May 2008

1. ORGANIZATION FOR INTERNATIONAL INVESTMENTSTATE AND LOCAL TAX DEVELOPMENTSCase and Controversy UpdateThursday May 1, 2008 Richard A. LeavyMayer Brown LLP1675 BroadwayNew York, New York 10019(212) 506-2310rleavy@mayerbrown.com May 2008

2. Richard A. Leavy – Biography Richard Leavy is partner in the Tax Transactions practice group of Mayer Brown LLP, resident in the New York office. Richard's practice includes all areas of state and local taxation, concentrating on transactional analysis and planning. Prior to joining Mayer Brown in 2007, Richard was an equity partner at another prominent international law firm (1998–2007). During the 1995–1996 term, Richard served as judicial intern to The Honorable Leonard I. Garth, US Court of Appeals for the Third Circuit. Richard holds an LLM in Taxation from New York University School of Law, a JD from Rutgers School of Law – Newark, and an undergraduate degree in political science from Rutgers College. Richard is admitted to practice in New York and New Jersey.

3. I. Recently Decided United States Supreme Court State Tax Cases II. Pending United States Supreme Court State Tax Cases III. State Tax Cases Denied Review by the United States Supreme Court IV. Recently Decided State Tax Cases

4. RECENTLY DECIDED UNITED STATES SUPREME COURT STATE TAX CASES • Permanent Mission of India to the United Nations v. City of New York, United States Supreme Court Dkt. No. 06-134, June 14, 2007. • Under New York law, real property owned by a foreign government is exempt from taxation when used exclusively for diplomatic offices or quarters for ambassadors or ministers. • New York City levied property taxes against the Mission for that portion of its diplomatic office buildings used to house lower level employees and their families. • The Mission claimed that the Foreign Sovereign Immunities Act of 1976 (FSIA) provided protection from suit by the City. • The Court held that the FSIA does not immunize a foreign government from a law suit to declare the validity of tax liens on property held by the sovereign for the purpose of housing its employees.

5. RECENTLY DECIDED UNITED STATES SUPREME COURT STATE TAX CASES • CSX Transportation, Inc. v. Georgia State Board of Equalization, Dkt. No. 06–1287, December 4, 2007. • The 4-R Act bars states from discriminating against railroads when levying property taxes and provides an exception to the general rule of the federal Tax Injunction Act, 28 U.S.C. §1341 against interference with matters of state taxation. • Federal courts may provide redress under the 4-R Act if the ratio of assessed value to true market value of rail transportation property exceeds by at least 5% the ratio of assessed value to true market value of other commercial and industrial property in the same assessment jurisdiction. • In order to evaluate an assessment ratio under the 4-R Act, federal courts must calculate the true market value of in-state railroad property, which requires a court to "look behind" a state's choice of valuation methods.

6. PENDING UNITED STATES SUPREME COURT STATE TAX CASES • Kentucky Department of Revenue v. Davis, United States Supreme Court Dkt. No. No. 06-666, Argued November 5, 2007. • Under Kentucky law,interest earned on Kentucky state and local bonds is exempt from state income tax and interest earned on out-of-state bonds is subject to Kentucky state income tax (this is the law in more than 40 states). • The plaintiffs filed a class action suit claiming that the Kentucky law taxing interest earned on out-of-state bonds violates both the commerce clause and the equal protection clause. • The trial court granted summary judgement in favor of the Kentucky Department of Revenue, the appeals court reversed holding that the law discriminates in violation of the dormant commerce clause and is facially unconstitutional, and the Kentucky Supreme Court refused to hear the case.

7. PENDING UNITED STATES SUPREME COURT STATE TAX CASES • MeadWestvaco Corp v. Illinois, United States Supreme Court Dkt. No. No. 06-666, Argued November 5, 2007. • The petitioner, a non-domiciliary of Illinois, sold its interest in LexisNexis, another non-domiciliary of Illinois, and reported the gain from the sale as nonbusiness income not apportionable to business income in Illinois (and therefore not subject to tax in Illinois). • The Illinois Department of Revenue characterized the gain as apportionable business income subject to tax in Illinois. • Meadwestvaco claimed thatIllinois should not tax the sale because LexisNexis was a non-unitary business held for investment purposes. • Both the Cook County Circuit Court and Illinois Appellate Court disagreed and held that the tax was proper because Meadwestvaco's investment in LexisNexis served an operational (rather than investment) function.

8. STATE TAX CASES DENIED REVIEW BY THE UNITED STATES SUPREME COURT • General Electric Co. v. Commissioner, New Hampshire Department of Revenue Administration, United States Supreme Court Dkt. No. 06-1210, petition for certiorari denied October 29, 2007. • Facial discrimination challenge to the New Hampshire business profits tax (BPT) under the Commerce Clause based on the limitation on the deduction provided for dividends received from foreign subsidiaries so as to only allow the deduction to the extent that the foreign subsidiary conducts income-generating business in the state. • The taxpayer challenged the constitutionality of the state's tax regime arguing that the denial of the deduction for dividends received from foreign corporations not doing business in the state facially discriminates against foreign commerce. • Florida Department of Revenue v. Piccadilly Cafeterias, Inc., United States Supreme Court, Dkt. No. 07-312, petition for certiorari granted December 7, 2007. • After bankruptcy petition filed under Chapter 11, the court approved a sale of the corporation's assets and held that the sale was exempt from stamp taxes under §1146(c), even though the sale was made prior to the corporation's global settlement and prior to any plan confirmation. • The Florida Department of Revenue asserted that §1146(a) (previously numbered as §1146(c)) of the federal Bankruptcy Code, which exempts from stamp or similar taxes any asset transfer under a plan confirmed under §1129 of the Code, does not apply to the transfer of assets made prior to the Chapter 11 plan confirmation. • The bankruptcy court, district court, and 11th Circuit all held that §1146(c) allows a tax exemption for pre-confirmation transfers.

