Indiana
In Letter of Findings No. 09-0446, the Indiana Department of Revenue wrestled with a complex, but not uncommon franchising structure. Taxpayer was a franchisor of certain intellectual property owned by an affiliate – Company A. Taxpayer had borrowed the funds to purchase its interest in Company A from yet another affiliate – Company B. Neither Company A nor Company B were subject to tax in their states of formation. Taxpayer argued that the intercompany payments of royalties (Company A) and interest (Company B) were arm's length and the structure was formed for valid business purposes. The Department affirmed the denial of Taxpayer's corporate income tax deductions primarily based on the perceived circular flow of funds.
Akerman Viewpoint
The Department did not dispute that the Taxpayer's structure had economic substance nor did it expressly contradict Taxpayer's claim that the intercompany payments were made at arm's length. This ruling presents the classic case of a taxpayer falling victim to the complexity of its chosen tax structure.
West Virginia
The West Virginia Office of Tax Appeals has recently issued a ruling – West Virginia Administrative Division No. 06-544 – addressing the State's position on economic nexus. In the ruling, the only connection between Taxpayer and West Virginia was the licensing of trademarks and trade names to franchisees located in the State. The administrative tribunal rebuffed Taxpayer's arguments that the imposition of the West Virginia corporate income and franchise taxes violated both the Due Process Clause and the Commerce Clause of the U.S. Constitution.
Akerman Viewpoint
For many taxpayers, this ruling is an unwanted extension of the recent decision of the recent MBNA decision – in which the taxpayer failed with similar challenges to the State's assertion of economic nexus. The decision in this ruling and by the court in MBNA look to the landmark case of Geoffrey for support. As with any economic nexus decision premised on Geoffrey, the focus of the battle is the Commerce Clause challenge.
Colorado
The Colorado legislature recently enacted a law (L.2010, H1193) creating a rebuttable presumption of sales tax nexus for out-of-state retailers if they are a member of a controlled group of corporations with at least one member having a physical presence in the State. A taxpayer can rebut this presumption of nexus if it can prove that the affiliate physically present in Colorado did not solicit sales on its behalf. A retailer failing to collect sales tax must (1) notify the Colorado purchaser of their obligation to pay sales and use tax and (2) prepare a schedule for each purchaser documenting his or her transaction history with the retailer. A penalty of $5 applies to each failure by the retailer to notify its Colorado purchasers of their tax obligations and a penalty of $10 applies to each failure by the retailer to provide transaction documentation to Colorado for each customer.
Akerman Viewpoint
The Colorado law is aggressive in that – unlike the many "Amazon" laws – it does not require in-state solicitation on behalf of the nonresident before the presumption of nexus arises. In addition, The Colorado law puts taxpayers in the difficult position of having to prove a negative to overcome the presumption of sales tax nexus. In protest, Amazon has recently cancelled all in-state affiliate relationships in Colorado.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
