipts from credit card payments be sourced to the state of
commercial domicile rather than the location of the credit card
8
Apportionment
COP v. Market Sourcing, Cont.
Cable One, Inc. v. Idaho State Tax Comm., 337 P.3d 595
(Id. 2014).
•
Held: the relevant “costs of performance” were related to provision of services to Idaho
customers, not the provision of services nationwide. Accordingly, since 68% of costs of
performance occurred in Idaho, all receipts from Idaho customers must be included in
the numerator of the Idaho sales factor.
First Marblehead Corp. v. Commissioner, 470 Mass. 497 (2015).
•
•
Sourcing value of third-party securitized loans to commercial domicile for property factor
purposes under MTC “SINAA” sourcing rules.
What about loans issued by affiliated entity?
9
Apportionment
COP v. Market Sourcing, Cont.
Comcast of Massachusetts I, Inc. v. Commissioner, No.
C321986 (App. Tx. Bd. filed Dec. 4, 2013).
•
Should various receipts of cable television company be sourced outside Massachusetts
based on cost of performance?
BBC Investment Co. v. Commissioner, No. C318191 (App.
Tx. Bd. filed Sept 20, 2012).
• Should advertising credits and vendor support funds be included in retailers sales factor
as “receipts” and sourced based on cost of performance.
10
Qui Tam is for XX and Class Action is for YY
11
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A. Overpayment of
tax, underpayment
of tax
B. Underpayment of
tax, overpayment
of tax
C. Federal suits,
state suits
D. Income tax, sales
tax
Non-traditional Tax Matters
Consumer Class Action Cases
Loeffler v. Target Corp., 324 P.3d 50 (Cal. 2014).
•
Retail purchasers could not use consumer protection statutes to
challenge a retailer’s alleged over-collection of sales tax.
Zachary Tucker et al. v. Papa John’s Int’l Inc. et al., case no. 3:14cv-00618-NJR-PMF, U.S. Dis. Ct. Ill.
Schojan et al. v. Papa John's Int’l Inc. et al., case number 8:14-cv01218, U.S. Dist. Ct. Fla.
• Both cases allege Papa John’s improperly collected sales tax
on delivery fees.
12
Non-Traditional Tax Matters
Consumer Class Action: Coupon Cases
Wong v. Whole Foods Market Group, Inc., Case 1:115-cv-00848,
U.S. District Court, N. D. Ill., East. Div. (filed Jan. 28, 2015).
• Plaintiff alleges taxpayer over-collected sales tax in relation to coupondiscounted sale.
Wong v. Target Corp., Case 1:115-cv-01985, U.S. District Court,
N. D. Ill., East. Div. (filed Mar. 5, 2015).
Bugliaro v. BJ’s Wholesale Club, Inc., Circuit Court of the 11th
Judicial Circuit of Florida (filed Mar. 17, 2015).
Farneth v. Wal-Mart Stores, Inc., Case 2:13-cv-01062, U.S. District
Court, Western District of Pennsylvania (filed Jul. 22, 2013).
13
Non-Traditional Tax Matters
False Claims Act Cases
Ill. ex. rel. Schad, Diamond and Shedden, P.C. v. QVC, Inc. and State of
Illinois, App. Ct. Ill., 1st Dist., No. 11L 8553 (2015).
• Plaintiff alleged that QVC did not collect sales tax on shipping charges to Illinois
customers.
• Case dismissed because of previous sales tax audit of the position by the Department
of Revenue.
The Illinois Wine Cases
People v. Sprint Nextel Corp., No. 103917/2011 (N.Y. App. Div. Feb. 27, 2014):
lawsuit alleges that Sprint Nextel failed to collect telecommunications sales taxes
after unbundling its wireless services.
Matter of Helio, LLC, Admin. Law Judge (June 12, 2014): ALJ ruled against taxpayer
(former affiliate of Sprint) on same bundling issue being litigated in FCA action. Case is on
appeal to NYS Tax Appeals Tribunal.
State of New York ex rel Danon v. Vanguard Group, Inc.: former in-house attorney alleged
evasion of $1 billion in federal and state taxes.
