The unitary combined reporting method for state corporate income taxation has been adopted by an increasing number of states. While combined reporting requirements vary significantly from state to state, nearly all combined reporting regimes require or allow a water’s-edge method that limits the members of a group return to entities that are incorporated in the United States and meet other combined reporting requirements. 

The water’s-edge combined reporting method makes sense for many taxpayers and stems from criticisms and litigation aimed at the worldwide combined reporting method. Problems with worldwide combined reporting include compliance challenges associated with varying accounting methods required by other countries, conversion of foreign currencies, and even the lack of available data associated with non-U.S. entities.

There are instances when a domestic incorporated entity is largely engaged in business outside the United States. To help solve this problem, many states adopted the Pareto principle, which states that “for many outcomes, roughly 80 percent of consequences come from 20 percent of causes (the ‘vital few’).” Application of an 80/20 rule in the context of water’s-edge combined reporting requires taxpayers to include in a water’s-edge return those foreign entities that conduct at least 20 percent of their business in the United States (an inbound 80/20 company), and exclude those domestic corporations that conduct at least 80 percent of their businesses outside the United States (an outbound 80/20 company).

In this installment of A Pinch of SALT for Tax Notes State, Eversheds Sutherland attorneys Jeff Friedman, Cyavash Ahmadi and Laurin McDonald describe 80/20 rules used by states in the context of water’s-edge combined reporting and the compliance issues that can arise as a result.

Read the full article here.

The Texas Comptroller of Public Accounts amended its franchise tax apportionment rule, as published in proposed form in the March 10 issue of the Texas Register. The rule, which is now final, discards the “receipt-producing, end-product act” test in light of Eversheds Sutherland’s litigation in Sirius XM Radio, Inc. v. Hegar. Taxpayers should consider the new rule and potentially filing refund claims.

Read Eversheds Sutherland’s description of the Comptroller’s now-adopted amendments here. Eversheds Sutherland attorneys will continue to monitor any developments.

48 Tex. Reg. 200 (January 20, 2023) available at:

https://www.sos.state.tx.us/texreg/pdf/backview/0120/0120prop.pdf.

Meet our March SALT Pets of the Month, 12-year-old Sunny and 5-year-old Lily! These lovely ladies belong to David Weiner, Vice President and Tax Counsel for A&E Television Networks. 

Sunny and Lily were both rescued as adult pups and were happy to join David’s family in 2017 and 2020. Sunny, whose coat is an adorable wiry mix of orange and white, and Lily, who has black and white markings, are both mixed breeds and around 50 pounds each. They get along like two peas in a pod!

Sunny was found in Louisiana, which must have been hard for her since she hates the heat.  Sunny wants to stay outside all day (and night!) during the winter. The colder the temps, the better! Prior to the pandemic, Sunny volunteered at schools and government offices as a certified therapy dog with David’s wife, Paula. She offered emotional support and stress relief.

Meanwhile, Lily was an owner surrender from South Carolina. Prior to her adoption, Lily had not spent much time indoors, but she has quickly gotten used to the good life, especially time on the couch. Lily can often be seen lounging on David’s bed, as well.

Around December 2021, Sunny began dragging one of her back legs. She was diagnosed with degenerative myelopathy, which is a genetic condition that affects dogs’ spinal cords. It causes progressive loss of coordination and weakness, but thankfully, the condition has not spread to her front legs. Sunny has adapted very well and uses a dog wheelchair outside. Neighbors and acquaintances are very supportive of her and often stop to inquire about her health or just give her scratches! 

The girls are beloved by David and Paula’s children Sabrina, age 17, and Cole, age 13.

We’re so happy to welcome them to the SALT Pet of the Month family! 

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: Which state legislature recently excluded digital advertising taxes from the governor’s appropriation bills?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be posted on Saturday in our SALT Shaker Weekly Digest. Be sure to check back then!

On February 24, 2023, the Wisconsin Tax Appeals Commission upheld the Department’s assessment that Skechers’ licensing transaction with its wholly owned subsidiary, Skechers USA Inc. II (SKII), lacked a valid business purpose and economic substance. On the formation of SKII, Skechers entered into a license agreement with its subsidiary that generated significant royalty deductions, which Skechers claimed on its Wisconsin tax returns. The Department disallowed the royalty expense paid by Skechers to SKII, assessing that the intercompany transactions between Skechers and SKII were sham transactions.

In its decision, the Commission agreed with the Department, finding that Skechers was unable to show that these intercompany transactions had a valid business purpose other than tax avoidance. While the Commission acknowledged that there may be some valid, non-tax, intellectual property related benefits to the formation of SKII, none of these benefits were considered by Skechers before the formation of SKII. The Commission further found that the royalty payments had no economic substance as Skechers failed to provide any documentary evidence showing a change to business practices, profitability or intellectual property before and after the creation of SKII and the transactions at issue.

Therefore, the Commission upheld the Department’s assessments, finding that Skechers failed to present persuasive evidence or testimony that it had a valid business purpose for entering into the licensing transaction with SKII that generated royalty deductions claimed on its Wisconsin tax returns and that the licensing transaction had economic substance.

Skechers USA Inc. v. Wisconsin Department of Revenue, docket numbers 10-I-071 and 10-I-072, in the State of Wisconsin Tax Appeals Commission.

The Illinois Department of Revenue (IDOR) released a general information letter outlining the applicability of Illinois Retailers’ Occupation Tax (ROT) on computer software licenses and maintenance agreements.

