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The Tennessee Department of Revenue recently issued a letter ruling stating that the service of converting and sending information to the SEC via the EDGAR filing system is a "telecommunications service" for Tennessee sales tax purposes. The SEC filing service provider addressed in the ruling converts the financial information submitted by its customers, including Tennessee customers, from a Word, Excel, or PowerPoint format into an SEC-compliant format, or "EDGARizes" the information, before filing the documents with the SEC. If the service provider or the SEC were located in Tennessee, the SEC filing service would be considered a taxable telecommunications service under the ruling.

The end result for the service provider in this case, however, was that its services were not subject to Tennessee sales tax. The service provider charged customers on a per-page or per-document basis, which the DOR considers to be like a call-by-call basis. In this case, the service provider's server, where the conversion of customer information takes place, and the SEC were both outside Tennessee, so the transmission of documents did not originate or terminate in Tennessee. Therefore, the charges were not sourced to Tennessee and not taxable by Tennessee even though the service provider's customers were in Tennessee.

The DOR's analysis of the "telecommunications service" definition is interesting and could potentially have a broader application because Tennessee is an associate member of the Streamlined Sales and Use Tax (SST) Agreement and the state has adopted the Agreement definition of "telecommunications service." In considering whether the conversion of information for the EDGAR filing system falls within the definition of "telecommunications service," the DOR reasoned that "[t]he entire process of transferring and converting information between companies constitutes an electronic data interchange ('EDI') process." Since the filing service is performed entirely electronically, computers are used to receive the financial information from customers and to convert the information from a Word, Excel, or PowerPoint document into an SEC-compliant document, and the purpose of the conversion was to create a document that the SEC can receive, the DOR found that the conversion process falls within the parameters of a taxable telecommunications service.

The DOR also found that the SEC filing service is not "data processing," which is excluded from the definition of "telecommunications service" but not specifically defined under the SST Agreement or Tennessee law. "Data processing" is defined in the online

Merriam-Webster Dictionary as "the converting of raw data to machine-readable form and its subsequent processing (as storing, updating, rearranging, or printing out) by a computer."

In its analysis of the data processing issue, the DOR focused on the purchaser's primary purpose, which is to be considered under the language excluding data processing and information services from the definition of "telecommunications service." Under that language, data processing and information services are described as services "that allow data to be generated, acquired, stored, processed, or retrieved and delivered by electronic transmission to a purchaser, where such purchaser's primary purpose for the underlying transaction is the processed data or information." The DOR found that the purchaser’s primary purpose in using the SEC filing service was not for data processing or retrieval, but was rather to have the financial information converted to an SEC-compliant format and electronically transmitted to the SEC. The DOR noted in the ruling: "In fact, the purchaser already has all of the data that is filed with the SEC and is not seeking to gain additional data or information; the Taxpayer’s service does not include generating any additional data."

Daniel Schibley of CCH, who has been following the Streamlined Sales Tax project since its beginning, notes: "If the filing system provider sends the processed data to the purchaser, and the purchaser then transmits the data to the SEC, would the transaction then fall within the definition of “data processing”? If so, it seems odd that the result changes if the provider sends the data directly to the SEC. This might be a good subject for an interpretation request directed to the SST’s Compliance Review and Interpretations Committee."



Laura LeeLun of CCH notes that the town of Breckenridge, Colorado, has filed a class action against Expedia, Inc.,, and other online travel companies (OTCs), claiming the OTCs failed to remit the proper amount of excise and sales taxes on lodging. The town alleges that the OTCs improperly calculate excise and sales taxes on the lower wholesale rate negotiated between the OTCs and the hotels, rather than the retail rate charged by the OTCs to the consumers. In addition, the town claims the OTCS have failed to file the required reports and to acquire a town license. By charging unitemized taxes and fees, the OTCs allegedly mislead the consumers into believing the correct amount of sales and excise taxes are being remitted.

