SALT SAVVY: COAST-TO-COAST SALT UPDATES - JUNE 2, 2021 - BAKER MCKENZIE
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
SALT Savvy: Coast-to-Coast SALT Updates June 2, 2021
Presenters
Nicole Ford Drew Hemmings Michael Tedesco
Partner │ New York Associate │ Chicago Associate │ New York
+1 212 626 4457 +1 312 861 3711 +1 212 626 4284
nicole.ford drew.hemmings michael.tedesco
@bakermckenzie.com @bakermckenzie.com @bakermckenzie.comPoll Question #1
3SALT Trends and Developments
Remote Workforce Concerns
Continues to be one of the most pressing state tax compliance concerns as we move
into the latter half of 2021.
Many states issued COVID-19 guidance indicating that WFH employees in the state
would not create nexus or withholding obligations.
However – what if your remote employee wants to stay remote after restrictions are
lifted?
New York’s convenience of the employer rule.
New Hampshire v. Massachusetts SCOTUS case.
Multi-State Worker Tax Fairness Act of 2021 (introduced May 27, 2021).
Importance of remote work policies.SALT Audit Resurgence
Many courthouses have reopened and several state DORs have been
mandated to return to in-person work.
Impact on speed and volume of state DOR audits?
Continued flexibility on audit timing and procedure?
Strategic points to consider on in-person versus remote conferences,
hearings, etc.?MTC Primed To Revamp Its Multistate Transfer
Pricing Collaboration and Enforcement Initiatives
State Intercompany Transactions Advisory Service (“SITAS”) Committee
formed in 2014 with the goal of providing participating states with: 1)
Mechanics training; 2) Third party audit services; 3) information
sharing/exchange agreements; and 4) case resolution and support
services.
Krystal Bolton from the Louisiana Dept. of Revenue appointed as Chair
of the SITAS Committee at end of 2020.
On March 23, 2021, SITAS held first public meeting in over 4 years.
7MTC Primed To Revamp Its Multistate Transfer
Pricing Collaboration and Enforcement Initiatives
Available at: https://www.mtc.gov/
8MTC Primed To Revamp Its Multistate Transfer
Pricing Collaboration and Enforcement Initiatives
92
New Legislation /
Administrative
GuidanceNew Jersey Combined Reporting Guidance
New Jersey moved to mandatory combined reporting July 31, 2019.
Issued revised TB-89(R) on January 13, 2021 setting forth some general rules.
Allocation Method: Joyce for worldwide & water’s-edge groups; Finnigan for affiliated group
returns.
Specifies water’s-edge group composition.
Water’s-edge is default unless worldwide or affiliated group election is made.
Taxpayers may change their method from 2019 to 2020.
TB-103 (Mar. 16, 2021): Conforming “in principle” to the federal consolidated return regulations “to the
extent consistent with the New Jersey Corporation Business Tax Act and the unitary business
principles[.]”
Consolidated return rules on DRD, GILTI, NOL and other special deductions not incorporated by
reference.
11Georgia Dilutes Judicial Deference
On April 29, Georgia enacted S.B. 185, which changes the standard of judicial deference
to Georgia Department of Revenue interpretations issued outside of APA notice and
comment.
All questions of law decided by a court or the Georgia Tax Tribunal must be made
without any deference to the Department’s determination or interpretation.
Prior deference standard: Whether Department’s interpretation was a “permissible
construction” of the statute.
Does not apply to regulations promulgated according to Georgia APA.
Applicable to all proceedings commenced before the Georgia Tax Tribunal or a
superior court of the state of Georgia on or after its effective date of April 29, 2021.
Effectively shifts interpretive power from the Department to the reviewing tribunal.
Compare to trio of cases issued in 2020: Citrix (MA); SiriusXM (TX); Synthes (PA)
12Problematic Legislation on the Horizon in Illinois?
Balanced budget must be passed by the Illinois legislature by June 30th
(FY 2022 starts July 1st).
State faces fiscal crises largely driven by underfunded pension system.
Illinois is projected to lead to a combined $250 billion shortfall in
revenue needs by 2045.
Deficit for FY 2022 expect to be $2.65 billion without reform.
13Problematic Legislation on the Horizon in Illinois?
