Georgia DOR Releases Guidance for Same-Sex Couples Filing in Georgia

On July 14, 2015, the Georgia Department of Revenue (“DOR”) released tax return filing guidance guidance for same-sex couples in response to the U.S. Supreme Court’s decision in Obergefell v. Hodges, 576 U.S. ___ (2015) which required states to license and recognize same-sex marriage. The Georgia DOR now will recognize same-sex marriage in the same way it recognizes marriages of opposite-sex couples. The Georgia DOR will recognize all marriages where the marriage license was issued in Georgia and all marriages lawfully licensed and performed out of state.Unknown

The guidance is important for Georgia same-sex couples that were married in a state legally recognizing marriage before 2015. Before the July 14 guidance, those couples were required to file Georgia individual income tax returns as if they were single – despite being required to adopt a federal filing status as married (either jointly or separately). Married same-sex Georgia couples who have not yet filed their 2014 Georgia income tax return may now file under the same rules that apply to legally married opposite-sex couples. If a legally married same-sex couple has already filed their 2014 return, they are permitted to file an amended return under the same rules that applied to legally married opposite-sex couples in 2014.

Georgia same-sex couples that were legally married in another state prior to 2014 are permitted to file amended Georgia income tax returns under the rules that applied for the tax years in question to lawfully married opposite-sex couples. Under O.C.G.A. § 48-2-35(c)(1)(A) a claim for refund be filed within three years of the later of the date of payment of the tax to the Georgia DOR or the due date (including any extensions granted) for filing the original return for that period.

Read the Georgia DOR guidance here.

Georgia Tax Tribunal Rules that Sales Tax Applies to Electric Utility’s Machinery Used in Transmission & Distribution

In Georgia Power Company v. MacGinnitie, Docket No. Tax-S&UT-1403540 (Ga. Tax Tribunal, Jan. 5, 2015), the Georgia Tax Tribunal held that machinery and equipment used in Georgia Power Company’s (hereinafter “Georgia Power”) electricity transmission and distribution system are subject to Georgia sales & use tax.

Georgia Power filed monthly sales and use tax returns with the Georgia Department of Revenue in 2009 and 2010. Tangible personal property used in the construction, maintenance, and operation of Georgia Power’s transmission and distribution system was treated as taxable on those returns. Georgia Power timely filed claims for refund for sales and use tax paid on those items in December 2012 and February 2013, respectively.  Georgia Power claimed a refund in the amount of $8,176,424 for 2009 and a refund in the amount of $10,269,678 for 2010.

In its claims for refund, Georgia Power took the position that the machinery and equipment used in its transmission and distribution system is exempt from Georgia sales & use tax under the manufacturing exemption in O.C.G.A. § 48-8-3(34) (2009) (recodified as O.C.G.A. §§ 48-8-3.2(a)(3), -(a)(7), -(a)(15), -3.2(b)).  Under O.C.G.A. § 48-8-3(34) machinery or equipment which is “necessary and integral” to the manufacture of tangible personal property in a Georgia manufacturing plant is exempt from Georgia sales & use tax.

The Georgia Department of Revenue denied Georgia Power’s refund claims and Georgia Power filed its refund action with the Georgia Tax Tribunal on July 26, 2013.  The Tax Tribunal considered two key issues in the case.  The first is whether the items included in the claim for refund are used for “manufacturing” electrical energy sold by Georgia Power within the meaning of O.C.G.A. §§ 48-8-3(34) and (34.3).  The second is whether Georgia Power’s electricity generating facilities are a single “manufacturing plant” under the same statute.

Georgia Power and the Georgia Department of Revenue each presented expert testimony discussing the role of the transmission and distribution system in the electricity generation process.  Georgia Power’s expert testified that the transmission and distribution system changes the character of the electrons passed from the generation facility.  The expert also testified that the source of the energy is the electrical generator located at a power plant.

The Georgia Department of Revenue’s expert testified that the movement of electrons from one location to another in response to voltage is how electrical energy is transmitted; the actual electricity generation occurs at the plant.  The Department of Revenue’s expert testified that the transmission and distribution system does not change the amount of electrical energy generated in a plant, but rather it controls how the electrical current is distributed to customers.

