Return to State Tax Highlights Table of Contents
Department of Taxation v. National Private Truck Council, No. 960575 (Va. Sup. Ct. 1/10/97). The Virginia Supreme Court struck down a Department regulation that immunizes from income tax under P.L. 86-272 only those transactions where the shipment of goods into the state is accomplished by common carrier. Virginia argued that the solicitation of goods and the delivery of goods are two separate transactions, and P.L. 86-272 confers immunity only on the solicitation of goods. Thus, under the Department's interpretation, any foreign company soliciting and approving orders for merchandise under the conditions set forth in P.L. 86-272, but delivering the goods to Virginia in its own vehicles is subject to income tax on the revenue derived from such sales. The state supreme court noted that P.L. 86-272 confers immunity on a particular kind of income-generating transaction, which includes not only the solicitation and approval of orders, but also the shipping and/or delivery of the ordered goods into the state. Because potentially taxable income is not generated until there has been a successful shipment or delivery of goods into the state, simply exempting solicitation from tax confers no immunity at all. The court further observed that Congress did not limit the term "delivery" to mean common carrier deliveries; thus, Congress must have intended the term to cover deliveries by both common, contract and the taxpayer's own vehicles. Since Congress did not identify any manner of delivery to qualify for immunity, the state cannot restrict congressional intent through regulation.
Kennametal, Inc. v. Commissioner of Revenue, Nos. 170029, 183527 and 186703 (Mass. App. Tax Bd. 11/1/96). The Massachusetts Appellate Tax Board ruled that the taxpayer's activities in the state exceeded the "solicitation" safe harbor afforded by P.L. 86-272, and was therefore subject to the Massachusetts corporate excise tax. The taxpayer is a multinational corporation that develops, manufactures and markets cemented carbides, ceramics and other materials used in cutting, shaping and forming alloys, pure metals, coal, concrete and similar substances. Although licensed to do business in Massachusetts, the taxpayer has not owned or rented office space in the state since 1960. The taxpayer's activities in Massachusetts consisted of sales to in-state customers by the taxpayer's direct sales force, who also provided technical consulting services and training sessions for the taxpayer's clients. Following the U.S. Supreme Court's decision in Wisconsin Department of Revenue v. William Wrigley Jr. Co., 112 S.Ct. 2447 (1992), the Appellate Tax Board (ATB) found that the taxpayer's activities in Massachusetts went beyond the mere solicitation protected by P.L. 86-272. Specifically, the ATB noted that the consulting and training sessions provided by the taxpayer's sales force are activities independent of solicitation.
Financial Institutions
Bell Federal Savings and Loan Assn. v. Wagner, No. 1-95-0853 (Ill. App. Ct. 12/13/96). The Illinois Court of Appeals ruled that the taxpayer was subject to state income tax on interest earned on a "daily investment deposit" (DID) account with the Federal Home Loan Bank Board. Under Illinois law, interest income earned from federal obligations is exempt from tax. The Federal Home Loan Bank Board Act, creating the FHLB, specifically exempts from tax the interest on notes, bonds and "other such obligations issued by the Bank." The court ruled that the taxpayer's account with the FHLB was not like a note or bond, and did not have the characteristics of a debt instrument, all of which are explicitly exempted from tax under the FHLB Act. The DID account is not a debt instrument, because by definition, such instruments include a promise to pay specified amounts at specified times. By contrast, the funds in a DID account, though interest bearing, are available to the taxpayer at all times. Indeed, the court noted, the taxpayer's account was quite similar to a commercial checking account. Therefore, the taxpayer's account with the FHLB was not a debt instrument, and thus subject to state income tax.
Personal Income Tax -- Equal Protection
Peden v. Kansas, No. 75,205 (Kans. Sup. Ct. 12/20/96). The Kansas Supreme Court ruled that the state's income tax system, which imposes a higher rate of tax on single taxpayers than the highest tax rate imposed on married couples filing jointly, does not violate the Equal Protection Clause of the federal constitution. The court found that even though the statute treats "arguably indistinguishable" classes of taxpayers differently (i.e., married and single taxpayers), under the rational basis standard of analysis for Equal Protection Clause purposes, the statute nevertheless bears a rational relationship to a legitimate state objective. The court identified four such objectives: (1) to encourage marriage; (2) to alleviate the increased financial burden placed on married couples; (3) to alleviate the "marriage penalty" under federal income tax law; and (4) to encourage joint filing of returns. Moreover, the court pointed out, it is irrelevant whether these objectives were stated in the income tax act's legislative history or whether any of the motives enumerated compelled the legislature to act. All that is necessary is that the court perceive one or more of the interests that could rationally justify the disparate tax rates. Since the court identified four such reasons, the tax system was permitted to stand.
Native Americans
Esquiro v. Department of Revenue, No. 3954 (Ore. Tax Ct. 1/28/97). The Oregon Tax Court ruled that the taxpayer, a member of a federally recognized native tribe in Alaska, but living on another tribe's reservation in Oregon, was subject to tax on income earned in Alaska. The court rejected the taxpayer's argument that he was not domiciled in Oregon because, as a reservation resident, he lived in a separate sovereign state. Aside from constituting an improper enlargement of Native American sovereignty, the court further noted that reservation residents are not wholly removed from the jurisdiction of state and federal governments. Oregon law exempts income earned within the boundaries of an active reservation by a member of a federally recognized Indian tribe, but the court ruled that the law does not apply in the instant dispute because the taxpayer earned the income in Alaska, not Oregon. The court further rejected the taxpayer's argument that state income tax on a resident non-tribal member infringes on tribal rights because reservation residents are subject to the tribe's right of self-governance. The court concluded that taxing the income of a nonmember Indian earned off the reservation does not infringe on any rights to tribal self-governance, as the taxpayer's assertion is not based on any existing treaty.
