Tennessee Trial Court Dismisses Phone Company's Refund Claim

    

     A Tennessee trial court has dismissed a phone company's franchise and excise tax refund lawsuit, concluding that the revenue commissioner properly exercised his discretion under UDITPA and the MTC regulations by imposing a variance to source sales of wireless service to the billing address of Tennessee customers. In so holding, the trial court did not address the taxpayer’s apportionment calculation, which was based on a cost-of-performance methodology. Vodafone Americas Holdings, Inc. v. Roberts, Civil No. 07-1860-IV (Mar. 19, 2013).

     For the tax years at issue , Vodafone filed Tennessee franchise and excise tax returns, using the billing addresses of the customers of Verizon Wireless to source its receipts from sales of certain telecommunications services. A refund claim was later filed asserting that Tennessee franchise and excise tax was not due because Vodafone lacked statutory and constitutionally-required business activity in Tennessee.

The refund claim was denied, and Vodafone initiated the subject lawsuit. Vodafone also asserted that the proper apportionment of the majority of wireless services at issue should be calculated using a cost-of-performance methodology.

     The revenue commissioner subsequently exercised his variance power and required Vodafone to calculate its Tennessee apportionment sales factor for the refund period and for all subsequent years using a "primary-place-of-use" methodology (i.e., according to the locations of the cell phone customers).

     In an earlier ruling on cross-motions for summary judgment, the trial court concluded that the Vodafone general partnership interest was sufficient to establish taxing nexus with Tennessee because of the activities of the general partnership in Tennessee. The trial court had also denied both parties’ motions for summary judgment and held that a trial was necessary to resolve factual issues bearing on the "propriety of the Commissioner's imposition of the variance at issue in this case under Tennessee law."

     A trial on stipulated facts and stipulated exhibits was held on March 5, 2013. On March 19, 2013, the court issued its memorandum and order, holding that the variance was properly issued by the revenue commissioner. In reaching this conclusion, the court primarily relied on Bellsouth Adver. & Publ’g Corp. v. Chumley, 308 S. W.3d 350 (Tenn. Ct. App. 2009), finding that "it was reasonable for the Commissioner to conclude that the cost of performance methodology did not fairly reflect the extent of Vodafone’s business activity in Tennessee. " The change in taxable earnings "amounted to roughly an 89% reduction" in apportioned receipts.

     The Court also concluded that the revenue commissioner’s properly found that Vodafone’s case presented an "unusual factual situation" that warranted the imposition of a variance based on the applicable regulations.

     The Court’s ruling is a final order for appeal purposes. Accordingly, Vodafone will have 30 days to file a notice of appeal if it intends to pursue this matter further.

Brett R. Carter, Bradley Arant Boult Cummings, LLP, Nashville

Amended Tennessee Business Tax Bill Released For Further Comment

The Tennessee Department of Revenue has released a new version of its Tennessee Business Tax Bill, which is titled the Uniformity and Small Business Relief Act. The original version, which was released in mid-February was addressed in an earlier article, Tennessee Requests Comments on Legislation to Amend the Locally-Imposed Gross Receipts Tax. This new version of the bill makes changes to the provisions applicable to cable and satelite providers as well as changes to the exemption for small businesses. The exemption is clarified in that the exemption level is raised to sales of $10,000 per jurisdiction. Taxpayers exempt under this provision must obtain an annual "Minimal Activity License" at a charge of $15 per year. The revision also clarifies the fact that services are imposed based on where a customer is located and receives the taxable services. It is likely that additional changes will be released, and we will update those revisions as they are made. A copy of the Amended Uniformity and Small  Business Relief Act is linked for your review.

Tennessee Tax Tribunal Bill?

Senator Bo Watson of the Tennessee General Assembly has introduced legislation in Tennessee that would modify Tennessee's tax dispute resolution system and incorporate a tax tribunal. The bill, which can be found by clicking on the following link, http://www.capitol.tn.gov/Bills/108/Bill/SB0734.pdf, was referred to the Senate Government Relations Comittee on February 6 and is being considered by that committee.

It is unclear whether there is an opportunity for this bill to gain any traction as the current system, while it may have some shortcomings, is not viewed is being broken. As this legislation proceeds, we will publish additional updates and analysis.

For updates, please follow @TNTaxLawyer on Twitter.

Tennessee To Propose Expansion of Business Tax on Gross Receipts



TN Governor, Bill Haslam



The Tennessee Business Tax has historically been imposed by local jurisdictions on activities conducted at places of business within the local jurisdiction. Thus, a place of business was required in the state, indeed in the local jurisdiction, to be subject to the tax. The Tennessee Department of Revenue is proposing changes to this tax to expand the base to include certain out-of-state businesses and to allow local governments to tax gross receipts earned outside of the local taxing jurisdcition. The attached link includes the proposed legislation, and the Department is seeking comments from interested taxpayers.

Entities that lease tangible property in Tennessee, deliver goods in the state in company-owned vehicles, provide services in Tennessee or sell goods in purely intrastate transactions but do not have business locations in the state will now be required under this legislation to report and pay a "state-level" business tax. The applicable sections of the bill to focus on is Section 15. Attention should also be focused on Section 13, which provides for the accompanying personal property tax credit that applies. The state has not expanded the credit to take into consideration potential property taxes paid.

The Commissioner of Revenue is seeking comments on the proposed legislation that also focuses on "television service providers" but provides no definition of such.

Constitutional issues with the existing tax, nor shortcomings in the applicable definitions are not addressed by this proposal.

http://bit.ly/1193ttH

Tennessee Court of Appeals Rules on City County Tax Dispute

The Tennessee Court of Appeals has ruled in a dispute between Bradley County and the City of Cleveland over a distribution of local option sales and use tax revenue. The Court held that the city is entitled to one year of the revenue increase but that the county will be entitled to the revenue for periods beginning after June 20, 2010.

