TUESDAY, JULY 13, 2010
VOL. 1, NO. 7 FREE
SUTHERLAND ASBILL & BRENNAN LLP www.sutherland.com
“Shaking things
up in state and
local tax”
FORECAST
Tax audits are
hot, humid and
sticky. Cold front
approaching.
Sutherland
New Hampshire Interest and
Dividends Tax: Who’s Taxable Now?
On June 10, 2010, New Hampshire
Governor John Lynch signed Special Ses-
sion House Bill 1 into law, which repeals
a signicant 2009 amendment. The 2009
amendment related to the Interest and Divi-
dends Tax Law (Rev. Stat. Ann. Chapter 77)
and made distributions from limited liability
companies, partnerships, and associations
with non-transferable shares subject to the
Interest and Dividends Tax and exempted
these entities from the tax. The repeal re-
verses course and now exempts these distri-
butions from the tax but restores the tax on
interest and dividends received by limited
liability companies, partnerships, and asso-
ciations with non-transferable shares. The
repeal applies to taxable periods ending on
or after December 31, 2010.
On June 28, 2010, the New Hampshire
Department of Revenue (“DOR”) issued
technical information release No. 2010-006
that claries that the legislation does not ret-
roactively repeal the 2009 amendment. Thus,
taxpayers that paid tax on the distributions
from limited liability companies, partner-
ships, and associations with non-transferable
shares for the 2009 tax period cannot claim
a refund. Limited liability companies, part-
nerships, and associations with non-trans-
ferable shares will be subject to the tax for
taxable periods ending on or after December
31, 2010, with respect to income from inter-
est and dividends.
In a case that may limit the
ability of consumers to le class
action lawsuits regarding Tennessee
taxes, the Tennessee Court of
Appeals ruled that a taxpayer is
precluded from bringing a class
action suit to reclaim improperly
paid taxes. In Wicker v.
Commissioner, Tenn. Department
of Revenue, No. M2009-02305-
COA-R9-CV (Tenn. Ct. App. June
23, 2010), two plaintiffs had been
assessed tax on “unauthorized
substances and illicit alcoholic
beverages,” otherwise known as
the “Drug Tax.” The plaintiffs
led a lawsuit after the Tennessee
Department of Revenue
(“Department”) failed to take any
action on their refund claims. The
plaintiffs led a petition individ-
ually and “on behalf of all others
similarly situated” seeking tax
refunds. After the Drug Tax was
declared unconstitutional by the
Tennessee Supreme Court in
Waters v. Farr, 291 S.W.3d
873, 908-13 (Tenn. 2009), the
Department attempted to issue
refund checks to the two plaintiffs.
Despite this attempted refund by
the Department, the plaintiffs
proceeded to le a “Motion to Cert-
ify Class.” The class was certied by
the lower court, and the Department
appealed that certication to the
Court of Appeals.
The Court of Appeals based
its decision to overturn the
certication on narrow statutory
and constitutional provisions —
a law known as the “Taxpayer
Remedies Statute,” and the
sovereign immunity provision
of Article I, Section 17 of the
Tennessee Constitution. The court
Totally Cool:
Tennessee Class Action
Lawsuit Smoked
Continued on Page 2
The South Carolina Taxation Realign-
ment Commission (“TRAC”) issued its sales
and use tax draft report (“draft report”) on
June 28, 2010. The South Carolina General
Assembly created TRAC to study the state’s
current tax structure and to make recommen-
dations to change that structure.
Among other recommendations, TRAC
proposes to expand the denition of tangible
personal property to include data processing,
electronically delivered software, and digital
products. TRAC also proposes the repeal of
a number of sales and use tax exemptions,
including several exemptions related to
transactions involving the generation or sale
of electricity. Interestingly, South Carolina
was one of the rst states to publish guidance
indicating that charges for access to software
hosted by an application service provider
were taxable. The draft report now recom-
mends that South Carolina also tax software
downloaded to a purchaser’s computer. In ad-
dition, TRAC recommends taxing electroni-
cally transferred “digital products,” which
include downloadable items such as “digital
audio-visual works” (movies), “digital audio
works” (songs), and “digital books.”
In addition to sales tax base expansion,
the draft report includes two use tax nexus
provisions. First, the draft report contains a
“click-through” nexus rebuttable presump-
tion similar to laws in New York, North Car-
olina, and Rhode Island. Under the proposal,
an out-of-state retailer would be presumed to
have South Carolina nexus sufcient to col-
lect use tax if it has sales in South Carolina
in excess of $10,000 and has a contractual
agreement with a South Carolina resident
to refer business to the out-of-state retailer.
The presumption may be rebutted with proof
that the resident did not engage in any so-
licitation in the state on behalf of the out-of-
state retailer. The second provision adopts
an afliate nexus standard by imposing a use
tax collection obligation on an out-of-state
company that is afliated with a company in
South Carolina, if the in-state afliate helps
the out-of-state company maintain a market
in the state.
South Carolina Goes Off the TRAC
