Monthly Archives: June 2013


As the summer kicks off across our fair land, it’s nice to see that the fiefdoms are busy spreading their taxing tentacles into businesses, regardless of Constitutional law. California’s ruling concerning securitization entities once again stretches and contorts the notion of nexus to an unrecognizable degree. I commend them for being so creative and being able to back into the desired result; but I guess when your state needs money to fund pensions, you get these type of “interesting” results. Enjoy your June.

California – Corporate Income Tax – Securitization Entities Had Nexus with State Through In-State Agents

Special purpose entities (SPEs) created as securitization subsidiaries had substantial nexus with California for corporation franchise and income tax purposes, even though they had no physical presence in California. The SPEs were part of one corporate enterprise that loaned money to buyers of motorcycles, equipment, clothing, insurance, and extended warranties; securitized and bundled thousands of those loans into notes; sold the notes to outside investors; and used the money from the sales of the notes to offer additional loans to buyers of motorcycles, equipment, clothing, insurance and extended warranties. The SPEs did not have a business existence separate and apart from their parent company and its financial subsidiary.

The Court held that because the parent company had a right to exercise control over the SPEs, and the SPEs only did business for the financial subsidiary, the SPEs were not third-party independent contractors. Therefore, the SPEs had substantial nexus with the state through their California agents, the parent company, the financial subsidiary, and the various in-state dealerships and, therefore, their California-sourced sales could be included in the sales factor of their combined reporting group for apportionment purposes. Harley-Davidson, Inc. & Subsidiaries v. California Franchise Tax Board, Superior Court, San Diego County (California), No. 37-2011-00100846-CU-MC-CTL (May 1, 2013)

Massachusetts – Corporate Income Tax – Tax Planning Strategy Lacked Business Purpose

A taxpayer’s state tax planning strategy that centralized the taxpayer’s tax, insurance, and internal audit functions was considered a sham, the tax effects of which should be ignored for Massachusetts corporate income tax purposes. Under the strategy, the principal reporting subsidiary of a combined group of affiliated corporations of an international conglomerate, which was doing business in Massachusetts, transferred its tax, insurance, and internal audit functions to the U.S. parent corporation of the U.S. subsidiaries of the conglomerate, which was headquartered in Canada, in order to create a physical presence for the U.S. parent in Massachusetts.

On the basis of the transfers, it was contended that the U.S. parent had sufficient nexus with Massachusetts and was included in the combined group’s Massachusetts corporate excise returns. However, the Tax Board held that the centralization of the tax, insurance and internal audit functions was not a legitimate business purpose of the transfer of such functions to the U.S. parent and the resulting intercompany charges and deductions. Further the Board held that the taxpayer failed to prove any valid business purpose or economic effects for the supposed transfers of centralized business operations to the U.S. parent during any of the tax years at issue. Allied Domecq Spirits and Wines USA, Inc. v. Commissioner of Revenue, Massachusetts Appellate Tax Board, Nos. C282807, C293684, C297779 (May 22, 2013).

New York – Governor Announces Tax – Free Communities Initiative

New York Gov. Andrew M. Cuomo recently announced an initiative known as Tax-Free NY, that will transform SUNY campuses and university communities across the state into tax-free communities that will attract start-ups, venture capital, new businesses, and investments from around the world. The exemptions for new businesses will be available for 10 years. All SUNY campuses outside of New York City and designated private colleges north of Westchester will not be subject to corporate franchise (income), sales, or property taxes. Up to 200,000 square feet surrounding the campus will be included in the tax-free community.

Eligible businesses include companies with a relationship to the academic mission of the university and companies creating new jobs, including new businesses, out-of-state businesses that relocate to New York, and existing businesses that expand their New York operations while maintaining their existing jobs. Release, Office of New York Gov. Cuomo, May 22, 2013.

Pennsylvania – Personal Income Tax – Nonresident Trusts Not Subject to Income Tax

The Pennsylvania Commonwealth Court recently held that trusts that were located in, administered in, and governed by the laws of Delaware and that had no Pennsylvania income or assets in the tax year could not be assessed Pennsylvania personal income tax and interest on all of the trusts’ income because it violated the Commerce Clause of the U.S. Constitution.

The trusts were set up by a Pennsylvania resident, and the beneficiaries were residents of Pennsylvania. The trusts’ books and records and the trustees were not located in Pennsylvania, and its affairs were conducted outside of Pennsylvania. The trusts argued that they did not have the required physical presence in Pennsylvania, while the state argued that the settlor of the trusts resided in Pennsylvania, creating the requisite physical presence to establish a substantial nexus. The trusts further argued that imposition of income tax did not bear a reasonable relationship to the benefits Pennsylvania conferred upon the trusts. The state argued that it provided benefits to the settlor and referred to the discretionary beneficiaries to support its contention that the imposition of the income tax did not violate the test.

The court noted that the trusts did not benefit from Pennsylvania and the beneficiaries were not the taxpayer in this matter, and that therefore, the imposition of the income tax on the trusts’ entire income was not reasonably related to the benefits that Pennsylvania provided the trusts under long standing US Supreme Court law. McNeil v. Commonwealth of Pennsylvania, Pennsylvania Commonwealth Court, No. 651 F.R. 2010 (May 24, 2013).