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					                       SJSU/TEI
              High Technology Tax Institute
                    November 6, 2006

               Current Developments in
              California/Multistate Taxation
Presenters:

Brian Pederson, Alvarez & Marsal
Allan Smith, Grant Thornton
Jim Songey, KPMG




                                               1
Key Areas of Development

 California New Matters

 Multistate Legislative Roundup

 Nexus

 P.L. 86-272

 Expense Disallowance Provisions & Related Party
 Transactions

 Tax Base, Deductions, & Credits



                                                   2
Keys Areas of Development


 Allocation & Apportionment

 Combined and Consolidated Reporting

 Franchise, Gross Receipts, and Net Worth Taxes

 Sales & Use Taxes

 Taxpayer Disclosure



                                                  3
California New Matters

 Sales factor – gross versus net issue
    Microsoft (Cal.)
       Gross receipts does include gross proceeds from the redemption of
       marketable securities
       But, FTB’s application of alternative apportionment was justified
           Transactions generated under 2% of Microsoft’s business income,
           produced approximately 73% of gross receipts
    General Motors (Cal.)
       Only interest from repurchase agreements (“repos”) included in sales
       factor
       Remanded to determine if alternative apportionment applicable to
       receipts from redemption of marketable securities
 Tax Credits
    Research tax credit could only be used to offset tax liability of
    unitary group member that generated credit (General Motors)



                                                                              4
California New Matters

 Sales factor sourcing – other than tangible property
    California Legal Ruling 2006-2
       Services performed by unitary affiliate not excluded – considered
       directly performed for affiliate not on behalf of affiliate
       Cost of performance based on arm's length payment to affiliate or
       actual costs incurred by affiliate
 Other sales factor issues
    California
       Legal Ruling 2006-01 discusses exclusion of property, payroll, sales
       related to nontaxable income
       Legal Ruling 2006-03
           IRC § 338(h)(10) gains – occasional sale rule may apply; gain
           included using combined group factors
           IRC § 338(g) gains – occasional sale rule and payroll factor not
           applicable if single day return required




                                                                              5
California New Matters

 Water's-edge legislation (S.B. 663)
     CFC that is a California taxpayer or that has ECI must include subpart F income in
     determining water's-edge income base

 Proposed regulations 25137 (Telecommunications)
     FTB staff request for permission to become involved in MTC proposed regulation and
     consider adoption by California or prepare its own regulation

 Proposed amendment to regulation 25110
     FTB staff request for permission to amend regulation regarding "non-effectively connected
     income" included in water's-edge income base. Regulation would describe how to determine
     deductions that would be allowed to arrive at "net NECI"

 Tax clearance certificate requirement eliminated (A.B. 2341)




                                                                                                 6
California New Matters

 SBE adopts pro-ration method for allocating CFC's dividends
      In a non-precedential Letter Decision (Appeal of Apple Computer), SBE held that dividends received
      from CFC partly included and partly excluded from water's-edge group should be prorated between
      Sec. 25016 elimination provisions and Sec. 24402.
      This ruling is in contrast to Appellate Court's holding in Fujitsu that preferential ordering is the proper
      rule whereby dividends are deemed to be paid first out of income included in the water's-edge
      combined report (thus subjecting a larger portion of the dividends to elimination under Sec. 25106)
 Elimination of dividends from pre-unitary E&P under Sec. 25106
      In a Chief Counsel ruling issued earlier this year, the FTB held that dividends paid up through a
      corporate chain from lower tier subsidiaries up to the ultimate parent of a combined unitary group were
      properly eliminated under Sec. 25106 in the following scenario:
           Ultimate parent (Company A), wholly owned first tier subsidiary (Company B), and wholly owned
           second tier subsidiary (Company C owned by Company B) are included in a unitary combined
           report in current year. In the current year, Company C pays a dividend up to Company B and, in
           turn, Company B pays a dividend up to Company A. Dividend paid from Company C to Company
           B is paid out of earnings and profits of prior year when Company B and Company C were part of
           a unitary combined report not including Company A.
           FTB held that dividend paid by Company B to Company A was eliminated under Sec. 25106
           because the dividend from Company C is considered apportionable business income with respect
           to Company B, notwithstanding the elimination of the dividends.




