Direct any questions on the content of this publication to Roxanne Bland at roxanne.bland@taxadmin.org
We hope you find this new publication informative and helpful. It
was prepared by Roxanne Davis, FTA Attorney. We also welcome short
submissions from our readers on rulings, cases, legislation, and any
other items you believe might be of interest. If you have questions,
or need further information, please call Roxanne at (202)
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Sincerely,
Harley T. Duncan
Executive Director
Apportionment Issues
Alabama Department of Revenue v. U.S. Steel Mining Co., Inc., No. F. 94-184, 5/30/95. This matter involved the method by which the taxpayer should be required to apportion capital to Alabama for franchise tax purposes. The Administrative Law Judge (ALJ) upheld the Department's position that the taxpayer's property and inventory factors should be averaged into a single factor for purposes of determining the taxpayer's franchise tax liability, rather than included together as a single factor, as the taxpayer contended. The ALJ determined that the state's requirement that the property and inventory factors be averaged into a single factor did not significantly distort the amount of capital apportioned to Alabama for franchise tax purposes.
Nexus
Private Letter Ruling #94-8, South Carolina Department of Revenue and Taxation. The taxpayer's business consisted of the leasing of five aircraft to commercial airlines. The Department ruled that the business did not have a substantial nexus with South Carolina for the tax year in question, because the taxpayer's only contact with the state was that three of its leased aircraft landed (out of thousands of landings) in the state during that time. Moreover, the taxpayer had no fixed place of business in South Carolina, did not maintain bank accounts, had no employees, telephone listings or post office boxes in the state. All of the leases were executed out of state, and the taxpayer had no control over where the lessees flew the aircraft. In addition, the planes were not hangared in the state. Therefore, the taxpayer's rental income from the aircraft leases was not subject to South Carolina corporate income tax.
SALES AND USE TAX
Matter of Dean Witter Reynolds, Inc., No. 812502, 7/6/95. As an incentive to maintain operations in New York City, a city agency agreed to confer its city and state sales tax exemptions on the taxpayer in exchange for the taxpayer's continuing presence in New York. In the course of negotiating this agreement (conducted in part by the City's highest officials), the city agency represented to the taxpayer that it had the legal authority and power to make the taxpayer an agent of the agency and could validly confer its exemptions on the taxpayer. Armed with these exemptions, the taxpayer commenced to redesign and reconstruct its New York offices. The State Department of Taxation assessed sales taxes on the materials purchased. The administrative law judge ruled that the taxpayer was not in fact entitled to the sales tax exemptions because the city agency did not have the authority, under state law, to designate the taxpayer as its agent for purposes of the sales tax exemption under the circumstances of this case. Since the taxpayer did not enter into an agreement with the state for a sales tax exemption, the state tax division was not estopped from assessing the unpaid sales taxes. It was of no moment that the taxpayer relied to its detriment on the mistaken representations of the city agency with respect to the state sales tax exemptions, because the taxpayer had not shown that it was entitled to rely on those representations. The state was estopped from assessing the city sales tax, however, because the taxpayer did establish that it relied on the agency's representations in this regard, in that the negotiations involved the highest city officials and the fact that the city reaped the benefits of the taxpayer's continued presence in the city.
Genetelli & Associates, TSB-A95(30)S, New York Commissioner of Taxation and Finance, 7/18/95. The Commissioner ruled that the taxpayer, a government contractor, is not liable for New York sales taxes on the purchase of supplies, equipment and services because the contractor was authorized by an exempt government agency to act as its agent for the purchases. The taxpayer's contract with the agency contained language conferring agency status on the contractor, and the purchase orders used by the taxpayer specified that it was acting as an agent for the exempt organization.
