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State & Local Tax Advisor - December 2012

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Florida

Tax on Repairs Performed Under Goodwill Warranty Program Amounted to Double Taxation

An auto manufacturer taxpayer was not liable for use taxes assessed against it by the Florida Department of Revenue on the value of repairs performed by the taxpayer’s dealers under its case-by-case goodwill warranty program because the tax due for such repairs was paid as part of the original sales transaction and to impose a second round of tax on the transaction would amount to double taxation or the pyramiding of tax, which is prohibited under state law. The taxpayer provides a case-by-case warranty program under which it authorizes its dealers to provide repairs to customer vehicles beyond the car’s base warranty period at no additional cost to the customer when the condition results from a defect in material or workmanship as opposed to normal aging or lack of proper maintenance. The appellate court held that the right to participate in the program and to receive repairs is part of the consideration received by the customer in exchange for the purchase price of the car. The tax due for such repairs is paid as part of the sales transaction. The department argued that the discretionary nature of the case-by-case goodwill warranty program distinguishes it from the taxpayer’s other repair programs. The appellate court disagreed, however, and found that although the taxpayer and its dealers have discretion in determining whether to provide a specific repair, that does not mean that customers receive nothing of value. Evidence presented at the trial court level demonstrated that the taxpayer paid millions in repair costs under the program during the audit period. Moreover, the evidence also indicated that the taxpayer includes the costs of the program in the price of the car. As a result, the taxpayer’s customers pay for, and are assessed sales tax on, the additional costs of the program at the time of sale.

Department of Revenue v. General Motors LLC, District Court of Appeal of Florida, First District, No. 1D12-784, December 5, 2012

Michigan

Taxpayer Required to Use MBT Apportionment Formula

Affirming the lower court, the Michigan Court of Appeals held that a Michigan taxpayer was required to use the Michigan business tax (MBT) apportionment formula (100% sales) and that the taxpayer was not permitted to elect to use the Multistate Tax Compact’s apportionment formula (equally-weighted property, payroll, and sales). The taxpayer argued that the MBT apportionment formula was optional, and the Department of Treasury argued that the MBT apportionment formula was mandatory. The court noted that the MBT statute allowed taxpayers to request permission to use an alternate apportionment method so that unusual situations where the default formula caused distortion would not occur. However, the Compact allowed an election of right, presumably exercised in order to obtain a lower tax liability. Examining the statutory language, the court noted that the applicable provision (M.C.L. 208.1301) absolutely precluded any other apportionment formula except by petition.

The taxpayer next argued that the Compact was a contract. However, the court noted that statutes were not deemed to be contracts in the absence of an exceedingly clearly-expressed intent by the Legislature. Essentially, for the Legislature to express such an intent, it would have had to use the word "contract" or "covenant," or otherwise explicitly "surrender its power to make changes." In addition, the Compact language did not specify that it was a contract. As such, the court reasoned that enacting a conflicting statute might be an improper way to repeal the Compact, but not necessarily impermissible. Accordingly, the MBT law repealed by implication the apportionment election provision in the Compact.

International Business Machines Corp. v. Department of Treasury, Michigan Court of Appeals, No. 306618, November 20, 2012

Single Mixed Transaction Rule Proposed; Other Administrative Amendments Proposed

The Michigan Department of Treasury has proposed a new sales and use tax rule regarding single mixed transactions. A "single mixed transaction" would be defined as a transaction in which a combination of taxable and nontaxable services, taxable and nontaxable personal property, or taxable and nontaxable services and personal property is sold for a single price. If the transaction was principally a transfer of taxable services or taxable tangible personal property, the entire transaction would be deemed taxable. However, if the transaction was principally the transfer of nontaxable services or nontaxable personal property, the entire transaction would be exempt. The following factors would be used to determine whether a single mixed transaction was principally the sale of a service or of personal property:

  • what the buyer sought as the object of the transaction;
  • what the seller or service provider is in the business of doing;
  • whether the taxable item was provided as a retail enterprise with a profit-making motive;
  • whether the taxable item was available for sale without the exempt item;
  • the extent to which the nontaxable item has contributed to the value of the taxable item; and
  • any other factors relevant to the particular transaction.

