On October 25, 2019, the Oregon Tax Court upheld the Department of Revenue’s proposed increase in the real market value of Level 3’s centrally assessed property. Level 3 operated an optical fiber network and provided various communication services. It argued that the Oregon Department of Revenue should not have included in its “unit” certain “investment attributes” it claimed do not qualify as property. The taxpayer argued that the first four attributes (future tangible and intangible property, present value of growth opportunities and potential mergers and acquisitions) “inhere in Taxpayer’s shares of stock and are not property that Taxpayer itself owns.” The court rejected this argument because “the potential for revenue growth may derive from an attribute of the unit of assembled equipment, real property, customer relationships and workforce in place, or from the ability of the company to attract merger partners and additional capital investment.” The legislature intended any or all of these factors to “‘count’ in the valuation of the unit of real, tangible and intangible property in place on any given assessment date.” The court then considered the remaining attributes, including stock liquidity, expected appreciation and favorable income tax treatment. The court rejected the taxpayer’s argument that, while the attributes have value, that value belongs to the taxpayer’s shareholders, not to the taxpayer as a company. The court was skeptical that some of the attributes created value for the taxpayer’s shareholders, and the taxpayer did not attempt to quantify any increment of value associated with any particular attribute. As a result, the court accepted the Department’s revenue growth rates, which resulted in an increase in the value of the property relative to the original assessed value.
On Friday, November 8, 2019, North Carolina’s Governor Roy Cooper signed Senate Bill 557, which among its provisions, requires marketplace facilitators to collect and remit sales tax in the state beginning on February 1, 2020. The economic thresholds for collection and remittance are gross sales of over $100,000 or two hundred or more separate transactions in the state for the previous or current calendar year. The economic thresholds apply to direct sales by the marketplace facilitator, and all marketplace facilitated sales for marketplace sellers.
S.B. 557 adopts a more narrow definition of “marketplace facilitator.” It defines a “marketplace facilitator” as a person that either directly or indirectly and whether through one or more affiliates: (1) lists or otherwise makes available for sale a marketplace seller’s items through a marketplace owned or operated by the marketplace facilitator, and (2) collects the sales price of a marketplace seller’s items, otherwise processes the payments, or makes payment processing services available for purchasers for the sale of the marketplace seller’s items.
Marketplace facilitators are required to collect and remit sales tax regardless of whether the marketplace seller for whom it makes a marketplace-facilitated sale is required to be registered to collect and remit sales tax in the state. Marketplace facilitators and marketplace sellers may enter into an agreement regarding the new law; however, such agreements cannot require a marketplace seller to collect and remit sales and use tax on marketplace-facilitated sales. The new marketplace collection law also provides class action protection for marketplace facilitators and liability relief if the marketplace facilitator receives incorrect information from the marketplace seller or if it does not receive specific written advice from the Secretary for the transaction at issue.
The new law also requires marketplace facilitator to provide marketplace sellers with information regarding the gross sales and number of transactions sourced to the state on its behalf within ten days after the end of each calendar month.
Why this is important: North Carolina was one of only nine remaining states with a sales tax that had not enacted a marketplace collection law. With the passage of S.B. 557, there are only eight states that have not enacted a marketplace collection law.
What to prepare for: Marketplace facilitators should prepare to collect sales tax in North Carolina state beginning on/or after February 1, 2020. Marketplace facilitators should also ensure that they have a system in place to provide notice reports to marketplace sellers on a monthly basis regarding the gross sales and number of transactions sourced to the state on the marketplace seller’s behalf.
Veterans Day is a time for us to reflect upon and celebrate the heroism of those who have served our country, past and present. In honor of this year’s Veterans Day, we sat down with SALT Partner Tim Gustafson (Sacramento) to ask him about his experience serving our nation.
What branch of the military did you serve in?
I served in the Army’s Judge Advocate General’s (JAG) Corps.
What was your primary job?
Because I was stationed at a small installation, I wore many hats over the course of my tour. I assisted individual clients with estate planning, family law and contract issues. I advised the local command on aspects of administrative, international, and criminal law. And I represented the United States Government as a prosecutor for military courts-martial.
What motivated you to join the JAG Corps?
Initially, it was because I didn’t want to work at a law firm right out of law school. After I looked into the JAG Corps, though, I quickly learned it would provide me with immediate, substantive experience in many areas of law, the opportunity to travel and meet all kinds of people and the chance to serve my country. Ironically, I also found out the Army JAG Corps fashions itself the nation’s oldest “law firm,” dating back to 1775.
