The New Jersey Appellate Division held that New Jersey’s insurance premium tax (IPT) for self-procured insurance coverage is based only on the risks insured in the state, and not based on risk insured throughout the United States. In reversing the New Jersey Tax Court, the appellate court noted the differences between self-procured insurance and surplus lines insurance noting that the plain language of the IPT statute applies a “home state rule” imposing the IPT on the premiums paid on all risks in the United States, while self-procured insurance is only subject to tax on risks within New Jersey. Because the taxpayer self-procured the insurance from a subsidiary captive insurance company, the court concluded that the insurance was not a surplus lines policy and not subject to IPT on all of its risks in the United States. Although the four relied on the plain language of the statute to resolve the case, the court noted that even if the IPT statute’s reference to surplus lines policies was ambiguous, any ambiguity would need to be resolved in the taxpayer’s favor.
The Minnesota Supreme Court held that a taxpayer that sold data technology services was not eligible for Minnesota’s sales tax exemption for computer equipment used in online data retrieval systems because the underlying information was “not equally accessible to all of its customers.”
Minnesota provides a sales tax exemption for, among other things, “machinery and equipment used primarily to electronically transmit results retrieved by a customer of an online computerized data retrieval system.” Minn. Stat. Ann. § 297A.68, Subd. 5(a). In turn, the statute defines an “online data retrieval system” as a “system whose cumulation of information is equally available and accessible to all its customers.” Id., Subd. 5(d)(8) (emphasis added).
Because the taxpayer’s customers obtained access only to their own collection of documents, and could not access or view other customers’ documents, the Supreme Court ruled that the taxpayer’s service did not meet the qualifying definition of an “online data retrieval system,” which requires that the information on the computer system be available to all customers. In reaching this conclusion, the Supreme Court examined the intent of the sales tax exemption and the plain meaning of the term “data retrieval” and concluded that the taxpayer’s proposed interpretation was untenable and would have made the exemption too broad.
Since its annual meeting in Boise, Idaho, in early August, the MTC has held a series of teleconference calls to discuss the priority marketplace issue list that was developed based on state input. The purpose of these calls is to solicit additional feedback from the states and business community on the issue list for purposes of drafting a white paper with recommendations on each of the issues. During the calls, the MTC has discussed a variety of issues, including:
• Fifteen states have a broad definition of marketplace facilitator, and 19 states plus the District have a narrow definition. Several of the states also have common exclusions from the definition of marketplace facilitator including, advertising, payment processors, food delivery services and online travel companies. The most common exclusion is for payment processors.
• whether marketplace facilitators should have the same rights as retailers. For example, should they qualify for bad deductions, vendor compensation and other price adjustments. The MTC noted that approximately 23 states currently treat marketplace facilitators as retailers.
• liability protections for marketplace facilitators. This discussion centered around which entities were subject to audit and whether states provide protections for marketplace facilitators that rely on information from marketplace sellers. There was also some discussion regarding whether marketplace sellers should be subject to audit.
• information reporting requirements between marketplace facilitators and marketplace sellers. For example, should marketplace sellers be required to provide marketplace facilitators certain information to determine taxability.
• simplified state/local tax rates for remote sellers. For example, some states allow remote sellers to collect at a single combined state and local tax rate. This type of system eases compliance for remote sellers and simplifies the determination of tax rates and taxability issues for every locality.
• registration and compliance for foreign sellers. It was noted that some state systems make it complicated for foreign sellers that are registering. For example, Arizona requires a US-recognized email domain. However, it was also noted that the Streamlined Sales Tax Board permits foreign companies to register through its process.
• locally administered taxes. For example, Colorado has 72 home rule cities that have independent taxing authority. Some of the changes that have been made in Louisiana and Alabama to simplify local tax discussions have also been discussed. For example, Alabama enacted a Simplified Sellers Use tax program that allows sellers to levy a flat eight percent rate statewide, half of which gets distributed to localities.
• What’s Next? The MTC is working toward finalizing a draft of its white paper on the marketplace issues before its next meeting in November.