Ruling of the Commissioner, No. PD 95-139, 5/31/95. The Virginia Department of Taxation ruled that a contractor does not have to pay sales tax on purchases of tangible personal property under a contract with the federal government. The contract requires the contractor to provide a total systems integration for the government, which includes planning, furnishing, installation and maintenance. The contractor is also required to provide user technical training and support. Under previous departmental rulings on this issue, if the primary object of the contract is the provision of services, any tangible personal property purchased by the contractor needed to carry out his responsibilities under the agreement is taxable to the contractor. If the primary object of the contract is the sale of tangible personal property, the contractor may purchase needed articles and equipment under the resale certificate exemption and resell these to the government without paying sales taxes. In the present matter, the Department found that the primary object of the contract was the provision of an integrated communications system. Therefore, purchases by the contractor in carrying out its obligations under the contract are exempt from sales taxes. The fact that the agreement requires the contractor to provide some services, such as planning, installation, etc., does not change the result because the goal of the contract is a "tangible computerized communications system."
Ruling of the Commissioner, No. PD 95-97, 5/2/95. The Commissioner of Taxation reversed a use tax assessment against a contractor for purchases made in connection with a services contract with the federal government. The Commissioner found that the contract between the federal government and the service provider designated the provider as a purchasing agent of the federal government, provided for the issuance of tax exemption certificates in lieu of payment of state and other taxes for which the federal government is not liable, provided that title to property purchased by the contractor vested in the government upon payment, and that the funds used for the contractor's purchases were advanced to the contractor by the federal government. This agency relationship between the contractor and the federal government precluded the assessment of use taxes on the contractor's purchases.
Ruling of the Commissioner, No. PD 95-68, 3/30/95. The taxpayer
is in the business of selling computers, peripheral equipment,
computer supplies and related computer service applications, and made
parts price updates available to customers electronically via
telephone lines, or through magnetic tapes. The Commissioner of
Taxation ruled that though charges related to information provided
electronically were not subject to the state's sales tax, charges
related to the transfer of information through the magnetic tapes
were taxable because conveying information through such means
constituted a sale of tangible personal property.
National Data Corporation v. Tracy, No. 93-T-1317 (Ohio BTA, July 7, 1995). The Ohio Board of Tax Appeals ruled that the taxpayer, a Georgia corporation providing services to Ohio banks, is not subject to use tax on its transactions with its Ohio customers because the transactions at issue do not constitute automatic data processing, a taxable service in Ohio. The taxpayer provides credit authorization services to merchants with accounts at certain Ohio banks. The merchant transmits the request for credit authorization to the taxpayers computers. The taxpayer's computers transmit the request to the bank's computers. The bank's computers authorize or deny authorization for credit, which is transmitted back to the taxpayer's computers, which in turn is transmitted to the terminal held by the retail merchant. The Board noted that the taxpayer does not manipulate the data in any way, and in fact merely acts as a relay station between the banks and the retail merchants. Thus, the taxpayer does not engage in data processing as defined by Ohio law, and is therefore not subject to the state's use tax.
Vt. Dept. of Taxes, Formal Ruling 95-04, 4/25/95. The state revenue agency ruled that the clients of a Vermont corporation are subject to the state's income tax because the duties performed by the in-state enterprise for its customers takes those customers out of the protections afforded by P.L. 86 272. The taxpayer duplicates master tapes on behalf of its corporate clients, who own the duplicated tapes. The taxpayer also performs a number of other services for its clients, such as physically storing and shipping the tapes, taking sales orders and filling such orders without client approval, and depositing checks and receipts from credit cards. The Department of Taxes ruled that these activities give the taxpayer's clients sufficient presence in Vermont to establish nexus for income tax purposes, because their presence exceeds that which is immune from taxation under P.L. 86-272. To fall within the protection of P.L. 86-272, the Department said, the taxpayer's activities on behalf of its clients must be limited to accepting orders on behalf of the clients, thereby binding the clients to contracts of sale.