Tennessee law generally provides for the allocation of the local sales tax revenue between city and county governments. Half of the revenue goes to education, but the non-education allocation can be varied by contract between the jurisidictions. In this case, such a contract was executed between the city and county in 1967. Several amendments followed in 1976 and 1982 which modified the statutory allocation provision. In the years that followed, the revenue increased, and the city and county also enacted subsequent rate increases, making the pot of money much more significant in recent years.

Due to budget constraints and locals looking for revenue in various places, the validity of the 1967 contract, as amended, became a disputed question between the parties. An earlier lawsuit was litigated in 2000 in which the Tennessee Court of Appeals upheld the 1967 Agreement in favor of the county. In the earlier lawsuit, the Court found a termination provision in the contract but concluded that the termination provision has not been satisfied.

The new case attempted to revisit some of the issues litigated in the earlier case while also attacking the allocation of revenue generated in the 2009-2010 fiscal year. The Tennessee Court of Appeals refused to entertain the city's challenges to the contracts, relying on the earlier-resolved dispute between the parties and concluding that the city could not relitigate those issues. Based on the city and the counties passage of an increase in local sales tax in 2009, the Court concluded that the city was entitled to the revenue from that year because the county did not pass the increase until the after the beginning of the fiscal year. While this consolation was nice, it was not the result for which the city was hoping.

Practice Pointer #1: The city will likely file a Rule 11 application with the Tennessee Supreme Court, so stay tuned on this issue to  see whether the Court of Appeals' ruling will stand. If the Supreme Court accepts the appeal, it will not be bound by the 2000 Court of Appeals ruling.

Practice Pointer #2: This ruling reiterated the point that was made in the first case that these cases depend on the terms of the contracts between the city and county. Cities and counties that are concerned about their allocation agreements should closely scrutinize these agreements to determine whether the validity of the contract could be called into question. Based on the amount of dollars at issue, this is likely worth considering.

The Court of Appeals Ruling can be found at: https://www.tba.org/sites/default/files/bradleycounty_103012.pdf

Twitter: @TNTAXLawyer

Tennessee Companies May Be Entitled to Refunds of FICA Withholding on Severance Payments

The Sixth Circuit Court of Appeals has held that payments made by a bankrupt retail corporation to its employees pursuant to pre- and post-bankruptcy severance programs were supplemental unemployment compensation benefits (SUB) that are not subject to the Federal Insurance Contributions Act (FICA).

The Court made a distinction between "wages" for federal income tax withholding and "wages" for FICA purposes. Because the SUB Payments were not "wages" for FICA purposes, the Court concluded that FICA was not due on the severance payments.

Although this 6th Circuit decision is appealable to the U.S. Supreme Court, the IRS has yet to indicate its intended course of action with respect to severance payments. Taxpayers that have paid FICA on severance payments should consider filing protective claims for refund. FICA tax refund claims must be filed by the later of:

• 3 years from the date Form 941 was filed, or
• 2 years from the date the tax reported on Form 941 was paid.

The unpublished opinion in In re Quality Stores, Inc., (6^th Cir. Sept. 10, 2012) can be found by clicking HERE.

For more information in tax issues related to Tennessee taxpayers, please follow me on Twitter - @TNTaxLawyer.

Tennessee Court Holds that Wide Area Network Service is a Taxable Telecommunications Service

A Tennessee Trial Court has ruled that wide area network (“WAN”) services provided by IBM are taxable “telecommunication services” under Tennessee’s sales and use tax.  IBM Corporation v. Farr, Civil No. 09-2144-I (Davidson County, Tenn. Chancery Ct. filed July 20, 2012).  The Court’s holding is premised on the conclusion that the “service consisted of the provision of links and hubs that transmitted IBM’s customers’ own information from one point to another.  Further, IBM did not provide any original information to its customers.  What IBM was selling, therefore, was the means of transmitting its customers’ information and not information that IBM itself provided.”  Id., slip op at 6-7 (emphasis added).

During the tax period at issue, IBM provided its WAN service to numerous customers in Tennessee.  The WAN consisted of a group of transmission lines or dedicated circuits from one location to another.  The WAN also included routers, hubs, and other equipment that made up the infrastructure through which customers accessed information.  According to IBM, the WAN services also included design, management, monitoring and troubleshooting the WAN.

IBM’s customers used the WAN service to allow its geographically separated managers, employees, and other authorized users to gain access to information critical to the customer’s day-to-day business operations.  Customers used computers and dedicated phone lines to log onto the WAN and gain access to the available information.  The WAN did not, however, provide IBM’s customers with the ability to send messages form one person to another.

IBM argued that the “true-object” test applied and that the WAN service was similar to the non-taxable online services provided in Prodigy Services Corp., Inc. v. Johnson, 125 S.W.3d 413 (Tenn. Ct. App. 2003) and the truck location service in Qualcomm, Inc. v. Chumley, 2007 WL 2827513 (Tenn. Ct. App. Sept. 26, 2007).  The trial court, however, relied on the fact that IBM did not create or gather the information made available to the users of the WAN service in reaching the conclusion that the WAN service was a telecommunications service more closely resembling the voicemail services that were found to be taxable telecommunications in Bellsouth Telecommunications, Inc. v. Johnson, 2006 WL 3071250 (Tenn. Ct. App. Oct. 27, 2006).

This case presents another in a continuing line of “true-object” cases in Tennessee in which the State has argued that a service is a taxable telecommunications service.  Thus, it is likely that an appeal will follow.

The deadline to file an appeal to the Tennessee Court of Appeals is mid-August.