TWIST - This Week in State Tax

The Louisiana Board of Tax Appeals recently concluded that a cable television provider was not liable for local sales taxes on its sales of Video on Demand and Pay-Per-View programming. The matter involved several parishes that had audited the taxpayer and issued separate assessments that were consolidated before the Board. The issue in the case was simple- the taxpayer provided cable television services to subscribers via satellite transmission and broadband and offered subscribers the ability to purchase Video on Demand and Pay-Per-View programming for an additional cost. Under Louisiana law, there is a prohibition against imposing state and local sales taxes on amounts collected from a cable television subscriber for "regular service, installation and repairs." The issue before the Board was whether the Video on Demand and Pay-Per-View transactions were considered “regular cable services” so that they were exempt from sales tax.  The parishes appeared to argue that the transactions were akin to the sale or rental of tangible personal property. The Board noted at the outset that the case was very similar to Normand v. Cox Communications in which a Louisiana court determined that Cox's Pay-Per-View and Video on Demand were regular cable services. However, unlike in Cox Communications where all programming was streamed in real time, the programming at issue could be downloaded and viewed at a later time. The Board, however, did not find the temporary storage of data in a customer’s cable box to require it to reach a different conclusion than the Cox Communications court. Importantly, the customer was still restricted in its viewing and use of the programming because all programming had to be decoded and interpreted by the set-top box, the programming could not be viewed on a different device, and the customer had no access to the content if their cable subscription expired. Further, the customers’ objective in purchasing the programming was to watch a movie or live event, not to obtain possession of packetized data. The parishes, the Board noted, urged it to find that Cox Communications was wrongly decided because the term tangible personal property was broadly defined. However, the Board noted that if the taxpayer’s programming was tangible personal property because the programming itself could be perceived, the cable exemption would be read virtually out of existence (except for installation and service) as all programming can be seen and heard.  The Board also rejected the parishes’ assertion that the transactions at issue were taxable telecommunications services. Audio and video programming services were specifically excluded from the definition of telecommunications services. Finally, there were two Parishes that asserted direct-to-home satellite services were taxable; the Board also rejected this position as being preempted by the federal Telecommunications Act of 1996. Please contact Randy Serpas with questions on DirectTV, LLC. V. City of Baton Rouge.  

A Wisconsin appellate court recently addressed whether a manufacturer qualified for a property tax exemption for machinery, tools, and patterns not used in manufacturing. The taxpayer manufactured cheese at a facility in Wisconsin. Under Wisconsin law, all property is subject to property taxation unless an exemption applies. While most property is assessed locally, manufacturing property is assessed by the Department of Revenue. While the Department assesses manufacturing property, it also administers an exemption for certain machinery and equipment that is exclusively and directly used in a manufacturer’s production process. The dispute at issue addressed a different exemption found in Wis. Stat. § 70.111(27) that applied to “machinery, tools, and patterns, not including such items used in manufacturing.” Specifically, the issue was whether the taxpayer was entitled to this exemption for machinery, tools and patterns that were used in manufacturing but that did not meet the “directly and exclusively” requirement. In other words, the taxpayer’s position was that it could qualify for the exemption for property that did not qualify for the manufacturing property tax exemption. The Department, on the other hand, argued that the exemption for machinery, tools, and patterns not used in manufacturing applied to only non-manufacturing property that was subject to local assessment. The dispute eventually made its way to the appeals court. Before the court, the taxpayer argued that the Tax Appeals Commission correctly concluded that § 70.111(27) exempts machinery, tools and patterns, regardless of who owns or uses it, so long as it is not used in the manufacturing process.

The court concluded that the phrase “used in manufacturing” found in Wis. Stat. § 70.111(27) was ambiguous because it was undefined and was capable of being understood differently by reasonable people. On one hand, it could be interpreted to apply to property not directly used in the production process. It could also be interpreted to exclude any manufacturing property subject to assessment by the Department. Due to the ambiguous nature of the language, the court looked to the legislative history surrounding the enactment of the Wis. Stat. § 70.111(27) exemption and concluded that the exemption did not apply to machinery, tools and patterns assessed by the Department. Importantly, documents and affidavits drafted by the Legislative Fiscal Bureau had estimated the separate costs of extending the Wis. Stat. § 70.111(27) exemption to both Department assessed manufacturing property and locally assessed non-manufacturing property. This was important because the state was required to compensate local governments for lost property tax revenues resulting from the exemption. The documentation showed that the legislature ultimately opted to exempt non-manufacturing property only and the legislation adopting the exemption had the corresponding fiscal appropriation. The court concluded that the taxpayer did not qualify for the Wis. Stat. § 70.111(27) exemption. Please contact John Vann with questions on Wisconsin Department of Revenue v. Master's Gallery Foods, Inc.