The requested class is defined as "all Colorado home rule municipalities which have enacted and collect any tax of any kind on overnight accommodations or lodging … but excluding any tax that is calculated on a set dollar per night basis (as opposed to a percentage), and excluding Denver, Colorado."

The complaint lists the following five claims for relief:


· A declaratory judgment that the OTCs have failed in their duty to remit excise and sales taxes based on the retail lodging rate;


· Violation of municipal ordinances;


· Conversion;


· Civil conspiracy; and


· Unjust enrichment.



Similar attempts at litigation against OTCs by municipalities have seen mixed results, with a federal appeals court recently holding that a New Jersey municipality lacked prudential standing to file a class action suit, on behalf of itself and similarly situated municipalities, against several online travel companies. Also, a Pennsylvania Commonwealth Court has partially reversed a trial court’s dismissal and remanded an OTC class action suit filed by a Pennsylvania county, as the court found that the principal of exhaustion did not apply to the county’s request for declaratory relief. The supreme courts in Georgia  (City of Atlanta v. and South Carolina (Travelscape LLC v. South Carolina Department of Revenue ) have both decided against OTCs.    



Click the link below to view the complaint.










As CCH editor Sandy Weiner recently reported, new legislation (S.L.. 2011-441 (S.B. 580)) clarifies the effective date of the North Carolina corporate income tax provisions that were contained in S.L. 2011-390 (H.B. 619), which outlined the procedures the Department of Revenue (DOR) must follow prior to requiring unitary businesses to file a combined return. The new legislaiton also addresses the validity of agreements entered into between the DOR and corporate taxpayers concerning the proper reflection of the businesses' income attributable to North Carolina.


Prior to S.L. 2011-441, the DOR's current authority to require a unitary group of businesses to file a combined return was repealed effective January 1, 2012. However, the new provisions that govern when and how the DOR may require a unitary group to file a combine return applied to assessments proposed for taxable years beginning after 2011. After S.L. 2011-441, both the repeal of the prior law and the implementation of the new procedures are in effect for taxable years beginning on or after January 1, 2012. Consequently, there is no longer any confusion as to whether the DOR could force combination in assessments made after January 1, 2012, for earlier tax years.


S.L. 2011-441 also clarifies that, in addition to the DOR's authority to force combination or require a taxpayer to use other means to more accurately reflect a taxpayer's net income attributable to North Carolina if the procedures outlined are satisfied, the DOR Secretary may enter into a voluntary agreement with a taxpayer to utilize an alternative filing methodology other than separate reporting that more accurately reports North Carolina net income.


Michigan is the latest state where legislation has been introduced that would require collection of sales and use taxes on Internet sales . H.B. 5004 and H.B. 5005 were both introduced on September 22. The bills include both click-through nexus and affiliate nexus provisions.

Meanwhile, California Gov. Jerry Brown has signed [legislation |] delaying the operative date of the state’s new “Amazon law”


The federal effort may have gotten a little more complicated in light of an opinion handed down by the U.S. Court of Appeals for the Second Circuit on September 20 (Red Earth LLC v. United States). The federal appeals court suggested that Congress may lack the authority to require an out-of-state seller to collect a state’s tax unless the seller has a minimum number of sales into that state. What that threshold would be is unclear.</span></p>


 The Taxpayer Guidance Division of the New York Department of Taxation and Finance recently added a written agreement requirement to its responsible person policy for certain partners and LLC members, and changed the calculation of the reduced amount of sales tax liability that an eligible partner or LLC member has to pay under the policy. The policy, which took effect March 9, 2011, addresses the harsh consequences of 100% personal liability for partners and LLC members who have no involvement in running the business by allowing these persons, who meet certain requirements, to pay a reduced amount of the business tax liability based on their portion of ownership interest in the business.


Under the recently issued policy statement, TSB-M-11(17)S, the person requesting relief must have a written agreement with the department that includes provisions requiring the eligible person's cooperation and assistance in identifying potentially responsible persons, detailing the business structure of tiered entities, and providing information regarding out-of-state entities, to the extent the person is able to provide the information.


