Under the compromise, fees paid by cellular phone customers would be allocated to the state that is the “primary place of use.” The bill, introduced by Senators Byron Dorgan (D.-N.Dakota) and Sam Brownback (R.-Kansas) in late October, has support from the National Governors’ Association, National League of Cities, Multistate Tax Commission, and Federation of Tax Administrators, among others.

THE UNITED STATES is appealing an October ruling by the World Trade Organization that “foreign sales corporations” are an illegal export subsidy.

Many American companies reduce US taxes on their export earnings by 15 to 30% by running the exports through an offshore entity called a “foreign sales corporation,” or “FSC.” For example, cross-border leases of US-made equipment are sometimes set up as FSC leases to reduce taxes on the rental income to the US lessor. The World Trade Organization ruling calls on the United States to withdraw the FSC subsidy by October 1, 2000 at the latest.

Approximately one in every four dollars in US exports is run through a FSC.

MASSACHUSETTS said a cogeneration facility whose contract to supply power to the local utility was bought out by the utility had a higher value for property tax purposes than the cogenerator claimed.

The cogenerator argued that the power plant had a low value because it had to operate on a merchant basis. Assessors for the town of Montague, where the facility was located, said the cogenerator had to take into account the $9.9 million a year that it would receive in buyout payments from the utility through 2009.

The Massachusetts appellate tax board agreed with the assessor in a ruling on November 1. The board said the buyout payments were an intangible that added to the facility’s value in the same way that government rent subsidies and accelerated depreciation add to value where the owner of an asset would qualify for them.

ALABAMA said that a local manufacturing company had to treat all of the dividends it received from two foreign subsidiaries as income from Alabama sources.

This meant the company had to pay income taxes on the dividends in Alabama. Most states require a company doing business in the state to allocate a share of its total income to the state based on the percentages of its total payroll, property and sales that are in the state.

In this case, QMS Inc. had its headquarters in Alabama. The company manufactured advanced printing systems. It had two wholly-owned foreign subsidiaries that did not do any business in Alabama, but the state said the subsidiaries were “integrally related” to the parent company. The parent pledged the shares of the subsidiaries as collateral for a loan. This triggered a “deemed” dividend under section 956 of the US tax code: the parent company was treated as having had the use of undistributed earnings in the foreign subsidiaries because it effectively borrowed against them in the United States.

The Alabama Department of Revenue said that the entire deemed dividend should be allocated to Alabama for state tax purposes. The decision was upheld this fall on appeal to an administrative law judge.

MCI AND TELECOM*USA lost a frustrating case on appeal over investment tax credits.

Congress repealed the investment tax credit at the end of 1985, but there were generous transition rules that allowed many companies still to qualify for credits for several more years. The credit allowed by these transition rules was 10% in 1986. It was 8.25% in 1987 and 6.5% from 1988 through 1990.

Meanwhile, a company had to reduce its depreciable basis by the full amount of the tax credit. MCI and Telecom*USA placed property in service in 1986 on which they were entitled to tax credits. However, they could not use the credits immediately and carried them forward to 1988. Under the rules, they could only claim a 6.5% credit. However, the IRS said each company had to reduce its depreciable basis by 10%. Both the US tax court and the US court of appeals for the DC circuit agreed with the IRS. The appeals court announced its decision in mid-October.