How many years did you serve?
I served for three years, which was one tour.
Did you go overseas?
I was stationed in the Netherlands, and it was awesome. There is a small military installation in the southernmost province of Limburg with a bowling alley, a grocery store and a law center. There was no on-post housing, so I lived in a converted Dutch farmhouse down the road from a traditional windmill. My command was in Germany so I spent a lot of time there, too, including at training events in the Moselle Valley (Germany’s wine country) and the German Alps. On one trip to Stuttgart, my place of duty for the evening was the local beer hall for Octoberfest. As for the rest of Europe, it was just a car, train or plane ride away.
What made you go to law school? Where did you go?
As a kid, grown-ups would tell me I would make a good lawyer because of how much I liked to argue. So I guess those comments, coupled with a strong and steady dose of “Matlock” reruns every summer during my elementary and junior high years, set me on the path to law school. Having gone from Southern California to Cleveland for undergrad, I returned west for law school and attended Stanford.
What made you choose tax law?
I fell into SALT. I ran the local tax center for one filing season while in Europe, but that was the extent of my tax experience. When I separated from the military, my father-in-law wanted my wife and me to land in Sacramento, and he, a judge at the time, would send me job postings, one of which was for a SALT associate at another firm. And the rest is history.
Do you get up earlier now or when you were on active duty?
I tend to be an early riser and enjoy exercising before work. So, in that sense, the military lifestyle fit me perfectly. These days, my personal “PT” begins a couple of hours earlier than it did in the Army, and sadly I don’t get paid to work out anymore.
Which era of life had tougher workouts?
Because I was stationed at a small unit, I was able to do my own thing in terms of a workout regimen. I still had to qualify on the two-mile run every year, though, and that was something I never enjoyed.
Favorite aspect of SALT?
I enjoy SALT for many of the same reasons I enjoyed my time in the JAG Corps. The SALT community is a relatively small group of professionals who are very bright, always interesting and in many ways like a family. The work is intellectually stimulating and varies considerably, so one never gets bored. And the Sacramento office, like the Netherlands Law Center, is far from the flag pole, giving us a bit more flexibility in our day-to-day routines.
What does Veterans Day mean to you?
Serving in the military was an incredibly enriching and humbling experience for me. In this politically-charged world of ours, the military community stands apart, a family of brothers and sisters doing right by each other and the country they love. It’s not about right or left, but about freedom, and sacrifice, and the men and women who fought, fight and will continue to fight for us all.
On October 21, 2019, the Multistate Tax Commission (“MTC”) Marketplace Work Group released its draft marketplace facilitator white paper addressing issues arising from marketplace facilitator laws that have been enacted in nearly all states. The draft white paper is the result of several months of public meetings held by the Work Group. The meetings consisted of input by representatives from the MTC, state revenue departments, taxpayers and outside consultants.
In August, the Work Group developed a prioritized issues list of the top 13 issues of greatest importance to the states. The Work Group then spent the following months reviewing the issues and considering feedback from taxpayers and tax advisers.
The 13 priority issues include:
- Definition of marketplace facilitator/provider.
- Who is the retailer?
- Remote seller and marketplace seller vs. marketplace facilitator/provider recordkeeping, audit exposure and liability protection.
- Marketplace seller-marketplace facilitator/provider information requirements.
- Collection responsibility/determination.
- Marketplace seller economic nexus threshold calculation.
- Remote seller sales/use tax economic nexus threshold issues.
- Certification requirements.
- Information sharing.
- Taxability determination.
- Return simplification.
- Foreign sellers.
- Local sales/use taxes.
While the MTC’s draft white paper does not take positions or provide recommendations on most of the issues, there are a few important points made in the white paper:
- Businesses desire a narrow definition of “marketplace facilitator.”
Taxpayer participants in the Work Group expressed a strong preference for the narrow definition of marketplace facilitator because the broad definition leads to more uncertainty and compliance issues. Specifically, a business that does not directly or indirectly process or collect payment cannot practically comply with a tax collection requirement.
- Businesses strongly prefer the marketplace to be the “retailer” for facilitated sales.
The prevailing trend among states enacting marketplace collection laws is to treat the marketplace facilitator as the “retailer” under the sales/use tax laws. Taxpayer participants in the Work Group expressed a strong preference for marketplaces being the sole retailer in marketplace transactions.
- Audit liability protections are still needed for marketplace facilitators.
