Current Developments in State and Local Tax

Winter 2020 © 2020 CCH inCorporated and its affiliates. all rigHts reserved.15Current Developments in State and Local TaxIncome Tax Cases, Alternative Apportionment, and Deference to Administrative AgenciesBy Craig B. Fields and Matthew F. Cammarataincome & franchise taxes—deductionsMassachusetts—Appeals Court Allows Deduction for Utility Taxes Paid to IndianaThe Massachusetts Appeals Court reversed a decision of the Appellate Tax Board and allowed Bay State Gas Company (“Bay State”) to deduct Indiana Utility Receipts Tax (“URT”) from its Massachusetts net income for corporate excise tax purposes.1Bay State is an energy company that operated in Massachusetts and, through two affiliates, in Indiana. Its affiliates were subject to and paid URT to Indiana. The URT is denominated as an “income tax” by Indiana statutes and imposes a tax on gross receipts received as consideration for the retail sale of utility services for consumption in Indiana.2Bay State claimed a deduction for the amounts paid to Indiana pursuant to Mass. Gen. Laws ch. 63, §30(4), which allows corporations to deduct from Massachusetts net income “deductions … allowable under the provisions of the Federal Internal Revenue Code.” The Commissioner disallowed the deduction, claiming that under Mass. Gen. Laws ch. 63, §30(4)(iii), no deduction is allowed for “taxes on or measured by income, franchise taxes measured by net income, franchise taxes for the privilege of doing business and capital stock taxes imposed by any [S]tate.” Although the Commissioner initially argued that the URT was an income tax, he later abandoned that argument and claimed on appeal that the URT is a “franchise tax for the privilege of doing business,” and therefore not deductible under Mass. Gen. Laws ch. 63, §30(4)(iii).The Commissioner supported his position by relying on a “longstanding Department of Revenue position” that the key feature of all taxes which are not Craig B. fields is a Partner and MattHeW f. CaMMarata is Of Counsel in the New York office of Blank Rome LLP.CURReNT DeveLOPMeNTs IN sTATe AND LOCAL TAxallowed as deductions “is that they are imposed on the corporation’s business as a whole, rather than on discrete events, or parts of the corporation’s activities, or owner-ship, within a State.” The Appeals Court reversed the Appellate Tax Board and found that Bay State had estab-lished that the URT is not a franchise tax on the entity as a whole, but rather is a tax on utilities’ retail sales.The Appeals Court also rejected the Commissioner’s argument that the URT was not a sales tax because the URT is not separately collected from purchasers. In rejecting that argument, the court reasoned that “with or without separate collection, as a matter of economics, a rational economic actor can always be expected to attempt to pass increased costs from taxes on to the consumer.” Case law from Indiana substantiated that Indiana utility vendors had increased costs after enactment of the URT to minimize the impact of the tax on their profit margins. In addition, the court took note of the fact that Indiana had adopted a compensating URT use tax on gross receipts from utility services after Indiana customers began using out-of-state companies for utility services after the URT was initially adopted, which further supported the char-acterization of the URT as a sales tax.income & franchise taxes—tax Caps and deference to administrative agenciesNew York—Tax Appeals Tribunal sides with Taxpayer in “Qualified Manufacturer” DisputeThe New York State Tax Appeals Tribunal (“TAT”) reversed the determination of an Administrative Law Judge and held that TransCanada Facility USA, Inc. (“TransCanada”) was a “qualified New York manufacturer” for New York State corporate franchise tax purposes, and therefore was subject to a $350,000 cap in computing its tax liability under the capital base of the franchise tax.3TransCanada is a wholesale energy provider that con-ducted business through various affiliates, one of which operated a generating facility in Long Island City, NY (the “Ravenswood Facility”). The parties stipulated that the Ravenswood Facility is a power plant that generated electricity and that the property at the Ravenswood Facility was depreciable under Code...