ATTORNEY GENERAL OPINIONS
Opinion of the Attorney General, OAG-95-13, 3/31/95. The Kentucky Attorney General opined that the state's illegal drug tax does not violate the double jeopardy clause of the 5th Amendment of the U.S. Constitution, as interpreted by the U.S. Supreme Court in Montana Department of Revenue v. Kurth Ranch, 511 U.S. ___ (1994). Kentucky's tax, the Attorney General wrote, is distinguishable from the Montana tax at issue in Kurth Ranch because the Montana tax was "absolutely conditioned on the commission of a crime." The Attorney General noted that unlike the Montana tax, the Kentucky tax is imposed on "a distinct and independent sphere of activity" that is not connected in any material way with a criminal prosecution. Specifically, the Attorney General noted that the tax (1) is imposed on the possession of, or commerce in, marijuana and controlled substances; (2) is payable via the purchase of stamps from the Kentucky Revenue Cabinet and affixed to the items sold; (3) the identity of persons purchasing stamps is confidential; (4) a failure by the state to convict persons subject to the tax in a criminal proceeding does not render the assessment invalid; and (5) possession of tax stamps may not be used against a person in a criminal prosecution.
Burlington Northern R.R. v. Bair, No. 93-4029 (8th Cir., 7/6/95). The 8th Circuit ruled that the U.S. Supreme Court's decision in Oregon Department of Revenue v. ACF Industries, 114 S.Ct. 843 (1994), in which the Court ruled that a state's system of property tax exemptions that exempts some commercial and industrial non-railroad property but not railroad property is not properly cognizable under subsection (b)(4) of the Railroad Revitalization and Regulatory Reform Act (49 U.S.C. 11503) (1988) ("4-R Act"), is not applicable to Iowa's property tax scheme. The federal appeals court read the ACF case to stand for the proposition that if a state exempts sufficient property from a property tax, then the tax can no longer be said to be a tax of general application. The 8th Circuit further buttressed this interpretation by noting a statement by the U.S. Supreme Court that " if railroads‹either alone or as part of some isolated and targeted group‹are the only commercial entities subject to an ad valorem property tax....It might be incorrect to say that the state "exempted" the non-taxed property." Iowa repealed its business personal property tax in 1987, but considers all personalty owned by railroads, both tangible and intangible, to constitute real property. Thus, most businesses' personalty in Iowa is exempt from tax, but personalty owned by railroads is not. Thus, the 8th Circuit found, Iowa's property tax system discriminates against railroads, and the claim was properly cognizable under the Act.
Burlington Northern R.R., et. al., v. Wisconsin Department of Revenue, No. 94-3738 (7th Cir., 6/29/95). In a case involving the same issue, the 7th Circuit upheld the lower court's summary judgment in favor of the state that the state's property tax does not discriminate against railroads, even though most non-railroad commercial and industrial property is exempt. The 7th Circuit interpreted the U.S. Supreme Court's holding in ACF to mean that the comparison class, for purposes of determining whether discrimination exists, consists of property that is actually taxed, not property that is subject to tax. Thus, the court rejected the taxpayer's argument that because a large percentage of property is exempt under the state's property tax system, the Wisconsin tax scheme is discriminatory. Acknowledging the narrow prospect of raising a cognizable claim in the case of a nominally general tax which in fact is a tax only on railroads, the court found that such was not the case here, because not all non-railroad property is exempt under Wisconsin's property tax statute.
Property Tax (General)
Hood River County v. Oregon Department of Revenue, No. 3644 (Ore. Tax Ct., 6/19/95). The taxpayer entered into an agricultural lease with an agency of the federal government. In lieu of rent, the taxpayer agreed to keep the land and an adjacent area free from weeds. The County disqualified the leased area from exempt status and assessed property taxes against the taxpayer, pursuant to a state statute that only exempts property owned by a federal wildlife agency leased for agricultural purposes, or other property that is held or occupied primarily for grazing livestock. The federal agency appealed the assessment to the state revenue department, which ruled the statute unconstitutional. The Tax Court affirmed the department's ruling, finding that because the statute exempts lessees of state-owned property used for agricultural purposes from the property tax (where consideration for the leasehold interest is paid other than in cash or a percentage of the crop), but not lessees of federal land used for the same purpose (and subject to the same payment conditions), the statute violates the doctrine of intergovernmental tax immunity and is therefore unconstitutional under the U.S. Supreme Court's decisions in Phillips Chemical Co. v. Dumas School District, 361 U.S. 376 (1961) and Davis v. Michigan Department of Treasury, 489 U.S. 803 (1989).