The letter states that sales of “canned” computer software are taxable retail sales in Illinois and are considered to be tangible personal property regardless of the form in which it is transferred or transmitted. However, if the computer software consists of “custom” computer programs, then the sales of such software may not be taxable retail sales. In addition, if the computer software, including canned software, is licensed and the license agreement meets the specified criteria in 86 Ill. Adm. Code § 130.1935(a)(1) (distinguishing licenses from sales a retail), neither the transfer of the software license nor the subsequent software updates are subject to ROT. With respect to the software maintenance agreements, the letter provides that taxability depends on whether the charges for the agreements are included in the selling price of the tangible personal property. The IDOR notes that software maintenance agreements are not taxable if the agreements for the maintenance of tangible personal property are sold separately from the tangible personal property. However, the service providers would incur use tax based on their cost price of tangible personal property transferred to customers incident to the completion of the maintenance service.  On the other hand, if the charges for the software maintenance agreements are included in the selling price of the tangible personal property, the charges are part of the gross receipts of the retail transaction and subject to ROT, but no ROT is incurred on the maintenance services or parts when the repair or servicing is performed.

Ill. Dep’t of Revenue, Gen. Info. Ltr. ST-22-0023-GIL (Oct. 19, 2022) (released Feb. 2023).

On March 15, 2023, the two houses of the New York State Legislature released their respective amendments (Senate Bills S.4008 and S.4009, Assembly Bills A.3008 and A.3009, collectively the Amendments) to New York Governor Kathy Hochul’s Fiscal Year 2024 Executive Budget (the Budget Bill) (see our prior legal alert). While the Amendments make notable changes to the Budget Bill, outlined below, which tax proposals the Amendments do not include is equally important to the future of New York’s tax climate. 

Read the full legal alert here.

Next week, Eversheds Sutherland is a proud sponsor of Tax Executives Institute’s (TEI) 73rd Midyear Conference, held this year between March 19-22, 2023 at the Grand Hyatt Hotel in Washington, DC.

Eversheds Sutherland SALT Partners Liz Cha and Charlie Kearns will present, and the details of their presentations are below.

Monday, March 20
Market Sourcing – Fair Apportionment?
2:15 – 3:15 p.m. ET
Speaker: Liz Cha

Wednesday, March 22
Remote/Mobile Workforce: Where Are We Now?
8:30 – 9:30 a.m. ET
Speaker: Charlie Kearns


Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: The Tax Policy Division of the Texas Comptroller of Public Accounts issued guidance summarizing (and incorporating by reference) certain federal statutes and regulations related to which (in)famous tax regime?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be posted on Saturday in our SALT Shaker Weekly Digest. Be sure to check back then!

On March 1, 2023, a Florida Circuit Court rejected the Department of Revenue’s attempt to achieve a market-based sourcing result under Florida’s costs of performance sourcing rule that applies to receipts from services. In Billmatrix Corp. et al. v. Dep’t of Revenue, the court granted summary judgment in favor of a number of affiliated corporations that had sourced their receipts from the provision of financial technology services based on the location of the corporations’ income-producing activities and associated costs of performance. Following an audit, the Department had issued corporate income tax assessments after making adjustments to source the corporations’ receipts based on the location of the corporations’ customers. The court, however, found that the Department’s “focus on the ‘location,’ ‘destination, or ‘actions’ of customers contradicts the plain language of the rule and must be rejected.”  The court held that, “to determine the taxpayer’s income-producing activity the Department must look at the transactions and activity the taxpayer directly engages in for the ultimate purpose of obtaining gains or profits, rather than looking at the actions or location of the customer.”

The Billmatrix ruling comes on the heels of a decision issued on November 28, 2022 by the same court that also addressed Florida’s costs of performance sourcing regime. In Target Enter., Inc. v. Dep’t of Revenue, the court rejected the Department’s argument that a corporation that performed services for an affiliate failed to provide sufficient documentation to support the use of the costs of performance sourcing rule and that, as a result, the Department was entitled to use its equitable authority to craft a new apportionment methodology. The court found that the relevant income producing activity was the corporation’s provision of services to its affiliate under a services agreement, that the services were performed by the corporation’s employees, and that the best evidence of the costs to perform the services was the corporation’s payroll apportionment workpapers. The court determined that the workpapers provided by the corporation “make abundantly clear that the greater proportion of the costs to perform [the corporation’s] services were incurred outside Florida.”

The two Florida decisions stand in stark contrast to an opinion issued by the Pennsylvania Supreme Court on February 22, 2023. In Synthes U.S. HQ, Inc. v. Commonwealth, the court held that under the state’s former costs of performance statute applicable to receipts from the provision of services, a corporation’s sales should have been sourced to the location where “the service is fulfilled and the income is finally produced, which is at the customer’s location.” The court reached its conclusion despite the fact that the Pennsylvania Legislature enacted a statutory amendment that adopted explicit market-based sourcing for receipts from services beginning in 2014 – after the years at issue in the case. Without citing to any Legislative history, the court stated that it did not view the amendment “as an attempt to alter the general framework for sourcing sales, but rather as an attempt to clarify the sourcing of sales of services to the point of delivery to the consumer.”

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: Which administrative office recently held that parts used to repair equipment that is subsequently shipped back to out-of-state customers is subject to use tax because the repairer is deemed the consumer?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be posted on Saturday in our SALT Shaker Weekly Digest. Be sure to check back then!

The Pennsylvania Supreme Court held that a taxpayer was not eligible for a sales tax refund on purchases made using coupons because the receipts did not sufficiently describe the coupons, and did not clearly indicate which item(s) the coupon discounted. Where a consumer uses a coupon, Pennsylvania sales tax is generally not due on discount amounts. In this case, the taxpayer engaged in three separate transactions using coupons. In the first transaction, the taxpayer purchased six items using five coupons of varying amounts, and none of the coupons related to a specific item. In the two remaining transactions, the taxpayer purchased a single item and used one coupon. The coupons appeared as “SCANNED COUP” on each of the three transactions’ receipts. Sales tax was imposed on the total purchase price before the coupon discounts were applied. The taxpayer sought a refund, contending that sales tax was only due on the post-discount price.

