SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP / WWW.SUTHERLAND.COM SALT SCOREBOARD / 2016 / Q2 Q2 2016 WINS 45 LOSSES 63 SIGNIFICANT TAXPAYER WINS AND LOSSES QUARTER 1 W L 24 24 QUARTER 3 W L QUARTER 4 W L QUARTER 2 W L 21 39 2016 OVERALL RESULTS SECOND QUARTER 2016 Overall, the second quarter of 2016 was tough on taxpayers, as states and localities prevailed in 21 out of 60 significant cases.1 28 sales and use tax cases and 20 corporate income tax cases made our cut of significant cases. In our Second Quarter Spotlight (see page 2), 10 manufacturing and processing exemption cases factored into our year-to-date tallies. 1 Some items may have been decided in a prior quarter but included in the quarter in which we summarized them. significant corporate income tax cases across the country Taxpayers prevailed in OUT OF 1434 significant sales and use tax cases across the country Taxpayers prevailed in OUT OF 2050 This is the second edition of the Sutherland SALT Scoreboard. Each quarter, we tally the results of what we deem to be significant taxpayer wins and losses and analyze those results. This issue of the SALT Scoreboard includes Sutherland’s observations on states’ conformity to insurance tax law, states’ manufacturing exemptions for sales taxes, and states’ treatment of the Multistate Tax Compact. Due Process CASE: Corrigan v. Testa, Slip Op. No. 2016-Ohio-2805 (Ohio May 4, 2016). SUMMARY: The Ohio Supreme Court held that the Due Process Clause of the U.S. Constitution precluded Ohio from taxing a nonresident individual on an apportioned share of his gain from the sale of a limited liability company that conducted business in the state. The court explained that the seller was not part of the entity’s unitary business because the seller merely provided “stewardship” services, rather than actively managing the business. View more information. Insurance CASE: In re Aetna, Inc., Nos. TAT(E)12-3(GC), TAT(E)12-4(GC) (N.Y.C. Tax App. Trib. June 3, 2016). SUMMARY: The New York City Tax Appeals Tribunal determined that a health maintenance organization was subject to the New York City general corporation tax. Notably, the Tribunal determined that HMOs were regulated almost entirely under the Public Health Law, not the Insurance Law, and therefore were not engaged in an insurance business in the state. View more information. SUTHERLAND OBSERVATION: Many states look to federal tax law to determine if a corporation’s status is an insurance company for state tax purposes. This case is notable because the Tribunal distinguished the federal case law on the issue instead of relying on it. Remote Sellers CASE: Scholastic Book Clubs, Inc. v. Ala. Dep’t of Revenue, No. S. 14-374 (Ala. Tax Trib. Mar. 25, 2016). SUMMARY: The Alabama Tax Tribunal concluded that an out-of-state retailer had nexus with Alabama for use tax collection purposes because of the activities of unrelated, uncompensated teachers in the state. View more information. SUTHERLAND OBSERVATION: The Scholastic Book cases have been litigated in several states since the 1990s with mixed results. However, in light of the changing nexus landscape in the states in recent years, it is not surprising that the Alabama Tax Tribunal concluded that the teachers’ distribution of catalogs and order forms to students, collection of money for orders and mailing of the orders and money to Scholastic Books resulted in a sales and use tax collection obligation for Scholastic Books in Alabama. SIGNIFICANT MULTISTATE DEVELOPMENTS YEAR-TO-DATE SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP / WWW.SUTHERLAND.COM SALT SCOREBOARD / 2016 / Q2 CASE: Sw. Royalties, Inc. v. Hegar, No. 14-0743 (Tex. June 17, 2016). SUMMARY: The Supreme Court of Texas held that an oil and gas exploration and production company’s purchases of equipment were not exempt from sales tax under various processing exemptions because the hydrocarbon changes were caused by natural pressure and temperature changes and not by the equipment. View more information. CASE: Bridges v. Nelson Indus. Steam Co., 190 So.3d 276 (La. 2016). SUMMARY: The Louisiana Supreme Court concluded that limestone purchased for the dual purposes of absorbing sulfur during the generation of electricity and producing ash for sale to third parties was exempt from Louisiana sales tax under the “further processing exclusion” because it was sufficient that the inclusion of the raw material into a sold by-product was a purpose for which the taxpayer purchased the material. View more information. CASE:Graphic Packaging Int’l, Inc. v. Lewis, 187 So.3d 499 (La. Ct. App. 2016). SUMMARY: The Louisiana Court of Appeals held that a paperboard products manufacturer was entitled to sales tax refunds for purchases of chemicals used in the manufacturing process under the “further processing” exclusion because they were identifiable components of the end product, benefited the end product, and purchased with the purpose of being included in the end product. View more information. CASE: In re Gray Oil Co., No. 2014-05 (Wyo. State Bd. of Equalization Apr. 8, 2016). SUMMARY: The Wyoming State Board of Equalization determined that sales of oil and lubricants used to lubricate machinery at a crude oil refinery did not qualify for an ingredient/component