Taxpayers losing SALT lawsuits

Your Guide to State, Local, Federal, Estate + International Taxation

Not only have states become more aggressive in collecting all sorts of taxes since the Wayfair decision passed, they have generally become more successful in their lawsuits as well.  In 2019 and 2018, taxpayers prevailed on their significant SALT lawsuits at 38.1 percent and 36.8 percent, respectively, while in 2017 and 2016 the percentages were higher, at 41.0 and 43.0, respectively.

Notable Wins

Through the first couple months of the new year, the win percentage was back down to 36.8 percent. And while the win percentage creeps near a lowly third, there were some key victories for taxpayers. Exxon Mobil came out on top in Montana, where the Montana Supreme Court held that its DOR was incorrect in allowing Exxon only an 80 percent dividends received exclusion for domestic corporations not included in its water’s-edge combined return.  Microsoft also prevailed in a sourcing matter case. The Wisconsin Court of Appeals rejected the DOR’s attempt to include the company’s gross receipts from the use of computer software by Wisconsin end-users in the franchise tax sales factor numerator. The Court held that Microsoft is not required to “look through” its computer manufacturer customer to source a sale to the location of the customer’s customer.

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Notable Loses

Despite some key wins, taxpayers are more often on the wrong side of notable SALT cases. Blue Buffalo Company lost in the Maryland Court of Special Appeals on a Public Law 86-272 case. This case is of particular interest to taxpayers who continue to see the Public Law dwindle in the aftermath of Wayfair. Blue Buffalo did not qualify for protection here because the seller’s collection of information by its employees was neither ancillary to solicitation, nor de minimis.  Rather, the collection of the information was found to be “carried out on a regular basis as a continuing matter of company policy.”  In another lawsuit, the New York Division of Tax Appeals held that the taxpayer was required to include royalties from foreign affiliates from 2007 through 2012 in its taxable net income.

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There seems to be a clear pattern of states becoming more successful on significant state and local tax lawsuits. Since the Wayfair decision by the Supreme Court, states have also continued to push the limits of what will give taxpayers nexus and thus, a way to tax the taxpayers.  With states now having strict economic nexus laws on income taxes, and statutes that tell taxpayers that they’ll be taxed to the furthest extent of the constitution, more state and local lawsuits are bound to arise.  Hopefully they will be decided for the taxpayer when they come.

Consult with a tax adviser that has experience handling state and local tax matters to make sure your business stays up to date on the latest developments, or if you have any questions about SALT lawsuits yourself.

Brian Ess