Reversing the Commonwealth Court, the Pennsylvania Supreme Court concluded that the coupons used in the transactions were taxable because they did not meet the specific requirements the Pennsylvania regulation, 61 Pa. Code § 33.2(b)(2), prescribes for excluding discounts from the sales tax base. The court explained that sales tax should be imposed on the full purchase price unless (1) the amount of the item and coupon are separately stated and identified, and (2) both the item and the coupon are described in the invoice or receipt. The court found that while the coupons were separately stated and identified as coupons in each of the receipts, the coupons were not sufficiently described. Without a proper description, the court explained, it is impossible to determine whether the coupons utilized were of the type that would establish a new purchase price. Thus, the court ruled that the taxpayer was not entitled to a refund of sales tax on the amount of the coupons.

Myers v. Pennsylvania, Nos. 67 MAP 2021 and 68 MAP 2021, 2023 WL 2145639, — A.3d —- (Pa. Feb. 22, 2023).

The Illinois Independent Tax Tribunal found that aviation fuel sold to airlines and subsequently stored at O’Hare International Airport was not exempt from Retailer’s Occupation Tax (ROT). The taxpayer collected the ROT on the sales, but later filed for refunds claiming these sales were exempt from the ROT under the expanded temporary storage exemption. Specifically, the exemption applies to: “tangible personal property purchased from an Illinois retailer by a taxpayer engaged in centralized purchasing activities in Illinois who will, upon receipt of the property in Illinois, temporarily store the property in Illinois (i) for the purpose of subsequently transporting it outside this State for use or consumption thereafter solely outside this State[.]” 35 ILCS 120/2-5(38) (Emphasis added).  The airlines advised the taxpayer that although airplanes received the fuel in Illinois, 98% of the fuel was consumed outside of the state. Based on this representation, the taxpayer filed refund claims arguing that such amounts were exempt from the ROT.

Relying on a case interpreting similar language in the context of the Use Tax Act, United Air Lines v. Mahin, 49 Ill. 2d 45 (1971), the tribunal broadly construed the word “solely” and thus narrowly construed the exemption. Because a portion of the fuel (i.e., approximately 2%) was consumed in Illinois, the tribunal determined that it was not stored in Illinois for use of consumption thereafter “solely” outside the State. Thus, based on the “plain language” of the rule, the tribunal found the exemption did not apply. The tribunal found that applying the temporary storage exemption on a percentage basis would be against the holding of United Air Lines, which the court was unwilling to overturn.

Am. Aviation Supply LLC v. Dep’t of Revenue, 21 TT 27, 21 TT 54 (IL Ind. Tax Tribunal, Jan. 3, 2023).

The Tax Policy Division of the Texas Comptroller of Public Accounts issued guidance summarizing certain federal statutes and regulations related to Internal Use Software (IUS) that are now incorporated-by-references into Texas’ research and development (R&D) laws. Specifically, for purposes of the franchise tax R&D credit laws and the sales tax R&D exemption, the Comptroller incorporates-by-reference certain definitions that, prior to the amendment, were only recognized if taxpayers were required to apply those regulations to the 2011 federal income tax year. Instead, the Comptroller now recognizes these federal laws if taxpayers were allowed to apply those regulations to the federal 2011 income tax year.

In federal tax year 2011, taxpayers were given the election between two different versions of Treas. Reg. § 1.41-4(c)(6): the version adopted in 2003 (contained in IRB 2001-5) and the version proposed in 2022 (contained in IRB 2002-4). Both versions of Treas. Reg. § 1.41-4(c)(6) have some identical provisions, including: (1) the general rule and exemptions from IUS treatment; (2) the definition of “computer services”; and (3) most—but not all—of the language and application of the High Threshold of Innovation Text (which must be satisfied in addition to the Four-Part Test).

The two versions, however, contain some differences: (1) how IUS is defined; (2) details on the treatment of hardware and software developed together as a single product; (3) applicability of a portion of the High Threshold of Innovation Test; (4) the exception for software used to provide noncomputer services; and (5) the examples used in each version of the regulation.

  1. Definition of IUS. IRB 2001-5 is more limited, defining IUS as any software developed to be used internally and clarifying that the sale of the software does not remove its IUS classification. Instead, IRB 2002-4 establishes a presumption that software is IUS unless it is developed to be commercially sold, leased, licensed, or otherwise marketed, for separately stated consideration to unrelated third parties, as determined at the start of the research.
  • Hardware and Software Developed Together as a Single Product. Both versions of the regulation state a new or improved package of hardware and software developed together as a single product, of which the software is an integral part, will be exempt from treatment as an IUS, so long as the product is used directly by the taxpayer to provide services to customers in its trade or business. IRB 2001-5, however, states that the services provided by the taxpayer must be “technological services,” whereas IRB 2002-4 provides that the services can be any services.
  • High Threshold of Innovation Test. While most of the High Threshold of Innovation Test is the same between both versions, IRB 2001-5 has detailed rules for its application.  Note that both versions provide that only the activities related to the new or improved software are considered for the test (i.e., the effect of modifications to related hardware or other software are not taken into account). 
  • Exception for Software Used to Provide Noncomputer Services. IRB 2001-5 uniquely exempts software used in providing noncomputer services to customers from the IUS exclusion. The exception was eliminated entirely in IRB 2002-4—the IRS considered that software eligible for the exception would be credit-eligible under other provisions, making the exception unnecessary.
  • Examples. IRB 2002-4 eliminated one of the two examples provided in IRB 2001-5, and uniquely modified the other. IRB 2002-4 also includes twelve additional examples.

