Tag Archives: State Law

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

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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

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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)

North Dakota Conservation Easements Prohibited by State Law

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us_tax_courtIn a case that highlights the potential conflict between state law and the requirements for the deductible donation of a conservation easement, the Tax Court in Wachter v. Commissioner held that a North Dakota conservation easement failed the “in perpetuity” requirement under IRC § 170(h)(2)(C) because North Dakota state law limits the duration of an easement to 99 years.

The taxpayers, comprised of two sets of couples filing joint returns for the tax years in question, owned varying interests in two partnerships, WW Ranch and Wind River, LLC. The partnerships entered into a cooperative agreement with the Commodity Credit Corporation and the American Foundation for Wildlife to sell conservation easements on multiple parcels from 2004 through 2006.

The taxpayers made three cash gifts to the North Dakota Natural Resource Trust (NRT) totaling $485,650 from 2004-2006. On its partnership returns, WW Ranch reported bargain sales of conservation easements as charitable contributions of $349,000 for 2004, $247,550 for 2005, and $162,500 for 2006. The parties obtained two appraisals to each contributed parcel. Each appraisal valued the property according to a different land use, and the taxpayers used the difference in appraised values to determine the value of the conservation easements.

The IRS issued notices of deficiency disallowing the charitable contribution deductions for both the cash payments to NRT and the property contributions. The IRS filed a motion for partial summary judgment.

Under IRC § 170(h)(1) a contribution of real property is a qualified conservation contribution if:

  1. The property is a “qualified property interest”,
  2. The contributee is a “qualified organization”, and
  3. The contribution is “exclusively for conservation purposes.”

The IRS argued that because the North Dakota state law restricts easements to 99 years the conservation easements cannot satisfy the first and third requirements of IRC § 170(h)(1). The parties agreed that the state law here is unique; it is the only state with a statute that provides for a maximum duration that may not be overcome by agreement.

Under IRC 170(h)(2)(c) a “qualified property interest” means “a restriction (granted in perpetuity) on the use which may be made of the real property. The taxpayers argued that the possibility that the land would revert back to them, WW Ranch, or their successors in interest is the same as a remote future event under Treas. Reg. § 1.170A-14(g)(3) that will not prevent the easements from being perpetual.

A remote future event under Treas. Reg. § 1.170A-14(g)(3) if “on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible.” The Tax Court cited its opinion in 885 Inv. Co. v. Commissioner, defining “so remote as to be negligible” as “a chance which persons generally would disregard as so highly improbable that it might be ignored with reasonable safety in undertaking a serious business transaction.”

The Court granted partial summary judgment on the conservation easement issue in favor of the IRS finding that “on the dates of the donations it was not only possible, it was inevitable that AFW would be divested of its interests in the easements by operation of North Dakota law.” The case will continue to trial on the deductibility of cash contributions to NRT.

Read the full opinion here: Wachter v. Commissioner, 142 T.C. No. 7