Hosts & Guests
Meredith Smith, Senior Tax Manager,
Judy Vorndran, Leading Partner, SALT
Richard Pomp, Partner, Horwood Marcus & Berk
Jordan Goodman, Professor of Law, University of Connecticut
Talking about SALT with Richard Pomp and Jordan Goodman (Part 2)
Meredith Smith: [00:00:00] Welcome to SALTovation. The SALTovation show is a podcast series featuring the leading voices in SALT, where we talk about the issues and strategies to help you make sense of state and local tax. We're back this week with the second installment of our engaging discussion with professor Richard Pomp and Jordan Goodman, where we've been discussing the duo’s top 10 lists and their thoughts on prominent tax cases and other state and local tax topics. Are there any other reasons to make tax decisions that you think are just really bad policies?
Richard Pomp: Uh, sure. I think the last case is what we went over, which I happened to have a subset here.
What, what was the most outrageous state decision? That we talked about. So we talk, we talked really stupid. Well, we, you yell, I talked, this was really stupid.
Jordan Goodman: I was going to talk about the thing that from a policy perspective, that's really making me crazy is this debate about whether the proceeds from the sale of a capital event should be included in the.
It's included income. Right? It's good and visiting, but we don't want to include the receipts. And I think that is just stupid. I just think it's wrong. And this isn't actually a debate that's going on now around the country about when to include it or not. And I think. California probably has the best approach to it.
Although I'm in California and I'm hitting them on the head with their own laws and they, they don't even know which way is up. I really think they, they think everything, every gross receipt should be included. If it moves the factor 5%, you got to show that it's not. I think, okay. That's a legitimate thing that you taught when we talked about, you have to show where it's a lot of it's Goodwill, right.
Gain on a capital event. It's Goodwill. You've got to show where it was sourced to, or show me some event to it before you include it. Well, I don't think that that's the right test. California for me. It's like, [00:02:00] what? How's it not distortive how much income did it generate compared to your normal income?
Right? That's the question that should be the subjective of, you know, numerical tests. And I've got a client that's got 95% of his income in the year is generated by the capital event. They go over throwing out the factors, but it's business income.
Richard Pomp: I'm baffled. I go, how could it not be included in the.
Yeah, this is kind of the old Microsoft case and general mills
Jordan Goodman: treasury function and
Richard Pomp: hedging. And they're hard cases because the gross receipts can be so enormous. Uh, being generated by a very small profit March. And now on the gain of the sale, you have this enormous capital gain that accrued over time.
And you're fortunate to get by. It's almost serendipitous. What the apportionment formula looks like in the year of the sale, when that it took 25 years to, uh, that gain to be [00:03:00] generated.
Jordan Goodman: I just think it doesn't take 25 years for the gain to be generated capital gain
Richard Pomp: when you spell. Yeah. But that's, that's not what the
Jordan Goodman: gain was.
Meredith Smith: The accumulation of value just in cabinet. And then you take current of course, factors
Jordan Goodman: in your life
Richard Pomp: and you, I mean, I would say you theoretically, the right answers, you should average the apportionment formulas over time.
Let's say it's Goodwill, not Goodwill. Doesn't happen instantaneously in the year of the sale. And it has been generated over time. And where do you source it? If you are going to put it in the apportionment formula, who's this numerator at the capital gain. That's the rub. I could,
Jordan Goodman: I could live with that.
If that was what the statute saying, but the statutes don't say that they either say all sales from big transactions get removed per se. Without an explanation that it [00:04:00] generated most of the liability, or I'll give you a piece of it or a portion of someplace else. It doesn't say that. And that's why I think from a policy perspective, the way the states are approaching it is just dead wrong.
They're just saying no.
Richard Pomp: Oh yeah. They don't know what to do. They don't know really. I that's what I said, theoretically, they don't know what to do as a practical matter. Now we actually Jordan or may not remember we were on the same side of me. It was handled by Jordan's firm. And when it was remanded, we got ready for a second round before Jordan was able though, to settle this case on ReadyMan and we had to confront what.