Also, under TSB-M-11(17)S, the calculation of an eligible person's sales tax liability now takes into account payments made by the business and responsible persons who did not get the relief, as well as the partnership's or LLC's tax liability, the partner's or member's percentage of ownership interest, and the pending expiration of a statute of limitations for assessing sales tax. Under the previous policy statement, TSB-M-11(6)S, the sales tax liability of an eligible person was based only on the tax liability of the business, the percentage of ownership interest, and the pending expiration of a statute of limitations.</span></p>



Laura LeeLun of CCH notes that, beginning October 1, 2011, Washington taxpayers must fully comply with the sales and use tax requirements relating to amusement and recreation service fees that were announced by the Department of Revenue in Excise Tax Advisory 3167.2011

According to the advisory, "entry fees" and "league fees" are not charges for amusement and recreation services and are not subject to the retail sales tax. However, it is the department’s position that fees that allow a person or team to participate in the underlying activity, no matter how they are titled, are charges for amusement and recreation services and are taxable.


During the 2011 legislative session, the Washington Recreation and Parks Association (WRPA), among others, supported Senate Bill 5422, which would have clarified that league fees charged to teams by governmental or nonprofit entities were exempt from sales tax. However, the Legislature failed to pass the bill. The advisory released by the department signals an attempt to clarify and enforce the collection of tax on league and entry fees that are actually charges for amusement and recreation services.

Until October 1, 2011, the department will work with taxpayers that make a good faith effort to comply with these requirements. Taxpayers should document their efforts in making the necessary system changes in order to receive such consideration.



Laura LeeLun of CCH notes that, according to a

report summary released August 31, 2011, by the University of Denver's Center for Colorado's Economic Future, projected spending for programs in Colorado's general fund will exceed projected revenues by almost $3.1 billion in fiscal year 2023-24. The report recommends the following tax changes, among others, to address the gap:


· the extension of the 2.9% sales tax to a wide range of services, excluding health services;


· reinstatement of a four bracket graduated income tax (the first $50,000 taxed at 4%; the next $50,000 taxed at 4.7%; next $100,000 taxed at 5.4%; and income in excess of $200,000 at 6.1%); and


· a phase-in of a uniform mill levy in all school districts, regardless of wealth.


The report represented Phase 2 of a study of state tax policy requested by lawmakers last year.

Colorado voters will soon get the chance to affect tax policy, as Proposition 103 qualified for the November ballot. The measure would increase the state individual and corporate income tax from 4.63% to 5% and the sales tax from 2.9% to 3% for a period of five years, beginning January 1, 2012. The revenue generated from the tax increase, expected to be $3 billion, would be used to help fund education in the state.



As previously noted, the North Carolina Department of Revenue is offering state tax relief due to the impact of Hurricane Irene. (North Carolina ) Many other states have also jumped in to offer tax assistance as well, mostly in the form of extended filing and payment deadlines, and/or waiver of penalties and interest. States currently offering such assistance are listed below, along with links to the specific state information.




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New Hampshire:





New Jersey:


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In +Apple, Inc. v. Franchise Tax Board+</em>, the California Court of Appeal had to determine the appropriate method to account for the source from which repatriated dividends were paid, and which of two competing methods was more consistent with the provisions of California tax law that seek to ensure that foreign subsidiary income is appropriately taxed. Apple, which filed a California water's edge combined report, claimed that it was subjected to double taxation when the California Franchise Tax Board (FTB) applied a last-in-first-out (LIFO) proration of its income, treating repatriated dividends from certain foreign subsidiaries as paid first from current year's earnings, and only then from the most recent prior years' earnings on a year-by-year basis. According to Apple, Rev. &amp; Tax. Code §25106, as interpreted in Fujitsu IT Holdings, Inc. v. Franchise Tax Board, 120 Cal.App.4th 459 (2004), required that such dividends instead be subject to "preferential ordering" and be deemed to be paid first out of income already taxed in prior years, and thus eliminated entirely from the recipient's income subject to California tax. Unfortunately for Apple, the court ruled in favor of the FTB and determined that the LIFO ordering was proper.