Judge Beaudrot reviewed Ga. Comp. R. & Regs. § 560-12-2-.62(2)(h) defining “manufacturing as an operation to change, process, transform, or convert industrial materials by physical or chemical means, into articles of tangible personal property for sale or further manufacturing that have a different form, configuration, utility, composition, or character.”  Judge Beaudrot held that Georgia Power’s manufacturing of electricity is the production of electrical energy, which “begins and ends” at Georgia Power’s generating plants. Judge Beaudrot cited several cases with similar factual circumstances decided in other jurisdictions supporting his conclusion including Niagara Mowhawk Power Corp. v. Wanamaker, 144 N.Y.S. 2d 458 (N.Y. App. Div. 1955), Peoples Gas and Electric Co. v. State Tax Comm’n, 28 N.W. 2d 799 (Iowa 1947), and Utilcorp United Inc. v. Dir. of Revenue, 75 S.W. 3d 725 (Mo. 2001).

Judge Beaudrot also rejected Georgia Power’s argument that its transmission and distribution system covering almost the entire state of Georgia is part of a single manufacturing plant generating electricity. Judge Beaudrot held that while Georgia Power’s transmission and distribution system is “highly integrated” with its generation facilities it is not necessary for the manufacturing of electricity that takes place at the generating plants.  Thus, the Tax Tribunal upheld the Georgia Department of Revenue’s denial of Georgia Power’s claim for refund.

Read the full opinion here:  Georgia Power Company v. MacGinnitie, Docket No. Tax-S&UT-1403540 (Ga. Tax Tribunal, Jan. 5, 2015)

New Jersey: Toyota Can Reduce Gains on Sale of Leased Vehicles

New Jersey Tax CourtIn Toyota Motor Credit v. Director, Div. of Taxation, Docket No. 002021-2010 (Aug. 1, 2014), the New Jersey Tax Court held that Toyota Motor Credit Corporation (“TMCC”) was entitled to increase its tax basis in leased vehicles to the extent of prior year depreciation deductions that hadn’t produced a New Jersey tax benefit.

TMCC is a California corporation that operates a vehicle leasing business in New Jersey.  In a typical lease transaction, an automotive dealer enters into a lease agreement with a customer for a Toyota vehicle.  TMCC purchases the leased vehicle from the dealer, the dealer assigns the lease agreement to TMCC, and TMCC collects the lease payments from the customer.  At the conclusion of the lease, TMCC sells the vehicle.

During periods prior to 2003, TMCC had depreciation deductions of $2.041 billion in excess of what was needed to reduce TMCC’s entire net income to zero.  This gave TMCC a net operating loss of $2.041 billion prior to the 2003 tax year.  For federal tax purposes, in 2003 and 2004, TMCC disposed of vehicles and recognized depreciation recovery gain of $484 million and $1.278 billion, respectively.  TMCC could not use these losses for New Jersey Corporation Business Tax (“CBT”) purposes in 2003 and 2004 because the CBT prohibited loss carryovers for depreciation in 2003 and 2004.

TMCC initially reported gains for CBT purposes for 2003 and 2004 on the sale of leased vehicles because of its federal adjusted basis.  Relying on the New Jersey Tax Court’s holding in Moroney v. Director, Div. of Taxation, 376 N.J. Super. 1 (App. Div. 2005), TMCC amended its 2003 and 2004 CBT return to eliminate gains of $484 million and $1.278 billion, respectively, by increasing its basis in vehicles sold during those two years by the amount of depreciation that was unused for CBT purposes.  TMCC argued that disallowing the basis adjustment for CBT purposes imposes a tax on phantom income.

Moroney involved individual taxpayers challenging New Jersey’s Gross Income Tax Act (“GIT”).  In Moroney, the taxpayers sold rental properties.  Despite taking federal depreciation deductions on the property during the course of ownership, the taxpayers used the properties’ purchase price as the basis for calculating gain under New Jersey law.  The taxpayers took this position because the operating expenses exceeded rental income in each year the Moroneys owned the properties and the GIT Act prohibits loss carryforwards.  The taxpayers prevailed and TMCC argued that the same principle should apply to its facts under the CBT.