14
Nexus
Income/Franchise Tax Nexus
Gore Enterprise Holdings, Inc. v. Comptroller of the Treasury, 87 A.3d 1263
(Md. 2014).
•
Two subsidiaries of a parent corporation that did business in Maryland
were subject to corporate tax as the subsidiaries were found to have “no
economic substance as separate business entities from their parent.”
Village Super Market of PA, Inc. v. Dir., Div. of Taxation, 27 N.J. Tax 394 (N.J. Tax Ct.
2013).
•
A Pennsylvania corporation had nexus with New Jersey by virtue of its interest in
a New Jersey limited partnership.
BIS LP v. Dir., Div. of Taxation, 27 N.J. Tax 58 (N.J. Tax Ct. 2012).
•
Corporate partner did not have nexus with New Jersey despite its interest in a
New Jersey limited partnership.
15
Nexus
Income/Franchise Tax Nexus Cont’d
Lorillard Licensing Co. LLC v. Dir., No. A-2033-12T1 (N.J. Tax Ct. Jan. 14,
2014).
• If licensing trademarks for use in New Jersey is sufficient to create
nexus for tax purposes, the same standard must be applied for
throwout rule purposes.
ConAgra Brands, Inc. v. Comptroller, No. 09-IN-00_0150 (Md. Tax. Ct.
Feb. 24, 2015).
• Intangibles holding company had nexus in Maryland, despite only
contact with state being royalty payments from affiliate operating in
state.
Swart Enterprises v. FTB, No. 13CECG02171 (Nov. 14, 2014)
• Passive ownership of 0.2% of California investment fund by out of state
business with no activity or physical presence in California does not
subject it to income tax or the $800 minimum tax.
16
Nexus
Reverse Nexus & Economic Nexus
Allied Domecq Spirits & Wines USA, Inc. v. Commissioner, 10 N.E.3d
178 (Mass. App. Ct. 2014).
• A transfer of employees and business functions to an affiliate
ignored as sham transaction. Results in denial of nexus to entity
with employees in Massachusetts.
L.L. Bean, Inc. v. Levin, Case No. 2010-2853 (Ohio BTA Mar. 6,
2014).
• Challenges constitutionality of MTC’s factor nexus provisions that
apply to CAT. Case settled in Nov. 2014.
• Crutchfield, Inc. and Newegg, Inc. now leading cases on issue at
Ohio Sup. Ct.
17
Does your company comply with the states’ factor
nexus laws – i.e., agree subject to tax if over
threshold?
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A. Heck no
B. Yes, litigation
adverse
C. We have nexus
everywhere 
18
Nexus
Due Process Resurgence?
Daimler AG v. Bauman, 134 S. Ct. 746 (2014).
• Conduct of U.S. sub on behalf of foreign parent corporation does not create general
jurisdiction over foreign corporation.
Goodyear Dunlop Tires v. Brown, 131 S. Ct. 2846 (2011).
• No general jurisdiction over foreign subs of U.S. parent corporation because subs lacked
“continuous and systematic general business contacts” with forum state.
J. McIntyre Machinery, Ltd. v. Nicastro, 131 S. Ct. 2780 (2011).
• Lead opinion says defendant must “purposefully avail itself of the privilege of conducting
activities within the forum state, thus invoking the benefits and protections of its laws.”
Walden v. Fiore, 134 S. Ct. 1115 (2014).
• Two professional gamblers could not force defendant to litigate in NV for alleged conduct
that took place in GA even though the conduct impacted defendants in forum state.
19
Addback
Kimberly-Clark Corp. (Mass. App. Ct.), review denied, (Mass.
2013).
• Interest deductions related to a corporation’s cash management
system must be added back to the corporation’s income
• Intercompany loans did not constitute bona fide debt.
• Ongoing Challenges: Staples and Mass Mutual
• Still an issue after combined reporting for net worth measure of tax
N.Y. Tax Law § 208.9(o)(3).
• Litigation pending.
• Royalty income exclusion and expense addback provision (pre-2013).
• Opportunity for income exclusion benefit even if royalty payments
made by non-New York taxpayer (i.e., alien corporation) or corporation
with minimal New York presence.