<u>Court's Reasoning</u>

In reaching its conclusion, the court first distinguished Fujitsu on the basis that that case dealt with the source of dividend payments when controlled foreign corporations had an undistributed pool of accumulated earnings only from the +current +year, while there was an undistributed pool of accumulated earnings from prior tax years as well in the case at hand. Fujitsu did not discuss at all how earnings accumulated over multiple tax years should be treated.


In addition, the court noted that IRC §316 establishes a definitive LIFO ordering rule for dividends paid, and that former Rev. & Tax. Code §24495 and its successor statutes have either followed the language of IRC §316 or expressly incorporated its provisions. An FTB regulation, Reg. 24411, also incorporates the LIFO dividend ordering rule. Apple maintained that IRC §316 was only a rule of general applicability, expressly allowing for alternative ordering, and that IRC §959(c) trumped IRC §316. However, IRC §959(c) is not expressly incorporated in the Rev. & Tax. Code.


Furthermore, the court was not persuaded by Apple's insistence that Rev. & Tax. Code §25106 implicitly adopted an equivalent preferential ordering rule. According to the court, LIFO ordering as between tax years was consistent with clear statutory and regulatory authority and it deterred abuse by preventing a corporation from declaring what year's earnings were being distributed. The court also believed that the policy of Rev. & Tax. Code §25106 to prevent double taxation was still honored in allowing total exclusion for dividends received within a tax year to the extent of included income for that tax year.


<u>Other Issues</u>

Apple did present sufficient proof that the FTB improperly disallowed a portion of its claimed interest expense deduction. However, Apple was not entitled as a "prevailing party" to attorney fees, because the FTB's position in the case was substantially justified.


 Laura LeeLun of CCH notes that beginning October 1, 2011, Rhode Island will impose its 7% sales tax on medical marijuana.


The budget bill, H.B. 5894 , also expanded the sales tax base to include over-the-counter drugs,  prewritten software delivered electronically or by load and leave, and package tour and sightseeing transportation services.

Though sales of medical marijuana will technically be subject to tax, Gov. Lincoln Chafee has indefinitely suspended the licensing of medical marijuana dispensaries or "compassion centers." In April, U.S. Attorney Peter F. Neronha advised Chafee that the dispensaries could face criminal prosecution for growing and distributing marijuana. The dispensaries selected by the Rhode Island Department of Health and awaiting the governor's decision are Greenleaf Compassionate Care Center, Summit Medical Compassion Center of Warwick, and the Thomas C. Slater Compassion Center of Providence.


Bernita Ferdinand of CCH submits the following blog entry:


(A) A business in State A has merchandise to sell to State A customers; (B) it contracts for the merchandise to be sold through State B e-commerce service's website; (C) the e-commerce service has no physical presence, agents, salespeople, etc., in State A, nor does it advertise there; (D) assume no affiliate/controlled group factor; (E) the e-commerce service does not collect sales tax on the sales. Should the e-commerce service be collecting sales tax?

First, should (C) or (D) above even factor into this analysis, given that the essence of the transaction is a State A business selling to State A customers? Stated another way, should a State A retailer + State A customers = X, where X = nobody pays any sales tax? The way some states' nexus laws are drafted, their definition of a "retailer" who is responsible for collecting sales tax does not include out-of-state sellers otherwise lacking nexus that make sales to in-state residents for in-state sellers.

Second, it "feels" like sales tax should be collected in the above scenario. But given that tax law is not based on feelings, it doesn't matter what one may feel about this situation. What matters is what the law says. It remains to be seen whether legislators in states where this touchy-feely issue arises tighten up their nexus laws in response to the multistate, outsourced e-commerce business model.

In addition to a potential loss of tax revenue in certain states, paying an out-of-state company for e-commerce services is a second way for money to exit a state. On the sales tax legislation front, out-of-state e-commerce platform services may be the new in-state affiliate referral.



