There is an injunction in Scripture against putting new wine into old wineskins, lest the skins burst and the wine be spilled. But state revenue departments answer to a different, if not a higher, authority and in the rush to find new revenues try to jam new sources of income into old statutory wineskins. While the results are not shattering, they are sufficiently disjunctive to validate the wisdom of the ages.

Consider the strange fruit yielded by grafting green branches of the developing service industry, especially in the high tech area, onto gnarled trunks of state tax codes that are rooted in B.C. (before computer) soil.

AGGRESSIVE ALLOCATION IN CALIFORNIA

As in so many areas, California is the granddaddy of aggressive taxation. it is thus instructive to analyze a case involving the high tech services sector, specifically in the area of telecommunications satellites. The case, Communications Satellite Corporation v. Franchise Tax Board ("Comsat"), was a Court of Appeals holding in a 1984 case dealing with apportionment of satellite activities.

Comsat was a Washington, DC corporation with its principal place of business there. The Company was a member of an international joint venture, which gave it an interest in communications satellites. The satellites were manufactured in various parts of the U.S., launched from Cape Canaveral, FL, and tracked by ground stations located in Maine, Italy, Australia and Hawaii. The satellites were placed in geosynchronous orbits (i.e., orbiting speed matched the earth's rotation so that the satellites appeared to be stationary vis-a-vis the earth) over the indian, Atlantic and Pacific oceans. At no time did the satellites pass over California. The major tie to California was the presence of one out of seven earth stations, the receiving antennae and supporting electrical equipment. Comsat earned its revenues from leasing use of its earth stations, and from participation in the joint venture.

In computing its California corporate income tax, Comsat omitted the value of the satellites from the numerator of the property factor but included it in the denominator. The taxpayer did the same with respect to the receipts factor, its share of the joint venture revenue. The rationale? The property and receipts attributable thereto were not in California, but were hovering somewhere over the Indian Ocean, for instance. That the items belonged in the "everywhere" denominator factors appeared to be obvious. Not to the state taxing authorities however ! State auditors went through a variety of improvised apportionment methods, under the theory that the California tax law and Uniform Division of Income for Tax Purposes Act (UDITPA), upon which the law was based, do not allow income to escape taxation at the state level entirely. In a sense the state was asserting a throwback rule, although the rule had never been applied to receipts from services, and clearly not to property.

The lower court apparently sided with Comsat's contention that the literal wording of the apportionment statute controlled. The Appellate Court did not. It held for the state, on grounds that were not explicitly argued by the state's attorneys. The court held that the statute placed property in the numerator if it was "used" in the state. Actual location was irrelevant. The court thus adopted an economic viability test, stating that the satellite was totally dependent on the earth station. "Without the connection to the earth station, the satellites function in outer space to no purpose involving this state with it. With it, they function in California. The ascription of a function in California' to the satellites is a recognition of the realities of telecommunications and space technology, not an indulgence in fiction."

Thus, the Court accepted California's discretionary factors. The state had assigned the property and receipts in question by including the value of and receipts from the satellite in the apportionable base. For example, a portion of the satellites' value was included in the property factor, in the ratio that Comsat's California property bore to all its property, exclusive of the satellite. Similarly, revenues it received from its interest in Intelsat, the joint venture consortium that operated the satellites, were included in the California receipts factor, based on the ratio of its receipts from leasing half-circuits that terminated at its California earth stations to its receipts from leasing half-circuits everywhere. (A half-circuit is a communications channel between an earth station and a satellite. Two half-circuits are necessary for a phone call or a TV program to reach its earthly destination. In the court's mind, the invisible half-circuits provided the necessary link between California and Comsat's interest in the orbiting satellites.)

The Court dismissed due process concerns. Comsat had a minimal connection and hence nexus. The apportionment bore a rational relationship between the income base and the interstate values of the enterprise.

PROBLEMS WITH THE COURT'S RATIONALE

Although the Court paid lip service to the notion that the party seeking equitable relief bears the burden of proof (in this case the state), the Court's reliance on a reasonableness standard (i.e., the rational relationship test) seemingly ignored the burden. After all, was Comsat's reliance on literal statutory wording any less reasonable? If not, and if the burden rested with the state, it is hard to agree with the judges that burden was met, absent a more cogent statement in the decision.

