Articles Tagged with “State and Local Tax Attorney”

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It is difficult to change the channel without hearing some development this week in the Boston Marathon explosion. This week in April, 2013 has been mostly a dark one. However, as we tend to in the face of crisis, our nation has shown its resolve and unity. While it can never replace the loss of life and the feeling of fear that stemmed from the incident, there have been some rays of sunshine. Among the acts of good faith to those struck by this horrible event are the IRS and the Massachusetts Department of Revenue. Each has shown some leniency for its respective filing deadlines.

With tax day marked as April 15, 2013, the IRS allowed for an extension as a result of the tragedy. Specifically, the IRS has allowed for a three-month filing and payment extension to Bostonians and others affected by the explosions. Consequently, no filings or payments will be due if completed by July 15, 2013. The three-month leniency applies to all individuals who are residents of Suffolk County, Massachusetts, including the City of Boston. The IRS also allowed an extension for victims and their families, first responders, and those who had preparers that were adversely affected.

Piggybacking on this idea was the Massachusetts Department of Revenue for state and local tax filings. Massachusetts announced that state and local tax payers have another week to file their returns. That means any person or business that has personal, business, or corporate income tax returns has at least until April 23, 2013 to file their returns.

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Due to the rising cost and high taxes of cigarettes throughout the country, individuals and businesses are coming up with creative ways to avoid the tax on cigarettes and tobacco. From clubs, to specialty stores, and even peoples’ homes, establishments that allow smokers to make their own cigarettes are on the rise. Companies such as RYO have installed thousands of machines throughout the nation in an effort to combat the rising costs of cigarettes, which are over $66 per carton in some states. The machines can reduce costs to as low as $20 per carton in some states, which has resulted in an industry that has quadrupled in size over the past few years. What is often overlooked by many of these do-it-yourself stores is whether allowing customers to partake in cigarette making morphs them into a cigarette manufacturer. In most states, becoming a cigarette manufacturer can impose strict and expensive license requirements as well as burdensome state taxes.

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For example, in January, 2013, a nonprofit club in Michigan acquired a cigarette making machine. The club purchased the machine as a convenience for its members in a non-commercial setting. Concerned as to whether this practice turned the company into a “manufacturer” of tobacco products under Michigan law, the company requested a Letter Ruling, specifically LR 2013-1, Michigan Department of Treasury, January 31, 2013. The club took it a step further and asked whether the club member operating the cigarette machine would also be a manufacturer.

Under Michigan law, MCL 205422(m)(ii), any person who operates or allows another to operate a “cigarette making machine” for the purpose of generating a cigarette is a “manufacturer.” The defined “cigarette making machine,” means a machine or device that 1) is capable of being loaded with tobacco, cigarette papers or tubes, or any other component related to a cigarette, 2) is designed to produce a cigarette, 3) is commercial grade, and 4) is powered by something other than human power. Applying this nice narrow and concise definition, the state determined that the machines used were the dreaded “cigarette making machine.”

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It never ceases to amaze me as to the types of cases and industries that come up in our practice. In late 2012, a Taxpayer, or its representative, inquired to the Missouri Department of Revenue whether certain sales it made to its customers are subject to Missouri sales and use tax. As a state and local tax attorney and the proud recipient of a recent jawbone graft, this particular ruling caught my attention. Specifically, in LR 732, Mo. Dept. of Revenue (August 10, 2012), a dental supply and service distributor sold single patient use medical materials to its customers. The medical materials happened to be used for structural support for bone tissue during jaw bone grafting.

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Like every one of the 45 states and the District of Colombia that has a sales and use tax regime, Missouri has a medical supply exemption. Medical exemptions are often popular ways for Legislatures to look popular by exempting items such as food and medicine that is necessary for people to survive. States take the position that taxpayers should not be burdened with state taxes for items that are essential.

At issue in LR 732, Mo. Dept. of Revenue (August 10, 2012) was Missouri’s exemption for “orthopedic devices” such as rigid or semi rigid leg, arm, back or neck braces that are used to support weak or deformed body, or restrict or eliminate motion in diseased or injured body parts. Sounds delicious, don’t it? In any event, the Taxpayer was curious if jawbone grafting materials fit within this gruesome sounding exemption.
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McDonalds.jpgAs many of you are aware, today, February 18, 2013, is President’s Day. For many that means banks are closed and, more importantly, work is closed. For many others, like me, President’s Day really just feels like another day. However, this President’s Day is special thanks to McDonald’s.

Like most of the country, on my drive into work this morning, I heard about McDonald’s special President’s Day promotion. Specifically, if a customer purchases a Big Mac or Quarter Pounder, a second delicious sandwich can be purchased for a penny. Why did McDonald’s charge a penny, rather than just giving it away for free? Perhaps, the corporate executives at McDonald have read my riveting state and local tax blog last week.

