SALT Webinar Series │ May 13, 2020

Coast to Coast Controversy Update

Presenters

Maria Eberle

Partner │ New York

+1 212 626 4414

maria.eberle

@bakermckenzie.com

Mike Shaikh

Partner │ Los Angeles

+1 650 251 5945

mike.shaikh

@bakermckenzie.com

Roman Patzner

Associate │ Chicago

+1 312 861 8945

roman.patzner

@bakermckenzie.com

Stephen W. Long

Partner │ Dallas

+1 214 978 3086

stephen.long

@bakermckenzie.com

Agenda

1 East Coast Update

2 Texas Update

3 West Coast Update

4 Midwest Update

1

East Coast Update

Matter of TransCanada Facility USA Inc.

New York provides favorable tax rates/base treatment to entities that are

“qualified New York manufacturers”

Case involved whether a producer of electricity qualified for the $350,000

cap on the NY capital tax base

The Tribunal concluded that TransCanada was entitled to the cap and

the conclusion was primarily driven by an important statutory

construction argument

The Tribunal held that the $350,000 tax cap was part of a tax imposition

provision – requiring construction in favor of the taxpayer

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Audit Trends

$$$$ - States in dire need of cash (settlements on

noncontroversial issues)

Hot audit issues:

Transactions with foreign affiliates (noncombinable entities)

Apportionment sourcing

Taxability of digital products and services

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2

Texas Update

Texas Developments

Flood of new COGS guidance (AMC, Sunstate, Gulf Copper)

Also, now Texas is a market-sourcing state (Sirius XM)

New R&D credit rules are in the works and they are going to

cause some serious fireworks

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3

West Coast Update

Lending Tree, LLC v. WA DOR – “Who’s the Customer?”

Does an online marketplace source receipts based on the location of

the lenders who pay them or potential borrowers who pay the

lenders?

Facts:

Taxpayer earned receipts from its online loan marketplace that

matched prospective borrowers and lenders.

Taxpayer earned fees from lenders for its referral services.

Service receipts are sourced where the customer receives the benefit

of the service: where the customer’s business activities occur.

DOR: source to location of prospective borrowers (customer’s

customer)

Court: sourced to where lender is conducting related business

activities (customer is the lender)

See also, ARUP Labs, Inc. v. WA DOR

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McClain v. Sav-On Drugs (California Supreme Court)

Background: sales tax is imposed on seller and only sellers can file refund claims. Buyers

must sue sellers to file claims for overpaid tax (Javor v. BOE)

Facts:

Taxpayer sued pharmacies selling lancets and diabetic blood test strips, seeking to

compel sellers to file refund claims

State had provided informal guidance that off-the-shelf lancets/strips are not exempt

CA Supreme Court unanimously held no suit permitted

Javor remedy only available when the issue of taxability has already been resolved

In this case, consumers would first be required to get a determination from the state

that these items were not taxable

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Abercrombie / Harley and the Elective Combined Report

Background:

California requires unitary combined reporting for all taxpayers operating in and out of

California

Combined reporting is elective for taxpayers operating entirely in California (CR&TC §25101.15)

Does this facially discriminate against interstate commerce?

Court of Appeal in Harley Davidson originally remanded back to trial court to apply a “strict

scrutiny” standard (though the articulated standard was not so strict).

Ultimately, the trial and appellate court applied an overly broad purpose to allow the

discriminatory treatment.

Court of Appeal in Abercrombie skipped past the commerce clause analysis and “assumed” a

commerce clause violation, but still held that the taxpayer failed to prove it would have paid less

tax with a separate-company election

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4

Midwest Update

Labell v. City of Chicago, 2019 IL App (1st) 181379

“The Netflix Tax” - Dept. of Finance Ruling #5 went into effect on July 1, 2015, extending

Chicago’s 9% amusement tax to Internet streaming “amusements”.

Illinois Appellate Court affirmed the Circuit Court’s decision on September 30, 2019.

Court found that the tax may be imposed on streaming services billed to customers with a

Chicago address; ordinance did not result in extraterritorial taxation and merely created a

presumption of taxability based on billing address.

Court also found the tax did not violate the Internet Tax Freedom Act, nor the Illinois

Constitution’s Uniformity Clause, because there are differences between live performances and

streaming entertainment.

Plaintiffs’ appeal to the Supreme Court of Illinois was denied on March 25, 2020.

Apple, Inc. v. City of Chicago, Ill. Cir. Ct., No. 2018-L-050514. Despite the court decision in

Labell, Apple’s complaint will likely proceed because the suit was stayed until after Labell was

decided.