Gwinnett County, Georgia, v. Gwinnett I Limited Partnership, No. S94G1822 (Ga. Sup. Ct., 6/30/95). The taxpayer purchased property in a foreclosure sale in 1990, and paid the 1989 taxes under protest. The taxpayer then filed a refund claim for almost half of the taxes paid under OCGA §48-5-380, claiming that the 1989 assessment was illegal and erroneous because of improper valuation, lack of uniformity and lack of equalization, which was denied. The state district court granted summary judgment in favor of the county, ruling that the exclusive procedure for addressing the issues raised by the taxpayer appears at OCGA §48-5-311, a route the taxpayer did not take. The appeals court reversed.
The Georgia Supreme Court affirmed the district court's holding,
finding that the procedures outlined under OCGA §§48-5-311
and 48-5-380 were intended by the legislature to serve two distinct
purposes. Section 48-5 311 is intended to provide the most
expeditious resolution of a property tax dispute between the county
and a taxpayer, preferably before the taxes are paid (although a
taxpayer may bring a dispute after the taxes are paid). This
procedure should be used when a property owner is dissatisfied with
an assessment, believes the property is not taxable, or that
uniformity and equalization in the assessment have not been achieved.
Section 48-5-380, on the other hand, is a procedure by which a
taxpayer may contest the factual record on which the assessment is
based, or challenge the legality of the procedures used by the
assessor to value the property after the tax is paid. In the present
case, the court said, the taxpayer's claim was merely based on the
amount of the assessment, not on any inaccuracy contained in the
factual record, nor on the illegality of the assessment procedures.
As such, the claim could not be pursued under §48-5-380.
SALES AND USE TAX
Care Computer Systems, Inc. v. Arizona Department of Revenue, No. 1049 93-S (Ariz. Board of Tax Appeals, Div. II, 4/4/95, released 6/95). The Arizona BTA ruled that the taxpayer, a vendor of computer software and hardware who also provided some training on the use of its computer systems in Arizona, was not liable for the transaction privilege (sales) tax on systems sold in the state because its activities in Arizona did not establish the requisite nexus with the state. The BTA found that the taxpayer's activities, which included (1) a visit to the state once per year by a company salesperson; (2) 21 days of customer training per year by nonresident company personnel; (3) approximately 180 customer transactions over a 4-year period generating almost $400,000 of Arizona income; and (4) title to two personal computers subject to lease-purchase agreements over a 7-month period, did not show intent to establish a business presence in the state sufficient to subject the taxpayer to the state's privilege tax liability.
Walgreen Co. v. Charnes, No. 94CA0402 (Colo. Ct. App., 7/13/95). A Colorado appeals court has ruled that the city of Denver's practice of subjecting advertising inserts purchased from out-of-state publishers to use tax but not taxing purchasers of newspaper classified advertising does not violate the Equal Protection Clause of the U.S. Constitution. Noting that only advertising inserts are subject to tax under the municipal code, the court explained that for equal protection purposes, the class to which the taxpayer belonged is composed of purchasers of preprinted ad inserts in retail sales, and all members of this class are treated equally. Purchasers of classified advertising are not a part of this class because they are not similarly situated. Therefore, no equal protection violation existed with respect to the taxpayer and other purchasers of classified advertising.
Florida Department of Revenue, et. al., v. Share International, Inc., No. 93 4093 (Fla. Dist. Ct., 8/21/95). A Florida district court has affirmed a lower court holding that the taxpayer, a Texas corporation, is not liable for use tax on items sold to Florida residents and delivered by common carrier or general mail delivery. The Department of Revenue based its nexus determination on the fact that the taxpayer attended trade shows in the state for a period of 3 days over a 5-year period, where it sold some of its products. The court rejected the state's argument that the taxpayer purposefully availed itself of the state's economic market, through its continuing pattern of temporary physical presence in the state where it solicited sales of its products. The Department further argued that the U.S. Supreme Court never required a taxpayer's permanent physical presence in a state in order to establish the substantial nexus needed to impose a use tax collection duty. Instead, the revenue agency contended, what is required is that a vendor have employees or agents in a state, have products or make sales in a state and the physical presence be coupled with the intent to have the opportunity for financial gain for the vendor in the taxing state.