For the few of you that did not read my blog I did last week, I wrote about the power of the sale for resale exemption offered by most states in their sales and use tax regime. In a nutshell, this means that when a business purchases something it does not pay tax but rather charges tax to its customer when the item is resold.

The policy behind the sale for resale exemption is that sales and use tax attempts to tax consumption by adding a tax to purchases made by the end consumer of a good or service. While each state varies as to exactly what is and is not taxable, every state that I am aware of has a sale for resale exemption. Conversely, if the business is the end user on items it purchases it owes a use tax on those items. The sale for resale exemption can be a very powerful multi-state sales tax technique if used correctly.
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In 2012, West Virginia (home of MBNA) went after ConAgra Foods, Inc. ConAgra is a trademark holding company and wholly owned by a Nebraska subsidiary of CA foods. ConAgra held valuable trademarks and trade names from affiliated and unrelated entities such as Armour, Butterball, Healthy Choice, Kid Cuisine, Morton, and Swift, and licensed them back for a fee. With the recently decided KFC and MBNA on the back burner, West Virginia seemed destined to rule in the state’s favor on a seemingly similar transaction. Surprisingly, the West Virginia Supreme Court went the other direction.

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In 2011 a devastating taxpayer case in the SALT corporate income tax was decided. This slightly different spin on the case was introduced by a famous colonel and his chicken company. The company, known as Kentucky Fried Chicken, was incorporated in Delaware with a headquarters in Kentucky. KFC.jpgKFC licensed its valuable name to franchisors nationwide, including into Iowa. Slightly different than the related trademark license in the Geoffrey cases, KFC licensed its trademark to franchisor’s who independently owned KFC’s. Certainly the use of the KFC trademark in Iowa could not force Kentucky based KFC to pay Iowa income tax could it?

The Supreme Court of Iowa ruled that it could in 2010. Lacking physical presence, the court said KFC was economically present in Iowa because its trademarks were firmly rooted in Iowa. Further, the court opined that such intangibles were functionally equivalent of physical presence. The court concluded “the intangibles in Iowa” provided sufficient nexus. How an intangible trademark could be firmly rooted anywhere or be present in Iowa is beyond me. In its liberal reading of Quill the court stated that physical presence was limited to sales and use tax cases because the burdens of filing income tax are far less than that of a sales and use tax. Following the logic in this case, there is no telling how far states can go to tax foreign trademark holding companies.

About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, and Florida probate. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email or phone listed on this page.

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Trademark licensing companies have always been a difficult inquiry for courts to analyze from a constitutional perspective in the state and local tax arena. At its very basic level, the trademark licensing company cases involve a holding company (almost always a Delaware company) with no physical assets or employees in the taxing state. The holding company holds a valuable intangible asset, a trademark for example, and charges another company a fee to use that intangible asset to sell goods in a taxing state. The question then arises – does the taxing state have the power to tax the out-of-state holding company based on other company’s use of its trademarks within that state?
Trademark.jpgThe only Supreme Court case that attempts to address this issue is Quill Corp. v. North Dakota, in 1992. In Quill, the Court held that in order for a state to have the power to tax a company within that state, the company must have some “physical presence” within that state. To add another wrinkle, Quill dealt with the ability for a state to force a company to collect its use tax. Does this “physical presence” apply to sales tax? What about corporate income tax?
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Over the past few years many retailers and online companies have turned to shopper’s personal webpages for advertising. In our current online marketplace, individuals can post items, outfits, and recipes to their social media sites. Piggybacking on our growing use of social media in our daily lives, companies have taken advantage of this by paying individuals for tweets, posts, and other social media disseminations that drive customers to a company or online retailer. Using this tactic, social media sites such as Twitter, Facebook, and Pintrest are being transformed into paid promotion generators. Social Media.jpgAn October 2012 article written in the New York Times that can be found here, discusses a Manhattan talent agent. In her free time the shopper posts various fashion items to her social media sites, such as lipsticks on her Pintrest account and her “night life collection” on Beso (which apparently is a shopping website.) If her posts drive customers to the lipstick site or Beso, the companies will reward her by paying her a fee. Some sites, such as Beso pay users around 14 cents for every click the individual sends to Beso. While other retailers, such as Pose, pay only when a product is purchased resulting from the click (usually around 5%). According to the article, the Manhattan talent agent makes about $50/month from promotion fees.

After reading this article, I am sure many readers had the same thought I did – can the fee paid from the retailer to the individual create nexus for sales tax purposes? Actually, I am sure the only people that even thought about this are state and local tax attorneys like me who spend many of their hours reading about sales tax laws. On a serious note, it does present an interesting sales tax law issue as to whether these activities can create nexus to an online retailer who has nothing in the state aside from a shopper who happens to post their products to social media.
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