This Week in State Tax

The Alabama Tax Tribunal recently held that a taxpayer’s purchase of heavy equipment used to lift and move logs into position for wood chipping did not qualify for the reduced sales tax rate for equipment used in manufacturing. The taxpayer was in the business of producing wood chips it sold to paper mills. The taxpayer explained that upon receipt of the logs at its facility, the taxpayer moved the logs into a “wet yard” where the taxpayer used the equipment at issue to position the logs to receive a continuous treatment of water and unidentified chemicals to ensure their integrity through the manufacturing process. The Taxpayer then used cranes to move the logs into a debarking drum before being delivered to the chipper on a conveyor system.

At issue was whether the taxpayer’s purchase of equipment to lift and move the large logs into position in the wet yard qualified for Alabama’s reduced sales tax rate as purchases of machines used in the manufacture of tangible personal property. The Department of Revenue’s regulation on material handling equipment provides that transportation equipment is taxable at the general rate of 4 percent up to the point where the materials go into “process,” but that “the equipment feeding the first processing machine” is taxed under the machine levy of 1.5 percent. The taxpayer argued that “the equipment feeding the first processing machine” was the heavy equipment used to transport and position the logs in the wet yard, and the wet yard was the first processing machine used for continuous wetting and treatment to maintain the integrity of the raw materials.

The Tribunal rejected the taxpayer’s argument for failing to produce evidence to support its claim that the wet yard and its continuous wetting/treatment system were part of the taxpayer’s manufacturing process. Specifically, the Tribunal found that the taxpayer failed to provide evidence about the chemicals used, the treatment process, or its effect on the wood, and noted that the taxpayer’s representatives had not visited the facility in over 10 years. The Tribunal also highlighted that the taxpayer’s post-trial memorandum attempted to define the wet yard as the “first processing machine,” but this was not supported by the record. Therefore, the Tribunal denied the claim. For more information on Alabama Chips, Inc., v. State of Alabama DOR, contact  Scott Jackson. 

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A Florida appellate court recently ruled that a taxpayer who successfully petitioned for a refund of overpaid motor fuel taxes is owed interest on the refund despite objection from the Florida Department of Revenue. This determination concerning interest is the second proceeding related to the taxpayer’s refund claim for overpaid motor fuel taxes dating back to 2011 to 2014. In the first proceeding, the taxpayer, a wholesaler of gasoline, purchased fuel from a Florida distributor and paid roughly $3 million in motor fuel taxes directly to the distributor; it later paid the same amount of tax directly to the Department. The double payment was discovered by the Department during a subsequent audit of the taxpayer. The taxpayer filed a claim for a refund of the double payment and, after the refund claim was denied, filed an appeal in which a Florida appellate court ruled that the taxpayer was due a refund under Fla. Stat. § 215.26(1) (allowing for refunds for an overpayment of tax, a payment of tax where no tax is due, and any payment of tax made in error). The court instructed the Department to issue the refund. Shortly thereafter, the Department issued a refund for only the tax amount not including interest.

In this, the second proceeding, the court specifically states that Fla. Stat. § 213.255 is clear in requiring that taxpayers be paid interest on payments of overpaid taxes, payments of taxes not due, or taxes paid in error, with such interest to begin running 90 days after a timely and complete refund application is submitted. In the opinion, the court noted that the Department did not set forth an argument in the initial proceeding that the taxpayer’s refund application, submitted in 2019, was incomplete and was thus precluded from arguing on appeal that no interest was warranted. The court also addressed a trial court ruling that denied the request for interest on the basis that Florida law restricts a taxpayer’s ability to bring further action related to a tax refund claim when an appellate court has already ruled on it. Here, the appellate court held that the taxpayer’s claim for interest is wholly separate from the action seeking the refund and only became actionable once the refund was issued without applicable interest.

Note that while this case specifically covered overpaid motor fuel taxes, the statutes under which the taxpayer made its claim, Fla. Stat. §§ 215.26 and 213.255, apply to other types of taxes administered by the Department of Revenue. Please contact Henry Parcinski with questions on SEI Fuel Services, Inc. v. State of Fla. Dep’t. of Rev.

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The New Mexico Taxation and Revenue Department recently issued two complementary rulings addressing whether legal fees earned by law firms representing out-of-state plaintiffs in New Mexico litigation are subject to New Mexico gross receipts tax (GRT). In Rulings 401-25-2 & 401-25-3, a New Mexico law firm, together with co-counsel from a Texas law firm, represented Texas-resident plaintiffs in a successful case in the New Mexico trial and appellate courts. The plaintiffs, who remained Texas residents throughout the proceedings, were awarded damages; they received the award payments in Texas and paid contingent legal fees, expenses, and costs to both law firms for their legal services. Both firms also included separately stated New Mexico gross receipts tax on their invoices, believing it was due at the time.

The law firms requested that the Department rule on whether the legal fees were deductible from gross receipts as receipts from the sale of services to an out-of-state buyer, and if not deductible, whether it was appropriate for them to bill and be reimbursed for the GRT by the client. The Department’s analysis focused on statutory provisions which allow a deduction from gross receipts for services performed for out-of-state buyers when the product of the service is delivered and initially used outside New Mexico. The Department determined that the legal services provided to the Texas plaintiffs met this standard. Although the litigation occurred in New Mexico, the benefits of the service, in this case the awarded damages, were received and initially used in Texas. As a result, the law firms’ receipts were deductible and not subject to New Mexico GRT, assuming that the clients deliver an appropriate nontaxable transaction certificate (or other evidence acceptable to the Department) to the law firms evidencing that the legal standard is met.

The rulings further clarified that, because both law firms had separately stated the GRT on their invoices and paid the tax in good faith, they were entitled to reimbursement from the plaintiffs for the tax paid. For further questions regarding the rulings and the New Mexico GRT, please contact Carolyn Owens.

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The Virginia Department of Taxation has issued a Tax Bulletin in response to a recent Virginia Court of Appeals ruling which found that the Department’s historical practice of using a blended apportionment fraction for apportioning the income of a corporation with receipts from an interest in a pass-through entity (PTE) is unconstitutional, unless the corporation and PTE have a unitary business relationship. In Dep’t of Taxation v. FJ Mgmt., Inc., the appellate court ruled that because the corporate taxpayer and the PTE in which it held an interest did not have a unitary business relationship with one another, the two entities were not permitted to combine apportionment factors to create one blended apportionment fraction. [For details on Dep’t. of Taxation v. FJ Mgmt., Inc., see our TWIST of November 18, 2024]. To conform with the court’s decision, the newly issued bulletin provides that the amount of non-unitary PTE income on which a corporate partner can be taxed is equal to its distributive share of PTE income apportioned to Virginia at the PTE-level based solely on the PTE’s own apportionment factors.

The bulletin also provides instructions on how this change affects return reporting requirements. Corporate taxpayers receiving income from an interest in non-unitary PTEs must report the income as “allocated dividend income,” check the box on Line 3(i) of Form 500A, and include a statement listing the name and FEIN of each non-unitary PTE apportioned on a non-blended basis. The Department will update return instructions to reflect these changes. As to transition relief, for tax years 2024 and before, the Department will not require returns, including amended returns, to be filed in accordance with this new policy. Instead, such returns will be permitted to apply the Department’s long-standing blended apportionment policy, even if no unitary relationship exists. At the election of the taxpayer, the Department will allow returns for 2024 and prior years, including amended returns, to be filed in conformity with the instructions described above. However, taxpayers choosing to file amended returns must do so within the applicable statute of limitations. Please contact Diana Smith with questions on Va. Tax Bulletin 25-5. 

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