                                                                                                                    7
Legislative Roundup - Texas

 H.B. 3 replaces franchise tax with alternative margin
 tax
    Enacted May 18, 2006; effective for reports due on or
    after January 1, 2008
    “Alternative Margin” =
    Total revenue – (Cost of Goods sold or Compensation)
      However, ceiling of 70 percent of total revenue
      Cost of goods sold not tied exclusively to Internal Revenue
      Code
      Compensation capped at $300,000 per employee
      Elect to deduct cost of goods sold or compensation
      Election applies to entire unitary group


                                                                    8
Legislative Roundup - Texas

 Taxpayers
   Virtually all entities other than individuals and general
   partnerships owned entirely by natural persons
   Includes limited partnerships
   Numerous exclusions
      Real estate investment trusts that do not hold real estate
      Passive entities
 Combined reporting
   80 percent ownership threshold (not 50 percent)
   80/20 exclusion
   Combined margin computed pre-apportionment


                                                                   9
Legislative Roundup - Texas

 Apportionment
    Single factor
    Sourcing rules same as franchise tax
    No throwback rule
 Tax rate
    Generally 1 percent; 0.5 percent for wholesalers and
    retailers
 Transitional rules for “new” taxpayers (i.e., not
 previously subject to the franchise tax)




                                                           10
Legislative Roundup - Kentucky

 Special Session H.B. 1
   New limited liability entity (“LLE”) tax replaces AMC
   beginning in 2007
      Corporations and pass through entities subject to LLE tax
    Pass-through entities no longer subject to corporate
    income tax, income flows through to corporate owner
      Doing business standard modified to include ownership of
      pass-through entities
    Corporate owners get credit for LLE tax paid by pass-
    through entities
      Credit an be used to offset corporate income or LLE tax
      Credit cannot be carried forward or back
 H.B. 403 - Expense disallowance revised to include
 intangible expenses, retroactive to January 1, 2005

                                                                  11
Legislative Roundup – New Jersey

 A. 4901
    Attributional nexus
    Sales tax rate increase from 6% to 7%
    Expansion of sales tax base, including digital goods and
    information services
 A. 4706
    Corporate tax surcharge for three years
 NOL limitation allowed to expire
 AMA allowed to sunset




                                                               12
Legislative Roundup – Pennsylvania

 H.B. 859
    NOL cap increased from $2 million to greater of $3
    million or 12.5% of taxable income
    Increases sales factor from 60% to 70%, for corporate
    net income tax purposes only
 S.B. 300
    Accelerates phase-out of capital stock/franchise tax
    Changes treatment of S corporations; instead of
    separate S election, federal S corporation status
    respected unless taxpayer opts out
 No Graham Packaging fix


                                                            13
Legislative Roundup – Ohio


 Ohio H.B. 530
   “Qualified distribution center” exemption
      Original sourcing rules resulted in most receipts from distribution
      centers being sourced to Ohio, even if goods ultimately
      delivered out-of-state
      Unless rejected by referendum, effective date is January 1, 2007
   Consolidated group amended to include all foreign
   entities, not just foreign corporations
   Numerous other technical revisions




                                                                            14
Legislative Roundup – Other States

 Idaho
    Sales tax rate increased from 5 percent to 6 percent
 Michigan
    SBT phase-out accelerated from 2009 to 2007
 North Carolina
    S.B. 1741 expense disallowance expanded to
    copyrights and patents; franchise tax extended to LLCs
    H.B. 1891 expense disallowance exception for
    payments to non-US related members
 South Carolina H.B. 4874
    Single factor apportionment for manufacturers/sellers
 Tennessee H.B. 4048
    REIT franchise tax exemption eliminated
                                                             15
Legislative Roundup – Other States

 Rejected measures
   Minnesota foreign operating company additional
   substance requirements
   California separate M-3 requirement