The memo clarifies that taxpayers have the option to elect between the two versions—but any version they select will be applied in full (i.e., they may not elect between different provisions within both versions). The memo also clarifies that additional provisions from the 2016 regulations are not incorporated-by-reference.

Texas Comp. Of Pub. Accounts, Tax Policy Division, Mem. 202302001L (February 6, 2023).  

The California Office of Tax Appeals (OTA) held that a taxpayer was liable for use tax on parts used to repair equipment in California before shipping it back to out-of-state customers. The taxpayer is a distributor, retailer, and repairer of endoscopes and other medical devices, and as part of its optional lump-sum maintenance contracts, the taxpayer performed repairs at its California facility free of charge to the customers. The taxpayer purchased repair parts without tax and stored them in California. Upon completion of the repairs, the taxpayer shipped the repaired equipment via common carrier to its customers. The taxpayer did not accrue use tax on the repair parts, because the out-of-state customers were the consumers of the repair parts.

The OTA disagreed with the taxpayer’s position, instead holding that the taxpayer’s performance of the repairs was a taxable use within California. The OTA relied on two California regulations which state that a person obligated under an optional warranty contract to furnish parts, materials, and labor necessary to maintain property is deemed to be the consumer, and the repairer under an optional lump-sum maintenance contract is the consumer of the parts and materials. Therefore, the OTA held that use tax applied to the repair parts.

In the Matter of the Appeal of Olympus Am. Inc., 2023-OTA-087 (Cal. OTA Dec. 20, 2022).

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: Which state recently dismissed a class action lawsuit because the tax at issue was actually an excise tax, rather than sales tax?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be posted on Saturday in our SALT Shaker Weekly Digest. Be sure to check back then!

An administrative law judge at the New York Division of Tax Appeals found that a company’s vendor management fees were taxable as the sale of pre-written software. The company offers a web-based application that helps to manage and procure staffing services from requisition through billing. The company argued that its fees are not taxable because “the primary purpose of its service was to act as a “matching” agent for suppliers of temporary labor and customers needing such labor and not the license of software.” The Department countered that the primary function test does not apply because they are licensing tangible personal property.  While the company also provided certain customization services, such charges were not assessed by the Department.

The ALJ found the company used the same software for all of its customers; thus, the product was pre-written software – a type of tangible personal property and the primary function test should not apply. Nonetheless, even if the primary function did apply, the ALJ noted that the primary function of the sale was a license of software. In particular, “the software technology and license appear to be completely intertwined with all the services petitioner offers in the contract” and “the ultimate goal was to provide customers a seamless, automated and efficient system of fulfilling and monitoring their temporary employment needs, and that required, as the contract reflects, utilization of the software technology license.”

In the Matter of the Petition of Beeline.com, Inc., DTA No. 829516, (N.Y. Div. Tax App. Feb. 9, 2023).

As cute as he is cuddly, meet Zorro, our February Pet of the Month! Zorro is an adorable Cardigan Welsh Corgi that turned two this past Halloween. His proud parent is Jéanne Rauch-Zender, Editor in Chief of Tax Notes State.

Beyond snacking on tasty treats, he loves to play baseball with Jéanne’s kids, and brings sweet and protective energy to their household. He’s also a little bossy!

His current trick is an ability to carry his own leash, which comes in very handy. He loves to run as fast as possible, which often results in tripping over his short legs, common with his Corgi brothers and sisters.

We’re glad to feature you, Zorro!

In 2021, the Georgia Tax Tribunal ruled that a non-profit hospital was entitled to use Quality Jobs Tax Credits (QJTC) against its unrelated business income tax and its payroll withholding tax. The Tribunal’s decision was affirmed by the Fulton County Superior Court. In response to these court decisions, the Department has proposed legislation, to purportedly “clarify” the plain language of the QJTC statute. Rather than a mere clarification, HB 482 changes the existing law and if enacted as a clarification, the proposed legislation could deprive taxpayers of the credit for prior years and establish troubling precedent.

Read the full legal alert here.

In the latest episode of the SALT Shaker Podcast, Eversheds Sutherland Associate Jeremy Gove is pleased to welcome back Doug Lindholm, President and Executive Director of the Council On State Taxation (COST).

Doug dives into the background of COST, how he came to assume his current position, and COST’s role in the state and local tax realm. Doug and Jeremy also touch on the founding of the State Tax Research Institute (STRI), the research and educational arm of COST, which is designed to enhance the public dialogue and understanding of state and local tax policy. 

Jeremy’s newest overrated/underrated question deals with winter accessories. How do you feel about wearing scarves?

Questions or comments? Email SALTonline@eversheds-sutherland.com. You can also subscribe to receive our regular updates hosted on the SALT Shaker blog.

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Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: As showcased in the SALT Scoreboards for 2022, how many significant corporate income taxpayer wins were there for the entire year?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be posted on Saturday in our SALT Shaker Weekly Digest. Be sure to check back then!

Members of the Eversheds Sutherland SALT team will present during COST’s 2023 Sales Tax Conference & Audit Session in Denver, CO from February 22-24, 2023. The conference features presentations on the most recent transactional tax developments, initiatives and case law topics. SALT team speakers and topics include:

  • What’s Happening with Digital Service Taxes (DST) and Taxes on Digital Products? The New Frontier – Jeff Friedman
  • On-Demand Services and the States’ Marketplace Rules – What’s the Impact? – Michele Borens

For more information and to register, click here.