Tax Credits
Ardire v. Tracy, No. 95-1535 (Ohio Sup. Ct. 2/12/97). The Ohio Supreme Court affirmed the ruling of the Tax Commissioner and the Board of Tax Appeals that the taxpayers were not entitled to an income tax credit for the single business tax (SBT) paid to Michigan, because the SBT is not an income tax. The taxpayers received income from their interests in an S corporation, which paid income tax to California and the single business tax to Michigan. On their return, the taxpayers claimed a credit against their Ohio tax liability for the single business tax the corporation paid to Michigan. The Commissioner and the Ohio BTA ruled that the taxpayers were not entitled to a credit for the Michigan tax paid because the SBT is not an income tax. Neither is the SBT a tax measured by income, the court said. Although the SBT starts with a corporation's federal taxable income, the extensive adjustments required to compute the SBT (such as depreciation, salary, rent and other expenses) do not render the SBT a tax measured by net income.
Unitary Business -- Apportionment
Hercules, Inc. v. Commissioner of Revenue, Nos. 6532 and 6533 (Minn. Tax Ct. 1/27/97). The Minnesota Tax Court ruled that the gain realized from the taxpayer's sale of stock was apportionable business income because the taxpayer's holdings served an operational function in the taxpayer's line of business. The taxpayer is a manufacturer and merchant of a broad line of natural and synthetic products and materials. To assure a supply of resin for its manufacturing operations, the taxpayer formed a joint venture with another resin manufacturer, each holding a 50 percent share of the resulting enterprise. The taxpayer contributed its entire resin manufacturing division (including all equipment and personnel) to the new venture. The taxpayer also furnished the new corporation with financial, legal, medical and management expertise as well as a broad range of other services, and a number of the taxpayer's board of directors also served as directors of the joint venture. The taxpayer sold its interest in the joint venture to avoid a hostile takeover, realizing a gain of over $1 billion.
The Tax Commissioner determined that the taxpayer was engaged in a unitary enterprise with all of its subsidiaries, and concluded that the gain realized on the sale of stock in the taxpayer's joint venture was apportionable to Minnesota. The Tax Court agreed with the Commissioner, finding that the taxpayer's joint venture holdings furthered the taxpayer's trade or business, and that including the gain realized upon sale in the taxpayer's income apportionable to Minnesota did not contravene the Commerce or Due Process Clauses of the federal constitution. The court noted that the taxpayer relied on its interest in the joint venture to protect itself from the vagaries of the petrochemical market, and further noted that there was no evidence that the taxpayer segregated neither dividend income received from the joint venture nor the gain realized from the stock sale from its operating income. The court distinguished the U.S. Supreme Court's ruling in Allied Signal, Inc. v. Director, Division of Taxation, 504 U.S. 768 (1992), noting that in the instant case not only did there exist a unitary relationship between the taxpayer and the joint venture, but also that the taxpayer's holdings in the joint venture served an operational function in the taxpayer's business.
Shaklee Corp. v. Illinois Department of Revenue, No. 93 L 50530 (Ill. Cir. Ct. 9/26/96). The Illinois Circuit Court ruled that the taxpayer's gain from the sale of stock in a subsidiary was apportionable to the Illinois income for the unitary group. The taxpayer, a Delaware corporation is a manufacturer, wholesaler and distributor of consumer products doing business worldwide, including Illinois. Two of the taxpayer's wholly owned subsidiaries, both holding companies, sold 100 percent of the stock in the taxpayer's Japanese subsidiary for a gain of over $58 million. The sale took place in Japan. The taxpayer did not report the gain on its subsidiaries' returns, contending that they were not part of the taxpayer's unitary business group. The court determined that the taxpayer and its holding company subsidiaries were in fact unitary under Illinois law, rejecting the taxpayer's contention that because the taxpayer's subsidiaries are holding companies, they are not in the same line of business as the taxpayer. The court noted that the subsidiaries were functionally integrated with the taxpayer, were centrally managed by the taxpayer, and were certainly related to the taxpayer through ownership.
The court then turned to the question of whether the gain on the sale of stock constituted business or nonbusiness income under the Uniform Division of Income for Tax Purposes Act (UDITPA) definition of business income. The taxpayer argued that UDITPA only references the "transactional" test. Since the stock sale was not connected to the taxpayer's Illinois operations, the gain is not apportionable to Illinois. The state argued that UDITPA contains both the transactional test and the "functional" test, which includes income from tangible and intangible property if the acquisition, management and disposition of the property constitute integral parts of the taxpayer's trade or business. Under the functional test, the taxpayer's gain is clearly apportionable to Illinois. Looking to its own case law, the court determined that the functional test is clearly extant in Illinois, and that under that test, the gain was clearly business income, and thus apportionable to Illinois.
Texaco-Cities Service Pipeline Company, v. McGaw, No. 1-95-1022 (Ill. Ct. App. 1/17/97). The Illinois Court of Appeals ruled that the gain realized by the taxpayer from the sale of a pipeline constituted business income and is therefore apportionable to Illinois. The taxpayer is a nonresident corporation that owned and operated a pipeline, which ran through various states, including Illinois. Crude oil and other petroleum products were transported through the pipeline, which served various oil refineries. During the period at issue, the taxpayer sold major portions of the pipeline, including those that served refineries at two locations in Illinois. The sale accounted for almost 90 percent of the taxpayer's pipeline holdings. On its return, the taxpayer reported the sale of the pipeline and associated real estate as nonbusiness income. The taxpayer apportioned its business income using the one-factor formula permitted under the Illinois income tax statute for pipeline transport activity.
