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California: Broker/Dealers Impacted by Recent Unclaimed Property Guidance

The California State Controller recently issued a letter to a third-party audit firm describing its interpretation of the state’s unclaimed property laws in relation to unclaimed brokerage accounts. Specifically, the Controller stated that it that it believes the escheatment of unclaimed brokerage accounts should be covered by Cal. Civ. Pro. Code § 1520 governing “miscellaneous intangibles�� rather than Cal. Civ. Pro. Code § 1516, which addresses stock and other intangible interests in a business association. In the Controller’s view, both the plain language and legislative history of the unclaimed property law indicates that the stock provision only applies to property held on behalf of its owner by the issuing entity, not by a third-party broker.

This distinction is important because, while the two provisions each trigger after three years of inactivity, Cal. Civ. Pro. Code § 1516 includes an additional requirement that the location of the owner be unknown to the holder at the end of the three-year period before escheatment occurs. This requirement is not in Cal. Civ. Pro. Code § 1520, which means that even if a firm believes it knows the location of an account owner, the brokerage account may be escheatable if inactive by the owner for more than three years. As such, applying Cal. Civ. Pro. Code § 1520, the miscellaneous intangibles statute, to a brokerage account may significantly increase the likelihood of a brokerage account being escheated under state unclaimed property laws. Broker-dealers should take steps to ensure that accounts remain active and consider the impacts of these new provisions. Please contact William King, Karen Anderson or Marion Acord with questions.��

Louisiana: Board Rules Cloud Storage Services are Nontaxable

The Louisiana Board of Tax Appeals recently addressed whether subscriptions to a cloud storage plan were subject to New Orleans city sales taxes. The taxpayer at issue manufactured and sold various devices, such as computers, smartphones, and tablets. Owners of the devices were allowed to remotely store up to five gigabytes of personal digital content at no cost. Additional storage capacity was available in exchange for a monthly subscription fee. The software required to access the remote personal electronic storage was preloaded onto the devices sold by the taxpayer and was available to any customer with Internet access.  Following an audit, the City of New Orleans/Orleans Parish assessed City sales tax and the French Quarter Economic Development District sales tax on the subscription fees charged to customers located in New Orleans.

The taxpayer protested the assessment, arguing that the receipts from its cloud subscription services were not taxable under the Internet Tax Freedom Act (ITFA), which prohibits states and localities from taxing “Internet Access.”�� Importantly, the definition of “Internet Access�� in the ITFA includes access to “personal electronic storage capacity.�� The taxpayer argued that its services fell within the plain language meaning of this provision because it provides subscribers with “personal electronic storage capacity.�� The Board agreed, noting that the service was used by individual customers for accessing, storing, and retrieving their data and was accessible on a computer or other service through the Internet. As additional grounds for granting the taxpayer’s motion for partial summary judgement, the Board noted that the City did not oppose the taxpayer’s classification of the cloud storage subscription as a service. Louisiana taxes specifically enumerated services only and personal electronic storage services are not included in the list of taxable services. Please contact Randy Serpas with questions on Apple, Inc. v. Samuel.��

Louisiana: Taxpayer Was Selling Pipe to Related Entities

The Louisiana Board of Tax Appeals recently determined that a taxpayer qualified for the Manufacturing Machinery and Equipment Exclusion (MM&E Exclusion), although most of its output was sold to related parties. The taxpayer at issue purchased equipment that it used to fashion customer-provided pipes into specialized joints or connections for use in oil and gas well drilling and production operations. During the tax period in question, ninety-five percent of the taxpayer’s jobs were performed for one of the taxpayer’s divisions and/or related parties controlled by a common parent corporation. Related or not, the customers were required to pay for the items before they retrieve them. If the customer did not pay, the taxpayer cut the connections or joint that it had fashioned off the pipe and returned the pipe to the customer. Under Louisiana Law, which is incorporated into Jefferson Parish Code, the MM&E Exclusion applies to purchases of machinery and equipment used by a manufacturer for the actual manufacturing of tangible personal property, which is for sale “to another�� and is not produced for internal use.

Following an audit, the Jefferson Parish Collector assessed sales and use tax plus interest on the equipment purchased for use in the taxpayer’s manufacturing process. The Collector asserted that the taxpayer did not qualify for the MM&E Exclusion because it did not sell the connections “to another�� when ninety-five percent of its jobs were for related party customers. Further, the Collector asserted a sale did not occur because ownership of the pipe was never transferred, as the pipe was supplied to the taxpayer by the customers.

Phrasing the question presented as whether a transfer of ownership is absolutely necessary for there to be a “sale,�� the Board determined it was not. A “sale�� includes both a transfer of ownership or a transfer of possession. Moreover, the definition of sale includes the fabrication of tangible personal property from materials provided by a customer. In a previous case, Louisiana Power & Light Co. v. Slaughter, the court defined fabrication as making, creating, or constructing by combining or assembling and found the term “fabrication�� was synonymous with manufacturing. Therefore, the Board concluded that a sale occurred because the taxpayer transferred possession of an item fabricated from materials provided by a customer. The Collector also asserted that the fact that the taxpayer’s customers were mostly related entities meant that the connections were produced for internal use and not for sale to another. Previous Louisiana cases have concluded that for the separate existence of related entities to be disregarded, the facts must be “such as are normally sufficient to warrant piercing the corporate veil.�� The Board found that the facts in this case did not support such a piercing. Notably, the related and unrelated transactions were handled in the same manner with the same pricing, and there was no evidence that the related parties had any involvement in the taxpayer’s business. In the Board’s view, simply having a common parent entity was not a reason to pierce the corporate veil. As such, the Board ruled in the taxpayer’s favor. Please contact Randy Serpas with questions on Hunting Energy Servc., Inc. v. Lopinto.��

Tennessee: Department Revises Position on FDII

Tennessee’s Franchise and Excise Tax Manual contains a plethora of information on these taxes, including covering conformity to certain federal provisions. Under IRC section 250 corporations are allowed a deduction equal to 37.5 percent of their foreign derived intangible income or FDII. The Department historically took the position, as outlined in the manual, that any deduction for FDII taken for federal income tax purposes was disallowed in computing Tennessee corporate excise tax. On January 26, 2023, the state published an overview of upcoming updates to the Franchise and Excise Tax Manual. One of those updates relates to the FDII deduction. Notably, the Department has reviewed this issue and determined that while Tennessee has decoupled from IRC section 250 for purposes of GILTI, it has not decoupled for purposes of the FDII deduction. Therefore, in computing “net earnings�� under Tenn. Code Ann. § 67-4-2006, taxpayers are entitled to the full amount of the IRC section 250(a) deduction to which it is entitled under federal law as it relates to FDII. Please contact Taylor Sorrells with questions.