Rejecting these arguments, the district court noted that the U.S. Supreme Court's cases on this issue indicate that only an out-of-state seller who maintains a continuing presence in the taxing state through the presence of one or two employees (whose activities may or may not be related to the taxpayer's mail order business) may be subject to use tax collection requirements. The court further observed that since most of the taxpayer's customers who attended the seminars were not Florida residents, the taxpayer could not have exploited the Florida consumer market by creating a customer base in the state by attending the seminars. However, though the court acknowledged that the U.S. Supreme Court never required a permanent physical presence in any of its jurisprudence on this issue, the High Court never determined at what point a taxpayer's activities in a state cross the "bright line" and establish substantial nexus in a taxing state. The court concluded, however, that the taxpayer's presence and activities in the state for a period of three days each year was not enough to establish the substantial nexus which would allow Florida to impose a duty to collect and remit use tax on sales made to Florida residents.
(Note: The district court certified this case to the Florida Supreme Court, asking, "whether, under the facts of this case, 'substantial nexus' within the meaning set forth by the United States Supreme Court in Quill Corporation v. North Dakota, 504 U.S. 298 (1992) and National Bellas Hess, Inc., v. Department of Revenue of Ilinois, 386 U.S. 753 (1967), exists which would permit Florida to require Share to collect sales and use taxes on all goods sold to Florida residents?")
Central Transport v. Tracy, 72 Ohio St. 3d 296 (1995). The Ohio Supreme Court has found that the exercise of rights over property located in the state is a taxable event and provides substantial nexus to Ohio to support the state's taxing authority over the taxpayer for purposes of enforcing the state's use tax. The court observed that the four-prong test of Complete Auto Transit v. Brady, 439 U.S. 274 (1977), requires that the taxed activity have a substantial nexus with the taxing state, but that in making this determination a court need not consider whether property "came to rest" within a particular state. Rather, substantial nexus hinges on whether there occurred a taxable event, such as the use of the property within the state. The taxpayer took title to and had possession of purchased property at a dock facility in Ohio. The taxpayer's employees inspected the property and loaded onto vehicles transporting the property out-of-state. This exercise of control over the property by the taxpayer's employees was enough to create substantial nexus with Ohio, and it was not significant that the property was not stored or even opened in the state prior to being shipped elsewhere.
Enterprise School Photos, Inc. v. Oklahoma Tax Commission, No. 83,216 (Okla. Ct. App., 5/23/95). The Oklahoma Court of Appeals determined that photograph sales to students by a company not related to the school do not qualify for an exemption for sales of property to schools. Because the school was not involved in the accounting and handling of funds received for the photographs, the consumers or users of the photographic services were the students themselves, not the school.
INCOME TAX
TTX (Formerly Trailer Train) Company v. Idaho State Tax Commission, et. al., No. 20525 (Idaho Sup. Ct., 5/11/95). The taxpayer is a Delaware corporation in the business of leasing railroad cars to rail transportation concerns, some of which operate in Idaho. The lessees of the rail cars are charged on a per-day and per-mile basis, without reference to state boundaries. The lessees have total control over the use and the location of the railcars during the term of the lease. The taxpayer's only contact with Idaho is the presence of its rail cars within the state, on which the taxpayer pays property taxes. The state tax commission determined that the taxpayer owed income taxes due to the presence of its property in the state. The taxpayer protested, arguing that the state's income tax statute does not reach it due to its lack of business activity within the state. Affirming the district court's summary judgment in favor of the taxpayer, the state supreme court found that the state's income tax statute only reaches taxpayers that transact or are authorized to transact business in the state, or taxpayers that earn income attributable to the state. Here, the taxpayer neither transacted nor was authorized to transact business in Idaho. Even though the taxpayer has a business situs in Idaho (due to the presence of its leased property) it does not conduct any business or engage in any activity in the state. Further, under Idaho law, rental income derived from physical property located in the state is only taxable if the physical location of the property is known or ascertainable by the taxpayer. Because the physical location of the specific cars leased to the railroads is unknown to the taxpayer, the state could not lawfully tax the taxpayer's income earned from the presence of its leased property in Idaho.