Legislation that would delay implementation of California’s two-month old “Amazon” law  has passed the Legislature and is on its way to Gov. Jerry Brown. According to published reports, Amazon will drop its effort to gather signatures for a voter repeal in return for the one-year delay in implementation.

Under the new legislation, California law would temporarily return to the standards in place before the Amazon law was enacted in late June. The click-through and affiliate nexus provisions would then only take effect next year. The exact timing would depend on whether the states receive federal authority to make remote sellers collect the states’ sales taxes.

Legislation to give member states of the Streamlined Sales and Use Tax (SST) Agreement remote collection authority [was introduced |] in both houses of Congress at the end of July. However, California is not currently a member of the SST Agreement.

If Gov. Brown signs the bill, the Amazon provision will take effect on September 15, 2012 (if federal authority is not enacted on or before July 31, 2012), or on January 1, 2013 (if federal authority is enacted but California does not implement it on or before September 14, 2012). If federal authority is enacted and California implements it, the new implementation legislation would presumably replace the delayed  nexus provisions in the Amazon law.


Several North Carolina counties affected by severe weather and flooding from Hurricane Irene will be afforded some relief from tax deadline penalties, in addition to an optional income tax deduction. In a press release, the North Carolina Department of Revenue announced that businesses or individuals in counties declared federal disaster areas (Beaufort, Carteret, Craven, Dare, Halifax, Hyde, Lenoir, Pamlico and Tyrrell) that had a filing and/or payment requirement for any state tax due on or after August 25, and on or before October 31, are entitled to a waiver of late filing and payment penalties as long as the return is filed and the tax paid by October 31, 2011. Additionally, the department will suspend forced collection actions, including the issuance of garnishments, tax warrants, and certificates of tax liabilities, for taxpayers in the declared disaster areas until October 31, 2011.


Taxpayers located in counties declared federal disaster areas may also elect to claim a disaster-related casualty loss on either their 2010 or 2011 state income tax returns. Taxpayers are advised that the loss must be deducted on the state income tax return in the same year it is deducted for federal income tax purposes.



In its announcement, dated September 1, 2011, the department noted that if more counties are designated federal disaster areas, taxpayers in those areas will also qualify for the storm relief. Since that time, the following counties have also been declared federal disaster areas: Bertie, Brunswick, Camden, Chowan, Columbus, Currituck, Duplin, Edgecombe, Gates, Greene, Hertford, Johnston, Jones, Martin, Nash, New Hanover, Northampton, Onslow, Pasquotank, Pender, Perquimans, Pitt, Vance, Wayne, and Wilson. The Federal Emergency Management Agency (FEMA) website contains a complete and up-to-date listing of counties that are declared federal disaster areas. FEMA </p>



Laura LeeLun of CCH notes that on July 25, 2011, two education nonprofit groups and 12 state representatives, among others, filed a lawsuit (League of Education Voters v. State of Washington) in the King County Superior Court challenging the two-thirds supermajority vote requirement in each house to enact laws that raise taxes. The suit challenges the constitutionality of [RCW 43.135.034 |], which was codified after [Initiative 1053 |] was approved by voters in 2010. The constitutional violations alleged in the suit include the following:


· the supermajority requirement violates the constitutional requirement that bills need only a simple majority to pass;


· the supermajority requirement impairs the Legislature's plenary power to pass laws;


· RCW 43.135.034's limitations on the Legislature effectively "suspend and surrender" the power of taxation granted in Article VII, §1; and


· RCW 43.135.034 impermissibly amends the constitution by initiative.


Among other factors, the plaintiffs' standing is based on

Substitute House Bill 2078, which would have funded K-3 class size reductions by closing a tax loophole for large banks. The bill received a majority of votes for passage in the 2011 legislative session but fell short of the two-thirds majority and, therefore, was not sent to the Senate.


This action raises issues similar to those raised in several prior suits. However, those lawsuits did not reach the constitutional arguments but were decided on procedural grounds.


Click the link below to view the complaint.