The department has also proposed to rescind the following sales and use tax rules: R205.5 ("Tangible Personal Property"), R205.9 ("Sales for purposes of resale"), and R205.23 ("Records"). Additionally, the department has proposed to amend the following rules: R205.1 ("Sales tax licenses"), R205.8 ("Consumer; use; conversion"), R205.15 ("Trade-in deduction"), R205.16 ("Returned goods"), R205.20 ("General application"), R205.22 ("Discounts generally; discounts on certain motor vehicle sales"), R205.26 ("Use tax registration"), R205.28 ("Use tax included in gross proceeds"), and R205.136 ("Food for human consumption"). A public hearing will be held on December 14, 2012.

R205.5, 205.9, 205.23, 205.1, 205.8, 205.15, 205.16, 205.20, 205.22, 205.26, 205.28, 205.136, and 205.29, Michigan Department of Treasury, December 1, 2012

Sale of Business Excluded From Sales Factor Denominator

The Michigan Court of Appeals held that a taxpayer subject to the former single business tax (SBT) was required to exclude the proceeds of selling a business from the taxpayer’s sales factor denominator for apportionment purposes. An S corporation that imported and distributed wines and spirits, the taxpayer sold all the tangible and intangible assets related to the Grey Goose vodka brand for over $2 billion in 2004. The taxpayer argued that the amount received should be included in the sales factor denominator. To determine if the transaction constituted a "sale," the court looked to the applicable statutory definition. The former SBT law defined "sale" to include, among other things, the rental, lease, licensing, or use of tangible or intangible property which constituted business activity. "Business activity" was defined broadly. The court reasoned that "sale" and "business activity" were not synonymous; otherwise, the Legislature would not have provided separate definitions. The amount the taxpayer received was not for the use of a brand name; rather, it was for the transfer of title to the entire brand. Thus, the court concluded that the transaction of selling the business was not a "sale" under the former law. The taxpayer also argued that the department’s calculation of the sales factor led to a grossly distorted result, which was unconstitutional. The court declared that the taxpayer’s arguments on this issue were conclusory and without merit. The brand was sold in Michigan; therefore, the state was entitled to tax a portion of the proceeds.

Sidney Frank Importing Company, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 306742, December 4, 20

Lessee Not Liable for Tax on Uniform Rental

A manufacturer of auto parts was not liable for Michigan use tax on uniform rentals because the obligation to pay use tax falls only upon the lessor. The rental contract between the taxpayer and the lessor did not specify which party was responsible for use taxes. MCL 205.95(4) and Rule 82 of the Michigan Administrative Code state that the person engaged in the business of renting or leasing tangible personal property shall pay the sales or use tax at the time of purchase or may pay the use tax on the rental receipts. Therefore, lessors are required to pay the use tax, and no corresponding obligation attaches to the lessee.

Musashi Auto Parts of Michigan, Inc. v. Department of Treasury, Michigan Court of Appeals, No. 305268, December 13, 2012

Ohio

Taxpayers Who Increase Payroll May Reduce Amount of Depreciation Addback

Recently signed Ohio legislation permits certain taxpayers that claim an enhanced federal income tax depreciation deduction to reduce the amount of the deduction they must add back for Ohio income tax purposes for taxable years beginning in 2012 or thereafter, clarifies treatment of net operating losses, and makes various other changes.

Beginning with taxable year 2012, taxpayers who increase employee income tax withholdings by more than 10% during the taxpayer’s immediately preceding taxable year must add back 2/3 of the bonus depreciation expenses allowed by IRC §168(k) and the qualifying depreciation expenses allowed by IRC §179. Current Ohio law requires taxpayers to add back 5/6 of their depreciation expenses and an equal portion (1/5) of the add-back amount over the next five tax years.