The gain, we're going to be taxable. If Lexus, what is going to be taxable by the states in which Lexus did business, forgive me, just Lexis, carve it out as a freestanding entity. What states [00:05:00] should have a piece of that capital gain, a couple of billion dollar capital gain. Uh, and we had some theoretical discussion in a white paper.
I did. And then of course the case was settled and that was the end of that. But, uh, the VAs case out of Massachusetts may raise exactly this situation. Yeah, you do that sale partnership, interest, enormous capital pain, and who gets a piece of
Jordan Goodman: it? That's the area we're seeing it right now are these sales of through entities.
Where does it go? And the states are scattered. You've got California saying if it's business income, you look to the factors of the entity being sold, not the asset being sold, which is. To me, theoretically inconsistent, but I understand what they're getting at kind of what you said then, you know, where you've, you've been there for historically where the appreciation occurred.
I think it's misplaced, but I understand that at least, but the states are all across the board as to whether it should be. Whereas to be at the [00:06:00] asset that's being sold or going through to the entity that's being sold and where, what historical and that's what veterans all about, right. That Vectren case is all about the anomaly of going into Michigan.
Uh, we normally have a 3% factor having a 70% factor in a year of sale and how distorted it. Isn't the court guy. Of course gotten it twice now. Right? So that to me is kind of the upper
Richard Pomp: limit that illustrates my point about how gain can accrue over time. And it's serendipitous. The, where you are the year is finally recognized.
And you may have an apportionment formula having nothing to do realistically with, with the game. Well, we have equitable apportionment and say a safety valve. If you can get a court to understand what you're, you're saying, the stupidest case, I think is the one out of Indiana. We talk about that together.
Jordan, the express scripts case, basically a [00:07:00] management company, doing what Anthony. Used to do before that they outsourced it to express scripts, just manage the drug reimbursement program and they didn't sell drugs. CVS sold drugs, Walmart. Well, uh, what's it's Walgreens, Walgreens. And then. Indiana. The tax department says you're selling tangible personal property and they go say what?
Uh, we're a service provider and we're in a state that at that time was cost of performance and Indiana. You don't get any of the gross receipts. And the department said, oh no, no, you have an entry. This just fascinated me. By the way. There's an entry on their federal tax return, where they have put their normal deductions, but they call it cost of goods.
Have you ever run into this shorten?
Jordan Goodman: Yes. Yes. You [00:08:00] have.
Richard Pomp: What is going
Jordan Goodman: on where I I've seen it, where they use cost to get sold, because it doesn't matter for federal purposes. It's just a deduction, but the state will jump on it. And the opposite in Texas in class, you call it cost of goods sold. You don't get it as cost to consultant, even if it is cost a good soul.
Well that talk
Judy Vorndran: because it doesn't fit in all the other categories. So you're like wanting to throw in here and it is about,
Jordan Goodman: yeah. The deductions,
Richard Pomp: the deduction. Yeah. But your law firm doesn't have a consequence. So you deduct your associate salaries and everything. Yeah. Uh, I don't line on the return. You don't need to put to good.
So, so I never understood it, but the department jumped on him according to Jordan's absolutely right. Jumped on it and said, well, look obviously at selling product. And that brings them outside of cost of performance. Yeah into destination Rome. [00:09:00] Luckily, Indiana is one of the great tax court judges in the country.
Jordan Goodman: Judgment.
Richard Pomp: She's wonderful. Wonderful. Co-host she sees him the department.
In fact, I noticed that we seem to be settling more cases because they don't want to go before. So it's easier to settle in the Indiana, but, uh, yeah, she's wonderful. And she saw right through that man, this case, when you read the opinion, it kind of drips with score, not a very good department. That's one of the worst cases.
I think I have read recently, but the taste is, I don't understand why they're abroad. They come to mind Chevron and a, it was a Citco. They, they brought a case that was essentially re litigating general mills, general mills had, was about hedging and it was their inventory control [00:10:00] program. Uh, and buying, you know, to protect the price of corn and whatever they put in their scenarios.