                                                    16
Nexus – Intangibles

 KMart (N.M.)
    Court declined to address appellate court’s
    precedential holding that out-of-state intangible
    licensing company had income tax nexus
    But, reversed on gross receipts tax issue; held not
    subject to tax on statutory grounds
    Sonic, follows KMart
      Franchise fees paid to out-of-state restaurant corporation
      not subject to gross receipts tax
    H.B. 583, enacted in response to KMart, receipts
    from intangible property located in the state are
    subject to gross receipts tax, prospectively

                                                                   17
Nexus – Intangibles

 Geoffrey (Okla. Civ. Ct. App.)
   Intangible licensing company subject to income tax
   Quill physical presence rule only applies to sales and
   use taxes
   Court relied heavily on A&F Trademark
   Court also upheld use of single factor apportionment
   formula




                                                            18
Nexus – Intangibles
 LANCO (N.J. Super. Ct., App. Div.)
   Decision affirmed by N.J. Supreme Court
   Intangible licensing company had nexus; Tax Court decision
   reversed
   Quill not applicable to income taxes
   Relied heavily on A&F Trademark - - out of North Carolina
    Also relied on:
      International Harvester, even though involved withholding tax
      Gap (Apparel), even though not a decision on the merits and
      did not involve Commerce Clause
   Did not address director’s arguments
      Attempt to reconnect Due Process and Commerce Clause
      nexus standards
      Also argued that licensing increased sales, increased need for
      fire, police, other protections


                                                                       19
Nexus – Attribution, Remote Sellers
  Georgia H.B. 111
   In-state affiliated retailer establishes nexus unless:
       Does not sell, market, advertise or perform other services
       on behalf of remote seller
       Accepts returns from third parties under same terms as
       returns from affiliate
    Expands categories of actors that establish nexus
    through solicitation
    Amends provision establishing nexus through
    advertisement
       Advertisement alone or common carrier delivery alone do
       not establish nexus
    Effective July 1, 2006

                                                                    20
Nexus – Attribution, Remote Sellers
  New Jersey A. 4901
    Attributional nexus for related parties
       Burden imposed on in-state seller to collect on sales made
       by out-of-state related seller if acting as “agent”
       Trigger criteria
          Similar name, tradename
          Intercompany service fee contingent on sales
          Common business plan
          Services to promote, maintain seller’s market
       Is Quill satisfied just because incidence of tax on remote
       sale is shifted to an entity with nexus?




                                                                    21
Nexus – Attribution, Remote Sellers
  Massachusetts Letter Ruling 05-7
   Bricks and mortar retailer in state would not create
   nexus for affiliated remote sellers
   Even though retailer would accept returns of items
   purchased from remote sellers, as well as from
   unrelated sellers
   Accepting returns was only incidental
   Scripto/Tyler pipe marketing standard not satisfied
   because remote sellers’ markets already
   established and retailer would actually decrease
   their market share
   Acknowledged, distinguished Borders Online

                                                          22
Nexus – Attribution, Remote Sellers

 Arco Building Systems (Tenn. Ct. App.)
   Out-of-state seller had use tax nexus; manufacturer
   located in Tennessee
   Shipments made by common carrier
   Common carrier collected payment, turned over to
   manufacturer
   Arm’s-length sale; typical indicia of attributional nexus
   absent
   Court concerned about double benefit
      Seller registered as a dealer in Tennessee; purchased from
      manufacturers under resale certificate
      Yet no tax collection obligation assuming seller lacked nexus

                                                                      23
Nexus – Attribution, Other
  Lanzi (Ala. App.)
     Nonresident limited partner not subject to tax
     Analogized relationship to stock ownership

  Mockingbird (Cal. SBE)
    Member managed LLC subject to minimum tax
    Presumed that business activities/decisions occurred in state
    because members resided there

  Asworth (Ky. BTA)
    Corporate partner did not have nexus based on former
    physical presence nexus standard
    Opportunity limited to pre-2005 tax years
    Decision has been appealed by Department