The taxpayer argued that the proceeds from the sale of its pipeline constituted nonbusiness income because it is not in the business of selling pipeline; rather it is in the business of transporting by pipeline. Thus, the taxpayer concluded, the income from its extraordinary transaction is nonbusiness income. The court disagreed. Illinois law, it said, adopts the language of UDITPA, which includes as business income all income from tangible and intangible property if the acquisition, management and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations. This language encompasses both the transactional and functional tests. The taxpayer's reading of the statute encompasses only the transactional test. The functional test requires an inquiry into whether the property was used in the taxpayer's regular trade or business operations. Because the taxpayer used the pipeline in its regular trade or business, the income generated from the sale of the pipeline constituted business income.
Disposing of the remaining issues, the court ruled that the appropriate formula for apportioning the income from the pipeline sale is the one-factor formula adopted from transportation companies. The taxpayer argued that it should be permitted to use the standard three-factor formula, because the sale of the pipeline did not generate income from the taxpayer's transportation activities. The court disagreed with this contention also, finding that the legislative history of the state's income tax statute focuses on the taxpayer, not the type of income-producing activity, in determining which apportionment formula is appropriate. Because the taxpayer is engaged in the transportation industry, the one-factor apportionment formula is appropriate, even though the income to be apportioned was not earned through its normal business activities.
Combined Reporting
Leathers v. Jacuzzi, No. 96-136 (Ark. Sup. Ct. 12/16/96). The Arkansas Supreme Court overturned the holding of the chancery court permitting the taxpayer to file a combined income tax return when the taxpayer had not sought permission to do so from the Department of Revenue. The taxpayer filed a combined return with its unitary subsidiary, a domestic international sales corporation (DISC). The taxpayer and subsidiary shared management, personnel facilities, and accounting operations. Arkansas law does not completely prohibit the filing of combined returns, but it is the Department's policy not to accept such returns unless the taxpayer has received prior permission from the Tax Commissioner. The state supreme court ruled that the commissioner's power to permit or require combined returns is discretionary under state law, and even if a combined return is required to achieve a clear reflection of a taxpayer's income and expenses, the taxpayer must still make application to the Tax Commissioner before proceeding to file a combined return.
Trusts and Estates
District of Columbia v. Chase Manhattan Bank, No. 95-TX-1599 (D.C. Ct. App. 1/30/97). The D.C. Court of Appeals ruled that the Due Process Clause does not prohibit the District of Columbia from imposing a tax on the annual net income of a testamentary trust created by the will of a deceased District of Columbia domiciliary, even though the trustee, trust assets and all of the beneficiaries are located outside the District. The trust was created at the death of the decedent, a District of Columbia resident, in 1934. The trust document directs the trustees to invest the trust assets and accumulate all income not needed to pay annuities to the trust's beneficiaries or to compensate the trustees. The trustees were only permitted to invest in stocks and bonds of a certain character that were permissible under the laws of the District of Columbia. The D.C. courts have exercised supervisory jurisdiction over the trust since its inception in 1934. In addition to annual accountings the trustees were required to file, the courts also adjudicated any and all disputes relating to the trust. In 1990, the D.C. Superior Court waived the requirement that the trustee file annual accountings, and further disavowed any "continuing jurisdiction" over the trust. The trust filed a refund for taxes paid from 1981 through 1987, alleging that because neither the trustee, trust assets nor trust beneficiaries are located in the District, due process prohibits the District from levying tax on the trust's net income. The trial court granted summary judgment in favor of the trust, and ordered refunds.
The Court of Appeals, referring to the U.S. Supreme Court's decision in Quill v. North Dakota, 504 U.S. 298 (1992), noted that due process jurisdiction does not require a taxpayer's physical presence. The court also pointed out that a state may tax a resident's income, regardless of the source. Indeed, the court said, the concept of residency, if established with reference to minimum contacts, carries significant legal weight. The critical question is whether the relationship between the District of Columbia and the testamentary trust is sufficiently close to justify the District's classification as a resident for the purpose of taxation. The Court of Appeals reached the conclusion that the trust was a resident of the District on the basis that the trust, probated in the District, has a relationship to the District that is distinct from the relationship between the trustees, the trust assets and the District. It is the District of Columbia, the court noted, that has the power to adjudicate disputes involving the trust, and to order accountings to protect the trust corpus and beneficiaries. These powers, according to the court, reflect the District's justifiable jurisdiction over the trust itself, and to treat the trust as a "District of Columbia resident" for income tax purposes.
Equipment Leasing
Latin Express Service, Inc. v. Florida, No. 95-510 (Fla. Ct. App. 2/4/97). A Florida appeals court ruled that a taxpayer was liable for sales tax on nine buses leased to a related company. The taxpayer purchased the buses in 1990 and 1991, registering them in North Carolina. It then leased the vehicles to a related company. The court noted that Florida law requires any person or corporation with offices in the state making a lease of tangible personal property for use in Florida, to register as a dealer with the state, and further requires them to collect the appropriate amount of sales tax on the lease. Because the taxpayer has a presence in Florida, and its lessee made use of the buses in the state (as well as other states), the taxpayer was required to register as a dealer in Florida before entering into the leases, and to collect and remit sales tax. The court noted that had the taxpayer and its lessee registered as dealers with the Department of Revenue, they could have been eligible for a proration of the tax based on Florida mileage versus total mileage, since the lessee is a licensed common carrier in interstate commerce.