In +US West, Inc. v. Department of Revenue+, the Oregon Tax Court filled a gap in Oregon tax law when it held that, for Oregon corporate excise (income) tax purposes, the taxpayer’s net operating loss (NOL) carryforward could be based only on a former parent corporation’s NOL before the date of the taxpayer’s spinoff from the parent’s affiliated group.


On June 12, 1998, Media One (the parent) completed a transaction in which all of the issued and outstanding shares of US West, Qwest Dex Holdings, and their subsidiaries (collectively referred to as the taxpayer) were distributed to the then-shareholders of the parrent in a so-called "spinoff" transaction. Prior to that date, the taxpayer was included in the parent’s federal and Oregon consolidated returns. Under federal rules, after the spinoff, the parent filed a return for the entire 1998 tax year showing a significant NOL. Under the same rules, the taxpayer was required to file two short-year returns: one for the pre-spin period and another for the post-spin period. On its post-spin federal and Oregon returns, the taxpayer claimed an amount of the parent’s NOL carryforward from the pre-spin period. Although the taxpayer and the Department of Revenue (DOR) agreed that some of the NOL could be used to offset the taxpayer’s net income, they disagreed on the amount and method of calculating the amount claimed.


Basically, the taxpayer argued that the total loss amount for the parent, standing alone, for the full 1998 year should be taken into account, while the DOR contended that the total loss amount should have been multiplied by a fraction based on the pre-spin period.


There is no provision in the Oregon statutes or the DOR’s rules for the particular situation in which a departing member leaves the group in the middle of the tax year of the consolidated group, especially when the remaining corporation or group has a loss for the full year. The federal mid-year departure rule also did not apply because it did not account for Oregon’s systems of unitary taxation and allocation and apportionment. Under the rule, the amount of NOL assigned to any member of a group is determined by the ratio in which that individual member contributed to the overall group "pool" of loss for the loss year (the "contribution to pool" method). The separate loss figures for each member of the consolidated group are determinative in calculating the loss carryover for that member. No combination of results occurs and the only period considered for the departing member is the short period during which the departing member was in the group. Under Oregon law, a consolidated return may only be filed if a unitary relationship exists and if the 80% common equity ownership test is satisfied. In this instance, neither condition was met for the post-spin period, and thus there was no consolidation allowed for the taxpayer’s post-spin return.


The Tax Court determined that the DOR’s ratable allocation method produced a reasonable calculation of the parent’s loss for the period during which it was unitary with the taxpayer. That loss amount, after reduction by the taxpayer’s income for its pre-spin year, had to then be apportioned for Oregon loss carryforward purposes. Therefore, the DOR’s motion for summary judgment was granted, but the case was continued for consideration of any remaining issues, including differences, if any, as to the computation of relevant apportionment factors to be applied.



Laura LeeLun of CCH notes that the Council on State Taxation (COST) has filed an amicus brief with the South Carolina Supreme Court, challenging the plaintiff's standing in Bodman v. South Carolina to object to the state's sales and use tax structure. In Bodman, the plaintiff, a property owner with "young children who will soon be school-aged," alleges that the 85 exemptions in S.C. Code Ann. §§12-36-2120 and 12-36-2110 are "an arbitrary classification of different entities for tax purposes that is unconstitutional." The number of exemptions are unconstitutional, Bodman claims, as South Carolina exempts more sales tax than it collects ($2.7 billion v. $2.19 billion). The suit seeks a declaratory judgment that (1) the 85 whole or partial exemptions in the S.C. Code Ann. §§12-36-2120 and 12-36-2110 are a violation of Equal Protection and (2) the statutes are unconstitutional as special legislation.

COST asserts that Bodman lacks standing as a private citizen to challenge the tax structure as he does not allege direct harm. Alternatively, COST argues that the exemptions targeted in the lawsuit serve a valid public policy in that they alleviate double taxation resulting from sales taxes on business inputs. Taxing such inputs, COST claims, raises production costs and puts businesses within South Carolina at a competitive disadvantage.


Click the links below to view the complaint and COST's amicus brief.










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