Additionally, taxpayers who increase their Ohio payroll withholdings for the prior year by the sum of both the federal enhanced IRC §168(k) and §179 qualifying depreciation expense would not be required to add back any of the federal bonus depreciation deduction for Ohio income tax purposes.

The legislation also clarifies Ohio’s income tax treatment of enhanced depreciation allowances in a taxable year in which a business's allowances result in or increase the business's federal net operating loss (NOL) carryback or carryforward.

The legislation disallows the deduction of any enhanced federal depreciation or expensing allowance for a taxable year if the taxpayer’s allowances result in or increase the taxpayer’s NOL carryback or carryforward for that year. Taxpayers must add back the entire amount of the federal deduction and then may claim the federal deduction in six equal increments beginning in the following year unless, in that year, the owner's claimed allowances result in or increase the owner's net operating loss carryback or carryforward.

The legislation also disallows income tax refunds for bonus depreciation deductions that had been forfeited before the bill's clarifications became effective.

H.B. 365, Laws 2012, effective 90 days after filing with the Secretary of State, applicable as noted; Bill Analysis, Ohio Legislative Service Commission

Taxability of Food Sold by Restaurants Discussed

The Ohio Department of Taxation has issued an information release on the applicability of sales tax to food sold by restaurants and other vendors for consumption on the premises. All food sold for consumption on the premises is taxable. The sale of soft drinks is always taxable, no matter where they are consumed. If a business operates as part of a food court, the common seating area is considered "on premises," and tax applies. If the business is a food truck and a seating area is provided for customers, on-premises taxability also applies. If a taxpayer owns or leases the building and surrounding real estate, the parking lot is considered to be part of the premises for tax purposes. The department recommends that taxpayers ask customers if their food purchase is "for here" or "to go" in order to determine taxability. 

Sales Tax Information Release ST 2012-01, Ohio Department of Taxation, December 6, 2012.

Pennsylvania

Mandatory EFT Payment Amount Lowered to $10,000

For a variety of Pennsylvania taxes, a regulation amendment lowers the amount for which payments must be made by electronic funds transfer to $10,000 (formerly $20,000) or more in conformance with recent statutory changes. The regulation applies to the following taxes:

  • sales and use;
  • employer withholding;
  • liquid fuels;
  • fuel use;
  • mutual thrift institutions;
  • oil company franchise;
  • malt beverage;
  • motor carrier road;
  • corporate net income;
  • capital stock-franchise;
  • bank shares;
  • title insurance and trust company shares;
  • insurance premiums;
  • public utility realty; and
  • gross receipts.

Along with other conforming amendments, the Department of Revenue rescinded a regulation that required it to notify certain taxpayers that they would be required to register on or before September 1 concerning mandatory EFT payments based on its anticipated revenues for the following year. The department noted that technology advances and streamlining processes available on its website had rendered the registration process obsolete.

61 Pa. Code §§ 5.3, 5.5, and 5.7, Pennsylvania Department of Revenue, effective December 1, 2012, applicable January 1, 2013

Tennessee

U.S. Supreme Court Declines to Review Whether Teachers Created Nexus for Mail-Order Bookseller

The U.S. Supreme Court has denied a request to review a holding by the Tennessee Court of Appeals (the Tennessee Supreme Court denied review) that found the activities of schools and teachers to be sufficient to create Tennessee sales and use tax nexus for a mail-order company that sold books via marketing materials distributed in schools. Specifically, the Tennessee Court of Appeals found that there were sufficient connections with the state to establish nexus because the company created a de facto marketing and distribution mechanism within Tennessee schools.

Scholastic Book Clubs, Inc. v. Roberts, U.S. Supreme Court, Dkt. 12-374, petition for certiorari denied November 26, 2012

If you have any questions, please contact your tax advisor.

 

The information provided in this alert is only a general summary and is being distributed with the understanding that Plante Moran, PLLC is not rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use. ©2012 CCH. All Rights Reserved

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