Country Clubs
Old Warson Country Club v. Director of Revenue, No. 78684 (Mo. Sup. Ct. 11/19/96). The Missouri Supreme Court ruled that assessments used by a country club solely for capital improvement, made against members of the club who obtain something other than the right to enjoy the use of the club's facilities, are not subject to sales tax. The taxpayer has six classes of club members; only four membership classes were subject to the assessment. Three of the classes, upon acceptance in the club, are issued certificates representing the members' equity in the club. These classes are also entitled to vote on all matters submitted to the membership, and may hold any official position in the club. The fourth class of members did not have equity interests in the club, voting rights or the ability to hold any club office. For all classes, up to one-third of the assessments made were refundable. The Director of Revenue determined that the club was liable for sales tax on the assessments paid by its members. The state supreme court disagreed, noting that in order for the sales tax to apply, the members' fees must be paid to or in a place of amusement, and the club must be a seller engaged in the business of rendering a taxable service at retail. For three of the membership classes, the court determined that because the assessments were used to make capital improvements to the club, they were in reality an equity transaction which enhanced the value of the members' capital in the club and membership assets, separate and apart from any payment of operating expenses related to the receipt of any service. The fourth class of membership, the court noted, lacked sufficient indicia of ownership to characterize the capital assessments paid as equity contributions. However, to the extent of a member's right to a refund, the assessment more resembles a loan. Thus, this class of member stands in the relationship of a creditor to the club, and the assessment is not taxable. The nonrefundable portion of the assessment, the court concluded, is a payment for the continued right to use the club's facilities, and is taxable as a fee for service.
Transaction Privilege Tax -- Federal Contractors -- Native Americans
Cannon Structures, Inc. v. Department of Revenue, No. 961-92-S (Ariz. Bd. of Tax App. 11/5/96). The Arizona Board of Tax Appeals ruled that the taxpayer, a non-Indian construction firm performing work on reservation lands under contract with the federal Bureau of Reclamation (BOR), is liable for the state's transaction privilege tax on receipts attributable to the work performed under the federal contract. The taxpayer was awarded a contract by the BOR to lay an underground pipeline to carry water to the Native Americans residing on the reservation and to other, non-Indian, nonreservation communities in fulfillment of the Southern Arizona Water Rights Settlement Act of 1982 (SAWRSA). The taxpayer argued that the transaction privilege tax is preempted by SAWRSA, because the state's interest in imposing the tax is clearly outweighed by the federal interest in providing water to the Native American and nonnative citizenry, and that imposition of the tax would result in a loss of funds earmarked by Congress for the pipeline. The BTA disagreed, finding that the taxpayer presented no evidence that the state tax would undermine any federal interests, or diminish the pool of funds available for the pipeline's construction. The BTA noted that the preemption argument is inapplicable to this case because the taxpayer's contract is with the federal government, not the tribe. Further, Congress' objectives in enacting SAWRSA not only included the provision of water to the Tribe, but also to serve the interests of the non-Indian community who would also be served by the pipeline, including the City of Tuscon. Moreover, the taxpayer presented no evidence that the transaction privilege tax adversely affected the tribe by reducing the amount of funds available for the pipeline project. Thus, Arizona could legitimately impose its tax on the activities at issue.
Telecommunications
Administrative Ruling, No. 96-05-28-002, Oklahoma Tax Commission (5/28/96). The Commission ruled that the taxpayer, a long-distance telephone company, was liable for sales and use tax on interstate telephone services provided to Oklahoma customers. Tax was due on calls made or received by Oklahoma customers and billed to an Oklahoma address. The taxable event is the billing of the Oklahoma customer. The sales and use tax scheme passes constitutional muster under Complete Auto Transit v. Brady, 430 U.S. 274 (1977). Substantial nexus with Oklahoma exists because the service was billed to customers in Oklahoma; thus, the only long-distance calls subject to tax are those originating or terminating in Oklahoma and billed to an Oklahoma address. The tax is fairly apportioned because it is internally and externally consistent, because if every state had the same system, no interstate call would be subject to more than one state's tax. The tax is externally consistent because the portion of the revenue from interstate telephony subject to tax reasonably reflects the Oklahoma component of the call.
Internet
Revenue Ruling 96-003, Alabama Department of Revenue (11/22/96). The Department of Revenue ruled that monthly flat rates and hourly charge plans offered by an Internet service provider to its customers are subject to the state's utility gross receipts tax, because the taxpayer's activities constitute the operation or provision of a taxable computer exchange service. However, charges for the use of a database, provided by the taxpayer to its customer as part of its World Wide Web (WWW) services, are not subject to tax. Providing access to the Internet, the Department says, is a computer exchange service subject to tax as a utility service under Alabama law. However, WWW services or training is not subject to tax because the storage of data is specially excluded from the definition of a computer exchange service; and training and consulting serves are not included within the statutory definition of "utility services." Charges for telephone service, whether provided by a long-distance carrier or by a local telephone exchange, are subject to the utility gross receipts tax, and are the responsibility of the telephone company to collect and remit.