Marketplace collection laws generally provide that the marketplace facilitator is the party to be audited on facilitated sales transactions. However, some marketplace collection laws also impose recordkeeping requirements on marketplace sellers for facilitated sales and subject the marketplace seller to audit when the marketplace facilitator can establish that its failure to collect was due to erroneous information provided by the marketplace seller. Taxpayer participants in the Work Group believe that at least for a transition period, audit liability protection needs to remain in place for marketplace facilitators for non-collection caused by erroneous information from marketplace sellers.
- Collection obligations regarding other types of fees and taxes remain unresolved.
Generally, state laws requiring marketplace facilitators to collect tax, limit the collection requirement only to sales and use taxes. It is often unclear what should happen when other types of fees or taxes apply to the transaction. Certain participants in the Work Group urged that one party or the other should collect all applicable taxes to avoid a customer receiving multiple invoices for the same transaction. However, other participants wanted the marketplace collection requirement limited to sales/use tax.
- State information sharing can create a chilling effect for registrants.
A mechanism currently exists for state tax agencies to share or exchange taxpayer information. However, the MTC acknowledged that remote sellers may be hesitant to register if information sharing among the states is targeted specifically to identify those remote sellers who have registered in one state but not others.
- Foreign sellers need better guidance.
States need to provide clearer guidance to foreign sellers and marketplace facilitators regarding registration procedures. States should also develop work-around processes for foreign sellers needing to register for sales/use tax when those foreign sellers have no permanent establishment, lack an FEIN number, and their officers are not US citizens.
- Local tax collection solutions are in the works.
The collection of local sales/use taxes adds a layer of complexity to tax compliance for remote sellers and marketplaces. Some states have local jurisdictions with “home rule” authority to impose and administer local sales/use taxes, and local sales tax administration may not be centralized at the state level. These states are working to create centralized filing systems in an effort to solve this problem.
What to prepare for: The MTC will be meeting this week in San Antonio, Texas, where the findings of the white paper will be presented. It is expected that the white paper will serve as guidance for states considering implementing or modifying their marketplace collection laws, in addition to providing taxpayers with important insight regarding how states view marketplace collection obligations.
Why this is important: States are expected to make revisions to existing marketplace collection laws in the 2020 legislative sessions. The MTCs recommendations will likely have some influence on these revisions.
Happy Halloween from the Eversheds Sutherland SALT Team! Check out some of the “spooky” costumes from our lawyers and their families this year:
Maria Todorova (Partner, Atlanta) and her family dressed up as the Addams Family.
Jonathan Feldman (Partner, Atlanta) and his wife dressed up as peanut butter and jelly. His kids were having a blast while trick-or-treating!
Tim Gustafson (Partner, Sacramento) is pictured with his family at the Gustafson family aquarium/zoo/farm/prehistoric DNA replication fun center!
Charlie Kearns’ (Partner, DC) daughter, Princess Ella the First, was loving the Halloween sweets!
Open Weaver Banks (Counsel, New York) and her husband may not have worn their costumes, but they did enjoy the Halloween festivities by attending the Keene, New Hampshire Pumpkinfest.
Chris Lee’s (Associate, Atlanta) family went out as two unicorns and a werewolf!
SALT Secretaries Debbie Manders’, Candide Alba’s, Melissa Bragg’s and Sandie Kiedrowski’s kids and grand kids dressed as a vampire, demon princess, Woody, Scooby Doo, S.W.A.T. Officer and inmate, Tinkerbell and Peter Pan, and a Greek Goddess and Elsa .
And, lastly, it wouldn’t be an Eversheds Sutherland SALT Halloween without some of our SALT Pets. Todd Betor’s (Counsel, DC) Caldwell dressed up as a pineapple, while Sam Trencs‘ (Associate, DC) Romeo wore a pumpkin costume this Halloween.
We hope everyone had a safe and happy Halloween! Share your Halloween photos with us via Twitter @ESsaltLaw.
Bingham and Angela Merklaws were never supposed to be friends. The rivalry between cats and dogs is the oldest story in the book, but somehow these two were destined for each other. Growing up in separate parts of the country, it was Casey Mock, Manager, Public Policy, State and Local Tax at Amazon, and his wife Abby, who brought these two together.
Bingham, named after Grammy and Oscar-winning musician, Ryan Bingham, was adopted by Casey and Abby from a Washington, DC rescue organization after being picked up as an unclaimed stray in Clemson, South Carolina.
