Current developments.

• Author: Pinger, Richard A.
• Position: Part 1 - State and local taxation

EXECUTIVE SUMMARY

This two-part article discusses a plethora of recent state and Multistate Tax Commission pronouncements issued in the income tax and sales and use tax areas. In Part I, the income tax discussion covers nexus, apportionment, and trends in business and nonbusiness income; Part II, in the May issue, will examine other income tax developments, as well as sales and use tax nexus issues and other developments.

Nexus Issues

State Pronouncements

* Alabama

The Alabama Department of Revenue recently issued regulations providing that entities leasing, renting, licensing or otherwise disposing of tangible personal property, or engaged in transactions involving intangibles (e.g., franchises, patents, copyrights, trademarks, service marks, etc., or any other type of property), are removed from the protection of P.L. 86-272.(1) These regulations were later withdrawn for further study.

* Florida

The Florida Department of Revenue has ruled that an out-of-state corporation's use of its own vehicles to deliver goods to Florida customers established nexus.(2)

* Idaho

The Idaho Supreme Court has held that an out-of-state corporation is not subject to Idaho income tax due solely to the presence in that state of its railcars that have been leased to other railroads.(3)

* Michigan

A company did not maintain offices in states other than Michigan, but regularly sent employees to other states. Although Due Process concerns were satisfied for Michigan single business tax purposes by the company's sales solicitation activities in the other states, reversal and remand of the case to the Court of Claims was warranted to determine whether the company had substantial nexus under the Commerce Clause with states in which it solicited sales to warrant exclusion of such sales from its Michigan sales factor.(4)

* Missouri

The Missouri Supreme Court held that income earned by a Missouri real estate holding company from a Florida mobile home park was taxable in Missouri because the taxpayer made all management decisions there; specifically, the holding company's president had authority to sign checks from the park's general account and all bookkeeping and tax preparation services were performed in Missouri by a contractor chosen by the holding company.(5)

* New York

A Delaware corporation that held a greater-than-50% interest in a New York limited partnership was not subject to New York corporation franchise tax. An administrative law judge ruled that the corporation did not have sufficient nexus with New York for several reasons--the corporation's partnership interest was its sole interest in New York, the company did not maintain a separate office or conduct business in New York and had limited communication with the general partner. In addition, the partnership had been formed for a valid business purpose and not to avoid tax.(6)

* Vermont

Out-of-state corporate clients of a Vermont corporation that performs services within the state on behalf of such clients (e.g., handling customer complaints, maintaining bank accounts, depositing checks and credit card payments, removing inventory from storage and packaging and shipping to customers) have nexus and are thus subject to Vermont corporate income tax.(7)

* Wisconsin

A foreign sales corporation (FSC) is subject to the corporate franchise (income) tax as a separate corporation if the company has nexus in Wisconsin and is a viable corporation with substance. The FSC's net income will be subject to tax because Wisconsin excludes the Federal tax treatment of FSCs.(8)

Multistate Tax Commission Pronouncements

* Revised P.L. 86-272 nexus guidelines

The Multistate Tax Commission (MTC) has updated its guidelines regarding P.L. 86-272 nexus to reflect the Supreme Court's ruling in Wisconsin Dep't of Rev. v. William Wrigley, Jr., Co.(9) In addition, in response to the decision in Geoffrey, Inc. v. South Carolina Tax Comm'n,(10) the definition of property afforded the limited immunity for solicitation excludes intangible property.

* Final Report on MTC Statement regarding P.L. 86-272

In addition to issuing an updated policy statement regarding P.L. 86-272, the MTC has issued the Final Report of the Hearing Officer on the MTC Statement on P.L. 86-272. A number of recommendations included in the Report are favorable to taxpayers; for instance, the Report recommends that states permit sales representatives to maintain limited "in-home" offices (even if they are paid directly or indirectly by the out-of-state company) without losing immunity under P.L. 86-272. The recommendations also provide that the use of personal property (e.g., cellular phones, fax and copy machines, software and computers) solely for solicitation activities should not remove P.L. 86-272 protection. Similarly, providing shipping and delivery information both before and after sale and coordinating deliveries or shipments of the customer's goods should not cause an out-of-state corporation to lose immunity. The Hearing Officer also recommended that states treat the mere registration to do business by an out-of-state company as not removing the immunity otherwise available. However, if the company seeks to use or protect other state benefits (e.g., trade or corporate name protection), the state could reasonably take the position that the immunity is lost.

On the other hand, the Hearing Officer recommended that there is no protection afforded the collection of current or delinquent accounts, whether directly, indirectly by a third party, through assignment (presumably, for some immediate or contingent value) or otherwise. The Report also recommends that the protections under P.L. 86-272 not be extended to sellers of services and to those who perform services (e.g., installation or maintenance) in connection with the sale of goods. On the issue of whether the in-state delivery of goods in the seller's own trucks removes the protection, the Report recommends that, until the issue is judicially settled, states treat shipments and deliveries of goods by means of private carrier as unprotected activity, regardless of whether a separate delivery fee is charged to the purchaser.

With respect to the question of the extent to which immunity is lost if, during a portion of a tax period, the out-of-state seller conducts unprotected activities, the Hearing Officer concluded that the immunity is lost for the entire tax year.

The Report also recommended that the Executive Committee authorize the Uniformity Committee to review the appropriateness and feasibility of establishing de minimis gross receipts or apportionment factor standards for inclusion in the Statement at a future date.

With respect to the application of the throwback rule in calculating a unitary combined return, until the Finnigan(11) / Airborne Navigation(12) approach is judicially affirmed in those states that have adopted it (California and Kansas), the Hearing Officer recommended that states adhere to the Joyce(13) rule.

* Nexus Bulletin 95-1

In a controversial action, the MTC issued National Nexus Program Bulletin 95-1 in December 1995, advising computer manufacturers and marketers that nexus is established for sales and use and income and franchise tax purposes if instate repairs are provided through third-party repair service providers. A significant number of states have indicated that they intend to enforce these principles.

These actions are being challenged by various industry coalitions and taxpayers based on what they believe to be faulty legal analysis and administrative procedural problems in the states' adoption of the new standards.

Apportionment

State Pronouncements

* California

In accordance with McDonnell Douglas Corp. v. Franchise Tax Board(14) (FTB), the FTB has withdrawn Legal Ruling 348, which interpreted California Revenue and Taxation Code Section 25135 concerning the assignment of sales of tangible personal property to California. Under McDonnell, if goods are received by a purchaser in California and immediately transported by it to its place of business in another state, the sale is treated as a sale in the destination state and is assigned there for apportionment purposes, unless the seller is not taxable in the destination state.

* Connecticut

The Connecticut Supreme Court held that a company's rental interest in an out-of-state warehouse storage space need not be a possessory interest to be included in the property factor for apportionment purposes. The warehouse space at issue was leased in terms of square footage instead of specifying a particular location within the warehouse.(15)

* Illinois

An Illinois...