Nexus -- Trade Shows
Technical Service Bulletin, No. A-96(62)S, New York State Department of Taxation and Finance (10/1/96). The Department advised that the taxpayer was not required to register as a New York vendor or to collect sales tax on sales made to New York customers because insufficient nexus exists between the taxpayer and New York to support the tax collection duty. The taxpayer manufactures precision liquid dispensing equipment. It has no offices, property, or permanent employees in New York; neither does it solicit business in the state. New York purchases of the taxpayer's product are shipped into the state via U.S. mail or common carrier. The taxpayer's employees travel to New York for 2 or 3 days per year to attend a trade show, at which the taxpayer's product is demonstrated, but not sold or offered for sale. The taxpayer also does not send personnel into the state to perform maintenance work for its New York customers. Based on these facts, the Department ruled that under Matter of Orvis v. Tax Appeals Tribunal, the taxpayer is not required to register as a vendor for sales tax purposes (nor collect the sales tax on New York sales) because it does not have demonstrably more than the "slightest presence" in the state. Therefore, insufficient nexus exists between the taxpayer and New York to impose sales tax on the taxpayer's New York sales
Nexus -- Employee Visits
Philip Crosby Associates, Inc. v. Department of Revenue, No. U. 96-143 (Admin. Law Div. 12/4/96). An administrative law judge (ALJ) determined that the taxpayer, a Florida corporation, was properly required to collect use tax on tangible personal property sold to its Alabama customers. The taxpayer operates a management consulting business, and solicits Alabama customers through telemarketing. If an Alabama business expressed interest, the taxpayer sent an employee into the state to make a presentation. Should the business become a client, the taxpayer conducted training seminars outside Alabama, after which the client's employees returned to Alabama to train the customer's other employees. In one instance, however, the taxpayer sent employees into the state to conduct a seminar for one of their larger clients. Customers were required to purchase the taxpayer's books and tapes on management training. The taxpayer followed up training sessions with in-state consulting and business review services. In finding that the taxpayer was liable to collect use tax on sales to Alabama customers, the ALJ noted that during the audit period the taxpayer's employees made at least 69 trips into Alabama, for durations of 1 to 5 days. These activities, the ALJ pointed out, enabled the taxpayer to establish and maintain its Alabama market for its products as well as its consulting services. Even though some of the employee's trips into the state were not directly related to the tangible personal property being taxed, the ALJ noted that transactional nexus between the taxpayer's activities and the property being taxed need not exist.
Native Americans
Matter of Kaul, No. 74,528 (Kans. Sup. Ct., 3/7/97). The Kansas Supreme Court ruled that land situated within the boundaries of the Potowatomi Indian Reservation and owned in fee patent by an enrolled member of the tribe is not subject to ad valorem property taxes under §1 of the 1861 Act for Admission of Kansas Into the Union. The Kansas Board of Tax Appeals ruled that under the 1861 Act, Kansas has no jurisdiction to tax the property, and ordered that the property be removed from the tax rolls. Though the U.S. Supreme Court ruled that unrestricted alienable lands were subject to state and local property taxes, the Board ruled that the 1861 Act admitting Kansas into the Union prohibited such taxation because the Act specifically exempts Indian lands from being part of the state subject to taxation. The state supreme court agreed, finding that the 1861 Act does not support the county's position that all Indian lands held in fee simple by an Indian are included within the state's boundaries and subject to ad valorem taxation. The plain meaning of the Act, the court found, appears to state that all Indian land was to be excluded from the state and not subject to tax unless it was specifically included by treaty or an act of Congress. Even though the Treaty between the federal government and the Potowatomi tribe allows the President to grant fee patents to those tribal members deemed competent, the county did not show that this was the source of the taxpayer's patent. Therefore, the court remanded that case to the Board of Tax Appeals for a determination of the propriety of state ad valorem taxation of the taxpayer's land in light of the treaties between the Potowatomi tribe and the federal government.
United States v. Michigan, Nos. 1574 and 1575 (6th Cir. 1/22/97). The 6th Circuit ruled that Michigan may not impose ad valorem property taxes on lands owned by the Saginaw Chippewa Indian tribe and its members. In the 19th century, the federal government executed two treaties granting public lands to three Chippewa tribes, including the Saginaw tribe. Under these same treaties, the government allotted tracts of land to individual tribal members. Since the treaties were made, the chain of owners for the individually allotted tracts included at least one non-Indian owner. During the times the property was owned by non-Indians, Michigan and its local governments assessed ad valorem taxes on the land. Property taxes continued to be assessed after the parcels were repurchased by both individual Indians and the tribe. The federal government and the tribe sued the state and local governments, contending that the land is "Indian country." The district court granted summary judgment to the state, finding that when the land was conveyed 100 years ago, Congress intended to give the state authority to tax the land.
The 6th Circuit disagreed. Under County of Yakima v. Confederated Tribes and Bands of the Yakima Indian Nation, 502 U.S. 251 (1992), state and local taxation of Indian lands is permitted only when Congress has made it unmistakably clear that states enjoy the authority to tax. The state's reliance on the General Allotment Act of 1887 (and its subsequent amendment in 1906) was misplaced. While the Acts render Indian land alienable, alienability alone does not imply that the lands are taxable by the state. In addition, there was no indication that the land involved in this dispute was conveyed under the 1887 Act. Whether the land at issue is taxable depends on the language of the 100-year-old treaty conveying the land to the tribe‹if the treaty language contains language and expressly grants the state the power to levy property tax, it may do so.
FCC Broadcast License
Ohio Cellular RSA Limited Partnership, No. 23294 (W.Va. Sup. Ct. 11/18/96). The West Virginia Supreme Court ruled that the taxpayer was not subject to West Virginia property tax on the value of the FCC license authorizing the taxpayer to provide cellular telephone service because the license did not come within the statutory definition of personal property. Although the term "other intangible property" is included in the definition of personal property, proper statutory construction restricts the use of a general term following a list of specific items to other items of the same nature as those specified. Thus, the right to use the electromagnetic spectrum, while not without value, is not similar to "notes, bonds, and account receivable, or stocks," all of which represent documentary evidence of value or indebtedness. The license also cannot be considered "chattel, real," defined as an interest in real property less than freehold, because it does not concern real property. Since the statute is unclear as to whether a broadcast license is taxable and any ambiguity must be construed in favor of the taxpayer, the definition of personal property cannot be said to include the taxpayer's FCC license.