Uh, and it, it went to trial and the court said, yes, it's a grocery seat, but. It's so distorted said that you, um, we'll give you the groceries, the sheet, but you can't put that grocery seat in the denominator. It's a grocery seat, but under equitable portion, only the net gain on your hedging will be put in the denominator, which is the approach.
Many states take with the treasury function. For sure paper on day one for a million on day two, you get 1,000,001 back, and you'd like to say your gross receipt is 1,000,001, and you do this day after day after day. And pretty soon you got an enormous gross receipt. Then, then the states don't allow this anymore.
Anyway, Chevron. Hedging against the price of its influence and Citgo. I think it wasn't SICO. They litigated this and of [00:11:00] course they got there, but take it to them. It was a ridiculous case to go up on. And I thought we had seen the last of those cases, but I guess not
Jordan Goodman: California, that kind of. Regulatorily nailed down of what they have to do, what the test is.
I'm not sure I don't miss.
Richard Pomp: Yeah. In California, because the general mills, when a woman Microsoft was in California. Um, yeah, so Merican Honda, one that Jordan and I talked about
Jordan Goodman: again, not my client, but my case, not my understanding don't know.
Richard Pomp: Why don't you explain the facts first?
Jordan Goodman: Okay. Well, they make a little bit of money selling vehicles.
They make a lot of money on, uh, earning tax credits and they sell the tax rate hundreds of millions of dollars, a detector like $250 million [00:12:00] year after year. And it was more profitable than their operations and they claimed it was not in business income. Dave source to their commercial domiciles.
Richard Pomp: And I happened to be their commercial dominance decide.
Well, what do you think the odds were? They actually had a number on their California return, but the case doesn't say, but that went
Jordan Goodman: up to the Arkansas Supreme court and it was a case of first impression and they really have not looked at the definition of business income in Arkansas before. I don't disagree with the decision.
You know, I am an optimist. I looked at the decision of the Arkansas Supreme court and they really said something that's really important for all of anybody's listening in the salt world. They gave no deference to the regulations issued by the department of revenue in Arkansas on what business and non-business.
They said we can read the statute. We don't need your help. Thank you very much. Which to me was the most important thing of Americana because the issue itself [00:13:00] as to whether these tax credits, they sold year after year, where business income was kind of a silly
Richard Pomp: question. They had a division in the company in charge of selling these credits.
Uh, you couldn't ask for a more straightforward business income case. Never understood why they thought they had a shot at this. But this issue of deference is a, a big issue. As you folks know, I don't know why you would want to put blinders on and not even look at what the department did. They may have some insight that you don't have as a late judge.
I would give it whatever deference it deserves and the other. You don't like it, you think they're wrong? Fine. You'll be ignorant. Why do you want to be ignorant and remain in the dark about what your tax agency, the most knowledgeable people in the state presumably think about this problem. I don't, I, [00:14:00] you know, they know it was fine de Nova with whatever respect you think it deserves maybe even better.
Jordan Goodman: yeah, the good judges always say, I'll take that under advisement. Right. And then they either listen to it or they don't listen to it. They do it themselves, but they kind of do it in the privacy of their own office by saying we'll take it under advisement. Yeah. Right. But I love it. And that's one that should be quoted all over the places because the department's opinion.
Worth nothing. I like it. I was just going
Richard Pomp: to read statutes to you. You like it until the regulation helps your client well, but then if you like it, then, then it ought to be listened to. So two weeks from now, Sirius radio is big in Texas and
Jordan Goodman: it's right after week after
Richard Pomp: Thanksgiving. Alright, buddy. Jeff Friedman is arguing that, uh, in Texas [00:15:00] and that's a big one.
It's just interesting. The lawyer arguing for the state when he was in private practice actually argued the position that Sirius radio is taking. And then they're saying. Based on your case law, as much as the statute, it's where the content was produced. So much content in Texas turns, right? There is a there's something called a roadshow.