9. STATE TAX CASES DENIED REVIEW BY THE UNITED STATES SUPREME COURT • Ford Motor Co. v. Seattle, United States Supreme Court Dkt. No. 07-623, petition for certiorari denied February 19, 2008. • Seattle and Tacoma each impose a "business activity" tax on a company's gross receipts from wholesale sales. • Ford Motor Co. asserted that the cities of Seattle and Tacoma, Washington unconstitutionally taxed wholesale activity occurring outside the jurisdictional boundaries of the cities. • Lanco, Inc. v. Director, Division of Taxation, United States Supreme Court Dkt. No. 06-1236, petition for certiorari denied June 18, 2007. • Lanco was a Delaware corporation with no officers, employees, or real or tangible personal property in New Jersey. However, Lanco owned and licensed intangibles to its affiliate in New Jersey. • In a decision affirmed by the New Jersey Supreme Court, the Appellate Division of the Superior Court held that that Quill's physical presence nexus requirement is not applicable to income tax and that the New Jersey Corporation Business Tax may be constitutionally applied to income derived by plaintiff from licensing fees attributable to New Jersey. • FIA Card Services NA, f/k/a MBNA America. Bank NA, v. Tax Commission, No. 06-1228, petition for certiorari denied June 18, 2007. • West Virginia's statute imposes a tax on financial institutions based on the amount of the financial institutions' economic activity with respect to West Virginia customers.

10. STATE TAX CASES DENIED REVIEW BY THE UNITED STATES SUPREME COURT • In a decision affirmed by the West Virginia Supreme Court, the Circuit held that the corporate net income and business franchise taxes had been properly imposed on MBNA, since the gross receipts attributable to a West Virginia source far exceeded the statutory threshold for nexus and concluded that MBNA had substantial nexus with the state for the years in question such that imposition of the corporate income and business franchise taxes was proper. • The Court rejected the "bright-line physical presence test" established in Bellas Hess and adhered to in Quill because the taxes at issue in this case were not sales and use taxes. Specifically, the Court found as a matter of law that physical presence was not required to establish substantial nexus to satisfy the Commerce Clause when imposing corporate net income and business franchise taxes. • In reaching its decision, the Court focused on the many benefits MBNA was deemed to receive from the state, such as the banking and consumer credit laws and access to the state's courts, all of which enabled MBNA to generate income from West Virginia customers. The Court noted in particular that because MBNA extends substantial unsecured credit to citizens of West Virginia, the fact that MBNA had access to West Virginia courts was essential to its business operations. • Fluor Enterprises, Inc. v. Michigan Department of Treasury, United States Supreme Court Dkt. No. 07-149, petition for certiorari denied October 9, 2007. • A taxpayer challenged the Michigan single business tax apportionment statute as violating the Commerce Clause by classifying receipts for services rendered outside Michigan as Michigan sales. • The corporation's employees performed engineering and architectural services outside of Michigan that were related to real estate improvement projects constructed in Michigan, thereby constituting "services performed" for "construction activities" that took place within Michigan.

11. RECENTLY DECIDED STATE TAX CASES - Alabama • Alabama • Graduate Supply House, Inc. v. Alabama Department of Revenue, Alabama Department of Revenue, Administrative Law Division, No. S. 05-751, November 20, 2007. • The physical presence of the taxpayer's income-producing property in Alabama established substantial nexus and taxability. • Even if the in-state company's representatives were not deemed to be agents, the caps and gowns that were being rented in Alabama from which it derived substantial income created nexus. • Garrison v. Alabama Department of Revenue, Alabama Department of Revenue, Administrative Law Division, No. INC. 07-699, November 1, 2007. • A faxed notice of appeal does not constitute a proper filing of an appeal, absent an agency rule to the contrary. • The taxpayer's attorney sent a faxed letter that to the Alabama Income Tax Division's Individual Hearing Section, which was docketed by the Administrative Law Division as an appeal of a personal income tax assessment.

12. RECENTLY DECIDED STATE TAX CASES - Alabama • Alabama Department of Revenue v. Hoover, Inc.,Alabama Court of Civil Appeals, Dkt. No. 2060142, August 31, 2007. • Collateral estoppel barred the Alabama Department of Revenue from relitigating the issue of whether sufficient justification existed for a sales tax scheme that the Alabama Supreme Court had previously held to be facially discriminatory against interstate commerce. • In 2006 the Alabama Supreme Court determined that Alabama's policy of imposing Alabama sales tax on sales of products delivered in Alabama to out-of-state governmental entities, while exempting sales of products delivered in Alabama to Alabama state and local governmental entities, violated the federal Commerce Clause. • Even though the case concerned different tax years and different sales tax assessments, it involved the same fundamental issues so the principle of collateral estoppel applied because inasmuch as the issue was identical to the issue litigated in the prior action, the issue was actually litigated in the prior action, the resolution of the issue was necessary to the prior judgment, and the same parties were involved in both actions..

