Nexus expansion continues to be a hot topic in state and location taxation. States have become increasingly aggressive in subjecting entities without a physical presence to taxation, often by asserting that the out-of-state company has “economic nexus” with the state. In a recent decision, the New Jersey Tax Court has reinvigorated a nexus ghost from tax years past, seemingly looking to the unitary business principle (or at least the hallmarks of a unitary business) to conclude that a corporate limited partner was subject to tax in New Jersey by virtue of its interest in a partnership that was doing business in the state. Preserve II, Inc. v. Director, Div. of Taxation, Docket No. 010920-2013 (N.J. Tax Ct. Oct. 4, 2017).
In ComCon Prod. Servs. I, Inc. v. Cal. Franchise Tax Bd., Cal. Ct. App., No. B259619 (December 14, 2016), the California Court of Appeals, Second Appellate District, affirmed the lower court’s judgment, holding that Comcast Corporation and its then majority-owned subsidiary, QVC, Inc., were not unitary, but that a $1.5 billion termination fee that Comcast received in its failed merger with MediaOne Group, Inc. was apportionable business income. The Appellate Court also addressed two issues not discussed by the lower court concluding that (1) the taxation of the termination fee was proper under the Due Process Clause, finding a “definite link” between the termination payment and California (as the MediaOne merger failure impacted the value of every aspect of Comcast’s business); and (2) Comcast forfeited its right to argue, as it failed to raise the issue in its refund claim, that the termination fee should have been included in its sales factor denominator.
In a decision that may foretell the future of business privilege tax nexus, the Washington Supreme Court in November upheld the imposition of the state’s business & occupation (B&O) tax on an out-of-state distributor with respect to sales that were not generated by the distributor’s in-state office. In Avnet Inc. v. Dep’t of Rev., Dkt. No. 92080-0 (Wash. 2016), the Court effectively killed any notion that transactional nexus is required to impose the B&O tax—a tax on the privilege of doing business in Washington. This case, coupled with the Ohio Supreme Court’s decision in Crutchfield v. Testa, which was decided one week before Avnet and involved Ohio’s similar Commercial Activity Tax (CAT), continue the trend of aggressively pursuing nexus in the business privilege tax context.
The South Carolina Department of Revenue (“Department”) appealed the South Carolina Court of Appeal’s decision in Rent-A-Center West, Inc. v. South Carolina Dep’t of Revenue on November 30, 2016. The Court of Appeals held, on October 26, 2016, that the Department did not satisfy its burden to apply alternative apportionment to Rent-A-Center West, Inc. (“RAC West”). The Court of Appeal’s decision is a big win for taxpayers in South Carolina as it reaffirms that the Department cannot rely on bald assertions to apply alternative apportionment.