Zack Atkins and Evan Hamme Serve as Panelists at Paul J. Hartman State & Local Tax Forum

Zack Atkins participated on a panel that discussed the true object test in sales and use taxes. The true object test applies to determine how a mixed transaction is classified based on its taxable and nontaxable components—noting a recent increase in cases where states have challenged mixed transactions in an effort to find additional revenue sources.

Citing the Arizona Court of Appeals’ decision from late January in ADP LLC v. Arizona Department of Revenue, which upheld a lower court ruling that ADP’s software rental to Maricopa County was subject to the state’s transaction privilege tax, Atkins voiced his disappointment in the decision. He stated that there is a solid argument to be made that the license and software did not fundamentally alter ADP’s service to its customer.

In a conversation addressing state treatment of related party transactions and taxpayer transfer pricing studies, Hamme noted that in Lorillard Tobacco Co. v. Division of Taxation, the New Jersey Tax Court recently struck down an older addback regulation on the unreasonableness exception to the addback after finding that it was unconstitutional. The New Jersey Tax Court remedied the unconstitutional regulation by applying a later version of the regulation retroactively. The later regulation allowed taxpayers to deduct interest expenses paid to related parties if the transaction resembled similar lending transactions between unrelated parties.

Hamme mentioned he is not a fan of the retroactive application of the regulation, particularly since neither party argued for it in the case, but further noted that the later regulation provided taxpayers an opportunity to deduct interest expense paid to related parties based on transfer pricing principles.

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