Another theoretical flaw in the court's reasoning was its treatment of Comsat's Commerce Clause claim. The court, as an afterthought, dismissed the claim because "it has not been shown that Comsat had been subjected to excessive and duplicate taxation, and that interstate commerce has thereby been discriminated against or otherwise impeded." (Remember, the burden of proof should have rested with the state.) This quote is the sole discussion by the Court of the Commerce Clause.

A better analysis would be to look to the generally accepted norm, the four-prong test enunciated by the U.S. Supreme Court in Complete Auto Transit Co. v Brady requiring:

1. Some minimal link, or nexus;

2. A fair apportionment;

3. The tax be fairly related to the benefits conferred by the state; and,

4. The tax asserted by the state not result in multiple taxation.

The second and third prongs of the test are somewhat at variance with the Comsat Court's sole pegging of the satellite's utility to the earth station, which conveniently had a situs in the Golden State. After all, there were many benefits conferred by other states that were just as vital to the satellite's operation as the California earth station, but were ignored by the court in its sole reliance on the earth station as the measuring stick of the satellite's economic viability. To be sure, there were earth stations in six other jurisdictions. There were also costs of manufacture, administration, launching, and tracking and telemetry. None of these were situated in California. Yet all point to cost of performance as a fairer matching of benefits and burdens among the states than did the court's earth station approach.

USE OF A STATE GOVERNMENT'S SERVICES--MISSOURI

Precise matching of benefits to burdens is an inexact technique. That is the very reason that statutory apportionment formulas have been upheld--they are inexact, but are a fair approximation of activity within the state. And at least one court has gone through a more precise statistical approach to apply the Complete Auto Transit test. In Burke & Sons Oil Co. v. Missouri, the State Supreme Court tried mathematically to match the taxpayer's exploitation of the state with the use tax collection liability asserted by the state. The court calculated the vendor's tax cost per mile and per minute of penetration into the state, for purposes of tapping at least a small part of the state's market. During a five-year period subjected to tax examination, the benefits were deemed to be too few, arithmetically, for the state to be allowed to place the liability on an out-of-state vendor's shoulders.

It would seem the Comsat court could have done as much in devising a fair apportionment or in requiring the state to do so to meet its burden for nullifying the statutory three-factor method of apportionment.

MUST ALL INCOME BE APPORTIONED TO A STATE?

This, of course, assumes the State was correct in throwing back property and receipts. Does this mean that any taxpayer, whose factors reported to all states do not add up to 100%, is at risk? In the age of spreadsheet disclosure, there may be such a risk. A more reasonable answer, however, is that it may be the nontraditional industries (e.g., telecommunications, service providers, etc.) who may be attacked. California has long looked askance at specialized industries. The landmark case was Luckenbach v. Franchise Tax Board.

In that case the court grappled with the issue of apportioning income of a shipping company. Faced with the threat of tax revenue being attributed to the "tax-free face of the deep," akin to Comsat's apportionment of property and receipts to the tax-free realm of the heavens, the court adopted a port-day formula. The formula compared the taxpayer's days spent in California ports vis-a-vis total days spent in any port. (of course the port-day doctrine appears to rest on surer footing than does the latter court's earth station approach in Comsat.) The key point of Luckenbach was that it demonstrated the traditional three-factor approach can be altered if property is not a relevant factor for a given industry. As the Court stated, "We do not mean to devalue the factor of location. It may be important or unimportant, according to the characteristics of the particular business enterprise."

Thus, the court downplayed factors ordinarily associated with a stationary, as opposed to a mobile, activity. in the case of the latter type of activity the court looked to the "production element." Were it not for the productive potential acquired at the port of departure and liquidated at the port of destination, the high seas portion of the time-space continuum would be barren of profits. "

Nor is the alteration of factors the sole province of mobile activities such as vessels or satellites. A similar fate awaited the taxpayer in Appeal of American Telephone and Telegraph Company ('AT&T'). The issue involved taxpayer's use of trans-oceanic cables laid between California and Hawaii; a side issue dealt with AT&T's leasing of circuits on the Comsat satellite. Taxpayer included the full value of transoceanic cables in its property factor. The state disputed this, contending that this would attribute part of the tax base beyond the three-mile limit and the Outer Continental Shelf of both California and Hawaii.