                                                                    24
Nexus – Attribution, Other

  Dell (La. Ct. App.)
    Reversed lower court; repairers established use tax
    nexus for out-of-state seller
    Despite contract between repair company and
    customer, repair company acting on seller’s behalf
  Dell (N.M. Tax. Rev. Dept.)
    Seller liable for gross receipts tax on computer sales
    and use tax on catalogs




                                                             25
Nexus – Attribution, Other
  Virginia (Dept. of Tax.)
     New distribution center would not create nexus for
     affiliates
     Buy-sell arrangement
     Center was single member LLC but elected to be
     taxed as a corporation




                                                          26
Nexus – Other

 Tennessee Revenue Ruling 05-25
   One employee established nexus for online seller
   Maintained website, not involved in sales

 Buehner Block (Wyo.)
   Voluntary possession of vendor’s license plus use of
   common carrier to deliver goods sufficient to create
   substantial nexus




                                                          27
P.L. 86-272


 Chester Asher (N.J. Tax Ct.)
   Activities of delivery persons not protected
   Collected outstanding balances, picked up
   returned, spoiled and overshipped merchandise

 New York ruling
   Manufacturer’s R&D arrangement with university did not
   compromise P.L. 86-272 protection




                                                            28
 Expense Disallowance

 Narrower                                                                           Broader
Royalties      and                                 and              and
               intangible related                  all intercompany other expenses
               interest                            interest
North          District of Columbia                 Alabama       Kentucky3
Carolina       Georgia                              Arkansas      South Carolina4
               Indiana      NEW
                                                    Connecticut
Oregon1        Mississippi                          Illinois1
               New York                             Maryland
               Tennessee2                           Massachusetts
               Virginia                             New Jersey
                                                    Ohio
     1To recipient outside combined report   3Management fees; but only intangible interest disallowed
     2For disclosure purposes only           4If accrued but not paid                                  29
Related Party Expense Disallowance

 Indiana H.B. 1001
   Applies to intangible expenses and directly
   related interest
   Many exceptions; most have business
   purpose and/or arm’s length requirements
   Extensive disclosure requirements
   Numerous exceptions; some twists
     Subject to tax . . . in domicile
     Conduit also applies to payments received from
     unrelated parties
   Effective July 1, 2006


                                                      30
Related Party Expense Disallowance

 Kentucky H.B. 403
   Intangible expenses disallowed retroactively to 2005
   Inadvertently omitted from 2005 legislation

 North Carolina
    S.B. 1741 expands expense disallowance to copyrights and
    patents
    H.B. 1891 creates foreign payment exception

 Alabama
    Conduit exception added to regulation
    Included within unreasonable exception
    Complex limitations on deductibility


                                                               31
Related Party Transactions

 Virginia
    Management fees deductible, represented payment
    for actual services
    No deduction for markup
    Implies evidence of arm’s length profit component
    may be eligible for deduction




                                                        32
Tax Base

 Michigan
   V&J Foods (Mich. Ct. App.)
      Royalties did not include payment for services, must be added
      back
   Ford Credit (Mich. Ct. App.)
      Deemed dividends from CFCs not gross receipts for purposes
      of determining eligibility for SBT reduction

 Davis (Ky. Ct. App.)
   Exemption for Kentucky municipal bond interest
   unconstitutional where other state obligations taxed
   Taxpayer was an individual


                                                                      33
Tax Base – Net Operating Losses

   Louisiana Revenue Ruling 06-008
      State IRC § 382 limitation – use one of three methods:
         Allowable federal NOL x Louisiana apportionment ratio
         Allowable federal NOL x (Louisiana income/federal income)
         Louisiana NOL x (Allowable federal NOL/total NOL)


   Matter of Univisa (NY Div. of Tax App.)
      Federal election to reattribute NOLs generated by a subsidiary
      followed even though taxpayer filed separately in New York

   Pennsylvania
      NOL cap raised from $2 million to $3 million or 12.5 percent of
      taxable income