The Maryland Tax Court reversed the Comptroller’s disallowance of NOLs and essentially struck down a regulation that limited the usage of pre-nexus NOLs. The Comptroller disallowed the taxpayer’s use of NOLs accumulates by entities with no nexus in Maryland that subsequently merged into the taxpayer. The Comptroller relied on a regulation enacted in 2007 that did not permit the use of NOLs of an acquired company that was not subject to Maryland income tax when the NOL was generated. COMAR 03.04.03.07(5). The Tax Court ruled that no statutory authority existed for this regulation, and the only permissible subtraction or addition to federal taxable income are prescribed in Maryland statutes. In this case, the Taxpayer’s NOLs were allowed for federal income tax purposes, and the Maryland Tax Court noted that no statute contemplates the modification the Comptroller made.
Massachusetts Court of Appeals held that a taxpayer could not rely on timely applications for refund of deficiency assessments to also seek refund resulting from alleged overstatement of sales factor in corresponding years’ returns, where the initial application for abatement did not include the sales factor argument and statute of limitations had since lapsed.
The Court of Appeals concluded that the taxpayer’s deficiency assessments only encompassed the stated amounts in the notices of deficiency assessment, not any differences between the amounts the taxpayer self-reported on its returns for the appealed years and the amounts “properly due.” The taxpayer sought to broaden the scope of its deficiency assessments appeals to also seek a refund for taxes paid because of an overstated sales factor. The Court of Appeals concluded that because the taxpayer had never applied for an abatement of the tax originally reported on the return, any challenge to the original self-assessment was time-barred.
On October 4, 2019, the California Department of Tax and Fee Administration (CDTFA) released its Initial Discussion Paper in anticipation of an Interested Parties Meeting (IPM) set for October 15, 2019 in Sacramento. The subject of both the IPM and the Discussion Paper is how to interpret, clarify and make specific the Marketplace Facilitator Act.
Assembly Bill (AB) No. 147 (Stats. 2019, ch. 5) was signed into law in April 2019 and, broadly speaking, has two components. First, as a result of Wayfair, AB 147 added California Revenue and Taxation Code section 6203(c)(4) which provides that a retailer engaged in business in California includes “Any retailer that, in the preceding calendar year or the current calendar year, has total combined sales of tangible personal property for delivery in this state by the retailer and all persons related to the retailer that exceed five hundred thousand dollars ($500,000). That new provision was operative as of April 1, 2019, and was the subject of a CDTFA Initial Discussion Paper released on May 10, 2019, and the subject of a CDTFA IPM held on May 23, 2019, regarding needed amendments to existing CDTFA regulations 1684 and 1827 to conform them to this statutory change.
Second, AB 147 expanded the definition of “retailer” to include marketplace facilitators, as defined, and those new provisions – known as The Marketplace Facilitator Act – were operative as of October 1, 2019. The IPM held on May 23, 2019 did not address the marketplace facilitator provisions of the bill, which CDTFA chose to address at a separate IPM, and which is now set for October 15th. The Initial Discussion Paper just released for that IPM includes a copy of Proposed Regulation 1684.5, “Marketplace Sales” and staff “looks forward to hearing the interested parties’ thoughts regarding the proposed regulation as well as any additional issues that may warrant further consideration.”
On September 30, 2019, in Labell v. City of Chicago, the Illinois Appellate Court upheld the City of Chicago’s imposition of its amusement tax on streaming video, streaming audio and online gaming services.
Read our full Legal Alert here.
California Assembly Bill (AB) 1790 passed the Legislature on September 26, 2019 and was sent to the Governor. The Governor has until October 13th to act on the bill. The Legislative Counsel’s Digest for AB 1790 states the bill would require a marketplace, as defined, to ensure that their terms and conditions regarding commercial relationships with marketplace sellers meet specified requirements, including that the terms and conditions are drafted in plain and intelligible language. The bill would define “marketplace seller” for these purposes as a person residing in the state who has an agreement with a marketplace and makes retail sales of services or tangible personal property through a marketplace owned, operated or controlled by that marketplace. If a marketplace decides to suspend or terminate a marketplace seller based upon an alleged violation of law or a term, condition or policy of the marketplace, the bill would require the marketplace to provide the marketplace seller with a written statement of reasons for that decision, as specified.