13. RECENTLY DECIDED STATE TAX CASES - Alabama • Surtees v. VFJ Ventures, Inc., Alabama Court of Civil Appeals, No. 2060478, February 8, 2008. • The Alabama Court of Civil Appeals held the disallowal of deductions under Alabama's addback statute for royalty payments a manufacturing corporation made to certain related intangible management companies proper. • Because the statute provides that the addback requirement does not apply if it would be "unreasonable," but does not define the term, the higher court gave deference to the consistent agency interpretation that an addback would be unreasonable if the resulting tax would be out of proportion to the corporation's activities in Alabama. • To construe the unreasonableness exception as requiring only a showing of a business purpose or economic substance would render the rule ineffective • Tate & Lyle Ingredients Americas, Inc. v. Alabama Department of Revenue, Alabama Department of Revenue, Administrative Law Division, No. CORP. 07-162, January 15, 2008. • An out-of-state corporation was not subject to Alabama corporate income tax on the gain it realized from selling its one-third stock interest in a European company, despite the fact that the two companies were in the same general line of business (i.e., selling cereal sweeteners) and were owned by the same holding company. • The assertions that the companies were unitary and operationally related were found to be speculative and unsupported by the evidence. • The determining question was whether there was a flow of value between the companies, as evidenced by functional integration, centralization of management, and economies of scale.

14. RECENTLY DECIDED STATE TAX CASES - Arizona • Arizona • Arizona Department of Revenue, Case No. 200600082-C, Decision of Hearing Officer, June 15, 2007 (released August 2007). • Gain from sales of assets and property by holding companies that were members of a taxpayer's affiliated group and included in the taxpayer's consolidated Arizona corporate income tax return were held to be apportionable business income since the business of the holding companies was to hold the assets and property sold. • Royalty income from patents held by holding companies was business income where the business of the holding companies was to hold the patents. • Richardson v. Arizona Department of Revenue, Arizona State Board of Tax Appeals, No. 1949-06-I, July 18, 2007 (released October 2007). • An Arizona law imposing personal income tax on a taxpayer's income from out-of-state municipal bond interest, while excluding Arizona municipal bond interest from tax, was held not to violate the Commerce or Equal Protection Clauses of the United States and Arizona Constitutions, or the Uniformity Clause of the Arizona Constitution. • The Board of Tax Appeals based its decision on (i) having no authority to recognize an administrative class refund claim or class action on behalf of the taxpayer and other similarly-situated taxpayers and (ii) having no authority to declare a statute unconstitutional (although it could apply constitutional doctrines to resolve claims). • Southwest Airlines Co. v. Arizona Department of Revenue, Arizona Court of Appeals Dkt. No. 1 CA-TX 07-0002. • Personal property tax was properly imposed on avionics software installed in flight computers aboard the taxpayer's aircraft in Arizona.

15. RECENTLY DECIDED STATE TAX CASES - Arkansas • Arkansas • Citifinancial Retail Services Division of Citicorp Trust Bank, FSB v. Weiss, Arkansas Supreme Court, No. 07-551, January 17, 2008. • A company that provided financing on consumer retail purchases was not a "taxpayer" under the Arkansas bad debt statute and therefore was not entitled to claim a refund of sales taxes that it had paid to retailers on credit accounts on which consumers defaulted, even though it was an assignee of the retailer. • To qualify for a refund under the bad debt statute, a person must be liable for remitting sales tax on the purchase. • Although the financing company paid the sales tax to the retailer, the retailer remained the person liable for reporting and remitting the sales tax to the state.

16. RECENTLY DECIDED STATE TAX CASES - California • California • General Mills, Inc. & Subsidiaries v. Franchise Tax Board, California Superior Court for the County of San Francisco, No. 439929, September 26, 2007. • Receipts from a taxpayer's sales transactions in the commodity futures market could not be treated as "gross receipts" in calculating the taxpayer's sales factor for California corporation franchise and income tax apportionment purposes. • The court held that although a party realized the same gross profits from a futures contract as from a cash market sale, the economic reality of a futures transaction was significantly different from that of a cash market sale and justified disparate treatment for apportionment purposes. • Some of the factors deemed relevant included (i) the rarity of an actual purchase or sale of a commodity, (ii) the ability of either party to unilaterally decide to offset the contract, (iii) the primary function of the contracts as a way to expose parties to price fluctuations, (iv) the claiming of gross receipts equal to the nominal price of a grain futures contract and the amount realized from the sale of products resulting in double-counting of futures transactions in a manner that did not fairly reflect actual business gains, (v) .the GAAP recording of gains and losses resulting from hedging activities, and not gross sales, and (vi) the lack of a profit motive (the hedging motive).