                                                                        34
Tax Base - REITs

    New Jersey
      Regulation amended to provide that REIT dividends
      ineligible for DRD
      Effective for distributions paid on or after February 6,
      2006
      Draft regulation would have disallowed “indirect”
      distributions; language omitted from final version
      Administrative response to UNB decision




                                                                 35
Credits

    Cuno
      On May 15, 2006, the U.S. Supreme Court vacated
      Sixth Circuit decision which had held Ohio investment
      tax credit (ITC) unconstitutional
      Supreme Court’s ruling based solely on lack of
      standing; did not address merits
          Plaintiffs did not show actual injury
          Impact of incentives hypothetical, uncertain, remote, may
          actually benefit taxpayers
      Invalidated Sixth Circuit’s order enjoining Ohio from
      enforcing the ITC


                                                                      36
Allocation and Apportionment

  Allocable or apportionable?
      Science Applications (Md. Tax Ct.)
        Capital gain from sale of subsidiary not taxable
        Subsidiary at all times managed separately from parent
        Parent did business in Maryland, but subsidiary had no
        presence
        Gain had no nexus to Maryland
        Taxation of gain would have caused distortion




                                                                 37
Allocation and Apportionment

 Allocable or apportionable?
    Siegel-Robert, Inc. (TN Chancery Ct,)
      Interest from U.S. Treasury securities not apportionable
      Funds were intended and used solely to purchase diversified
      businesses for investment
      Earnings not used for capital replacement, expansion or to fund
      day to day operation
      No unitary relationship between manufacturing business and
      investment functions




                                                                        38
Allocation and Apportionment

  Allocable or apportionable?
      Indiana Letter of Findings 02-2004007
        Capital gain related to contribution of assets to a new
        partnership satisfied transactional test
        Taxpayer in the business of selling its business

     Indiana Letter of Findings 02-0274
        Gain on sale of three subsidiaries created, sold three days later
        was nonbusiness income
        Subsidiaries held foreign interests not integral or essential to
        taxpayer’s business




                                                                            39
Allocation and Apportionment

 Sales factor sourcing – tangible property
   Indiana
      H.B. 1001 – dock sales sourced to destination
      Legislatively overrules Miller Brewing (Ind. Tax Ct.) ruling that
      sales should be sourced to dock
   Paccar (Ala. ALJ)
      Sourced to destination; issue of first impression
   Virginia
      Sales made to Virginia distribution center under buy-sell
      arrangement sourced to Virginia regardless of destination
      Alternative apportionment not justified



                                                                          40
Allocation and Apportionment

 Sales factor sourcing - other than tangible property
   Massachusetts – Interface Group (App. Tax Bd.)
      In-state company that assembled vacation packages must
      source all receipts to Massachusetts
      Costs not sourced to location of vendors
      Each package not a separate income producing activity
      Operation of business as a whole was the income producing
      activity; cited Boston Professional Hockey Assoc.
   Massachusetts – EUA Ocean State (App. Tax Bd.)
      Receipts from sale of electricity not sale of tangible personal
      property
      Department will not appeal, will follow ruling; refund opportunities


                                                                             41
Allocation and Apportionment

 Sales factor sourcing - other than tangible property
   California Legal Ruling 2006-02
      Services performed by unitary affiliate not excluded – considered
      directly performed for affiliate not on behalf of affiliate
      Cost of performance based on arm’s length payment to affiliate
      or actual costs incurred by affiliate
   Indiana Letter of Findings 2006-02IT
      Insurance company receipts sourced based on personal services
      ratio
      2005 ruling sourcing same receipts based on property and
      payroll factors withdrawn
   New Jersey
      Regulation clarified – trademark receipts sourced based on
      licensee’s pro rata use in state according to its sales factor


                                                                          42
Allocation and Apportionment


 Other sales factor issues
   California
      Legal Ruling 2006-01 discusses exclusion of property, payroll,
      sales related to nontaxable income
      Legal Ruling 2006-03
         IRC § 338(h)(10) gains – occasional sale rule may apply;
         gain included using combined group factors
         IRC § 338(g) gains – occasion sale rule and payroll factor not
         applicable if single day return required
   Arizona
      Nonunitary partnership’s receipts not included in corporate
      partner’s sales factor numerator