Angela Merklaws, named after German Chancellor, Angela Merkel, was abandoned and found by Abby in a Vermont grocery store parking lot.
As adopted pets with little known history, Casey was curious to find out more about their ancestry. So, Casey opened up the Amazon app and purchased a DNA kit. The results? Angela is a brown tiger tabby, and Bingham is a mix of Dalmatian, Rhodesian, German shepherd and Chow.
Angela and Bingham love to eat together – and who can blame them? Casey has made the unfortunate mistake of turning his back on two pounds of smoked brisket sitting on the counter. In less than a minute, without a sound or a mess, the two were able to devour every last bite. When there is no brisket around, Angela’s favorite food is ahi tuna, but Bingham will pretty much chow down on anything Angela chooses to share with him. When they’re starving, Angela will start opening all of the cabinets looking for the duo’s next meal.
We are thrilled to feature Bingham and Angela Merklaws as our October pets of the month!
The Washington Department of Revenue determined that a taxpayer did not qualify for the B&O tax deduction for payments made to an affiliate for the provision of “paymaster services” under R.C.W. § 82.04.43393. The paymaster services deduction did not apply to the taxpayer, which provided payroll services to affiliate restaurant employers, because the taxpayer had a “functional employment relationship” with the affiliates’ employees. Washington allows taxpayers that are “qualified employers of record” to deduct amounts received for the provision of paymaster services to cover the costs of a “qualified employee,” i.e., the employee of an affiliate. To qualify for the deduction, the taxpayer must limit its relationship with its affiliate’s employees and may only provide payroll services on behalf of the affiliate. The deduction does not apply if the taxpayer has a functional employment relationship with such affiliate’s employees, including control over the employee’s work schedule, salary, discipline, hiring and termination.
The Department found that the taxpayer had control over certain decisions relating to its affiliate’s employees, such as the provision of health insurance plan options and qualifications for a full-time employee because the taxpayer provided its affiliate’s employees with a handbook that outlined policies and conditions of employment. Further, the taxpayer did not have any documentation or agreements with its affiliates that stated the relationship between the taxpayer, its affiliates and its affiliates’ employees. The taxpayer has the burden of showing that they qualify for a tax deduction and was required to keep records to demonstrate that the taxpayer had no functional employment relationship with the employees. Because the taxpayer did not meet this burden, the Department determined that it did not qualify for the deduction for paymaster services.
This is the third edition of the Eversheds Sutherland SALT Scoreboard for 2019. Since 2016, we have tallied the results of what we deem to be significant taxpayer wins and losses and analyzed those results. This edition of the SALT Scoreboard includes a discussion of the Illinois Appellate Court’s recent decision in Labell v. City of Chicago, insights regarding Maryland’s net operating loss deduction, and, to celebrate the opening of our new San Diego office, a spotlight on California tax cases.
Check out the scoreboard here.
After 46 years, the United Kingdom is braced for the impact of leaving the European Union. Brexit will inevitably have a significant impact on trade in goods and services not only with the EU but the rest of the world. The UK has negotiated a Withdrawal Agreement with the EU. This effectively sets out the details of the divorce and provides a transitional period until the end of December 2020 to allow for a new agreement for the future trading relationship with the EU. At the moment, the UK Parliament has agreed in principle to the Withdrawal Agreement but cannot agree on a timetable to implement this agreement into UK law, and there is a stalemate currently which is likely to lead to a general election. Looming over this remains the specter of a “no-deal Brexit,” where no transitional measures apply, and the UK moves directly to third country status with the EU.
The EU has now granted the UK an extension to January 31, 2020. On this date, the UK will crash out of the EU, unless the deal negotiated by the Prime Minister, Boris Johnson, and the EU Member States is agreed by UK Parliament and ratified, or an alternative deal is agreed or further time is agreed with the EU.
So Brexit is really just the beginning of a new chapter of uncertainty as to how the UK will trade with the EU and whether it will be able to secure any free trade deals with other countries, including the US. If the current EU Withdrawal Agreement is ratified by the EU Member States and the UK, there is a transitional period, where the UK will remain effectively in the EU, until December 31, 2020. It is hoped that the UK and EU will be able to agree on a future trading relationship but if it does not, then the parties may agree on a further extension to the transitional period of up to two years, or in theory the UK might still crash out without a deal at the end of the transitional period if no agreement is reached.