The New Jersey Division of Taxation argued that Moroney did not apply in this case because the CBT Act, unlike the GIT Act, directly ties taxable income in New Jersey to federal taxable income.  The GIT Act has “long been recognized as not mirroring federal statutes.”

The Court, instead, focused on the existing provisions of the CBT Act, which paralleled relevant statutes in the GIT Act.  Specifically, the Court examined N.J.S.A. 54:10A-4(k) also imposes a tax on “net income,” including “profit gained through a sale . . . of capital assets.”  Looking at the legislative intent, the Court found that the CBT Act “expresses the intent to tax only the gain a taxpayer realizes from the sale of property [and] permitting TMCC to employ a Moroney adjustment to the basis of its property would further this statutory objective.”

The Court also found in favor of TMCC regarding income apportionment under New Jersey’s Throw-Out Rule.  The Throw-Out Rule, enacted as part of the Business Tax Reform Act of 2002, amended the receipts factor for CBT apportionment.  It changed the income tax apportionment sales factor from a ratio of New Jersey receipts to total receipts (NJ receipts/total receipts) to a ratio of New Jersey receipts to taxed receipts (NJ receipts/taxed receipts).  The rule excludes receipts from the denominator of the sales factor that would be assigned to a state or foreign country in which the taxpayer is not subject to tax.

The Director removed TMCC’s receipts from the denominator of the receipts factor for Nevada, South Dakota, and Wyoming, because TMCC did not pay tax in those jurisdictions. TMCC had lease receipts in Nevada and paid between $25 million and $56 million in tax from 2003 to 2006. TMCC also had significant receipts in South Dakota and Wyoming. The Director argued that the receipts from each state should be “thrown out” because the tax paid to Nevada was actually a sales tax and TMCC did not pay tax in South Dakota and Wyoming.  The Court rejected the Director’s arguments.  The Court held that “sufficient constitutional nexus is all that is required” to preclude the removal of TMCC’s receipts from the denominator of the receipts fraction in all three states.

Read the full opinion here: Toyota Motor Credit Corp. v. Director, Div. of Taxation, Docket No. 002021-2010 (Aug. 1, 2014)

Michigan Court of Appeals Rejects IBM’s MTC Election

The Michigan Court of Appeals has ruled that the Multistate Tax Compact (MTC) election is not available for Michigan taxpayers. The appellate tribunal affirmed the trial court’s decision that IBM could not elect to apportion its income according to the three-factor MTC formula. The Court of Appeals held that apportionment under the Michigan Business Tax (MBT) is mandatory and “the possibility of electing a different apportionment formula as a matter of right is simply not permitted.” The court held that the mandatory language of the later enacted MBT repealed the MTC election by implication.

This decision further muddies the water around the viability of this popular state tax planning strategy for large multi-state corporations. The California Court of Appeal recently allowed an MTC Election in a case that is almost certainly headed to the California Supreme Court. Savoy taxpayers can, and should, expect that each state will view this election differently.

The Michigan opinion contained a couple of interesting litigation notes too. First, the opinion was issued as an unpublished, per curiam decision. Under Michigan law unpublished opinions do not have the force of stare decisis – that is, no binding precedential value. For a case that prompted two amici curiae briefs, one might have expected a decision that would have firmly established the law for other taxpayers. This one, however, was not it.

The per curiam (“by the court”) designation is also interesting in that it is often reserved for opinions of lesser importance. Per curiam decisions often imply a collective view of the prevailing law by the reviewing court.

However, that wasn’t exactly the case here. The per curiam decision was accompanied by a concurring opinion. The author of the concurrence, Judge Riordan, agreed with the court’s determination that IBM was required to use the MBT apportionment method, but wrote to note his disagreement with idea that the MTC election had been impliedly repealed by the passage of the MBT. The concurrence is interesting in that its reluctance to embrace the idea of “repeal by implication” was similar to the reasoning applied by the California court in the Gilette case, mentioned above, that upheld that the MTC election. Corporate taxpayers who have taken the MTC election in some states, or are considering it, would be well advised to track these cases closely.