Governor J.B. Pritzker proposed the following measures to “close
unaffordable corporate loopholes”:
1. Rollback Beneficial TCJA Provisions:
Reduce the 100% deduction for foreign-sourced dividends and the 50% deduction for
global intangible low-taxed income (GILTI) to “align[] the tax treatment of foreign-source
dividends and GILTI to the treatment of domestic dividends” – to generate approx.
$107M.
Eliminate 100% accelerated depreciation deduction under IRC § 168(k) – to generate
approx. $214M.
2. Temporary $100k Net Operating Loss Deduction Cap for Next 3 Years – to generate
approx. $314M.
3. Halt the Repeal of the Corporate Franchise Tax – to generate approx. $100M (along with
proposals to eliminate certain income tax credits and sales tax exemptions).
Budget Implementation Bill (HB 2499, Senate Amendment 2 / SB 2017,
House Amendment 2) Released Week of May 31st.
14City of Chicago Announces Economic Nexus Guidance
and Safe Harbor in Light of Wayfair
The City of Chicago recently issued nexus guidance and a limited safe harbor for City tax
purposes in light of the U.S. Supreme Court’s pivotal South Dakota v. Wayfair ruling and
the State of Illinois’ statutory economic nexus standards.
Illinois economic nexus threshold of $100k or 200 or more transactions considered but
non-binding for City tax purposes.
Nexus is a “combined question of law and fact” that must be analyzed on a case-by-case
basis. Numerous other factors may be considered.
Beginning July 1, 2021, the City will offer a safe harbor for “an out-of-state entity that
received under $100,000 in revenue from Chicago customers during the most recent four
calendar quarters ….”
However, this safe harbor is narrowly limited to “(i) Chicago’s amusement tax … as applied
to amusements that are delivered electronically ; and (ii) Chicago’s personal property
lease transaction tax … as applied to nonpossessory computer leases.”
15Taxation of Digital Services
Taxes on Gross Receipts from Digital Advertising Services
Maryland (Enacted) (HB 732)
HB 732 (legislature overrode governor’s veto February 12, 2021) creates a new gross
receipts tax on “digital advertising services.”
Challenges:
Federal lawsuit: Chamber of Commerce of the U.S.A. et al. v. Franchot (D. Md.
Docket No. 1:21-cv-410-DKC)
State lawsuit: Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia,
LLC et al. v. Comptroller of the Treasury of Maryland (Cir. Ct. Md. Anne Arundel
Cnty. Case No. C-02-CV-21-000509)
Connecticut (Proposed) (HB 6443 and SB 1106).
New York (Proposed) (S1124).
16Taxation of Digital Services
Taxation of Personal Information or User Data
New York (Proposed) (S4959 / A6199)
Excise tax on the collection of consumer data.
The proposed legislation would impose an excise tax on "commercial data collectors"
“[A] for-profit entity that: (i) collects, maintains, uses, processes, sells or shares consumer data
in support of its business activities; and (ii) collects consumer data, other than consumer contact
information, on more than one million individual New York consumers in a month within the
calendar year."
The rate of tax varies depending on the number of New York consumers on whom the commercial
data collector collects data per month.
Low end: if over 1 million, but not more than 2 million NY consumers
Tax rate: $0.05 per month on number of NY consumers over 1 million, but not more than 2
million
High end: if over 10 million NY consumers
Tax rate: $2,250,000 per month + $0.50 per month on number of NY consumers over 10
million.
17Taxation of Digital Services
Taxation of Personal Information or User Data (cont’d.)
Massachusetts (Proposed) (S1938):
Would not impose a tax, but would require “[e]very person engaging within this
state in the business of making sales of personal information” to register with
the Department of Revenue and file a return.
Within a year of the bill’s passage, the Department would be required to report
“a summary of the information received . . . and provide a recommendation for
how to impose a tax on these businesses in order to ensure appropriate
compensation to the people of the Commonwealth.”
The bill was introduced February 18, 2021, and has been in revenue committee
since March 29, 2021.
18Taxation of Digital Services
Expansion of Sales Tax Base
In addition to imposing new taxes on digital services, states have expanded
their existing sales tax bases to capture digital goods and services.