17. RECENTLY DECIDED STATE TAX CASES - California • Barnesandnoble.com LLC v. State Board of Equalization, California Superior Court, San Francisco County, Case No. CGC-06-456465, October 11, 2007, filed October 12, 2007. • The use by a brick-and-mortar company of coupons in its shopping bags to provide a discount on any one online purchase from its Internet retailer sister company (taxpayer) did not create nexus sufficient to impose California use tax registration, collection and remittance obligations. • The court held that the concept of agency requires something significantly more than the passive distribution of coupons and the agent must have the authority to bind the principal. • County of Los Angeles v. Superior Court of Los Angeles County, California Court of Appeal, Second Appellate District, B198118, January 24, 2008 • A challenge to county utility user tax could be certified as a class action despite both a state law restriction on class actions for tax refunds and the failure of individual class members to comply with either the state's Government Claims Act or the county's claims ordinance. • The class was required to show some compliance with each claims requirement and substantial compliance with all the requirements, and the county had not contended that the class failed to meet the substantial compliance test.

18. RECENTLY DECIDED STATE TAX CASES - Delaware • Delaware • Lehman Bros. Bank, FSB v. State Bank Commissioner, Delaware Supreme Court, No. 656, 2006, November 7, 2007. • A federally chartered savings bank, with its principal office and a small staff of employees in Delaware, was held to be liable for Delaware franchise tax assessments, even though most of the bank's employees, including senior management, were located in New York because the bank was domiciled in Delaware for franchise tax purposes. • The tax was held not to violate the Commerce or Due Process clauses of the United States Constitution because the bank had the requisite minimum contacts with Delaware and received state benefits and protections. • The Delaware Bank Commissioner was found to have abused his discretion when he refused to abate penalties for additional tax without providing an explanation for the three-year delay in notifying the bank of the tax deficiency.

19. RECENTLY DECIDED STATE TAX CASES - Florida • Florida • City of Tampa v. Addison, Florida Court of Appeal, Second District, No. 2D06-3168, August 8, 2007. • Challenge to the constitutionality of the occupational license tax as applied to attorneys practicing law in Tampa. • An order of class certification was affirmed for members of the Florida bar challenging the constitutionality of the city of Tampa's occupational license tax because the city's objections were without merit. • Technical Assistance Advisement, No. 07C1-007, Florida Department of Revenue, October 17, 2007. • An out-of-state financial services processing company was held to have established a taxable nexus with Florida for corporate income tax purposes based on business dealings with unrelated authorized vendors. • The taxpayer did not maintain real or tangible personal property or employ personnel or agents in Florida but was licensed by the Office of Financial Regulation. • "Doing business "in Florida means actively engaging in any transaction for the purpose of financial gain; physical presence is not required to impose the state's corporate income tax. • The presence of the unrelated vendors was sufficient to create corporate income tax nexus, because without them, the taxpayer could not operate its business in Florida.

20. RECENTLY DECIDED STATE TAX CASES - Florida • Golden West Financial Corp. v. Florida Department of Revenue, Florida District Court of Appeal, First District, No. 1D07-0135, February 19, 2008. • Florida Rule 12C-1.-13(14)(j) purports to prohibit a deduction for a NOL carryover sustained in a prior taxable year for which a Florida consolidated return was not filed and Florida corporate income tax returns were not filed for all members of the group. • The corporate income tax separate return limitation year (SRLY) rule applied to net operating losses (NOLs) was held to be invalid because it impermissibly "enlarges, modifies, or contravenes the specific provisions" of the two enabling statutes and, therefore, it is a prohibited invalid exercise of delegated legislative authority.

21. RECENTLY DECIDED STATE TAX CASES - Idaho • Idaho • Decision No. 19311, Idaho State Tax Commission, July 30, 2007. • Income from the sale of a subsidiaries' stock and minority interests in several partnerships was held to constitute apportionable business income for Idaho corporate income tax purposes. • The existence of a unitary business demonstrated that the subsidiaries served an operational rather than an investment function and served as the necessary predicate to apportioning the gain. • The subsidiaries furthered the parent's delivery of integrated service packages to its customers to expand its markets by providing installation and maintenance services, materials and supplies, managerial, technical, accounting, and administrative services to the parent company's operating subsidiaries. • The subsidiaries had previously been included in the parent corporation's combined reports.

22. RECENTLY DECIDED STATE TAX CASES - Idaho • Decision No. 19853, August 16, 2007. • The sale of an ownership interest in a former subsidiary was held to be apportionable business income for Idaho corporate income tax purposes. • The prospective agreement entered into by the seller and the purchaser of the subsidiary guaranteeing the continued supply of the former subsidiary's products and a no-competition clause in the sale agreement demonstrated that the sold subsidiary was not a passive investment and could not rebut the strong presumption that income from stock or other securities is business income.

23. RECENTLY DECIDED STATE TAX CASES - Illinois • Illinois • State ex rel. Beeler v. Ritz Camera, Illinois Appellate Court, First District, No. 1-05-1059, October 5, 2007. • The original complaint was a qui tam action filed under the Illinois Whistleblower Reward and Protection Act by a private law firm alleging that numerous retailers with out-of-state operations failed to collect and remit Illinois use tax on goods sold to Illinois residents over the Internet and/or through catalogs. The Attorney General later intervened and prosecuted the matter on the State's behalf. • A joint motion to dismiss filed by the defendant retailers was denied by the trial court, the interlocutory appeal was denied by the Appellate Court, and the Supreme Court directed the Appellate Court to answer the six certified questions prior to proceeding: • If a remote retailer does not collect and remit use tax on sales to Illinois customers, can it make a knowingly false record or statement, as required to create liability under the Illinois Whistleblower Act? • Does the Whistleblower Act require the existence of an actual record or statement to support a claim or can the failure to keep a record be actionable? • Can documents memorializing a purchase (i.e. invoices or packing receipts) that show that tax is "$0.0" or in some other way that tax is not being collected be considered "false" under the Act where the retailer that created those documents does not collect tax? • Is it necessary that a false statement be submitted to or actually relied upon by the State?

