Current developments.

• Author: Pinger, Richard A.
• Position: Part 2 - 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 area, and state and Federal pronouncements in the sales and use tax arena. In Part I, published in April, the income tax discussion covered nexus, apportionment, and trends in business and nonbusiness income; Part II, below, examines other income tax developments, as well as sales and use tax nexus issues and other developments.

Income Tax--Other Developments

State Pronouncements

* Alabama

An administrative law judge (ALJ) determined that the Department of Revenue properly apportioned a limited partnership's long-term debt to the taxpayer, a general partner, in accordance with the taxpayer's ownership interest in the partnership.(1)

* California

The California State Board of Equalization (SBE) ruled that an automobile leasing company is really engaged in conditional sales and thus cannot deduct depreciation on the vehicles.(2)

* Kentucky

A new regulation specifically denies taxpayers the ability to elect retroactively to amortize intangibles otherwise subject to Sec. 197.(3)

* Minnesota

Minnesota income tax was not due on income a corporation assigned under state and Federal provisions allowing a profitable corporation to assign income to subsidiaries jointly owned by the corporation and an Alaska Native Corporation (ANC). The objective was to offset the corporation's income by the "purchase" of the ANC's net operating losses (NOLs).

The Commissioner of Revenue unsuccessfully argued that, despite the clear language of Minn. Stat. Section 290.01, subd. 20, the legislature did not intend to adopt Section 1804 (e) (4) of the Tax Reform Act of 1986 as an amendment to the state definition of corporate gross income, because that phrase was defined independently of Federal law in 1985. The Commissioner also argued that the legislature could not have intended to adopt a Federal law that provides assistance to ANCs, which have no connection to Minnesota.(4)

* New Jersey

The New Jersey Supreme Court upheld a real estate investment trust's (REIT's) dividends-paid deduction in computing its Federal taxable income. N.J.S.A. 54:10A-4(k) provides that the starting point for computing New Jersey taxable income is Federal taxable income before the NOL deduction and special deductions. According to Sec. 857 (b) (2) (B), a REIT may deduct dividends paid to shareholders when computing its Federal taxable income; in the court's view, that deduction is not a special deduction described in Secs. 241-249, and so was allowable.(5)

* New Mexico

The Court of Appeals upheld a credit for employer expenditures for employee child care expenses under Sec. 129.(6)

* New York

An ALJ ruled that a nonrefundable commitment fee need not be traced to a specific asset to be considered directly attributable to business capital.(7)

* Oklahoma

The U.S. Supreme Court affirmed the Oklahoma Supreme Court's denial of declaratory or injunctive relief (under 42 U.S.C. Section 1983) to out-of-state motor carriers operating in Oklahoma who successfully challenged that state's third-structure taxes. The Court held the taxes to be violative of the Commerce Clause because adequate remedies existed under state law; Section 1983 provides no basis for courts to issue injunctive or declaratory relief in state tax cases when there is an adequate remedy at law. Construing Section 1983 in conjunction with the long-held principle of noninterference with state taxation, the Court concluded that Section 1983 does not call for courts (whether Federal or state) to disrupt state tax administration by issuing injunctive or declaratory relief when state law furnishes an adequate legal remedy; since no relief could be awarded under Section 1983, attorney's fees could not be awarded under 42 U.S.C. Section 1988.(8)

* Wisconsin

The Tax Appeals Commission denied a taxpayer's petition for redetermination of the disallowance of deductions for dividends received from two subsidiaries with which it merged mid-year.(9)

Sales and Use Tax-Nexus

State Pronouncements

* Arizona

The Board of Tax Appeals (BTA) held that a business whose sole contacts with Arizona consisted of a one-day salesperson visit per year and the short-term lease of two personal computers did not have sufficient nexus to be subject to the transaction privilege (sales) tax.(10)

* Florida

A court of appeal ruled that the taxpayer's participation in a three-day seminar in Florida did not create nexus for Florida use tax purposes. The taxpayer limited its activities in Florida to displaying and selling products at the seminar. The court reasoned that the taxpayer's activities at the seminar neither created a customer base in Florida nor exploited its consumer market. The court certified to the Florida Supreme Court the question of whether substantial nexus was created.(11)

* Kansas

The BTA ruled that Scholastic Book Clubs, Inc.'s use of Kansas school teachers to distribute flyers, collect and remit order forms and money, and distribute books on its behalf triggered use tax collection obligations. To encourage the teachers' participation, the taxpayer awarded them bonus points redeemable for education-related merchandise. The BTA successfully argued that the teachers were the taxpayer's apparent agents and created nexus between the taxpayer and the state.(12)

* Michigan

The Court of Claims upheld a taxpayer's claim of a bad debt deduction related to uncollected sales made in Michigan. Michigan allows taxpayers to take a bad debt deduction against gross sales if the sale was subject to Michigan sales tax; there is no corresponding deduction for sales subject to use tax. Michigan determines whether a given sale is subject to sales tax or use tax based on where the product is shipped from and the existence of sufficient local...