20
Addback
Morgan Stanley & Co., Inc. v. Dir., Div. of Taxation, No. 0075572007 (N.J. Tax Ct. October 29, 2014).
• Taxpayer could qualify for “unreasonable” exception to interest add
back requirement without showing that tax was paid by the recipient.
Duke Entergy Corp. v. Director, No. 010448-2008 (N.J. Tax Ct. Dec. 2,
2014).
• Electric utilities taxes paid to other states were not based on income
or profit, and therefore not required to be added back to federal
taxable income for New Jersey purposes.
21
Discrimination & Incentives
CDR Sys. Corp. v. Okla. Tax Comm’n, 2014 OK 31 (Okla. Apr. 22,
2014).
•
•
Held that for purposes of discrimination, the Commerce Clause is not
implicated unless there is actual or prospective competition between the
supposedly favored and disfavored entities in a single market.
A petition for rehearing was filed with the Oklahoma Supreme Court on May 12,
2014.
22
What do you think about tax incentives offered by the
state?
A. Bad, they should
be found
unconstitutional
B. Love’m, give me
more
C. Prefer tax rates be
reduced for
everyone
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23
Business vs. Nonbusiness Income
Elan Pharmaceuticals, Inc. v. Director, Div. of Taxation,
No. 010589-2010 (N.J. Tax Ct. May 1, 2014).
• Sale of a drug line constitutes apportionable business income.
First Data Corp. v. Arizona Dep’t of Revenue, 313 P.3d 548
(Ariz. Ct. App. 2013); Harris Corp. v. Arizona Dep’t of
Revenue, 312 P.3d 1143 (Ariz. Ct. App. 2013).
• Transactional vs. Functional test.
24
Combination
Combined Reporting
ComCon Production Services I, Inc. v. California Franchise Tax Bd.,
No. BC489779 (Los Angeles Super. Ct. Mar. 6, 2014).
•
A unitary relationship did not exist between Comcast and its 57% owned
subsidiary.
Tesoro Corp. v. Dep’t of Revenue, 312 P.3d 830 (Alaska 2013), cert.
denied, 134 S. Ct. 2697 (U.S. Jun. 2, 2014) (No. 13-1023).
•
Tesoro and its affiliates were engaged in a unitary business and thus the
worldwide income was subject to Alaska’s three-factor apportionment
formula.
Rent-a-Center Inc. v. Dep’t of Revenue, TC-MD 111031D
(Or. T.C. Apr. 23, 2014).
•
A rent-to-own retailer and its subsidiary franchiser of rent-to-own stores
were not unitary because the companies lacked centralized management.
25
Combination
The New York Experience
In re IT USA, Inc., DTA No. 823780 (N.Y.S. Tax App. Trib. Apr. 16, 2014).
•
A common parent and its subsidiaries were unitary as functionally integrated wholesalers of clothing
that operated with centralized management.
In re Sungard Capital Corp., DTA No. 823631(N.Y.S. Tax App. Trib. Apr.
3, 2014).
•
Taxpayers were not unitary as there was little evidence of interdependence, functional
integration or economies of scale in the operations of their specific business segments.
In re Knowledge Learning Corp., DTA Nos. 823962 & 823963 (N.Y.S. Tax
App. Trib. Sept. 18, 2014)

Distortion combination still exists, but taxpayer permitted to combine without proving distortion
because transfer of employees between related entities resulted in substantial intercompany
transactions.
In re Astoria Fin. Corp. & Affiliates, TAT (H) 10-35 (BT) (N.Y.C. Tax App.
Trib. Oct. 29, 2014)
•
Bank not required to filed combined NYC bank tax return with its CT subsidiary that held non-New
York mortgages.
26
When filing a combined tax return (required or
voluntary), have you been denied the inclusion of an
entity with losses?
A. Yes
B. Never
C. Rarely
el
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27
Net Operating Losses
Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth of
Pennsylvania, No. 98 F.R. 2012 (Pa. Commw. Ct. filed March 6, 2012).
• Does Pennsylvania’s cap on NOLs violate the State Constitution’s uniformity clause?