The California Board of Equalization read the statutory phrase of property "used in this state" expansively in holding that one-half of the entire cable value should be included in the numerator of the property factor. The Board also relied on its discretionary right to adjust factors if the statutory provision did not fairly represent taxpayer's activity in the state. Thus one-half of the cable was deemed "used" in California; from the mid-point in the Pacific Ocean to Oahu was imputed to the State of Hawaii. Implicit in the Board's finding was its "notion that UDITPA's fundamental purpose is to assure that 100%, and no more and no less, of a multi-state taxpayer's business income is taxed by the states having jurisdiction to tax it."

It is interesting that the Board distinguished an earlier case, Appeal of New York Football Giants, Inc. ("Giants"). in that case, the state asked for equitable relief from the standard three-factor apportionment method. Under NFL rules, home teams retain 60% of the gate, with 40% going to the visiting team. Thus under UDITPA, the receipts factor denominator includes 100% of a home team's revenues, which is the gross amount of home gate receipts, and its away-game share of 40% of the gate. California sought to remove 40% from the denominator (i.e., the share of gate receipts actually paid to the visiting team). The SBE ruled that, although the proposal was superior to the UDITPA approach, the result was not sufficiently unreasonable to allow repudiation of the UDITPA rule. The AT&T Board felt that the Giants presented a qualitatively different issue: some income escaping state taxation rather than all income slipping away. Yet the Board's reasoning was strained and the difference between the Giants and AT&T/ Comsat may be merely a matter of degree.

It should be noted that another corporation income tax case is pending, again involving Comsat, this time in an action by the Commonwealth of Pennsylvania, which is adopting the California approach. Thus, the aggressive approach of the states, using equity to alter settled tax law concepts, may be spreading eastward.

SALES TAX ON INTANGIBLE SERVICES

Of course, state action is not restricted to income taxation. Considerable activity has occurred, especially on the legislative front, with respect to sales tax. Historically, the sales and use tax statutes applied largely to retailers and manufacturers, that is, purveyors of tangible personal property. As the U.S. economy has shifted to a service-oriented one, the sales tax base has been broadened to encompass intangible services as well. High-tech industries are particularly susceptible to challenge. Consider, for example, action that has sprung up around the telecommunications industry.

Telecommunications

Taxes on these services are of two types: on sales and on gross receipts. The taxes are functionally equivalent, except that the former is imposed on the purchaser while the latter is imposed on the seller. Also, gross receipts taxes frequently provide for some type of apportionment, usually based on property or transmission lines owned or leased in-state, while sales taxes are usually unapportioned, but will typically provide for a credit for taxes paid to other states on the same service. In addition, there may be franchise-type taxes on capital or dividends of companies providing telecommunications services.

The U.S. Supreme Court recently upheld the imposition of an excise (sales) tax on interstate telecommunications services, in Goldberg v. Sweet. Such taxes are constitutional as long as they do not violate the four-pronged test, discussed previously, of Complete Auto Transit In Goldberg, the fair apportionment prong was satisfied by a credit for taxes paid to other states. In Che wake of Goldberg, some states that formerly taxed only intrastate telecommunications have expanded their statutes to cover interstate telecommunications.

The Illinois tax in Goldberg required that taxable telecommunications either originate or terminate within the state and also be charged to an in-state service address. in most cases in which interstate telecommunications charges are subject to a sales or gross receipts tax, "interstate" is similarly defined. Intrastate" telecommunications are usually defined as those originating and terminating within the state. However, there are exceptions to these generalized definitions. For example, Florida will impose gross receipts taxes on messages billed to a Florida customer or device. That is, a message sent from New York to Michigan would be subject to tax in Florida if billed to a Florida address; it need not originate or terminate in Florida. Also, a statutory or regulatory definition of "interstate" may not exist in a particular state to guide taxpayers as to which sales are taxable and which are not.