4-R Act
Duluth, Missabe & Iron Range Railway Company, et al., v. Wisconsin Department of Revenue, No. 95-3619 (7th Cir. 11/13/96). The 7th Circuit rejected the taxpayers' claim that the state violated the anti-discrimination provisions of the 4-R Act by undervaluing nonrailroad personal property vis-à-vis railroad personal property for tax purposes, despite the expert testimony of an economist who testified that U.S. government statistics showed that nonrailroad property was undervalued. The taxpayers are railroad companies doing business in Wisconsin, who believed that the state assessed their real and personal property at fair market value, but assessed the personal property of other commercial and industrial entities at below fair market value. Filing suit in federal district court, the taxpayers relied on the expert testimony of an economist, who asserted that data obtained from the Bureau of Economic Analysis (BEA) showed that non-railroad personalty in Wisconsin was assessed at no more than three-fourths of its full market value. The BEA statistics were not broken down by state, but by various industries. Wisconsin responded by showing that the state differed considerably from national norms, and the BEA statistics could not be extrapolated to Wisconsin. Indeed, the state showed that if the economist's method was applied to Wisconsin manufacturing property, the state assessed such property at more than twice its market value. The district court ruled in favor of the state, expressing some doubt that the data obtained from the BEA could be applied to Wisconsin. The 7th Circuit agreed with the district court, rejecting the railroads' argument that the lower court improperly discounted the expert testimony. Rather, the Court of Appeals said, the district court merely found that the economist's methodology was questionable as it led to the conclusion that the railroad's personalty was underassessed. The BEA data itself was not assailed, the 7th Circuit pointed out, only its application to Wisconsin. Concluding the lower court's findings were firmly rooted in the evidence, the Court of Appeals upheld the district court's decision.
Native Americans -- Motor Vehicle Excise Tax -- Motor Vehicle Registration Fee
Cheyenne River Sioux Tribe v. South Dakota, No. 95-2529 (8th Cir. 1/17/97). The 8th Circuit ruled that tribal members are not subject to South Dakota's motor vehicle excise tax, but are subject to the state's annual motor vehicle registration fee. South Dakota imposes an excise tax on the value of any motor vehicle purchased for use in the state. The tax is collected when the vehicle is registered. South Dakota also imposes a separate annual registration fee based on the weight of noncommercial vehicles. The taxpayers contested the levies, arguing that tribal members living on reservations are immune from both the tax and the registration fee. The Court of Appeals determined that the excise tax essentially operates as a tax on the ownership of a vehicle, and is therefore the kind of on-reservation activity that a state is not permitted to tax without express congressional authorization. The registration fee, however, is a nondiscriminatory fee for the registration of a vehicle in the state. The fee does not resemble a property tax, the court said, because it is not based on the value of a vehicle, and because the fees are dedicated to highway purposes.
Milk Tax
Cumberland Farms Inc. v. Mahany, No. 95-277-P-C (Dist. Ct. Maine 10/24/96). A federal district court upheld Maine's milk handling tax imposed on all milk consumed in the state against a Commerce Clause challenge, as well as a subsidy to Maine dairy farmers paid out of the state's general fund. In doing so, the federal court refused to construe the statutes together as an attempt by the Maine Legislature to reinstate a previously invalidated tax-and-rebate scheme struck down by the U.S. Supreme Court in West Lynn Creamery v. Healy by separating the tax and appropriations functions and filtering the revenues collected through the state's general fund. The court ruled that the milk handling tax was valid for Commerce Clause purposes, because the tax was assessed evenhandedly on all packaged milk for sale in Maine. The law also stated a legitimate purpose‹to reinstate state tax revenues. The court also found that the milk handling tax was not shown to have a discriminatory or burdensome effect on out-of-state competitors; any incidental burden the tax placed on interstate milk sales was outweighed by the state's legitimate interest in raising general revenue through its powers of taxation. Finally, because the subsidies were issued out of the state's general fund, rather than a dedicated fund, they were valid under the Commerce Clause.
Retaliatory Tax -- Refunds -- Statutes of Limitation
American States Insurance Co., et al., v. Department of Treasury, No. 181244 (Mich. Ct. App. 12/20/96). The Michigan Court of Appeals upheld the state's 90-day statute of limitations for filing refund claims for unconstitutionally collected taxes against a Due Process and Equal Protection challenge. The taxpayers are 35 insurance companies who made retaliatory tax payments between 1990 and 1992. In late 1992, the Michigan courts determined that the retaliatory tax was unconstitutional. The taxpayers filed refund claims for the taxes paid, which were denied by the Department as untimely, because the 90-day statute of limitations had expired. Rejecting the taxpayers' argument that the limitations period was "too short," the court noted that the Due Process Clause permits states to place reasonable restraints on a taxpayer's post-deprivation remedy. The court rejected the taxpayers' Equal Protection challenge on the grounds that the short statute of limitations is rationally related to a legitimate state purpose‹to limit the effect of the potentially negative impact preemption claims can have on the state treasury.