24. RECENTLY DECIDED STATE TAX CASES - Illinois • Does the use of the Whistleblower Act to enforce the sales and use tax laws improperly deprive taxpayers of the specific rights and privileges afforded them under the Protest Monies Act, the Taxpayer's Bill of Rights, and/or the statutory administrative procedures, such that the Act cannot be used to enforce the collection of taxes due the State? • Is the Illinois Department of Revenue the sole entity authorized by the Illinois General Assembly to assess and collect use tax? • Does the Illinois Whistleblower Act apply to alleged tax liabilities under the Use Tax Act? • (a) Does the Whistleblower Act violate the Attorney General clause of the Illinois Constitution, Article V, Section 15, by improperly usurping the exclusive authority of the Attorney General to initiate and conduct litigation on behalf of the State? (b) Does the Illinois Whistleblower Act, as applied to tax matters, violate either the Attorney General clause or the Executive Compensation clause of the Illinois Constitution, Article V, Sections 15 and 21?

25. RECENTLY DECIDED STATE TAX CASES - Indiana • Indiana • Letter of Findings No. 06-0377, Indiana Department of Revenue, December 26, 2007. • Forcing the taxpayer to file a combined corporate adjusted gross income tax return was justified based on the substantial artificial loss created by selling accounts receivable at a discount, which distorted the taxpayer's Indiana income and expenses. • Combination was permissible because the subsidiary did not qualify as a financial institution inasmuch as 80% of the subsidiary's gross income did not arise from the enumerated financial institution activities. • Letter of Findings No. 04-0262, Indiana Department of Revenue, December 26, 2007. • Income received by a rail transportation service provider from providing liability coverage was held to be "revenue from Indiana transportation" services, properly apportioned on the basis of mileage. • The allocation of all of the income to Indiana because the revenues were earned from the taxpayer's corporate office located in Indiana and the employees who performed the activities relating to the income were located in Indiana was improper. • The exclusion of the taxpayer's parent corporation from the consolidated return in was held to be permissible, even though the parent corporation had nexus, because inclusion resulted in a 120% decrease in taxpayer's adjusted gross income.

26. RECENTLY DECIDED STATE TAX CASES - Indiana • Letter of Findings No. 06-0511, Indiana Department of Revenue, January 30, 2008. • Royalty fees paid to an out-of-state related entity were properly deducted from gross income in computing its Indiana adjusted gross income tax. • The royalty fees were paid in exchange for the right to employ certain trademarks and logos and deducted those fees on its Indiana tax returns and there was no evidence that the royalty payments constituted an abusive tax avoidance scheme. • There was no loan of the royalties back to the taxpayer or other return of the royalties in the form of dividends.

27. RECENTLY DECIDED STATE TAX CASES - Kansas • Kansas • Opinion No. 2007-38, Kansas Attorney General, November 30, 2007. • Proposed Kansas property tax legislation providing for different rates of taxation based on whether the real property is owned by a private resident or a commercial home builder. • The proposed legislation was held to violate the uniform and equal provisions of the Kansas Constitution since property of the same type must be valued using the same method and not be based on who owns the property.

28. RECENTLY DECIDED STATE TAX CASES - Kentucky • Kentucky • Kentucky v. Autozone Development Corp., Kentucky Court of Appeals, No. 2006-CA-002175-MR, October 12, 2007. • A captive REIT doing business in Kentucky was allowed to claim a deduction for dividends paid. • The Kentucky Department of Revenue argued that deductions from gross income are strictly limited to those taken for federal income tax purposes. • Effective January 1, 2007, no deduction is allowed for dividends paid by a captive REIT. • AT&T Corp. v. Kentucky Finance and Administration Cabinet, Kentucky Board of Tax Appeals, File No. K01-R-18 (Order No. K-19978), January 4, 2008. • A New York company doing business in Kentucky was required to include all members of its affiliated group in the return, not just subsidiaries with Kentucky nexus. • A Kentucky consolidated return must include all members of the affiliated group included in the federal consolidated return, unless members are specifically exempt from taxation. • The consolidated return election treats all of the members of the affiliated group as a single corporation for income tax purposes.

29. RECENTLY DECIDED STATE TAX CASES - Kentucky • Kentucky Revenue Cabinet v. Asworth Corp., Franklin Circuit Court, Kentucky, No. 06-CI-00288, December 4, 2007. • An out-of-state corporation was held to have sufficient nexus with Kentucky for corporation income tax purposes even though the corporation had no physical presence in Kentucky. • The derivation of income from the ownership of partnership interests in partnerships doing business in Kentucky satisfied the substantial nexus requirement of the Commerce Clause. • A definite link or minimum connection as is required by the Due Process Clause was satisfied by the corporation's interest in partnerships doing business in Kentucky that resulted in a substantial amount of distributive income from in-state activities.