                                                                          43
Allocation and Apportionment

 Single factor apportionment
    Indiana H.B. 1001 – phase-in beginning in 2007
    South Carolina H.B. 4874
      For manufacturers and retailers
      In lieu of phase-in, must compute under old three-factor and
      single factor methods; only portion of tax savings from single
      factor will be permitted from 2007 until 2011
   Wal-Mart (N.M. Tax Rev. Dept.)
      Intangible licensing company required to use single factor and
      source according to location of use by licensee
      Was held in abeyance pending KMart
      Taxpayer conceded nexus; argued zero apportionment


                                                                       44
Allocation and Apportionment

 Payroll factor
   Plantation Pipeline (Ala. Dept. Rev.)
      Payments to affiliate for administrative services included in
      payroll factor; not leased employees
      Relied on C&D Chemical
   UPS (Pa. Supreme Ct.)
      Company with employees furnished by affiliate did not have a
      payroll factor




                                                                      45
Allocation and Apportionment


 Special industry formulas
   FedEx Ground (Pa. Commw. Ct.)
      Formula = average receipts per mile x miles traveled
      Taxpayer could compute numerator using lower in-state average
      revenue miles rather than everywhere revenue miles

 Constitutional issues
   Stonebridge (Ore. Tax Ct.)
      Apportionment formula distortive; violated Due Process fair
      apportionment
      Commerce Clause not at issue because insurance company
      Court ordered total tax refund because insurance company
      provisions do not authorize alternative apportionment


                                                                      46
Combined and Consolidated Returns

 Argonaut (Cal. SBE)
   Rejected taxpayer’s attempt to include insurance
   companies in combined report
   Consistent with longstanding policy
   Alternative apportionment could not be invoked
   Inclusion impractical since insurance companies do not
   have taxable income

 Kidde America (Mo.)
    Amended return can be used to elect consolidated
    despite regulation requiring election by return due date


                                                               47
Combined and Consolidated Returns

 New York forced combination
   Premier National Bancorp (N.Y. DTA)
      Article 32 bank and Article 9-A subsidiary could not be required
      to file combined
      Economic substance existed; not solely motivated by tax
      considerations
   Hallmark (N.Y. DTA)
      Sales company not required to file combined with manufacturer
      Pricing study, concurrent documentation overcame presumption
      of distortion
      Affiliate established for valid business reasons
      Arm’s length pricing not required to include “valuable
      organizational intangibles,” such as customer lists
   Neither ruling is precedential

                                                                         48
Franchise and Other Taxes

 AT&T (Ala. App. Ct.)
   Business privilege tax deduction for investment in
   other entities unconstitutional where tied to entities’
   doing business in Alabama
   Risk of multiple taxation insufficient to satisfy
   compensatory tax doctrine




                                                             49
Pass Through Entities

 Bender (D.C.)
   Unincorporated business tax did not violate Home
   Rule Act prohibition on taxation of nonresidents
   individuals
   UBT was enacted by Tax Act of 1947 and imposed
   by Congress
   Home Rule Act enacted in 1973, prohibition did not
   supersede or repeal UBT
   Reversed lower court decision




                                                        50
Pass Through Entities

 Northwest Energetic (Cal. Super. Ct.)
   Annual LLC fee ruled unconstitutional
   Levy was a tax not a fee
   Imposed on total income without apportionment;
   thus, violated constitutional fair apportionment
   requirement
   Not precedential
   However, protective refund claims will be held in
   abeyance pending appeal




                                                       51
Sales and Use Taxes – Software, Digital Goods

 Taxability of electronically transmitted software
   Colorado
      Software regulation revised effective May 30, 2006
      Software exempt unless three criteria met
         Prepackaged
         Non-negotiable license agreement contained in package
         Delivered via tangible medium (not counting load and leave)
      Replaces obsolete regulation withdrawn several years ago that
      only provided limited exemption for custom software
   Pennsylvania
      State rescinded its prior Policy Statement. Current
      policy, beginning Nov. 1, 2005, is that canned software is
      taxable regardless of delivery format