Waste Disposal Fees
Sanifill, Inc. v. Kandiyohi County, No. C8-96-1475 (Minn. Ct. App. 2/11/97). The Minnesota Court of Appeals invalidated Kandiyohi County's proposed waste disposal fee structure, which would subsidize county landfill operations with a service fee on all waste generated within the county as violating the Commerce Clause of the federal constitution. The taxpayer, engaged in the business of waste hauling and disposal, bought three waste-hauling companies in the county. The taxpayer also owns landfills in Minnesota and Iowa. The taxpayer notified the county that it would begin shipping wastes to landfills outside the county if the county's tipping fee were not lowered. In response, the county proposed to lower the tipping fee by half, and implement a service fee for waste generated in the county, regardless of its destination. The combination of the lowered tipping fee and service fee equaled the tipping fee objected to by the taxpayer. The taxpayer brought suit, arguing that the fee structure violates the Commerce Clause of the U.S. Constitution. The Court of Appeals took note that the fee structure is not discriminatory on its face. However, the fee structure is discriminatory in its effect. The court observed that the combination service fee/facility fee nets the county the same amount previously raised through the tipping fee alone, and once the waste has been collected by the hauler, the lower tip fee at the county's landfill, made possible by a subsidy from the service fee, renders other landfills uncompetitive. The court rejected the county's arguments that the service/facility fees serve legitimate environmental goals, and that there did not exist other, nondiscriminatory means to achieve the same results.
Drug Tax
Wisconsin v. Hall, No. 94-2848-CR (Wisc. Sup. Ct. 1/24/97). The Wisconsin Supreme Court ruled the state's drug tax stamp statute unconstitutional because it violates the privilege against self-incrimination in failing to protect against the derivative use, in a criminal proceeding, of the information it compels. The state's drug tax statute requires traffickers to purchase and affix tax stamps to all illegal drugs in possession. Failure to comply with the statute results in incarceration and/or a fine. The defendant/taxpayer in this case was convicted on two counts of delivering cocaine base and two counts of failing to comply with the state's drug tax stamp law. The Wisconsin Supreme Court reversed the stamp tax convictions, finding that although the statute prohibits the direct use of information that would support a conviction, the statute does not protect against the derivative use of such information. Explaining, the supreme court noted that the statute's purchase-by-mail provision allows dealers to reveal their names only to the Department of Revenue. The statute further prohibits the Department from revealing information obtained in administering the tax. By itself, the court said, the purchase requirement passes constitutional muster. However, this provision does not stand alone; the stamp statute further requires a dealer to affix and display the stamps on illegal drugs. The court concluded that the act of affixing and displaying the stamp is an incriminating testimonial communication that the dealer knowingly and intentionally possesses a particular quantity of illegal drugs. The court further noted that although the statute expressly prohibits the Department from revealing information obtained in administering the tax, it provides no penalty for doing so. Because the statute does not completely protect the right against self-incrimination, it must fail.
Single Business Tax
Magnatek Controls, Inc. v. Department of Treasury, No. 18112 (Mich. Ct. App. 2/7/97). The Michigan Court of Appeals ruled that Michigan could not assess its single business tax on sales made outside Michigan where the taxpayer is exposed, but not necessarily taxed, on such sales. The taxpayer has offices and a factory located in Michigan, at which a general sales manager and four product line managers are employed. The taxpayer also employs independent contractors to promote the taxpayer's products in states other than Michigan. The Michigan employees regularly traveled to other states to meet with the independent representatives, conduct seminars on the taxpayer's product, and to attend trade shows. The Department of Treasury assessed the single business tax on sales made to other states, arguing that those states could not have legitimately taxed the sales in question. The trial court ruled, and the Court of Appeals agreed, that the sales at issue could not be attributed to Michigan because they could have been subjected to tax by the states in which the sales were made. Substantial nexus under the Commerce Clause, the court observed, does not require an in-state sales force to continuously solicit customers; tax obligations may be imposed on taxpayers who occasionally send personnel into the state or employ in-state independent sales representatives to conduct economic activity on the taxpayer's behalf. In the instant matter, the taxpayer had sufficient physical presence in each of the states in which it was active to support a tax obligation. Because the taxpayer could legitimately be subjected to tax on sales made in other states, it was improper for Michigan to include those sales for purposes of determining the taxpayer's single business tax liability.
Foreign Corporate Franchise Tax -- Res Judicata
South Central Bell Telephone Company, et al., v. Alabama Department of Revenue, No. CV-89-2600-G (Ala. Cir. Ct. 12/3/96). The Alabama Circuit Court ruled that the taxpayers' challenge to the state's franchise tax was barred by res judicata because the same issues had been litigated and resolved against a different taxpayer in an earlier case. The taxpayers argued that to apply the doctrine of res judicata against them would deprive them of due process of law as guaranteed by the 14th Amendment. The court ruled that under Alabama law, the taxpayers' claims are barred by res judicata. However, the court next had to determine whether the ruling is an extreme application of the doctrine that denies the taxpayers their due process rights. In the U.S. Supreme Court's recent decision Richards v. Jefferson County, Alabama, 517 U.S. ___ (1996), the Court ruled that the class of petitioners (who protested the county's occupational taxes on federal equal protection grounds) in that case were not adequately represented by the class plaintiffs in an earlier action litigating the same issues because the Richards plaintiffs had no notice of the earlier action.
The court noted that Richards cannot be read to mean that there can never be a tax case when res judicata cannot bar a subsequent action attacking a state tax on federal constitutional grounds. More specifically, this case can be distinguished from Richards because the state, as the defendant, is not attempting to bind a class of persons to a prior judgment to which they were not a party. The taxpayers, the court pointed out, are large and sophisticated corporations, and it is logical to conclude that they are well informed in all matters involving issues of national and state taxation, and that they stay well informed of significant pending legal actions and court decisions. The court clarified this observation by stating that it does not mean that corporations are entitled to less notice and opportunities to be heard than private citizens; rather, it is merely logical to resolve an evidentiary issue of notice against the sophisticated and more informed non-party. Moreover, the taxpayers have admitted that they were well aware of the prior proceeding and of the Alabama court's decision in that case. Therefore, the court concluded, to apply the doctrine of res judicata to the taxpayers in this case does not violate their due process rights.