Not really, no some and a couple of hours a week, but that's it, you know, it's all housed in New York and the state is saying, no, no, We're market-based state, even though they're not. And where's the market. Well, your, your business is really decrypting signals at the, uh, uh, in the car. That's what you do for a living you decrypt signals.
And that [00:16:00] takes place. Nice to see. Now here's the question that takes place, where you have interstate truckers. They're big, serious radio subscribers, but you don't know where they are. So you've got to use billing address. All right. And you run into this in Chicago all the time, don't you with the
Jordan Goodman: aggressive transaction tax, right.
Billing address. But at least the city Chicago allows you to prove by affidavit that it's being used outside the city. Right? So they, they have an a Portsman method. So I got to give them kudos when I, when I have to. But this whole issue about being a customer performance state, well it's, which cost of performance.
So they're looking at, and they become so specific as to. Putting the credit card in the slot to where the antenna is located. Those aren't really cost of performance. Those are pieces of what, of the possible way that you get the service and pay for it. This is not really, it's not direct costs that I grew up learning and cost account.
And those aren't the direct costs. We don't know where the [00:17:00] intent is located. That's a function of how to deliver it. That's not maybe a piece of it, but certainly not. No, I'm a transaction by transaction basis.
Meredith Smith: I'm pretty sure radio, which is free, but do we source advertising to that? The revenue for that based on where it's listened to, and that is a moneymaker radio.
So I don't know that it just seems very contrary
Jordan Goodman: to. Yeah, ratings, Nielsen ratings, those kinds of things. A little bit more specific than population. I have any kind of advertising and broadcasting,
Richard Pomp: sorry, isn't it. Nielsen ratings or is there such a dinosaur because of the mobility? We have to watch things on the move
Jordan Goodman: right now.
The IP address of your phone is the same, no matter where it is. Right, right. Who hasn't watched the show, not at home. Right. Right. So it's really an inexact science. And when it comes down to you just start making stuff up and you can get a different word for the S but I'll use stuff. It's a family program, but it is just making stuff up and whether [00:18:00] it's fair or not.
And as the Supreme court said, it's not an exact science. And we'll give you some as,
Richard Pomp: as people have drafted for a living, say the perfect is the enemy of the good. We can't get the statue. Perfect. Let's just get a good, so we can go home. It's three in the morning, take a shower. We gotta be back at eight for the leadership beading.
Yeah. And this is, will be the challenge I see. In many of these situations, how close you have to get to the right answer, right.
Jordan Goodman: Well,
Judy Vorndran: and then the information you can get from companies about how they're, how they make their money. That's a very complicated story to unravel from an accounting record standpoint.
I mean, we have a client that redeems coupons and Washington took the position that the redeemers where the moneymaker with the coupons weren't paid for by the redeemers at all, they got a little discount to buy the good the manufacturers paid for the coupons. The state. So how does [00:19:00] estrogen get to glom on to that?
But the money wasn't big enough to fight. So there is this thing where people are going to get taken advantage of. If it's not material work, the safeties are going to make a grab for the money and there's going to be multiple states getting the same money. And I think that's really
Richard Pomp: problematic. I have hit on a big case in New York.
The jumps came down B and H photo. If you've ever been to New York, I, where are they? 47th street or something. And they're one of these big, big, uh, well-known mail order companies and cheap stuff, cheap prices and what not. And you go to their website, which I encourage you to do. And you'll see prices, camera $1,000 with a big X through it.
Today is price only $900. And that's what they collected sales tax on. It was a whistleblower case would shorten, has great experience with an [00:20:00] Illinois home of learn the pity whistleblower law firms. And the whistleblower said they should be collecting on a thousand dollars and stayed year losing tons of money.
And the ag actually says, okay, we're going to take this case. Talk about a stupid case, right? Yeah. A thousand dollar price, which no one ever pays because it's always done sale. The wrinkle is exactly what you said. Judy, the manufacturer gives us subsidy to BNH auto auto B and H photo on a certain amount of volume that they sell these cameras.