Wells Fargo Auto Finance, Inc. v. Dir., Div. of Taxation, No. 015965-2013
(N.J. Tax Ct. filed Oct. 7, 2013).
• Is a taxpayer entitled to extend its NOL carryforward period as a result of New Jersey’s
NOL suspension?
Toyota Motor Credit Corp. v. Dir., Div. of Taxation, No. 002021-2010 (N.J.
Tax Ct. Aug. 1, 2014).
•
Taxpayer could exclude from taxable income depreciation recapture where the
depreciation never produced a tax benefit.
Massachusetts:
•
Renewed relevance of Weston Marketing Corporation v. Commissioner, Mass App. Tx. Bd.
Dckt. No. 161893 (April 22, 1994) and tax-benefit rule for financial institutions.
28
Sales & Use Tax
Thomson Reuters, Inc. v. Dep’t of Treasury, No. 313825
(Mich. Ct. App. May 13, 2014).
• Payments for online tax research were determined to be
nontaxable information services rather than taxable prewritten
computer software.
Lucent Technologies, Inc. v. State Board of Equalization, No.
BC474710 (Cal. Super. Ct. Apr. 18, 2014).
• A company, which had obtained summary judgment in its favor,
was entitled to attorney’s fees as the SBE’s position in the case
was “not substantially justified.”
29
Sales & Use Tax
Matter of Sungard Securities Finance LLC, DTA No. 824336
(Feb. 6, 2014).
 ALJ rejected Department’s argument that taxpayer’s service was a
direct or “constructive license” of computer software, but agreed
some services taxable as information services.
In re Boulder Acquisition Corp., Nos. 1309150–52 (Pa. B.F. &
R. Oct. 1, 2014).
• Purchases of software were determined to be nontaxable where
(1) the invoices listed shipping and billing addresses outside
Pennsylvania, and (2) the State could not prove that the software
was used in or delivered to Pennsylvania.
30
Sales & Use Tax
Citrix Systems, Inc. v. Commissioner, No. C325421 (App. Tx.
Bd. filed Sept. 15, 2014).
 What is the true object of ASP providers sales: non-taxable service
or taxable software?
Brainshark, Inc. v. Commissioner, No. C318053 (App. Tx. Bd.
filed Aug, 3, 2012).
•
Does vendors conversion of powerpoint slides and voice recordings
into a video file constitute the sale of software?
31
Have you had issues in the sales or income tax area
with cloud computing services?
A. Yes, to both
B. Yes, only sales tax
C. Yes, only income
tax
D. None
No
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32
Amnesty Penalties
Metro. Life Ins. Co. v. Hamer, 990 N.E.2d 1144 (Ill. 2013).
•
A life insurance company was subject to a double interest penalty for
additional income taxes that were assessed following federal
adjustments made after an amnesty period had ended.
United Parcel Svc. Gen. Svcs. Co. v. Director, Div. of Taxation,
61 A.3d 160 (N.J. Super. Ct. App. Div. 2013).
•
Amnesty penalties were not “automatic” for all assessments related to
tax years for which amnesty was available and amnesty penalties did
not apply.
33
Have you been “lucky” and had to deal with a
Delaware unclaimed property issue?
A. Yes, that’s where all
our entities are
incorporated
B. Yes, but it was not
bad
C. No, we are DE
incorporated have no
unclaimed property
tax issues
D. No – we avoid DE
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34
Unclaimed Property
Temple-Inland, Inc. v. Thomas Cook et al., Civ. No. 14-654SLR (D. Del. Mar. 11, 2015).
• The Court denied the state’s motion to dismiss the plaintiff’s claims that
Delaware’s estimation methods violate substantive due process, the Ex
Post Facto Clause, the Takings Clause, the Commerce Clause, and the
Full Faith and Credit Clause of the US Constitution. While not a final
decision on the merits, the case suggests favorable outcomes for
property holders are possible.
35
Questions?
Fred Nicely
Council On State Taxation
(202) 484-5213
fnicely@cost.org
Adam Beckerink
Reed Smith LLP
(312) 207-6528
abeckerink@reedsmith.com
Robert Weyman
Reed Smith LLP
215-851-8160
rweyman@reedsmith.com
36