Read the Court of Appeals per curiam decision here:
IBM v. Dept. of Treasury, No. 306618 (Nov. 20, 2012) per curiam

Read judge Riordan’s concurring opinion here:
IBM v. Dept. of Treasury, No. 306618 (Nov. 20, 2012) concurrence

California Issues Guidance for MTC Election Refund Claims

Following the recent California Court of Appeal decision affirming Gillette’s election to apportion income under the Multistate Tax Compact (MTC), the California Franchise Tax Board (FTB) has issued guidance for taxpayers who wish to preserve the statute of limitations by filing amended returns that elect the MTC method retroactively.

The FTB has made clear its position that a taxpayer cannot elect to utilize the methodology contained in the MTC on an amended return. The FTB also is clear that it will only take action on the claims once Gillette has been fully resolved. Nonetheless, taxpayers wishing to file a protective claim retroactively electing to utilize the apportionment method contained in the MTC should mail an amended return or a letter claim to the FTB at:

Compact Method 347 MS: F381
Franchise Tax Board
C/O FTB Notice 2012-01
P.O. Box 1673
Sacramento, CA 95812-1673

The amended return should include

  • a revised Schedule R
  • a computation of the refund amount, and
  • “COMPACT METHOD” should be written in red at the top of the amended return.

An amended return is required for each year for which the retroactive election is made.

Please refer to the announcement for additional filing requirements.

FTB Notice 2012-01

On Rehearing the California Court of Appeal Allows MTC Election

On rehearing, the California Court of Appeal has reaffirmed its earlier (vacated) decision and reversed the decision of the Franchise Tax Board (“FTB”)  in Gillette v. Franchise Tax Board.  The Court of Appeal concluded that the 1993 amendment that attempted to repeal the Multistate Tax Compact (MTC) election was invalid and the taxpayer could elect to apportion under the three-factor MTC formula.

On July 24, 2012, the Court of Appeal released an opinion and decision that reversed the decision of the FTB. The FTB dismissed the taxpayer’s request for refund based on an election to apportion income according to the three-factor Multistate Tax Compact (MTC) formula. On August 9, 2012, the Court of Appeal vacated its opinion and decision and ordered a rehearing. The rehearing was held and the Court of Appeal is standing by its earlier decision: the FTB construction is invalid, the MTC election was not repealed, and the taxpayers could elect to apportion income under the three-factor MTC method.

The opinion after rehearing is substantially and substantively similar to the original opinion issued by the Court of Appeal. The following minor additions to the new opinion are notable. The new opinion notes the enactment of California Senate Bill No. 1015 on June 27, 2012 (which repealed the MTC election) and makes clear that the effect or validity of this later enacted statute was not before the court. It also recognizes that it was the “clear import” of the legislature to override the MTC election and mandate exclusive use of the double-weighted sales formula but that such a construction is invalid. Finally, the court strengthened the language in its conclusion:

The Legislature did not repeal, amend or reenact any part of the Compact at the time, and thus neither the public nor the legislators had adequate notice that the intent of this amendment was to eviscerate former section 38006.

Read the opinion on rehearing here:
Gillette v. FTB (Rehearing) 10.2.12

If you’d like to compare this opinion with the original, vacated, opinion please visit our earlier post on the order for rehearing.

California: FTB’s Alternate Apportionment Formula Approved Against General Mills

The California Court of Appeal has ruled that the Franchise Tax Board could impose an alternative apportionment method against General Mills because the apportionment method used by the taxpayer did not fairly represent its business activity in California.

The Court of Appeal had previously ruled that General Mills properly included hedging receipts in the denominator of its sales factor for California apportionment purposes. General Mills v. Franchise Tax Board, 172 Cal.App.4th 1535 (2009). The effect of that determination substantially reduced General Mills’ corporate income tax liability in California.

However, the case was remanded to the trial court to determine whether inclusion of the hedging receipts in the apportionment formula calculation resulted in a fair representation of General Mills’ business activity in California under California Revenue & Taxation Code § 25137. The trial court determined that it did not. The trial court then adopted the FTB’s alternative apportionment formula which included only the taxpayer’s net gains from its hedging strategy in the sales factor. In this ruling, the Court of Appeal affirmed the lower court’s determination and the imposition of the alternative apportionment formula.