The King County Superior Court in Washington dismissed a class action lawsuit which alleged that Kroger, Whole Foods, Safeway, and Town & Country Markets improperly collected sales tax on exempt items. In dismissing the claim, the court found that the sales tax at issue is an excise tax. Further, the court found that the exclusive remedy for a wrongfully collected excise tax is to seek a refund from either the retailer or the Department of Revenue, and after that, pursue a civil action in Thurston County Superior Court. The class representatives argued that they were contesting the legality of the tax, and thus not required to follow the statutory procedures for refunds. The court disagreed, holding that the statutory procedural requirements applied regardless of whether the challenge was to the application of the tax as a whole or as to a factual or computational error in imposing or collecting the tax. Because the court did not reach the merits of the underlying claim, the court dismissed the matter without prejudice, allowing the class to re-file with the Department within 21 days.

Caneer v. The Kroger Co., No. 22-2-08219-4-KNT (King Cnty. Sup. Ct., Jan. 20, 2023).

On December 22, 2022, the Massachusetts Supreme Judicial Court held that a taxpayer’s use of computer cookies did not constitute substantial nexus with the state for periods prior to the United States Supreme Court’s decision in South Dakota v. Wayfair, Inc. The taxpayer sold auto parts entirely online and utilized cookies to track customers that visited its website. Effective October 1, 2017, the Massachusetts Department of Revenue promulgated a regulation that required nondomiciliary vendors that employed apps, cookies, or content delivery networks (“CDNs”) in connection with its sale of goods or services in the state to register, collect, and remit Massachusetts sales or use tax if during the preceding 12 months it also met certain transaction value and volume thresholds. This regulation applied to periods prior to the Wayfair Court’s abrogation of the physical presence nexus rule. Nevertheless, the Department assessed the taxpayer based on its electronic contacts with Massachusetts. The taxpayer protested the Department’s use tax assessment for October 1, 2017 to October 31, 2017.

The Massachusetts Supreme Judicial Court held for the taxpayer. The court refused to apply Wayfair’s holding retroactively because “the regulation, by its own terms, limited its reach to nondomiciliary Internet vendors that satisfied the physical presence test set forth in Quill.” The court also admonished the Department for ignoring its position (contained in an amicus brief filed with the US Supreme Court) that it would not apply the Wayfair Court’s holding retroactively. Thus, the pre-Wayfair physical presence standard applied for the tax period at issue. Under that standard, the use of apps, cookies, and CDNs did not constitute physical presence in the state.  

U.S. Auto Parts Network, Inc. v. Commissioner of Revenue, 199 N.E.3d 840 (Mass. 2022).

State and local tax (SALT) issues may arise from mergers, acquisitions, or dispositions. Eversheds Sutherland Partner Todd Betor presented on Unique State Tax Issues at Tax Executives Institute’s 2023 Mergers & Acquisitions Seminar last week in Nashville, TN.

In addition to the need for SALT advisors to get involved at the outset of a deal, the following are three key takeaways from Todd’s panel presentation.

  1. States (and some localities) divert from the federal tax treatment of certain transactions;
  2. SALT deal considerations go beyond how states view a transaction; and
  3. Considering SALT issues as part of a plan can result in meaningful tax savings.

States Do Not Always Follow Federal Tax Rules or Results

As a general rule, states are not bound to conform to the federal tax treatment of a transaction. Indeed, the myriad of state responses to the 2017 Tax Cuts and Jobs Act and, more recently, the 2020 CARES Act demonstrates how very real the disconnect between federal tax provisions and state conformity therewith can be.

A prime example of this disconnect is illustrated by states’ varying levels of conformity to Internal Revenue Code (IRC) Section 381, which governs preservation/carryover of tax attributes,1 including net operating losses (NOLs) of the target company.

While a majority of states generally conform to IRC Section 381, a fair number do not. Massachusetts, for instance, decouples from the federal provision with respect to NOLs via regulation – 830 CMR § 63.30.2(9)(a). That regulation provides in the case of a merger of two or more corporations where there is a single surviving/successor entity, the NOLs of the corporation merged out of existence are eliminated. In other words, the surviving/successor entity only succeeds to, or more appropriately, carries forward the NOLs that a surviving corporation incurred prior to the merger. An unexpected result may occur where two or more existing corporations consolidate into a new corporation. In that situation, Massachusetts regulations provide that the new corporation has no NOLs—any NOLs of the consolidated entities are lost.

Massachusetts’ deviation from IRC Section 381 is but the tip of the state tax iceberg that companies and practitioners must navigate in evaluating and implementing a merger, acquisition, or divestiture, among other transactions. And this example merely serves to highlight the complexity state tax brings to a deal.

SALT Deal Considerations Go Beyond How States View a Transaction

How states ultimately view a transaction and the implications stemming therefrom is but one piece of the SALT considerations that go into a deal. Two examples of other major SALT considerations are discussed below.

A significant SALT consideration is the “track record” of the target company/business, e.g., historic tax positions, filing methodologies, audit history, etc., which the buyer should consider in moving forward with a transaction. This issue relates to successor liability of the buyer for SALT exposures inherent in stock and asset deals.

What a target’s SALT track record looks like, and how it looks through the lens of a buyer, can have a significant impact on a deal, including pricing. More often than not, a SALT risk is identified—typically in the diligence process, either proactively by the seller or raised by the buyer—that cannot otherwise be overcome by the buyer through negotiations (for example, the seller getting the buyer comfortable with the target’s position on the taxability of a service offering). When this occurs, the parties commonly seek to address the risk through seller indemnification, seller escrow (i.e., placing a portion of the purchase price in escrow pending a triggering point for use/release), and/or a purchase price reduction.