The new products and services subject to tax are often defined broadly and
inconsistently.
What does this all mean for historically exempt services delivered
electronically?
19Taxation of Digital Services
Expansion of Sales Tax Base (Cont’d)
Maryland (House Bill 932 ("H.B. 932")) (Enacted)
On February 12, 2021, Maryland enacted House Bill 932 ("H.B. 932"), which extends the state's sales tax to
sales of “digital products” effective March 14, 2021.
H.B. 932 defines a taxable “digital product” as “a product that is obtained electronically by the buyer or
delivered by means other than tangible storage media using technology having electrical, digital,
magnetic, wireless, optical, electromagnetic, or similar capabilities.”
H.B. 932 includes numerous examples of digital products, including electronically transferred music,
audiobooks, sound files, motion pictures, live events, video games, e-books, newspapers, chat room
discussions, weblogs, etc.
Notably, H.B. 932 does not list any form of “software” as an example.
Maryland Comptroller issued a publication, Business Tax Tip #29 (Mar. 1, 2021), taking the position that
"software as a service" is a "digital product," and will be subject to sales tax going forward.
Colorado (House Bill 21-1312 (“H.B. 1312”)) (Proposed)
H.B. 1312 would include “digital goods” in the definition of tangible personal property for purposes of the sales
and use tax.
Include “mainframe computer access, photocopying, and packing and crating” in the taxable purchase price for
purposes of the sales and use tax. 203
Recent Noteworthy
SALT CasesDelaware court rejects Department’s NOL policy
Verisign, Inc. v. Director of Revenue, No. N19C-08-093, Delaware Superior
Court (Dec. 17, 2020)
In December 2020, the Delaware Superior Court ruled that the Delaware Division of Revenue’s NOL policy violated the Uniformity
Clause of the Delaware Constitution.
The policy (found in the Delaware audit manual) limited a corporation’s NOL to the NOL of the taxpayer’s federal consolidated
group.
Verisign, Inc. filed as a member of a consolidated group for federal income tax purposes but filed a separate income tax return
in Delaware. In 2015 & 2016, Verisign’s separate company NOLs were greater than its consolidated group’s federal NOLs.
The court found that the NOL policy was consistent with Delaware law based on conformity to the IRC and prior case law.
The court also found that the policy did not violate the Commerce Clause because it did not benefit Delaware taxpayers at the
expense of non-Delaware taxpayers.
However, the court found that the policy violated Delaware’s Uniformity Clause by effectively creating two “classes” of
taxpayers based on their federal filing status.
Whether this separate treatment was “reasonable” depended on deference to the legislature, not the Division.
Impact in other states?
22Indiana Tax Court Prescribes Heavy Dose of Black Letter Law to
the Indiana Dept. of Revenue
Express Scripts Inc. v. Indiana Department of Revenue, No. 19T-TA-00018
(May 14, 2021)
The Indiana Tax Court ruled that a pharmacy benefit management
company (Express Scripts Inc.) is a service provider for corporate
income tax purposes; not a retailer of tangible personal property.
Express Scripts manages prescription drug benefits on behalf of its
clients, various health insurers. Services provided to clients include
negotiating contracts with local pharmacies.
During 2011 - 2013, Indiana sourced receipts from services to the
location where a “greater proportion” of a taxpayer’s income producing
activity occurs based on costs of performance -- in this case, outside of
Indiana.
23John Deere Bulldozes Wisconsin Dept. of Revenue’s Attempt to
Deny Properly Claimed Dividends Received Deduction
Wisconsin Dept. of Revenue v. Deere and Company, No. 2020AP726 (Feb. 25,
2021)
The Wisconsin Court of Appeals ruled the Wisconsin Dept. of Revenue
is prohibited from denying a taxpayer’s dividends received deduction
due to issuing guidance completely contrary to position taken on audit
and subsequent litigation.
Taxpayer wholly owned Deere Luxembourg, a foreign limited
partnership.
Deer Luxembourg elected to be treated as a corporation for U.S. federal
income tax purposes.
Deere Luxembourg paid a cash dividend to Taxpayer in the U.S.