sales tax exemption because they were not used directly in the manufacturing process or consumed or destroyed during the process. CASE: Walther v. Carrothers Constr. Co. of Ark., LLC, 2016 Ark. 209 (Ark. 2016). SUMMARY: The Supreme Court of Arkansas held that equipment used in a water treatment facility expansion was not exempt from use tax under a manufacturing exemption because the facility’s water treatment process did not transform the water into a different article. View more information. OVERALL SUTHERLAND OBSERVATION: While state economic development authorities often advertise their favorable environment for manufacturing businesses, recent cases emphasize how state revenue departments narrowly construe their manufacturing and processing exemptions and that taxpayers bear a considerable burden to meet each element of the exemptions. Retailers CASE:Office Depot, Inc. v. Dir. of Revenue, 484 S.W.3d 793 (Mo. 2016) (en banc). SUMMARY: The Missouri Supreme Court held that a taxpayer was not subject to Missouri’s use tax on catalogues shipped to Missouri residents when the printing and mailing of the catalogues occurred outside of Missouri and the taxpayer did not exercise any right or power incident to ownership or control over the catalogues in Missouri. Multistate Tax Compact CASE: Kimberly-Clark Corp. v. Commissioner of Revenue, No. A15-1322 (Minn. June 22, 2016). SUMMARY: The Minnesota Supreme Court held that Minnesota’s adoption of the Multistate Tax Compact did not create a binding contractual obligation and, as a result, the state’s subsequent repeal of the Compact’s alternative apportionment election provision was not prohibited as unconstitutionally impairing contractual obligations. View more information. Data Processing Services CASE: Hegar v. CheckFree Servs. Corp., No. 14-15-00027-CV (Tex. App. 14th Dist., Apr. 19, 2016). SUMMARY: The Texas Court of Appeals held that the taxpayer’s online bill pay service was not a taxable data processing service for Texas sales tax purposes because any activities the Comptroller labeled as data processing services were incidental to the professional services provided by the taxpayer. View more information. SUTHERLAND OBSERVATION: While the Texas Comptroller of Public Accounts has generally taken a broad interpretation of what constitutes taxable data processing services, this decision highlights an important exclusion from the definition of “data processing.” Specifically, the definition excludes providers of other professional services who use a computer to facilitate the performance of their services. The services provided by CheckFree Services Corporation fell within this exclusion. SIGNIFICANT MULTISTATE DEVELOPMENTS CONT’D SPOTLIGHT ON MANUFACTURING AND PROCESSING EXEMPTIONS significant manufacturing and processing exemption cases Taxpayers prevailed in OUT OF 410 SIGNIFICANT DEVELOPMENTS SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP / WWW.SUTHERLAND.COM SALT SCOREBOARD / 2016 / Q2 MEET YOUR SALT TEAM Michele Borens 202.383.0936 email@example.com Jonathan A. Feldman 404.853.8189 firstname.lastname@example.org Jeff rey A. Friedman 202.383.0718 jeff .email@example.com Todd A. Lard 202.383.0909 firstname.lastname@example.org Carley A. Roberts 916.241.0502 email@example.com Leah Robinson 212.389.5043 firstname.lastname@example.org Marc A. Simonetti 212.389.5015 email@example.com Maria M. Todorova 404.853.8214 firstname.lastname@example.org Eric S. Tresh 404.853.8579 email@example.com Scott Wright 404.853.8374 firstname.lastname@example.org Douglas Mo 916.241.0505 email@example.com Eric J. Coffi ll 916.241.0508 eric.coffi firstname.lastname@example.org Andrew D. Appleby 212.389.5042 email@example.com Open Weaver Banks 212.389.5081 firstname.lastname@example.org Madison J. Barnett 404.853.8191 email@example.com Timothy A. Gustafson 916.241.0507 firstname.lastname@example.org Charles C. Kearns 202.383.0864 email@example.com Amy F. Nogid 212.389.5086 firstname.lastname@example.org Zachary T. Atkins 404.853.8312 email@example.com Todd G. Betor 202.383.0855 firstname.lastname@example.org Nicole D. Boutros 212.389.5058 email@example.com Stephen A. Burroughs 404.853.8046 firstname.lastname@example.org Charles C. Capouet 202.383.0865 email@example.com Elizabeth S. Cha 202.383.0533 firstname.lastname@example.org Stephanie T. Do 202.383.0839 email@example.com Jessica A. Eisenmenger 202.383.0957 firstname.lastname@example.org Ted W. Friedman 202.383.0829 email@example.com Evan M. Hamme 212.389.5024 firstname.lastname@example.org Michael J. Kerman 202.383.0814 email@example.com Nicholas J. Kump 916.241.0516 firstname.lastname@example.org Christopher M. Mehrmann 202.383.0911 email@example.com Robert P. Merten III 916.241.0512 firstname.lastname@example.org Suzanne M. Palms 404.853.8074 email@example.com Hanish S. Patel 404.853.8066 firstname.lastname@example.org Alla Raykin 404.853.8033 email@example.com Samantha K. Trencs 202.383.0534 firstname.lastname@example.org Douglas J. Upton 212.389.5010 email@example.com SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP / WWW.SUTHERLAND.COM
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Sutherland "SALT Scoreboard" Publication - Second Quarter 2016
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