The difficulty that state legislators have in understanding new technologies may be seen in the bewildering variety of exemptions to sales tax on telecommunications offered by states that cannot clearly delineate where telecommunications end and information services begin, There may be exemptions for information services transmitted by telecommunications. For example, in Texas, storage of information is not taxable as a telecommunications service if the form or content is altered; however, it may be subject to a data-processing tax. Illinois does not subject value-added services to its gross receipts tax, while the District of Columbia exempts data transmission from its tax on toll telecommunications. Surely, such statutes are anachronisms in a growth industry where much new revenue is supplied by value-added services, such as call-forwarding or electronic mail.

Broad-Based Services

In addition to growth industries that have been targeted, a number of states have enacted broad-based services taxes, extending the traditional sales/use tax structure to a vast panoply of services. Two states that received widespread publicity for flirting with service taxes but failing to adopt such are Florida and New York.

Florida did pass legislation in 1987. But the concept was so novel, the ground so unprepared, and the legislation so hurriedly passed in the wake of a budget crisis, that the resulting uproar sent the service tax to its grave after a seven-month life. The attack was on two fronts:

* Politically, some of the industries affected, chiefly the advertising industry, mounted an enormous lobbying effort.

* Technically there were several glitches in the statute. For example, one section of the statute provided for unitary nexus in applying the tax. Thus, non-Florida work performed by a non-Florida vendor for a non-Florida buyer was taxable if the buyer had an affiliate with nexus to the Sunshine State. However, the section of the statute dealing with remittance of tax seemingly applied only to entities with nexus in their own right to the State. The Department of Revenue struggled mightily to overcome such problems by regulation.

In 1990, New York's marathon budget crisis also gave rise to a proposed service tax. However, the service sector mobilized a lobbying effort prior to enactment and, under the harsh glare of adverse public relations in the world's media capital, the legislation was stillborn.

Other states have been more successful in adopting a service tax. Chief among these are Connecticut and Texas, both of which have experienced massive enforcement problems, and, more recently, Massachusetts and the District of Columbia.

Confusion typically results, however, when a broad-based service tax is enacted in the context of a state tax code designed for a manufacturing and retail economy. Consider, for example, a traditional exemption for machinery and equipment used in manufacturing. The theory behind the manufacturing equipment exemption, ubiquitous in the sales tax codes of most states, is that the purchase of inputs to the production process, which include capital equipment, ought not to be taxable if the output is taxable. A side economic benefit is shifting of the tax burden associated with the product from producer to consumer. Thus, states such as New York provide a statutory exemption for purchases of machinery and equipment used in production of tangible personal property for sale and administrative regulations require that such machinery be used "directly" in the production process--e.g., change the raw material into a finished product. As the taxation of services is added to a sales tax code designed to tax sales of goods rather than services, the related production equipment exemption is either denied to service producers or seriously strained to accommodate these new, predominantly computer-based, industries.

Consider two cases involving attempts by taxpayers to avail themselves of exemptions for purchases of computers undoubtedly necessary to performance of services. in TV Data, a New York Tax Appeals Tribunal case, a company sold television program listings to newspapers, mostly in the form of paste-ups or camera-ready copy. About 20% of the time it delivered its service electronically directly to its customers' computers.

At issue was a production equipment exemption for computer hardware and peripherals the taxpayer used to produce its service. The Tribunal upheld the taxpayer's right to the exemption because the role of the computer was "direct, necessary, and integral" to production of taxpayer's services. It was sufficient that the computer had an active causal role in the production process; it was not necessary that the computer directly come in contact with a tangible product. The Tribunal did not distinguish TV listings delivered by electronic means from paste-ups or camera-ready copy. An earlier decision, which the Tribunal reversed, categorized TV listings obtained by wire as an information service and the same listings obtained as camera-ready copy as tangible personal property.

Similarly, a Minnesota law provided a reduced sales tax rate for capital equipment purchased to establish or expand a manufacturing, fabricating, or refining facility. In West Publishing Co., the taxpayer, a company that provided computerized legal research that was electronically transmitted to subscribers through computer terminals, was upheld in its attempt to obtain the reduced sales tax rate for purchases of its computer equipment. The Minnesota Tax Court held that computerized research is a product;" therefore, the partial exemption applied. it found no difference, surprisingly, between equipment used to print the same company's law books (obviously, products," by any definition) and computers used to transmit the same material to customers "in a different form." But the Tax Court ignored just the feature that makes a dial-up legal database service very different from a law book--that of interactivity. in some sense, the customer's computer was also being used as production equipment, because his selection determined what was produced. In both this case and the TV Data case, judicial bodies have stretched the limits of an outmoded production equipment exemption and attempted to squeeze essential intangible service components into a tangible personal property mold.