24John Deere Bulldozes Wisconsin Dept. of Revenue’s Attempt to
Deny Properly Claimed Dividends Received Deduction
Wisconsin Dept. of Revenue v. Deere and Company, No. 2020AP726 (Feb. 25,
2021) (cont’d.)
Taxpayer took a dividends-received deduction to reduce taxable income pursuant to Wis.
Stat. § 71.26(3)(j):
“[C]orporations may deduct from income dividends received from a corporation with
respect to its common stock if the corporation receiving the dividends owns, directly
or indirectly, during the entire taxable year at least 70 percent of the total combined
voting stock of the payor corporation”
Wisconsin defines “corporation” to include an entity that is not organized as a corporation,
but that is treated as a corporation for tax purposes. Wis. Stat. § 71.22(1k).
Dept. administrative guidance further stated: “If an LLC is classified as a corporation, an
LLC interest is treated in the same manner as stock.” Publ’n No. 119, § IX.
“[T]he department shall not take a position … that is contrary to any guidance published by
the department …” Wis. Stat. § 73.16.
25Global Mail Delivers Reality Check to the Illinois Secretary
of State
Global Mail, Inc. v. White, 2019 IL App (1st) 181778
On June 5, 2019, the Illinois legislature enacted S.B. 689 to phase out
the Illinois franchise tax starting with the 2020 tax year and culminating
in full repeal by 2024.
The Illinois Appellate Court ruled that the Office of the Secretary of State
improperly assessed an Ohio corporation, Global Mail, Inc., double the
amount of franchise tax actually due.
During a 2004 internal restructuring, Global Mail (Delaware) merged
with and into Global Mail (Ohio). No notification provided to the
Secretary of State.
26Global Mail Delivers Reality Check to the Illinois Secretary
of State
Global Mail changed its state of incorporation from Delaware to Ohio on
its 2013 Corporate Annual Report. The Secretary of State caught the
change on the 2015 annual report.
The Secretary of State attempted to assess both the non-existent
Delaware corp. and the Ohio corp. for all past periods due (2005-2016)
due to Global Mail failing to report the merger.
The Illinois Appellate Court held: “Delaware law dictates corporate
existence and, once the Delaware corporation no longer existed under
Delaware law, it no longer existed for purposes of incurring franchise
taxes.”
Despite phase-out, enforcement by the Secretary of State continues to
be very aggressive. Taxpayers be warned!
27Online Travel Company Win in Maryland
Travelocity.com LP v. Comptroller of Maryland, Case No. C-02-CV-18-003504
(Md. April 30, 2021)
Maryland Court of Appeals held that Travelocity.com LP (“Travelocity”), which operated an online travel
company, was not liable for Maryland sales tax on the difference between the sales tax charged on the
“net rate” paid by hotels and car rental agencies and the “marked-up” rate charged to customers
because Travelocity was not a “vendor” under the Maryland sales tax law.
During the audit period (March 1, 2003 - April 30, 2011), Travelocity operated as an online travel
company that provided an independent platform to review and request reservations from third-party
airlines, hotels, and rental car agencies.
Hotels and car rental agencies offered a “net rate” to Travelocity. For its service, Travelocity
charged customers a rate higher than the net rate, consolidating the net rate, fees, and other
charges in one lump sum to be paid by the customer.
Travelocity collected sales tax from the customer on the net rate and paid the hotels and car rental
agencies the net rate plus taxes.
Based on the agreements between Travelocity and the hotels/car rental agencies, “Travelocity did not
‘sell’ the rooms as a matter of law because they did not result in the transfer of title or possession of the
hotel rooms or rental cars.”
28New York Taxable Information Services
Matter of MarketShare Partners, LLC, DTA No. 828562 (N.Y. Div. Tax App. ALJ
Div. Dec. 3, 2020)
Marketing analytics "platform" is:
Taxable as an “information service” when sold without professional
services; but
Nontaxable when bundled with professional services that constitute the
"primary function" of the transaction.
Sales of “white papers” on the effectiveness of different types of advertising
media are taxable “information services.”
Sales of remotely accessed software are taxable.
29Questions
Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a global law firm with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior resul ts do not guarantee a similar outcome. © 2021 Baker & McKenzie LLP bakermckenzie.com
You can also read