Buffy Wicks, the author of AB 1790, placed a September 12, 2019 letter of legislative intent in the California Assembly Journal for September 14, 2019. The letter states that while “marketplace” in AB 1790 is “intentionally broad,” it is not intended to apply to a company that simply advertises third-party sellers’ products and services on their website or platform or refers customers to third-party sellers through their respective company website, so long as any retail sales are completed on the third-party sellers’ own websites or otherwise completed outside of the company’s website or platform. The letter also states the intent of the bill is for an online marketplace to post only the marketplace’s standard terms and conditions, which pertain to issues raised in AB 1790 rather than posting entire contracts with marketplace sellers. The letter states that AB 1790 will help level the playing field for small businesses by requiring online e-commerce marketplaces to provide clear and specific information about their terms and policies, make that information available online to the businesses that use their platform to sell goods and set objective grounds for disputes about the disbursement of funds from the third-party sales that are in the platform’s possession.
We interrupt our regularly scheduled SALT dog and cat programming to bring you our very first SALT duck and duckling of the month. Meet the mother-daughter duo, Natalia and Tatiana, two Muscovy ducks who could only fittingly be given Russian names. The mother-daughter duo is part of a larger flock of ducks and ducklings that live on a smallholding owned by Eversheds Sutherland’s UK Tax Partner, Giles Salmond.
Natalia, a two-year-old, just hatched her first flock of ducklings a couple of weeks ago. Tatiana is one of seven new ducklings in Natalia’s flock. While Tatiana is still young, she’s enjoying her time on the farm, eating the grass and any small bits of grain she can get her beak on.
Now that her ducks are in a row, Natalia is beginning to return to her everyday activities. Born with cunning wit, and a great sense of adventure, Natalia is an expert at escaping her fenced area and venturing off onto neighbors’ land. She also enjoys eating the plums that fall from the tree in her area of the garden, but most importantly, she enjoys hanging out with Giles. Although Giles is still waiting for her brood to get a little older before he can return to enjoying a cold vodka with her.
We are thrilled to feature Natalia and Tatiana as our SALT Pets of the Month!
The shift in tax collection responsibility to marketplace facilitators raises questions on how to accurately source sales made through the marketplaces. Depending on the state sourcing rules, a marketplace facilitator may need to know whether sourcing is determined based on the presence/location of the marketplace seller in the state or the presence/location of the marketplace facilitator. This may impact whether sales tax or use tax is required to be collected and the applicable tax rate.
As part of the marketplace facilitator provisions enacted in the states, some states have provided special sourcing provisions or guidance for sales made exclusively through marketplaces. For example, in Ohio, the marketplace facilitator provisions provide for specific sourcing for marketplace facilitators stating that they must collect tax based on a tiered set of rules that first require the marketplace facilitator to source to:
the location known to the marketplace facilitator where the consumer or the donee designated by the consumer receives the tangible personal property or service, including the location indicated by instructions for delivery to the consumer or the consumer’s done…” (Ohio R.C. 5741.05)
In Arizona, the Department of Revenue issued an FAQ clarifying the sourcing rules for marketplaces. The FAQ indicated that the sourcing rules for marketplaces depend on whether the marketplace facilitator is located in or outside of Arizona. For marketplace facilitators located in Arizona, sales are sourced based on the tax rates and code of the marketplace facilitator’s location in Arizona, if the order information is received in Arizona and the tax rates and codes of the customer’s address are outside of Arizona. If the marketplace facilitator is located outside of Arizona, then sales are sourced to the shipping address of the customer. If there is no shipping address, then the sales are sourced to the customer’s billing address.
Why this is important: If sales tax is not properly sourced using the states origin or destination-based sourcing rules, marketplace facilitators may be subject to additional tax, interest and penalties. Additionally, if the marketplace has under or over collected sales tax, there is a risk of consumer complaints, class action lawsuits and other state actions.
What to prepare for: Marketplace facilitators should review each of the state sourcing rules and marketplace collection laws to understand how sales made through the marketplace should be sourced.
Next Monday: MTC/NCSL Update