They're not required to lower the price of the camera. They're not required to put on. But you move a lot of our stuff and you're going to get a discount, like a volume discount. And because of that, The whistleblower thought [00:21:00] somehow there was the manufacturer's coupon in there. I testified in this case and basically said the sales tax is, is supposed to be imposed on consumption.
What's the consumption here. What do you pay before? That's your consumption now? I observed for yesterday. What it might've sold sell for tomorrow might pay for if they didn't have a coupon, what did you pay for it? That's your consumption? And, uh, we, we just won this case and big, big wind embarrassment to the attorney general because, uh, Jordan knows that that are the most, uh, being from the home of whistleblowers and Tetons and all that.
The attorney general has to decide whether he is going to get involved. She, in case of New York, whether she's going to get involved or. You did it, this one, why would you get involved in this Kaka mania case? No brainer from the start. I thought no, when I first got called [00:22:00] you're kidding. You're not kidding.
They actually think sales tax should be on thousand dollars of price. No one probably ever pays, but
Jordan Goodman: they really understood the facts, honestly. Cause it's a Jerry Maguire moment. Show me. When they get paid, that's really what the consideration is. And they kind of blew that and they were thinking of a manufacturer's coupon where they get reimbursed or so I don't seem to be like, they didn't really understand the facts when they got involved in it, because clearly on the facts that were true, there, there was no reason to litigate the case.
Richard Pomp: Yes. Then that could be that someone had the stars in their eyes. Yeah. Uh, yeah. Silly, right?
Jordan Goodman: Yeah, it was silly, but you
Richard Pomp: got paid. Yeah, I got paid. So not a contingency, you know, an extra weirdness cannot, cannot work on a contingency. You, um, and then I got cited, but she was nice. So, yeah. Um, I just have, the client was happy.
Everyone's white. I don't think it's [00:23:00] going to be appeal.
Jordan Goodman: I hope not, manufacturers have a lot of ways to get money to the vendor, not just with a. And I don't think it matters which way they do it. I would favor the manufacturer's coupon. What did you pay that vendor or get reimbursed? So it's not yet. It sounded like they're paying you.
That would be to anything. So I don't care. What piece of paper you give the store? What did you pay for it out of your cash? That's the only thing that matters.
Meredith Smith: Well, gentlemen, we really appreciate this conversation and for us today, that's what matters. And so, you know, maybe we'll just have to have you back.
You know, maybe in a couple of weeks, we'll talk about serious, but we really do appreciate your time. Jordan, professor Pomp. Thank you so much for joining us. This has been another episode of salts ovation until next time.This podcast is for educational purposes only and is not intended, nor should it be relied upon as legal tax accounting or investment in.
You should consult with a competent professional to discuss specifics of your situation and the applicability of the information presented. .
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Questions asked and answered in this Episode:
- What are some recent tax decisions that they think are bad policy?
What You Will Discover:
- [00:31] Tax decisions they think are bad policies
- [06:48] Their thoughts on the Express Scripts case
- [10:30] American Honda and Arkansas Supreme Court
- [14:42] The current case regarding Sirius XM Radio in Texas
- [18:34] How to impose sales tax through the B&H Photo case
- “I’ve seen it where they use cost of goods sold because it doesn’t matter for fellow purposes. It’s just a deduction, but the state will jump on it, and the opposite in Texas. Unless you call it cost of goods sold, you don’t get it as cost of goods sold even if it is cost of goods sold.” – Jordan Goodman [08:02]
- “I don’t care what piece of paper you give the store. What did you pay for out of your cash. That’s the only thing that matters.” – Richard Pomp [23:28]
Jordan Goodman on LinkedIn: linkedin.com/in/jordanmgoodman
HMB Legal Counsel: hmblaw.com
Richard Pomp: law.uconn.edu/person/richard-pomp