How a SALT risk is handled in the transaction agreement (e.g., indemnification, escrow, purchase price adjustment) is generally dependent on the scope of the risk, the risk appetite of the buyer, and advice of SALT advisors. On this last point, it is often that the parties will have differing positions on the historic tax position of the target—typically with respect to sales and use taxes. SALT advisors can add value by substantiating a position or otherwise providing context and support for a target’s position. And the advice may support the elimination or narrowing of an indemnification provision, escrow amount, or purchase price adjustment.

On the other side of the table, a SALT advisor’s role is to advise the buyer on the financial exposure related to pre-transaction tax liabilities of the target. This role is all the more important if a buyer is planning on, and/or the transaction agreement contemplates, the pursuing voluntary disclosure agreements (VDAs) to preemptively address SALT risks.

From the buy-side, another significant SALT consideration is what the post-transaction tax picture may look like. Though the implications are post-transaction, this analysis and planning should be contemporaneous with the steps leading up to close.

At a high-level, this generally involves a review of a target’s nexus footprint with a focus not just on current filing states, but also evaluating a target’s profile based on employee location (payroll), property location, and source of receipts (sales), and comparing that footprint to the buyer’s existing SALT filing profile. Hand-in-hand with the nexus evaluation is how the target will be viewed from an income tax filing perspective, particularly whether there will be “instant unity” of the target with the buyer’s existing business such that target would be included in the buyer’s existing state income tax reporting groups.

Consideration of SALT Issues as Part of a Plan Can Have Meaningful Tax Savings

Considering SALT issues as part of a plan can result in meaningful tax savings. For example, the use of equity consideration can lead to a significant state franchise (or net worth) tax exposure. These taxes are privilege taxes—taxes imposed for doing business in a state—that are generally based on a taxpayer’s total equity value.

A prime example is the Illinois Franchise Tax, administered by the Illinois Secretary of State as opposed to the state’s Department of Revenue, which utilizes “paid-in capital” as the base for the tax (as imposed on corporations) and is imposed on a separate company basis.2 The term is broadly defined to include – 

the sum of the cash and other consideration received, less expenses, including commissions, paid or incurred by the corporation, in connection with the issuance of shares, plus any cash and other consideration contributed to the corporation by or on behalf of its shareholders, plus amounts added or transferred to paid-in capital by action of the board of directors or shareholders pursuant to a share dividend, share split, or otherwise, minus reductions . . .. 3

The franchise tax implications of using equity consideration, specifically issuance of additional equity, are illustrated in the 2004 case of USX Corp. v. White.4 In that case, USX Corp. (USX) had issued additional shares of its stock (133,184,470 shares), which was used as consideration in a reverse subsidiary merger with Texas Oil and Gas Corporation. For purposes of its Franchise Tax, USX reported $2.99 billion as the entire consideration received for issuing the new USX stock—a $2.99 billion increase in paid-in capital. The case ultimately dealt with the application of an exclusion Illinois affords to vertical mergers—which the court found did not apply to USX’s fact pattern.

The above highlights the need for careful planning as to transaction consideration and its impact on a company’s franchise tax liability. Post-transaction debt restructuring can also have a significantly similar tax impact. All too often, though, SALT advisors are called upon to address the tax impact after the fact; further enforcing the need for SALT advisors to get involved at the outset of a deal.

_______

1 Putting aside limitations on tax attributes under IRC Sections 382, 383, and 384, and states’ conformity therewith. 

2 805 ILCS §§ 5/15.25, 15.40, 15.55, 15.70.

3 805 ILCS § 5/1.80(j).

4 352 Ill. App. 3d 709 (Ill. App. Ct. 2004).

The pending precedential Office of Tax Appeal’s (OTA) decision of Appeal of L. Smith, OTA Case No. 20036033 (Dec. 7, 2022) concerned whether California could impose income tax on a nonresident’s distributive share of gain from the sale of an interest in a timeshare developer operating in California as a limited liability company (Timeshare). This turned on two issues. 

The first issue was whether a nonresident’s distributive share of gain on a sale of an interest in a pass-through entity must be sourced using the statute for sourcing gain from the sale of intangibles, Cal. Rev. & Tax. Code § 17952, or FTB’s regulation for sourcing partnership income from a trade, business or profession, Cal. Code Regs., tit. 18, § (“Regulation”) 17951-4.  Following the Court of Appeal’s decision in The 2009 Metropoulos Family Trust, et al. v. Franchise Tax Bd. (2022) 79 Cal.App.5th 245, 266 (see our prior coverage here), the OTA found that it must apply FTB’s regulation. Although Metropoulos concerned an S Corporation, OTA found that its holding applies equally to partnerships and limited liability companies taxed as partnerships.

The second issue arose in the course of applying Regulation 17951-4:  whether the parent limited liability company (Holding Co) that sold the interest in Timeshare was engaged in a unitary business with Timeshare. If it was, then the apportionment factors of Timeshare would flow up to Holding Co, resulting in nearly 42 percent of the gain from the sale being sourced to California, as opposed to none. OTA found that Timeshare and Holding Co were engaged in a unitary business. Notably, OTA rejected FTB’s argument that a special unitary test applied to holding companies. It also explained that majority ownership is not required to be unitary in the partnership context because unlike “a corporate shareholder, only the partner’s ownership interest in the partnership’s income and apportionment factors may be combined.” The OTA’s analysis highlighted California’s alternative test for unity — the “three unities test” and “dependency or contribution test” — but focused on the latter because that is what FTB based its assessment on and the taxpayer failed to rebut FTB’s position. Critical factors that OTA relied on in reaching its decision were an integrated executive force, intercompany financing, and a covenant not to compete.

The decision is available here.

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: The Texas Comptroller of Public Accounts recently made amendments to its franchise tax apportionment rule in light of which case?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be posted on Saturday in our SALT Shaker Weekly Digest. Be sure to check back then!