30. RECENTLY DECIDED STATE TAX CASES - Louisiana • Louisiana • Firestone Polymers v. Calcasieu Parish School System, Louisiana Appellate Court, Third Circuit, No. 07-0501, October 31, 2007. • The lease tax paid under protest on shipping containers leased out-of-state was held to have been properly imposed. • The fact that the containers were delivered to the parish created the requisite taxable moment to justify the imposition • Bridges v. Geoffrey, Inc., Louisiana Appellate Court, First Circuit, No. 2007 CA 1063, February 8, 2008. • Substantial nexus in Louisiana was created for a Delaware intangible holding company based on the receipt of royalty income from an affiliated entity for the license of trademarks and trade names used in activities in Louisiana. • The company was subject to the corporate income and franchise taxes even though it had no physical presence in Louisiana. • Good faith to abate the penalties was lacking since the company declined to pay any corporate income or franchise tax based on the knowledge of the South Carolina Geoffrey decision.

31. RECENTLY DECIDED STATE TAX CASES - Massachusetts • Massachusetts • Fleet Funding Inc. et al v. Commissioner of Revenue, Massachusetts Appellate Tax Board, Feb. 21, 2007. • The dividends paid deductions allowable under the Massachusetts corporation excise tax was denied for dividends paid among two Massachusetts REITs and two Rhode Island passive investment companies on the basis that they lacked business purpose and economic substance. • The transactions were characterized as designed to convert interest earned from real estate loans into tax-free dividends from the Rhode Island passive investment companies. • The TJX Companies, Inc. v. Commissioner of Revenue, Massachusetts Appellate Tax Board, Nos. C262229-31, August 15, 2007. • The formation of subsidiaries to hold trademarks to create deductions for royalties paid to the subsidiaries under a transfer-and-license-back was characterized as a sham and the taxpayer was denied a deduction for the royalties paid. • The transactions were held to lack economic substance and have no purpose other than the creation of tax benefits. • The subsidiaries had no control over the intangibles they purported to own. • The subsidiaries did not negotiate the terms of the license agreements. • The business operations did not change as a result of the transfer and license-back.

32. RECENTLY DECIDED STATE TAX CASES - Michigan • Michigan • Dickow v. Michigan Department of Treasury, Michigan Tax Tribunal, No. 0329530, November 27, 2007. • A corporate president was found to be liable for Michigan sales, use, and withholding taxes because he had corporate responsibility for making tax returns and payments. • The president signed returns and checks in payment of taxes, demonstrating that he had tax-related responsibility. • NSK Corp. v. Department of Treasury, Michigan Court of Appeals, No. 274633, January 29, 2008. • The Michigan DOR audited the taxpayer and determined that taxes had been overpaid, but denied that interest was due on the overpayment identified since no "claim" for refund was submitted. • The court held that the term "claim" should not be strictly construed and that a claim is made on the date the DOR is made aware of the taxpayer's claim to a refund, which is the date of the audit determination letter since the letter functioned as the "claim."

33. RECENTLY DECIDED STATE TAX CASES – New Jersey • New Jersey • McKesson Water Products Company v. Division of Taxation, New Jersey Tax Court, No. 000156-2004, August 13, 2007. • Gain from the sale of a subsidiary's stock was held to be nonoperational income and therefore not subject to the New Jersey corporation business tax. • The taxpayer made an election under IRC section 338(h)(10), which is respected by New Jersey and required the state to respect all aspects of the deemed sale of assets and liquidation.

34. RECENTLY DECIDED STATE TAX CASES – New York • New York • In re Brown, New York Division of Tax Appeals, Administrative Law Judge Unit, DTA Nos. 821005 and 821012, December 13, 2007. • The controller and the general manager of a corporation were held not to be personally liable for sales and use taxes due, despite the fact that they both pled guilty to various criminal charges arising from violations of the Tax Law. • Neither the controller nor the general manager was an officer or a director of the corporation and neither had authority to sign checks. • New York State argued that the corporate veil should have been pierced and that the individuals should have been collaterally estopped from contesting their status as responsible officers. • In re Bausch & Lomb, Inc., New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No. 819883, December 20, 2007. • The taxpayer was allowed a corporate franchise tax refund claim that was based on a loss incurred in 1996 from the sale of a subsidiary included in the taxpayer's combined group. • The add-back of losses from subsidiary capital provided for in Tax Law §208.9(a) does not apply to the loss incurred by the taxpayer on its sale of stock.

35. RECENTLY DECIDED STATE TAX CASES – New York • Univisa, Inc., New York Division of Tax Appeals, Tax Appeals Tribunal, DTA No. 820289, September 20, 2007. • Corporations filing separate New York returns must compute their NOL deductions as if they had filed their federal returns on a separate basis. • NOLs should stay with the subsidiary as they would have if the subsidiary had filed separate federal income tax returns. • To place the taxpayer in the same position as if it did not file consolidated federal income tax returns, the use of NOLs of its subsidiary should be denied. • Niagara Mohawk Power Corp. v. Town of Moreau Assessor, New York Supreme Court, Appellate Division, Third Judicial Department, No. 501920, December 20, 2007. • The taxpayer's challenge to local property tax assessments were upheld despite the fact that the presumption of validity of the assessments was rebutted. • The taxpayers failed to meet their burden of demonstrating overvaluation by a preponderance of the evidence.