                                                                       52
Sales and Use Taxes – Software, Digital Goods

 Taxability of electronically transmitted software
   Massachusetts
      Taxable beginning April 1, 2006
      However, software development and sale will now qualify as
      manufacturing for purposes of qualifying for the corporate excise
      single factor apportionment formula

   Georgia
      Regulation provides that electronically downloaded software is
      not subject to tax




                                                                          53
Sales and Use Taxes – Manufacturing
Exemptions

 Southwestern Bell (Mo.)
   Middle of the system equipment exempt, even though
   some manufacturing occurs at customer site, on
   customer-owned equipment
   Optional vertical billing services exempt
   Demonstrates broad application of exemption
   Current law provides explicit exemption for
   telecommunications equipment
 AT&T (Tenn. Ct. App.)
   Equipment not exempt because used to provide
   service


                                                        54
Sales and Use Taxes – Equipment Exemptions

 Concentric (Pa. Commw. Ct.) – internet service
 provider’s equipment and wireline purchases taxable
    Manufacturing exemption inapplicable
    Uniformity clause challenge rejected because other
    industries subject to increased regulation
    Not exempt under Internet Tax Freedom Act because
    tax was grandfathered




                                                         55
Sales and Use Taxes – Other Exemptions

 Airlines
    American Airlines (N.Y. DTA) - Electricity eligible for
    airline maintenance/repair property exemption

 Advertising
   Verizon (Mass. App. Ct.)
      Printing costs for telephone directories not eligible for former
      advertising exemption
    Merion Publications (Pa. Commw. Ct.)
      Publisher eligible for direct mail advertising exemption even
      though advertising on behalf of others



                                                                         56
Sales and Use Taxes – True Object Test

 Virginia H.B. 5002/Tax Bulletin 06-4
    Legislation requires true object test to be applied on a
    statement of work basis, rather than an overall contract
    basis, for government contracts
    Effective for work orders entered into on or after July
    1, 2006
    Under old policy
      If overall contract was for services, contractor was subject to use
      tax on all purchases
      If overall contract was for goods, purchases were sales for
      resale and subsequent sale to governmental entity also exempt



                                                                            57
Sales and Use Taxes – Subjectivity

 DaimlerChrysler (Ohio Bd. Tax App.)
    Manufacturer, not dealer, subject to use tax on “goodwill” repair
    parts

 Leasing - Citicorp (Md.)
    Lease termination payment not subject to sales tax
    Lessee returned equipment, so no “sale” or “exchange” to lessee

 Choice Hotels (S.Dak.)
   Franchisor not subject to tax on fees collected from franchisees
   and remitted to travel agents
   Travel agent commissions generally exempt
   Exemption not lost by franchisor acting as conduit


                                                                        58
Sales and Use Taxes – Other Issues

 Bad debt deduction – DaimlerChrysler (Mich. Ct. App.)
   Vehicle finance company entitled to bad debt deduction

 Location of sale - Alabama
   Taxpayers may control situs of local sales and use tax

 Discrimination - DirectTV (N.C. Ct. App.)
    Imposition of sales tax on satellite but not traditional
    cable services did not violate Commerce Clause
    Differential tax treatment resulted from nature of
    businesses, not location of activities

                                                               59
Taxpayer Disclosure

 Massachusetts H.B. 4169
   Penalty for failure to disclose an inconsistent return position
   IRC § 6662-like penalty

 Utah S.B. 139
    Disclosure, penalties for taxpayers and advisors
    State level listed and reportable transactions
    No voluntary compliance initiative
    Effective January 1, 2007

 West Virginia H.B. 4630
   Disclosure, penalties for taxpayers and advisors
   Federal transactions only, no state level transactions
   Voluntary compliance August 1, 2006 through November 1, 2006


                                                                     60