A recent report issued by the New Jersey Division of Taxation includes a suggestion that state lawmakers consider a cloud computing tax. The report titled, “Studying the Impact of the Digital Economy” recommends adopting a sales and use tax model that differentiates between physical good and services and digital goods and services. The report notes that New Jersey law does not specifically address cloud computing services and thus sales tax does not apply to software as a service (SaaS) or platform as a service (PaaS). The report suggests that a review of tax policy regarding cloud computing services should be undertaken as the volume of transactions increases, but adds that “[t]o effectively tax cloud computing services, nexus and sourcing issues will also have to be addressed.”

New Jersey Division of Taxation, “Studying the Impact of the Digital Economy.” (2023)

The New York Tax Appeals Tribunal ruled that a semiconductor manufacturer was eligible to use the carryover refund from both the Empire Zone investment tax credit (EZ-ITC) for new businesses and the qualified investment project (QUIP)/significant investment project (SCIP) tax credit in the same year, resulting in a $152.3 million refund for the 2014 tax year. 

In 1986, the Legislature created the Economic Development Zone Act to stimulate private investment and job creation in specific economically challenged areas of the state (the areas were later renamed Empire Zones). Among the tax incentives, the EZ-ITC allowed taxpayers a refund of 50% of its EZ-ITC carryover as a new business, and a 50% refund of its EZ-ITC carryover as the owner of a QUIP or SCIP. 

GlobalFoundries, as an operator of a manufacturing facility in a designated Empire Zone, filed a refund claim for 2014 on the basis that it was entitled to combine the new business credit carryover refund and the QUIP/SCIP credit carryover refund, which together effectively provided a 100% refund of its EZ-ITC credit carryover. The Division of Tax Appeals rejected GlobalFoundries’s refund claim, ruling that the two credit carryovers are mutually exclusive, and that GlobalFoundries was only entitled to the original 50% refund. 

On appeal, the Tax Appeals Tribunal overturned the ALJ’s decision, refraining from deferring to the Divisions requested deference to its interpretation and concluding that the new business credit and the QUIP/SCIP credit could be taken together. The Tribunal pointed to the unambiguous plain language of the statute, which “expressly provides” that a new business is entitled to a 50% refund of its EZ-ITC carryover, and the statute “also expressly provides that, in addition, any taxpayer that is approved as the owner of a QUIP or SCIP may elect to treat 50% of its EZ-ITC carryover as an overpayment of tax to be credited or refunded.” The Tribunal held that a natural reading of the language allows a taxpayer that qualifies for both benefits to receive both benefits. 

Matter of the Petition of GlobalFoundries U.S. Inc., DTA No. 829184 (Tax App. Trib., Jan. 19, 2023).

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: The Supreme Court of Virginia recently upheld a decision invalidating which county’s plan to claw back tax refunds?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be posted on Saturday in our SALT Shaker Weekly Digest. Be sure to check back then!

To kick off the SALT Shaker Podcast for 2023, Eversheds Sutherland Associate and host Jeremy Gove welcomes Maria Koklanaris, Senior Tax Correspondent for Law360, to the show. Together, they tackle state tax legislation and litigation that should be on your radar this year.

Jeremy and Maria begin with an overview of state tax legislation season, including: two diverging trends, some states increasing taxes on people deemed “high earners” versus other states moving to cut taxes or simplifying their tax codes; and states’ continued attempts to tax the digital economy. 

Beyond legislation, they also discuss cases to watch this year, which includes two U.S. Supreme Court cases dealing with unclaimed property, and a non-tax California ballot initiative case which has the potential to inform the application of “Pike Balancing” under the Commerce Clause. They also address the pending case before the Ohio Supreme Court confronting the tax impacts of remote work.

You can read Maria’s articles they referenced here:

To conclude, Jeremy picks his first overrated/underrated question of the year – how do you feel about hot chocolate?

Questions or comments? Email SALTonline@eversheds-sutherland.com. You can also subscribe to receive our regular updates hosted on the SALT Shaker blog.

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On February 7, Eversheds Sutherland Partner Todd Betor will present during Tax Executive Institute’s 2023 Mergers and Acquisitions Seminar in Nashville, TN, which covers the critical tax and operational issues relevant to M&A transactions. Todd’s panel will discuss unique state tax issues.

For more information and to register, click here.

In addition, Eversheds Sutherland Partners Michele Borens and Jonathan Feldman will present during the 2023 National Multistate Tax Symposium, held in Orlando, FL. Jonathan will present Cultivating a Thriving Multistate Tax Environment: Fostering Today for Tomorrow on February 9, and Michele will present Sales and Use Tax Hot Topics in Our Digital World: What’s New and Next on February 10.

For more information and to register, click here.

On January 19, 2023, the Michigan Court of Appeals held that a taxpayer, transitioning from the Michigan Business Tax (MBT) to the Corporate Income Tax (CIT), cannot claim prior MBT business losses on its first CIT return. For tax years 2008 through 2011, the taxpayer filed MBT tax returns and claimed employment tax credits. In 2012, Michigan replaced the MBT with the CIT, but allowed businesses to continue filing MBT returns until they had exhausted their credits. However, any such taxpayer must pay the MBT as the greater of the typical MBT amount or as if it had instead filed a CIT return. The taxpayer took this approach until it exhausted its credits in 2018. In tax year 2019, the taxpayer filed its first CIT return and claimed an MBT business loss carryforward as a deduction. The Department of Treasury denied the deduction. 