(Note: In a rare move, the Idaho Supreme Court recently granted a rehearing in this case. An opinion is expected in late 1995 or early 1996.)
Simpson Timber Company v. Oregon Department of Revenue, No. 3651 (Ore. Tax Ct., 6/29/95). The taxpayer, a Washington corporation, owned tracts of redwood timber stands in California, which was used in its unitary business operations in Oregon from 1978 to 1988. In 1978, the federal government took over 7,000 acres of the taxpayer's land for the expansion of a national park. The taxpayer was paid a total of $111 million for its property, of which $79 million represented "delay compensation." The taxpayer reported the delay compensation on its Oregon tax returns as nonbusiness income, wholly allocable to Washington. The tax court determined that the $79 million was actually apportionable income, because the source of the delay compensation was the taxpayer's right to receive just compensation for the government's taking, and the land taken was used in the taxpayer's unitary business activities. Thus, though the disposition of the land was involuntary, it nevertheless constituted a disposition of a business asset. Therefore, the delay compensation was business income, and as such, must be apportioned.
Richmond Wholesale Meat Co. v. Franchise Tax Board, No. A064209, (Cal. Ct. App., 7/14/95). The California Court of Appeals found that the taxpayer's dissimilar lines of business were in fact a unitary operation, and that the income earned from its oil and gas interests was business income subject to apportionment. The taxpayer is in the business of food distribution and also owns non-operating interests in working oil and gas wells. The court determined that the disparate lines of business nevertheless constituted a unitary enterprise, because the taxpayer combined all income earned from its food and oil operations in a single corporate account, and the taxpayer's accounting department paid all bills for both operations. Further, the taxpayer used lines of credit secured by its oil and gas operations to provide funds to its food operations during a depressed period. These factors, together with evidence of a centralized executive force and general system of operation, enabled the court to find that the taxpayer's business was unitary. In addition, the income earned from the taxpayer's oil and gas interests constituted business income, rather than nonbusiness income from a passive investment, because both costs and payment for oil products sold were prorated among the interest holders on the basis of their respective shares; the interest holders could receive their share of production in kind; voting power was proportionate to their respective shares; and the parties liabilities were separate rather than joint. These findings led the court of appeals to conclude that the taxpayer's working interests constituted a trade or business, thereby making the income derived from these enterprises business income subject to apportionment.
A.M. Castle & Co. v. Franchise Tax Board, No. A064957 (Calif. Ct. App., 7/25/95). A California appeals court has ruled that the taxpayer, who had several offices in the state, was unitary with its wholly-owned subsidiary and that the state could therefore tax a portion of the subsidiary's income even though the subsidiary did not directly conduct any business in California. The court said that the presence of all of the factors of the "three unities test" (unitary of ownership, use and operation) was not necessary to find a unitary business under state regulations if it could be shown that the activities of the two enterprises are dependent upon, integrated with, or contribute to each other. The court determined that the parent's full ownership of the subsidiary (indicating unity of ownership) and the fact that the executive officers of the parent corporation comprised the entire board of directors for the subsidiary (demonstrating unity of use) was sufficient to find a unitary enterprise even though there was no clear evidence that the parent and subsidiary enjoyed a unity of operations. The presence of two of the three unities, combined with the facts that the parent and subsidiary were in the same line of business, that the parent routinely placed large orders with the subsidiary (as well as tapped into a new market using the sub's existing base), and made loans to the sub enabling it to expand its operations (thereby benefiting both businesses), provided ample evidence that the corporations were unitary.