Brexit under the Withdrawal Agreement
During a transitional period, the UK’s trading relationship will remain unchanged, so goods and services may be traded freely between the EU and UK without the imposition of customs duties, and the VAT rules will remain unchanged. The UK Government has legislated for a number of significant changes to the VAT system, which we anticipate will be imposed in the event of a no-deal Brexit or may become a feature of the UK VAT system depending on the nature of any free trade agreement.
One potentially important tax implication that would arise on Brexit even under the Withdrawal Agreement is that the EU Parent-Subsidiary and Interest and Royalties Directives will no longer directly apply to the UK. Broadly, these directives remove taxes on dividend, interest and royalty payments between European group companies. This could impact marketplace and other tech businesses with operations in Europe. The degree of impact depends upon whether existing double tax treaties replicate the effect of these directives but also the domestic Brexit legislation of other EU member states since many member states are introducing legislation that seeks to address the impact of Brexit for taxpayers in their jurisdictions.
No deal Brexit
One of the key areas that will be impacted by a no-deal Brexit is VAT on imports and Customs duties. Because if after Brexit the UK is no longer in a customs union with the EU, goods imported into the UK from third countries will no longer be able to move freely into the rest of the EU without complying with customs formalities and paying VAT at the border. If your company, a branch or subsidiary in the UK, is responsible for paying import VAT and duties, new arrangements will need to be put in place to make sure that you can move goods from the UK to the EU and vice versa. The additional costs in terms of tax and time to cross the borders may need to be factored into the pricing of those goods.
Following a no-deal Brexit, the UK will put the onus on third country suppliers to pay import VAT on goods entering the UK at or below £135 (currently about $174). The £15 (currently about $19) Low-Value Consignment Relief will no longer apply either. This will have a significant impact on suppliers who use online marketplaces. Thought, therefore, needs to be given to the contractual arrangements between suppliers and consumers as to who is liable for the import VAT and customs duties.
Postal service operators can register and pay this import VAT and duties for suppliers, but we are hearing that this new procedure is likely to cause delays at the border when goods are entering the UK because of the massive increase in goods now having to comply with VAT and customs clearance. You should, therefore, make sure that you are ready to deal with this and have contingency measures in place. We anticipate that the UK is likely to implement this additional obligation on suppliers in the event that the UK is able to adapt its UK VAT system once it has left the EU.
More generally in relation to VAT, the UK says that it will maintain its VAT system which is currently aligned with that in the rest of the EU, but once the UK is no longer bound by EU law, there is greater opportunity for the UK to diverge and adapt its VAT system.
Outside of sales and other indirect taxes, in addition to the point about the EU directives above, other EU laws such as State Aid laws (used in recent years to challenge the contracting structures of marketplace businesses) and the overriding EU fundamental freedoms that have had a big impact on UK tax law, will no longer directly apply. This will give the UK the ability to take divergent approaches to the EU, although it is unknown yet whether that could be positive or negative for the tech sector.
What to prepare for: The tech sector and the gig economy is under massive pressure from taxing authorities. The UK is also responding to VAT efficient arrangements where services are from one country but delivered to consumers in another. If the UK leaves the EU without a deal (or in the longer term after the transitional period under the Withdrawal Agreement), the UK may become more attractive as there will be VAT advantages to making cross border supplies, particularly of financial services such as banking and payment type services.
On October 16, 2019, the Pennsylvania Commonwealth Court held that a bank was required to pay sales tax on its purchases of computer hardware, canned computer software, and related services because a statutory amendment superseded the bank’s relied-upon exemption regulation. The court held that the bank complied with the regulation, which exempted from sales tax purchases of security equipment, as “construction contracts,” if: (1) the sellers or their designees installed the computer hardware; and (2) the bank used the equipment for its protection or convenience in conducting financial transactions. Rather, the seller is considered to be the consumer of the property and must pay sales or use tax on the installed equipment’s purchase price. At the time of the regulation’s promulgation, Pennsylvania’s statutes did not define “construction contract.” But, despite the regulation, the General Assembly later statutorily limited the term “construction contract” to “real estate” and “real estate structures.” Contrary to the bank’s argument, the court held that to invalidate the regulation, the state did not have to comply with the Commonwealth Documents Law’s regulation publication requirements. The statutory amendment rendered the regulation inconsistent with the underlying statute. Regardless of whether a regulation’s promulgation follows the proper procedures, a regulation must be consistent with the enabling statute. Victory Bank v. Pennsylvania, 236 F.R. 2014 (Pa. Cmwlth. Ct. Oct. 16, 2019).