36. RECENTLY DECIDED STATE TAX CASES – North Carolina • North Carolina • Blinson v. State of North Carolina, North Carolina Court of Appeals, NO. COA06-1258, October 16, 2007. • A challenge to the constitutionality of corporate income, corporate franchise, sales and use, and property tax benefits and other economic incentives and subsidies granted to Dell, Inc. was dismissed for failure to state a claim for relief and because the plaintiffs lacked standing under the state Uniformity of Taxation Clauses and the federal Dormant Commerce Clause. • The North Carolina Supreme Court had previously held that economic incentives offered by governmental entities to a private business for the purposes of job creation and economic development fulfilled a public purpose. • Economic development incentives do not constitute a prohibited exclusive emolument. • Wal-Mart Stores East, Inc. v. Hinton, North Carolina Superior Court, No. 06-CVS-3928, December 31, 2007. • The Department of Revenue was empowered to require a consolidated return and use combined reporting to determine a multistate unitary business's net income subject to North Carolina corporation franchise tax to correct the distortion created by a reorganization undertaken to insert a captive REIT structure. • The reorganization was undertaken to reduce the net income subject to North Carolina corporation franchise tax by providing a rent deduction for rent paid to the REIT and a dividends received deduction for dividends paid to the taxpayer by the out-of-state subsidiary property company from the rental income distributed to it by the REIT.

37. RECENTLY DECIDED STATE TAX CASES – North Carolina • The court found that the reorganization lacked any economic substance based on the following: • The real property mortgages were never transferred to the REIT. • The property transfers to the REIT were never recorded. • The taxes on the properties paid by the taxpayer's parent company. • Neither the REIT nor the property company had any employees and the management of the affairs of the new entities were undertaken by the former owner of the property. • Transactions were accomplished almost exclusively through bank account transfers or accounting entries on the parent company's ledgers.

38. RECENTLY DECIDED STATE TAX CASES – Oklahoma • Oklahoma • In re De-Annexation of Certain Real Property From the City of Seminole, Oklahoma Supreme Court, No. 102524, December 11, 2007. • An Oklahoma trial court ruled that it lacked the authority to rule on a municipal sales tax refund claim because the merchants failed to exhaust administrative remedies by first filing the claim with the Oklahoma Tax Commission. • The merchants had sought the refund of sales tax as a part of their challenge to the annexation of their property (the court invalidated the annexation).

39. RECENTLY DECIDED STATE TAX CASES – Oregon • Oregon • U-Haul Co. of Oregon v. Department of Revenue, Oregon Tax Court, No. TC-MD 030994B, August 29, 2007. • Indemnity payments made by the common parent of an affiliated group of companies were held to be expenses attributable to business income, and therefore apportionable, for Oregon corporation excise tax purposes. • The indemnity payments were made for breach of the directors fiduciary duty to family members who collectively held a minority interest in the common parent. • The indemnity payments satisfied the UDIPTA transactional test for business income, inasmuch as they were made in the regular course of the taxpayer's business.

40. RECENTLY DECIDED STATE TAX CASES – Pennsylvania • Pennsylvania • Legal Letter Ruling No. RTT-07-004, Pennsylvania Department of Revenue, June 7, 2007. • The transfer of record of ownership of two real property parcels, from owners of a Pennsylvania general partnership to the partnership itself, is not a corrective deed and is subject to the realty transfer tax. • The deed from the owners to the partnership resulted in an actual transfer of title to, and ownership of, the land and was not an exempt a corrective deed. • FedEx Ground Package System, Inc. v. Pennsylvania, Pennsylvania Commonwealth Court, Nos. 302 F.R. 2003 and 303 F.R. 2003, April 27, 2007, aff'd per curiam Nos. 55 MAP 2007 and 56 MAP 2007, December 27, 2007. • To compute Pennsylvania corporate net income tax of a trucking company, the numerator of apportionment fraction must be limited to Pennsylvania activity, using average receipts per mile for transporting property in the state multiplied by the total number of miles that the property is transported in the state. • The method of apportionment utilized by the Pennsylvania Department of Revenue, computing the numerator by multiplying average receipts everywhere by Pennsylvania miles, was rejected.

41. RECENTLY DECIDED STATE TAX CASES – Pennsylvania • Dechert LLP v. Pennsylvania, Pennsylvania Commonwealth Court, No. 885 F.R. 2004, January 23, 2008. • Canned software license renewals were held to be subject to Pennsylvania sales tax. • Canned software is tangible personal property, and the definition of "sale at retail" specifically includes the grant of a license to use or consume tangible personal property, regardless of the means of delivery.

42. RECENTLY DECIDED STATE TAX CASES – South Carolina • South Carolina • City of Charleston v. Hotels.Com, LP, United States District Court, District of South Carolina, Charleston Division, Nos. 2:06-CV-1646-PMD and 2:06-CV-2087-PMD, November 5, 2007. • A federal district court has denied a motion to dismiss a lawsuit brought by two South Carolina municipalities against online sellers and/or resellers of hotel rooms (defendants) for failing to remit the full amount of local accommodations taxes due and owing to the municipalities. • The municipalities assert that this practice violates their Municipal Accommodations Fee Ordinances, constitutes conversion, and is an unfair or deceptive trade practice in violation of the South Carolina Unfair Trade Practices Act.