Central National-Gottsman, Inc. v. New Jersey Department of Taxation, No. 13010-93, (N.J. Tax Court, 3/28/95). A New York S corporation that consisted of an investment division and a forest products division was not subject to New Jersey taxation on the income that it derived from its investment division, because the two divisions were not unitary and the investment division had no independent nexus to New Jersey. Lack of unity between the two divisions was evidenced by the fact that the divisions operated as separate entities; had separate officers, controllers and sales forces; the businesses were completely unrelated; maintenance of separate books, computer systems and bank assets; separate financing; and there were no economies of scale or central management.
NCR Corporation v. New Mexico Department of Taxation and Revenue, No. 13, 035 (N.M. Ct. App., 8/10/95). The state appeals court upheld New Mexico's taxation of a worldwide unitary taxpayer's foreign source income, ruling that the Foreign Commerce Clause of the U.S. Constitution did not preclude the state from taxing the taxpayer's foreign source royalty, interest and dividend income. The court also ruled that the Due Process Clause does not prohibit the state from taxing an apportioned share of the taxpayer's subpart F income. Finally, the Court held that there was no requirement that the state modify its apportionment method in order to reflect certain factors that gave rise to the taxpayer's foreign-source income. The Court said that it was clear that the New Mexico corporate income tax statute only imposes tax on the property, payroll and sales of the taxpayer's unitary business, which did not include the property, payroll and sales of the taxpayer's foreign subsidiaries. The state was therefore taxing only a portion of the income of a domestic corporation, and not the tangible property of a foreign corporation. Because the taxpayer's subsidiaries with Subpart F income were a part of the taxpayer's unitary business and the Internal Revenue Code requires the inclusion of a taxpayer's Subpart F income in gross income, the state's treatment of this income did not violate the U.S. or New Mexico constitution. Finally, the court ruled that the taxpayer failed to establish that the method of apportionment used by the Department was contrary to law or unfairly applied. The court said that the apportionment formula met the tests of fairness spelled out in Container Corp. v. Franchise Tax Board, 462 U.S. 159 (1983) and did not violate the Due Process or Commerce Clause of the federal constitution or the Due Process Clause of the New Mexico Constitution.
In re Monica Fuels, Inc., No. 94-506 (3d Cir., 6/2/95). The 3d Circuit ruled that a New Jersey lien for payment of motor fuel tax had priority over an IRS lien because the state lien was perfected first. Federal tax liens arise when the underlying taxes are assessed, and whether a state lien has priority depends on when it attached to the property so that nothing more had to be done to have a choate lien. Choateness requires that the identity of the lienor, the property subject to the lien and the amount of the lien are established. In the present case, the court ruled that the amount of the state lien was established when it mailed the notice of assessment to the taxpayer, since the New Jersey Division of Taxation has the authority to enforce liens prior to the expiration of the 90-day period for filing an appeal. Therefore, the state lien was choate on the date the taxpayer was notified of the assessment. In addition, the liens had to be summarily enforceable to take priority over later arising federal tax liens. The appeals court rejected the IRS' argument that since the Division's warrant of execution expired before the Division could actually collect the funds, the lien expired, leaving the Division without a means to summarily enforce the lien. The court disagreed, noting that because the warrant of execution does not create the state lien, termination of the warrant does not extinguish the lien. Moreover, the state does not have to take possession of a debtor's property in order to obtain a choate lien. Thus, the state tax liens were entitled to priority over the federal liens.
Burrus, et. ux., v. Oklahoma Tax Commission, and Internal Revenue Service, No. 94-6044 (10th Cir., 7/7/95). The question in this appeal is whether Oklahoma's Homestead laws, which prevent the state from seizing the principle residence of a state tax debtor but does not prevent the federal government from foreclosing on the same property to satisfy federal tax obligations, created an exception to the general rule that a previously filed state tax lien, which is otherwise choate, receives priority over a later federal tax lien. The 10th Circuit answered that the state's homestead proscription does not create such an exception to the general rule of "first in time, first in right." In law, the three requirements for establishing a lien are: (1) the identity of the lienor; (2) the identity property subject to the lien; and (3) the amount of the lien. The 10th Circuit rejected the IRS' argument that there now existed a fourth requirement for choateness‹that the state lien must be capable of actual enforcement prior to the creation of the federal lien. It is not that a lien must be immediately enforceable by summary proceedings at the time of filing, the court said, but rather at the time of enforcement.