Severance Taxes
Shell Oil Company, et al., v. Secretary, Revenue and Taxation, No. 96-C-0929 (La. Sup. Ct. 11/25/96). The Louisiana Supreme Court ruled that the state may assess and collect severance taxes on oil and gas extracted by the taxpayers from beneath lands within the confines of a federal enclave. The taxes were assessed on oil and gas produced by the taxpayers under mineral leases granted by the U.S. Department of the Interior covering certain lands within the Barksdale Air Force Base. Before the state Board of Tax Appeals, the taxpayers argued that the state was prohibited from imposing severance taxes pursuant to Art. I, §8, cl. 17 of the U.S. Constitution, which grants exclusive legislative jurisdiction over federal enclave lands to the U.S. Congress when the state has consented thereto. The state Board of Tax Appeals held for the taxpayers. On appeal, the taxpayers abandoned the constitutional argument, concentrating instead on the contention that the state could not collect the tax before September 1982, because the legislature had not authorized such collections. The appeals court held for the state, finding that the Louisiana legislature's 1973 amendments to state law regarding the method of calculation for severance taxes brought these taxes within the meaning of an "income tax," which states are expressly permitted to levy on federal enclaves by reason of the Buck Act, 4 U.S.C. §106; and further, 1976 congressional amendments to the Mineral Leasing Act for Acquired Lands, 30 U.S.C. §§351-359, also support the imposition of the state's severance tax.
Reviewing the history of the Barksdale Air Force Base, the court noted that the land and waters on which the base is now located were donated to the federal government in 1930. At this time, Louisiana already imposed a severance tax on fugitive oil and gas, and the legal nature of these commodities was already well-established. In Louisiana, oil and gas beneath the surface of the earth was, and still is, regarded as not susceptible to private ownership and is not a part of the land through which it flows.
The Department of the Army transferred its right to grant mineral leases on the base to the Department of the Interior in 1943. In the 1950s, private mineral lessees brought numerous legal challenges to the state's right to impose its severance tax on oil and gas extracted from lands on the air base. At that time, the Louisiana Supreme Court ruled that neither the U.S. Constitution nor Louisiana law prohibited the state from levying these taxes, because the fugitive oil and gas when captured did not belong to the federal government, but to the private lessees. No tax was levied against the government, and no tax was levied on the lands or instrumentalities of the government. As for the constitutional argument, the court ruled the state's ceding of land to the federal government did not carry with it such exclusive jurisdiction over the underlying fugitive oil and gas that the state was without authority to impose severance taxes on mineral lessees who severed the state's natural resources flowing beneath the Barksdale Air Force Base. This precedent, the court said, clearly establishes the state's right to impose severance taxes on the harvesting of natural resources by private mineral lessees operating on federal lands.
The state's severance tax also qualifies as an income tax, the court ruled, which states are expressly permitted to levy on federal enclaves pursuant to the Buck Act. In 1973, the court observed, the Louisiana legislature amended the severance tax statute, changing the manner in which the tax is calculated. Rather than computing the tax based on the quantity of oil extracted, the tax is now computed using a percentage of the value of the oil as measured by the gross receipts received from the first purchaser or the posted field price. This amendment, the court said, changed the nature of the severance tax to one resembling an income tax. Therefore, the state tax is permitted. The court further noted that in 1976, Congress amended the Mineral Leasing Act for Acquired Lands, permitting the imposition of severance taxes on the mineral lessees of federal lands, including federal enclaves. Prior to the amendment, the court noted, military bases were excluded from the Act's coverage.
Thus, the court concluded, Louisiana's power to impose severance taxes on fugitive oil and gas on federal lands was always extant. This authority was simply reinforced, rather than created, by the 1973 amendment to Louisiana's method of calculating severance taxes, and the 1976 congressional amendment which brought military bases within the scope of federal lands subject to state severance taxes. Therefore, the Louisiana legislature's amendment of the states severance tax statute which expressly permitted the state to tax mineral lessees operating on federal lands does not mean that the state was without authority to impose severance taxes prior to the amendment, as the taxpayers argued. The court reminded that Louisiana case law dating from the middle of this century held that the state had such authority, and that federal statutory law further supported that authority. Thus, the state was empowered to impose severance taxes on oil and gas extracted by the taxpayers from beneath the Barksdale Air Force Base during the period prior to 1982.
Internal Revenue Service -- Summons
United States v. State Bank of Golden Meadows (In the Matter of the Tax Liability of Elmo J. Pitre, III and Tammy L. Pitre), No. 96-2753 (E.D. La. 10/9/96). A federal district court in Louisiana ruled that a bank could not refuse to comply with an IRS third-party summons regarding information concerning a customer's account because to do so would contravene state law. The bank did not contest the legal sufficiency of the IRS summons, conceding that the IRS' investigation of its customer was being conducted pursuant to a legitimate purpose; that the government's inquiry is relevant to its purpose; that the information was not already in the IRS' possession; and that the administrative procedures required by law had been followed. Rather, the bank's resistance to the IRS summons was premised on the fact that if the bank complied with the request, the bank would contravene state law that generally prohibits disclosure of a customer's financial records. The district court rejected this argument, observing that "[s]tate laws that substantially interfere with the execution of federal laws are preempted by operation of the Supremacy Clause of the United States Constitution." Because Louisiana's law in this matter interfered with the IRS' legitimate investigation of a particular taxpayer, the state law must give way to federal interests. Therefore, the bank was required to comply with the IRS summons.