43. RECENTLY DECIDED STATE TAX CASES – Texas • Texas • Arnett v. Combs, U.S. Court Texas Court of Appeals, Fifth Circuit, No. 06-51103, November 30, 2007 • The retention by the Comptroller of surrendered unclaimed property was held not to be unconstitutional. • A suit was brought in federal district court alleging that the retention of unclaimed property constituted a taking without just compensation in violation of the Fifth and Fourteenth Amendments to the United States Constitution. • The district court dismissed the claims for monetary relief on the basis of (i) Eleventh Amendment immunity and (ii) lack of standing.

44. RECENTLY DECIDED STATE TAX CASES – Virginia • Virginia • Ruling of Commissioner, P.D. 07-181, Virginia Department of Taxation, November 21, 2007. • The location of an employee in the state to promote and sell the taxpayer's services to Virginia based organizations was held to not create sufficient nexus with Virginia to impose corporate income tax or a sales and use tax collection obligation. • The taxpayer was an energy services company that facilitated the sale of unused electricity back to the energy grid. • The taxpayer had one salesperson working in Virginia, which alone is not an adequate basis to create corporate income tax nexus. • The taxpayer was held not to be a dealer for sales and use tax purposes because it did not sell any tangible personal property at retail. • Ruling of Commissioner, P.D. 07-164, Virginia Department of Taxation, October 10, 2007. • Two trusts were held not to have nexus with Virginia and not subject to Virginia personal income tax following the relocation of the trust assets and the situs of trust administration outside of Virginia. • The fact that one trustee was a Virginia resident did not make the trusts resident trusts for Virginia income tax purposes, so long as the committee of trustees did not operate in Virginia and was not controlled in Virginia.

45. RECENTLY DECIDED STATE TAX CASES – Virginia • Virginia • Ruling of Commissioner, P.D. 07-174, Virginia Department of Taxation, November 14, 2007 • A taxpayer's request for an abatement of an assessment of Virginia corporate income tax based on the denial of deductions attributable to an intangible holding company was denied despite the additional documentation and financial statements the taxpayer submitted. • The Virginia Department of Taxation reiterated its previous holdings in this case and determined that the additional information offered by the taxpayer did not establish that the out-of-state subsidiary intangible holding company conducted its own activities or made loan transactions with the taxpayer at arm's length. • Ruling of Commissioner, P.D. 07-197, Virginia Department of Taxation, November 30, 2007. • Interest and capital gains passed through from an investment partnership to a corporate taxpayer were properly allocated because the income in question was generated through a passive investment with non-unitary payers.

46. RECENTLY DECIDED STATE TAX CASES – Virginia • Ruling of Commissioner, P.D. 08-02, Virginia Department of Taxation, January 7, 2008. • A telecommunications reseller's service transactions were not taxable by Virginia for corporate or sales and use tax purposes because no taxable nexus was created with Virginia. • The taxpayer used a third-party supplier of telecommunications services and facilities, and, thus, had no property, payroll, or sales in Virginia or its own to create Virginia numerators or a taxable nexus.

47. RECENTLY DECIDED STATE TAX CASES – Washington • Washington • Olson v. Sprint Spectrum L.P. d/b/a Sprint PCS, U.S. District Court, Western District of Washington, No. C06-0592-JCC, February 20, 2008. • A federal district court held that a settlement agreement approved by a Kansas state court in a separate class action precluded a class action against a wireless telephone company for impermissibly billing Washington business and occupation (B&O) tax to its Washington customers. • The court found that the plaintiffs were members of one of the settlement classes created in the prior settlement agreement, had received notice of the prior settlement, and failed to opt out of the prior settlement class.

48. RECENTLY DECIDED STATE TAX CASES – West Virginia • West Virginia • Decision No. 07-100 P, West Virginia Office of Tax Appeals, June 29, 2007. • An unexpected substantial increase in taxable income did not constitute the type of "unusual circumstance" authorizing the waiver of a taxpayer's penalty for the underpayment of West Virginia estimated personal income tax. • The taxpayer failed to (i) make estimated payments equal to 100% of the tax liability shown on the prior year's annual return or (ii) file the return and remitting the balance of tax due by January 31 of the following year.

49. RECENTLY DECIDED STATE TAX CASES – Wisconsin • Wisconsin • Louis Dreyfus Petroleum Products Corp. v. Wisconsin Department of Revenue, Wisconsin Tax Appeals Commission, No. 03-I-132, January 2, 2008. • Capital gain income from the sale of an interest in a partnership was held to be apportionable to Wisconsin. • The sale of the partnership interest constituted the sale of rights to specific partnership property, which was used in the production of business income, and was therefore apportionable income. • Because its ownership interest in the partnership was the corporation's only business activity, and the partnership was a general partnership, they (i) were functionally integrated, (ii) had centralized management, (iii) were in the same line of business, and (iv) enjoyed economies of scale. • Interest income from a loan to the taxpayer's parent company was not apportionable to Wisconsin, even though the loan was made with the proceeds from the sale of the partnership interest. • As a result of selling the partnership interest, the corporation no longer had a unitary or operational connection with the partnership, and the corporation ceased to have any contacts with Wisconsin. • When the corporation made the loan to the parent company, the interest income from that loan was not apportionable to Wisconsin because the Wisconsin taxable nexus was terminated.