RSM Resources

Credit for alternative fuel sellers and users still available
The Energy Policy Act of 2005modestly increased federal excise taxes on various alternative motor fuels andcreated the Volumetric Excise Tax Credit for Alternative Fuels (VEETC). TheVEETC is a 50-cent per gallon (121 cubic feet for gases) refundable credit foralternative fuels sold for use in motor boats and motor vehicles, including forklifts. This credit is in effect from Oct. 1, 2006, through Sept. 30, 2009.

Alternative fuels include liquefied petroleum gas (propane), “P Series” fuels, compressed or liquefied natural gas, liquefied hydrogen, fuel derived from coal through the Fischer-Tropsch process, and certain liquid hydrocarbons. Ethanol, methanol and biodiesel are specifically excluded from the definition of “alternative fuel.” 

The VEETC applies to sellers and users of alternative fuels. To claim the VEETC for alternative fuels used in a motor boat or motor vehicle, a business must be:

• Liable for the federal excise tax on alternative fuels used in motor boats or motor vehicles or sold for this purpose,
• Registered as an“alternative fueler” with the IRS – or registered under section 4101 for any reason.      

“Alternative fueler”includes businesses that produce alternative fuels or are otherwise liable for the federal excise tax on alternative fuels. IRS Notice 2006-92, Sept. 29, 2006

All states

Federal Business Activity Tax Simplification Act introduced in Senate
Senate Bill 1726 (SB 1726) represents Congress’ latest effort to clarify the intent of 86-272. Known as the Business Activity Tax Simplification Act of 2007, this bill codifies the physical presence standard for business activity taxes and applies the protection of P.L. 86-272 to all business activity taxes, not just net income taxes. The bill also extends the protections of PL 86-272 to include solicitation activities performed in connection with all sales and transactions, not just tangible personal property. According to one of the co-sponsors, SB 1726 was introduced in response to the U.S. Supreme Court’s refusal to hear two cases on the physical presence issue. The Court’s denial of these cases is discussed below. SB 1726,introduced in the U.S. Senate June 28, 2007 and Floor Statement, John Crapo, R-Idaho,June 28, 2007

Controversy matters

U.S. Supreme Court declines to hear economic nexus cases
On June 18, the U.S. Supreme Court denied requests to hear appeals of two cases where states imposed corporate income and franchise taxes despite a company’s lack of physical presence. Since the Court refused to hear these cases, the decisions in Lanco Inc. v. Director (New Jersey) and MBNA America Bank, N.A., v. Tax Commissioner (West Virginia) will stand.

The U.S. Supreme Court last ruled on the nexus issue in its 1992 decision in Quill. Here, the Court reaffirmed its ruling in National Bellas Hess and upheld physical presence as the requirement for a state to impose sales tax on a business entity. The Court also redefined this standard by ruling that the Due Process Clause required only a minimum connection, but the Commerce Clause required substantial connection.

In Lanco, New Jersey’s Supreme Court upheld the state’s corporate business tax on income from licensing intangibles by a company with no physical presence in the state. In support of its position, the court dismissed Quill as applicable only to sales taxes.

In MBNA , the West Virginia Supreme Court of Appeals held that the state could impose income and franchise tax on a bank with no physical presence in the state. As in Lanco, the court held that Quill is limited to sales and use taxes and that physical presence is now a poor measure of nexus due to the growth of electronic commerce. U.S.Supreme Court, petitions for certiorari, denied June 18, 2007

U.S. Supreme Court to hear Kentucky state bond interest case
In a case with potentially broader implications, the U.S. Supreme Court agreed to hear the appeal of Davis v. Department of Revenue. This case challenges Kentucky’s taxation of interest earned on bonds issued by other states and their political subdivisions, while exempting interest earned on bonds issued by Kentucky and its political subdivisions. Since a large majority of states with corporate or personal state income taxes have a similar rule, the Court’s ruling in this case could extend to them as well. In fact, a recent Arizona case raised similar issues and referenced Davis.

The case began in 2003 with a class action lawsuit by two Kentucky residents who paid Kentucky personal income tax on interest from out-of-state bonds. The individuals lost at the trial level, but won their 2006 appeal. In its decision, the Kentucky Court of Appeals ruled that Kentucky’s bond interest taxation scheme was unconstitutional because it affords more favorable tax treatment to in-state bonds than out-of-state bonds. The court did not specify a remedy. Kentucky’s Supreme Court declined to review the appeals court ruling, which set the stage for the current appeal.

The U.S. Supreme Court is scheduled to hear this case on Nov. 5, 2007, and issue a decision in 2008. KentuckyDep artment of Revenue v. Davis, U.S. Supreme Court petition for certiorari granted May 21, 2007; Case No. 200600161-C, Arizona Department of Revenue,Decision of Hearing Officer, June 7, 2007

Texas Supreme Court refuses to hear Home Interiors appeal; Comptroller ends appeal
Without issuing a published opinion, the Texas Supreme Court denied the Texas Comptroller’s appeal of Home Interiors v. Strayhorn on June 1, 2007. Previously, the Texas Court of Appeals ruled that the Texas-earned surplus throwback provision, as applied to Home Interiors, causes the franchise tax to be internally inconsistent in violation of the Commerce Clause of the U.S. Constitution.

Home Interiors is a Texas corporation with virtually all of its operations in Texas. It sells home décor products to independent contractors and during the period in question shipped products from Texas to all states. Under the Texas throwback provision, it increased Texas sales by sales in 36 states where its activities were protected from taxation by PL 86-272.

The comptroller had until Aug. 29 to petition Home Interiors to the U.S. Supreme Court, but declined to do so. Taxpayers can look forward to future procedures for filing refund claims based on this case. Strayhorn v. Home Interiors & Gifts, petition denied June 1, 2007