Read the opinion here:
General Mills v. FTB, No. A131477 (Cal. App. Aug. 29, 2012)

California Court of Appeal Decision on MTC Election Vacated for Rehearing

On August 9, 2012, the California Court of Appeal (1st Appellate District) “on its own motion and for good cause” vacated its decision and opinion issued on July 24, 2012 in Gillette v. Franchise Tax Board, and ordered a rehearing.

The vacated opinion held that, absent a complete or specific repeal, the Multistate Tax Compact (“MTC”) was binding on member states and a member state could not prevent taxpayers from electing into the MTC’s three-factor apportionment method. The appellants and other practitioners welcomed the decision but, alas, it is no more. Taxpayers and advisors anxious to take action based on the decision will have to wait.

Though the Court of Appeal’s order indicates that the decision to rehear the case was on its own motion, the Franchise Tax Board had filed a Motion for Rehearing the day before which was met by a request to modify the opinion by one of the appellants’ counsel (the case had been consolidated on appeal). It seems that the court did not recognize either motion in its order, but it did make it clear that “additional briefing from any party or any amicus curiae is not requested.”

A date for rehearing has not yet been scheduled.

Massachussetts Appeals Court Affirms Operational Approach to Cost of Performance without a Published Opinion

The appeal of AT&T Corporation v. Commissioner from the Massachusetts Appellate Tax Board (“ATB”) was among the 10 most requested dockets on the Supreme Judicial Court of Massachusetts website. It’s unlikely that observers got exactly what they expected because the decision came with a considerable caveat.

On July 13, 2012, the Massachusetts Appeals Court affirmed the decision of the ATB under Rule 1:28. A decision under Massachusetts Appeals Court Rule 1:28 exists somewhere between an unpublished decision and a per curium opinion. The rule is reserved for the summary disposition of cases where the panel of judges “determine that no substantial question of law is presented by the appeal.” It normally is not accompanied by an opinion (as was the case here) and is regarded as an unpublished decision by the Appeals Court. However, it is not regarded in exactly the same fashion as an unpublished decision in the federal context. Prior to 2008, and the Massachusetts Appellate Court’s decision in Chace v. Curran, 71 Mass. App. Ct. 258, appeal denied, 451 Mass. 1103 (2008), unpublished decisions were not to be relied upon or cited as authority. The Chace opinion, which was accompanied by an official amendment to the court rules, changed the status of Rule 1:28 decisions by holding that unpublished decisions “may be cited for persuasive value but…not as binding precedent.”

The affirmation of the ATB’s decision certainly was a good thing for AT&T even if the application of those facts to others might be approached with some caution. AT&T was subject to the Massachusetts public service corporation franchise tax. They sought a refund of taxes when they changed their approach to apportioning service income earned in Massachusetts. The Department of Revenue rejected the refund claim and they ended up in front of the ATB.

The central issue is what receipts should be included in the sales factor of Massachusetts apportionment purposes. Service income earned in Massachusetts is sourced to the commonwealth using a two-part analysis, often referred to as “cost of performance.” The first step is to determine the income producing activity. The second step is to then to determine if the greater portion of the cost of performing that activity occurs in Massachusetts or elsewhere.

The nature of the income producing activity was crucial to the ATB’s analysis of AT&T’s refund position. The Commissioner of the Department of Revenue argued that AT&T’s income should be measured based on each individual call or data transmission – the transactional approach. Under that analysis, the costs of performing each transaction was greater in Massachusetts than anywhere else, do the income from all the calls would be sourced to Massachusetts and subject to tax by Massachusetts.

AT&T countered that its income producing activity was “providing a national, integrated telecommunications network” – the operational approach. Of course, under AT&T’s method most of the costs related to performing the income producing activity happened at their corporate headquarters in New Jersey, outside of Massachusetts, thus depriving Massachusetts of the privilege of taxing the income.

AT&T had lost this argument in the Oregon Tax Court, but prevailed in the ATB. The ATB found that AT&T’s system of re-routing calls, sometimes across the nation, to make a connection in response to heavy network demands, and the unpredictability of that routing, illustrated that the income producing activity was part of an entire integrated network. It was this decision that the Appeals Court affirmed with its ruling.

The Appeals Court did not issue an opinion with its ruling, but you can read the ATB’s decision here.
AT&T Corp. v. Massachusetts, ATB 2011-524 (June 8, 2011)