Telecommunications and Information Services
Paging Network of Arizona v. Arizona Department of Revenue, No. 1058-93 S (Ariz. BTA, Div. II, 3/22/95). The taxpayer provides one-way paging and voice-mail messaging services to lessees of its pager units, and further offers a pager loss protection program to its customers. During an audit, the department determined that the taxpayer's paging and voice-mail services were subject to the transaction privilege tax as telecommunications services. The department further found that the fees charged by the taxpayer for its pager loss protection program was income, and included these amounts in its assessment. The taxpayer appealed these findings to the BTA, which determined that the relevant statute was intended to cover one-way paging and voice-mail services as well as two-way communication services. Therefore, the taxpayer's services fell within the scope of the state's tax on telecommunications services. Further, the statute does not discriminate against the taxpayer vis-a-vis other types of one-way telecommunications services which are not taxed (e.g., radio and television), because there exists a rational basis for the legislature's determination to divide these service providers into different classes (radio and television businesses do not charge for person-to-person communications). Finally, the taxpayer's fees generated from its pager loss protection program constitute taxable rental income because the fees constitute a portion of the taxpayer's contract revenues for its pager leasing business.
Drug Taxes
Gulledge v. Kansas Department of Revenue, No. 72,315 (Kan. Sup. Ct., 6/2/95). The state's highest court ruled that the Kansas Drug Tax was not a criminal penalty for double jeopardy purposes because the tax is not conditioned on the illegal nature of the sale or possession of marijuana. The court distinguished present case from the U.S. Supreme Court's decision in Kurth Ranch v. Montana Department of Revenue, 114 S.Ct. 1937 (1994), because the assessment of the state's drug tax does not directly rest on criminal conduct. Rather, the tax applies to drug traffickers regardless of whether they have been arrested for criminal conduct or not, and the tax is due upon the acquisition or possession of a specified amount of marijuana. This case has been appealed to the U.S. Supreme Court.
SB 612, 9/15/95. The California legislature passed a measure requiring local jurisdictions to impound revenue from sales taxes that have been challenged in court as unconstitutional. The measure also indemnifies the state from any recovery of an illegal local sales tax. The bill has the support of the State Board of Equalization. Governor Pete Wilson is expected to sign the measure.
Florida has enacted a law that revises sales tax payment formulas for companies that supply consumers with cable television as well as local and/or long-distance telephone services (SB 1554, signed 6/18/95, effective 7/1/95). As of 1/1/96, cable TV and long-distance companies will be able to provide local telephone service. By the same token, local phone companies will be able to offer long-distance and cable television services to its customers. Under the prior law, sales and gross receipts for telecommunications and cable services were taxed differently. The new law provides for a new tax rate to be paid by a company offering both services depending on how the service is structured and billed. Companies that offer both services and bill them separately will be taxed at the traditional rates, as will companies that offer both services for one price but itemize the combined bill. If a bill is not itemized, however, the entire amount billed will be taxed as a telecommunications service at the sales and gross receipts tax rates levied for such services.
Nebraska is phasing out its sales factor throwback rule, beginning in 1995 (Nebraska L.B. 559, Laws 1995 amending Neb. RS §77-2334.14; effective 9/9/95). Under prior law, the throwback rule generally required that receipts from sales to the U.S. Government and from sales of property shipped from within the state to a state in which the taxpayer is not taxable be included in the numerator of the Nebraska sales factor. Under the amended law, for taxable years beginning in 1995, the numerator of the sales factor is to include only two-thirds of the receipts from sales or property shipped out of state, and for taxable years beginning in 1996, the numerator of the sales factor shall include only one-third of such receipts. In post-1996 taxable years, the receipts are to be excluded entirely from the Nebraska sales factor.