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Chicago’s “Netflix” Streaming Tax Litigation

Wisconsin Department of Revenue v. Deere and Company, Dane County Case No. 2019CV002596(Wis. Cir. Ct., Dane Cnty., March 9, 2020).

Taxpayer owned an interest in a Luxembourg limited partnership.

Taxpayer elected to treat the LP as a corporation for federal income tax purposes.

Taxpayer then received distributions from the LP and then claimed both federal and Wisconsin dividend received

deductions (“DRD”).

The Wisconsin Department of Revenue disallowed the deduction on audit, arguing that the distributions did not qualify for

the Wisconsin DRD because

(1) the LP was not a corporation,

(2) despite its check-the-box election, the LP did not actually have stock, and

(3) the distributions were not made with respect to the company’s “common stock” as required under Wisconsin’s

DRD.

Taxpayer appealed to the Wisconsin Tax Appeals Commission which found that the distribution qualified for Wisconsin

DRD.

Department appealed to the Wisconsin Circuit Court which upheld the Tax Appeals Commission's decision.

Department recently appealed the Circuit Court decision on April 10, 2020.

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Wisconsin Allows Dividend Received Deductions for Distributions from LP (Taxed as a Corp.)

Greenscapes Home & Garden Prods. v. Testa, 129 N.E.3d 1060 (App. 10th Dist. 2019)

Taxpayer is a Georgia wholesaler of garden equipment without property, employees, or other presence in

Ohio.

Taxpayer’s customers arranged their own shipping for goods purchased and only provided Taxpayer with

a bill of lading indicating the destination.

Taxpayer’s primary customers were “big-box” retailers headquartered outside of Ohio but maintained

distribution centers in Ohio.

The Ohio Department of Taxation assessed the commercial-activity tax (“CAT”) on Taxpayer based on

the bill of lading information. Board of Tax Appeals upheld assessment.

Ohio Court of Appeals held that Taxpayer had sufficient Due Process nexus with Ohio to be liable for

Ohio’s CAT because it knew its customers were bringing its products into Ohio even though its

customers used their own trucks with title transfer at Taxpayer’s loading dock in Georgia.

Taxpayer appealed Ohio Court of Appeals decision to the Ohio Supreme Court which declined to review

the case.

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Sourcing of Sales for Ohio Commercial Activity Tax (“CAT”)

Defender Security Co. v. Testa, 2019-Ohio-725 (App. 10th Dist. 2019)

Taxpayer is an authorized dealer of security services for ADT, who obtained security monitoring service

contracts and sold them to ADT for a fee.

Taxpayer sought a refund on tax it paid on gross receipts from sales of contracts for Ohio locations,

arguing that those receipts should have been sourced to ADT’s principal place of business outside of

Ohio.

The Ohio Department of Taxation and Board of Tax Appeals denied the refund claim, which Taxpayer

appealed to the Ohio Court of Appeals.

Ohio Court of Appeals concluded ultimate benefit of payments Taxpayer received from ADT (purchaser

not located in Ohio) for residential security contracts were correctly based on the location of ADT’s

customers which were located in Ohio – and not ADT’s non-Ohio locations – denying Taxpayer’s refund

request (arguably, ODT is using look-through approach to the purchaser’s customers).

Discretionary appeal to the Ohio Supreme Court was accepted on June 26, 2019. Briefs have been filed

and oral augments heard on April 28, 2020.

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Sourcing of Sales for Ohio Commercial Activity Tax (“CAT”)

Mia Shoes v. McClain, BTA No. 2016-282 (Aug. 8, 2019)

Taxpayer is a wholesaler of footwear headquartered in Florida.

The footwear is manufactured overseas and then shipped to California or Florida.

Through common carriers, Taxpayer then transports the footwear to national retailers, one of which has

an Ohio distribution warehouse.

Taxpayer asserts Ohio’s ultimate delivery rule should allow it to exclude shoes shipped to an Ohio

warehouse and subsequently distributed to stores in and out of Ohio based on percentage of retail

stores in Ohio v. non-Ohio.

Ohio Department of Taxation assessed CAT on 100% of the deliveries to the Ohio warehouse, arguably

not allowing the use of a look-through approach for the taxpayer (however, there is also a burden of

proof issue).

The Tax Commissioner's final determination affirming a CAT assessment was affirmed by the Ohio Board

of Tax on August 8, 2019, finding that the Taxpayer failed to provide sufficient evident to substantiate its

claim.

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Sourcing of Sales for Ohio Commercial Activity Tax (“CAT”)

Questions

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