ACTION IN THE DISTRICT OF COLUMBIA

In 1989, the District passed new legislation to tax a broad array of information and data processing services, not to mention such other services as telecommunications (discussed above), real estate maintenance and landscaping. Under the statute, a taxable data- processing service is defined as processing of information for compilation and production of records of transaction, the maintenance, input, and retrieval of information, and provision of access to a computer to process, acquire or examine information.

The statute furnishes examples: business accounting; word-processing; payroll services, such as preparing employee work-time records or payroll checks; and any type of computerized data storage. Further, data-processing also includes the sale of all computer software (custom and canned) and almost all services connected with computers, or software consulting provided in conjunction with hardware sales, and modification and updating of software.

A taxable information service is defined as the furnishing of general or specialized news or current information by any means. Examples provided by the statute are mailing lists, financial reports, credit reports, and investment newsletters. Exemptions are provided for information used in newspapers or radio or television broadcasts, charges for information on account balances furnished by a financial institution, and proprietary information gathered on behalf of a particular client that may not be sold to others; such information is taxable if subsequently sold by the client to others.

Subsequent regulations added an exemption under data-processing services for use of a computer by a provider of other services when the computer is used to facilitate performance of the service or application of the knowledge of accounting principles and tax laws. A similar exemption is not provided under the information services provisions, however. The regulations also provided for payment of a use tax when information services are delivered from outside the District for use within the District. Information services sold and delivered outside the District are exempt; however, no provision is made for services delivered in the District but used outside; e.g., a report picked up by an out-of-state client at a District office, but used entirely outside the District. Other situs problems may exist, for example, if a Maryland client visits the District to discuss requirements for software that will be delivered in Maryland and used in its computers there.

Transactions with Affiliates

Another problem for business taxpayers can occur when one member of an affiliated group of companies performs services for another member. Originally, no exemption was provided in the statute for information or data-processing services performed by one affiliate for another. Recently, the law was amended to exempt data-processing services performed in the context of the affiliated group. However, no such exemption was added for information services. Thus, for example, if a headquarters organization within an affiliated group prepares a consolidated financial report on behalf of the entire group, each member max, be taxable on its portion of any intercompany charge for the report. A similar situation can occur if one company performs credit investigations on behalf of an affiliate.

Other Issues

A unique set of issues has arisen with respect to the taxability of services provided in the District, but used outside the District. The Department of Finance and Revenue has expressed its intent to tax only those services in which the beneficial use of the service occurs in the District. Such an interpretation is clearly needed to prevent an exodus of service providers serving a multi-state region from the District. Accordingly, Prop. Rule 473.5 provides: "Data processing services sold and delivered by the vendor to locations outside of the District are exempt from the sales tax." Similarly, Prop. Rule 474.8 states: "Information services sold and delivered by the vendor to locations outside of the District are exempt from the sales tax."

A number of concerns are raised by these provisions. For example, what constitutes "delivery" of a service? If a Maryland company engages a District consultant for data processing advice and the advice is communicated via telephone from the District to Maryland, what documentation must be maintained to support delivery outside the District? If, instead, the Maryland client picks up a written report in the District, is this a taxable District sale even though the beneficial use of the service will occur in Maryland? Similar problems arise with the notion of "sold in the District." If a Virginia client purchases data-processing services for use by its manufacturing divisions in District of Columbia, Virginia, and Michigan, where is the service sold? Current statutory definitions of "sale" and "retail sale" do not adequately address these issues.

if the experience of the first few years is indicative, we may be in for a period of drift with respect to sales taxation of the service sector, with alternating periods of proposed tax under budgetary duress, an ensuing lobbying maelstrom as the service sector, led by a few key groups especially affected, challenges the proposal, followed by either watered-down victory or defeat (the Florida/New York model) of the bill. If the state is victorious, the battle rages anew (the Massachusetts/DC model), as the service sector taxpayers and tax practitioners exploit loopholes inherent in jamming onto an intangible receipts economy a tax designed to reap the fruits of tangible personal property sales.

PROPERTY TAXATION

Finally, there is a growing body of case law dealing with another problem area of matching old laws to new industries: property taxation. There are six cases that are noteworthy.

Overflight Time Goes in Tax Base

Alaska Airlines, Inc., et. aL v. oregon Department of Revenue. For purposes of the assessment on property, the Oregon Supreme Court agreed that overflight time is an appropriate measure of the tax base. That is, the time spent in the air by taxpayer's aircraft flying over the state in cases where there is no terminal point in the state, is an appropriate inclusion in the tax measurement base.

The case was decided on two grounds. First, the Complete Auto Transit/Commerce Clause test was at issue. The second involved a reasonableness standard under Oregon law. The Court resolved the Commerce Clause issue in favor of the taxing authority for several reasons. One of these was that the internal and external consistency tests of Goldberg were met. That is, the state's tax was internally consistent because if every state were to use it, no multiple taxation would have resulted. in addition, it was externally consistent inasmuch as it dealt solely with in-state aircraft activity.

The Court was also persuaded by the fact that the taxpayer derived benefits from its in-state activities, such as the availability of search and rescue services, exploitation of commercial markets, and protection under Oregon criminal laws.

Of course the tenuous link is the characterization of "in-state activities." Complete Auto calls for "some definite link, some minimum connection" between the taxing state and the taxed activity. Here the Court may have leaped to flights of fancy, for, without any discussion of Oregonian air space and rights, the Court held that nexus existed because the aircraft at issue was part of an integrated whole used to carry on interstate commerce. Although prior statement must be considered, the Court failed to address how carrying on a purely interstate commerce business was related to Oregon nexus. indeed, the whole point of the Commerce Clause is to protect taxpayers engaged solely in interstate commerce, and not physically tied at some point in time to a place within the taxing state. From the record, it is clear that Alaska Airlines did, in addition to over-flights, provide service out of the Portland International Airport. Thus, Alaska Airlines did have nexus, vitiating the Court's holding. The Court's failure to properly address this, however, in the rush to cast a broad state tax net, is shocking. Proper analysis would have been to address the additional nexus facts, or sans the facts, to uphold the taxpayer's position. The Court may have been saved by the U.S. Supreme Court's refusal to grant certiorari in January, 1990.

Imaginary Surfaces Do Not

City of Winooski v. City of Burlington. This case was decided almost contrary to Alaska Airlines. At issue was property taxation of "imaginary surfaces," an FAA concept dealing with the space above the earth's surface extending out from the airport and its runways. The case was decided solely according to local law, but the court insisted on a literal reading of the statute. Thus, the "surfaces" created by FAA regulations did not soar to the level of tangible "land and buildings" required for taxation under municipal law.

Personal Property on Aircraft Does Not

Flying Tiger Line, Inc v. Board of Assessors of the City of Boston. The City tried to tax personalty used on aircraft of this non- Massachusetts-based taxpayer. Because the aircraft was not permanently stationed at Logan Airport in Boston and there was no apportionment of the tax base provided, the tax failed under both federal and state law doctrines. Interestingly, the Court recognized the difficulty in applying old laws to new industries by opining that the subject matter of the case was a proper one for consideration and enactment of a revised statute by the legislature.

Earth Station Does Not

Transponder Corporation of Denver v. Colorado. The taxpayer built and operated an earth station, which the property tax administrator tried to treat as taxable real property under public utility and telephone company statutes. The issue addressed was whether the type of service provided by Transponder was encompassed within the phrase "telephone company." The Court found considerable doubt as to whether the service generally offered by a telephone company was offered by Transponder. Thus, under the rule of statutory construction that doubts as to the meaning of a statute are to be construed against the taxing authority, the Court held for the taxpayer.

Aircraft on the Ground Does

County of Alameda v. State Board of Equalization. The court upheld the State's right to modify the assessment period, at the expense of the locality, for aircraft that were grounded due to an issue involving airworthiness. The County's assumption that it could tax property physically present in the state, whether in flight or on the ground, was rejected.

Leased Lines Do

United States Transmission Systems, Inc v. Colorado. The taxpayer was a common carrier, regulated by FCC, that provided long distance voice communication services within the continental U.S. USTS leased lines in Colorado from AT&T, MCI and Mountain Bell. The company did not offer handling of local calls as a service. The court nonetheless held that it was taxable as a "telephone company," distinguishing Transponder (above). The fact that the company only held intangible rights to use the Colorado lines, rather than outright ownership, was not a bar to ad valorem taxation.

STOPPING THE WAVES IN THE LONG RUN

Some of the preceding cases were decided for the taxpayer, some for the taxing authority. All were somewhat pioneering, if not surprising, decisions, that point out the dangers and unpredictability inherent in applying decades-old laws to years-young industries. in the long run, reliance on aggressive enforcement, hasty statutory enactment, and strained judicial reasoning would seem to be as effective as King Canute's commanding the waves to stop. A comprehensive program to build new state tax bridges, dams and dikes entails short-term pain but is effective in stopping the waves in the long-term, especially in a tax system predicated upon voluntary compliance, fairness and predictability. In all areas discussed, income, sales and property, and at all levels, legislative, judicial and administrative, the shift in the nature of the economy to service-oriented, high-tech enterprises offers the opportunity and necessity for detailed revision of state tax systems.

CASES CITED IN THIS ARTICLE

Communications Satellite corporation v. Franchise Tax Board, 156 Cal. App. 3rd 726; 203 Cal. Rptr. 779(1984).

Complete Auto Transit. inc. v. Brady. Chairman. Mississippi Tax Commission. 430 U.S. 274; 97 S. Ct. 1076(1977).

Burke & Sons Oil Co. v. Missouri Director of Revenue, 757 S.W. 2d 278 (Mo. Court of Appeals, July 26,1988, rehearing overruled 8/30/88).

Luckenbach Steamship Company v Franchise Tax Board, 219 Cal. App.2d 1710(1963, petition for Sup. Ct. hearing denied).

In the Matter of the Appeal of American Telephone and Telegraph Company, Cal. SBE, Slip Op. (June 29, 1984).

In the matter of the Appeal of New York Football Giants. Inc, Cal. SBE, Slip Op. June 28,1979).

Communications Satellite Corporation v. Commonwealth of Pennsylvania, 2270 CD 1988 (Petition for Review, Commonwealth Court of Pennsylvania, Sept. 26,1988).

Jerome F Goldberg and Robert McTigue, Appellants. v. Roger D. Sweet. Director, Illinois Department of Revenue; GTE Sprint Communications, Appellants v, Roger D. Sweet, 488 U.S. 252; 109 S. Ct. 582 (January, 1989).

in the matter of the Petition of T V Data. Inc Division of Tax Appeals, Tax Appeals Tribunal (New York, File No. 803016, March. 2,1989.

West Publishing Co., Minn. Tax Court, No 5346, (July 11,1990).

Alaska Airlines. Inc. v. Department of Revenue, No. S34859, S34860 (Oregon Supreme Court, February 22,1989, U.S. Sup. Ct. review denied).

City of Winooski v. City of Burlington. No. 89-151 (Sup. Ct. of Vermont, March 11,1990).

Flying Tiger Line Inc. v. Board of Assessors of the City of Boston. No. 132926 (Mass. Appel.Tax Board, March 14,1988).

Transponder Corp. of Denver v Prop" Tax Administrator, No. 82SA223; 681 P. 2d 499 Sup. Ct of Colorado en banc, April 23,1984).

County of Alameda v. State Board of Equalization. 131 Cal. App. 3d 374; Cal. Rptr. 450 (Superior Ct. of Sacramento County, April 30,1982; hearing denied, July 28, 1982).

United States Transmission System, Inc v. Board of Assessment Appeals, No. 835A373, 715 P.2d 1249 (Sup. Ct. of Colorado en banc, Mar. 17,1986).

Kenneth T. Zentsky, JD, CPA, is a Partner at Ernst & Young and Director of the New York Office State & Local Tax group.

Joan S. Faber, MBA, is a Senior Tax Consultant at the New York Office of Ernst & Young.

The authors acknowledge the contribution of Michael Lippman, of E&Y's Washington, DC, office.