The court first held that the taxpayer had not paid CIT from 2012 to 2018, even though it paid the “greater” CIT-based amount on the MBT return. The court concluded that the CIT-based amount is “[a]n amount equal” to the CIT liability, not a CIT liability itself. The court then concluded that the CIT does not allow a deduction for MBT business losses. The CIT defines “business loss” specifically with respect to the “corporate income tax base.” In contrast, the MBT “contemplates and uses a business income tax base which contains some different additions and deductions than those in the corresponding CIT statute.” Because the taxpayer did not previously file CIT returns and pay the CIT, it had no CIT base. It therefore had no CIT losses capable of being carried forward to tax year 2019. 

Int’l Auto. Components Grp. N. Am., Inc. v. Dep’t of Treas., No. 360602 (Mich. Ct. App. Jan. 19, 2023) (unpublished).

The Texas Comptroller of Public Accounts (the Comptroller) published proposed amendments to Texas’ franchise tax apportionment rule in the January 20 issue of the Texas Register, discarding the now-repudiated “receipt-producing, end-product act” test. The Comptroller proposed these amendments in response to the Texas Supreme Court’s unanimous decision in Sirius XM Radio, Inc. v. Hegar. Eversheds Sutherland’s SALT Team represented Sirius XM in this litigation.

Read the full legal alert here.

On February 1, 2023, New York Governor Kathy Hochul released her Fiscal Year 2024 Executive Budget and accompanying legislation (the Budget Bill). The Budget Bill includes several tax rate adjustments and technical fixes to the Tax Law, among other provisions.

Read the full legal alert here.

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: Which recently introduced bill would impose a tax on revenue from digital advertising services, specifically on persons with revenue from digital advertising services in excess of $25 million per year?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be posted on Saturday in our SALT Shaker Weekly Digest. Be sure to check back then!

In this article originally published by CalCPA in the January/February issue of California CPA, Eversheds Sutherland Senior Counsel Eric Coffill provides helpful tips for having a Power of Attorney (POA) submission to California’s Franchise Tax Board accepted the first time and for anticipating problems in using the POA.

Read the full article here.

New York and Massachusetts are the latest states to introduce tax legislation targeting digital advertising and data collection. Like the similar bills introduced earlier in Connecticut, New York, and Indiana, proposals similar to these latest New York and Massachusetts bills have been rejected by the respective legislatures in prior sessions.

New York revisits the commercial data collection tax

New York legislators continue to introduce bills targeting the digital economy and data collection. On January 18, New York State Senator Liz Krueger (D), Chair of the Senate Finance Committee, introduced S2012, which imposes a monthly excise tax on for-profit entities collecting and selling data from more than one million New Yorkers per month. The tax would apply regardless of how the data is collected, whether by electronic or other means.

The tax rate in S2012 would apply on a graduated scale based on the number of New York consumers whose data the taxpayer collects in a month. The tax starts at 5 cents per individual per month on the number of New York consumers over one million, which would cost businesses at a minimum $50,000.05 per month. The tax rate then gradually increases both in rate plus an additional flat rate amount. The highest rate is 50 cents per month on the number of New York consumers over ten million, plus a flat rate of $2,250,000. This legislation was previously introduced by Sen. Krueger during both the 2021 and 2022 legislative sessions in New York.

Massachusetts throws digital taxes against the wall to see what sticks

Massachusetts legislators have introduced a flurry of bills that would tax digital advertising, commercial data collection, or the sale of personal information. On January 18 and 20, state legislators in Massachusetts introduced six draft bills that would adopt a digital advertising services tax. Additional bills were introduced that would tax commercial data collection or the sale of personal information. Those bills are:

  • HD 1507 was filed on January 18 and is pending committee referral. The bill draft would establish a special commission to conduct a comprehensive study relative to generating revenue from digital advertising that is displayed inside of Massachusetts by companies that generate over $100 million a year in global revenue.
  • HD 1683 was also filed on January 18; this bill draft would assess and levy in each calendar year an excise on the sale of digital advertising services provided within the commonwealth. Revenue from digital advertising services would be required to be remitted monthly. The excise would be assessed at a rate equal to 6.25 percent of the annual gross revenue from digital advertising services provided within the commonwealth. The first $1 million in revenue would be exempt.
  • HD 3052 was filed on January 20; the bill would impose a 5 percent tax on persons with revenue from digital advertising services in excess of $25 million per year. The tax would apply to digital advertising services accessed via a digital interface within the state.
  • HD 3144 would impose a tiered digital advertising tax with rates of 5, 10, and 15 percent based on annual gross revenues from digital advertising provided in the state, based on IP address of the user’s device on which the advertising is accessed. The tax is imposed on persons with more than $100,000 of digital advertising services in Massachusetts. The draft was filed on January 20.
  • HD 3230 would impose a 6.25 percent excise tax on digital advertising services provided in Massachusetts. The service will be deemed to be in the state if the advertising is received on the user’s device with an IP address in the state. The draft was filed on January 20.
  • SD 1439 was filed on January 19 and is pending committee referral. The bill would impose a tiered digital advertising tax with rates of 5, 10, and 15 percent based on annual gross revenues from digital advertising provided in the state, based on IP address of the user’s device on which the advertising is accessed. The tax is imposed on persons with more than $100,000 of digital advertising services in Massachusetts.
  • SD 1711 would tax on the collection of data by commercial data collectors. Similar to the New York Senator Krueger’s bill, SD 1711 would impose a tax on commercial data collectors that collect, maintain, use, processes, sells, or shares consumer data in support of its business activities. The bill also adopts a tired rate structure where the first $1 million of receipts is exempt, but rates thereafter range from $.05 cents per month of the number of Massachusetts consumers if data is collected from more than 1 million less than 2 million Massachusetts consumers, up to $750,000 per month plus $.30 cents per month on the number of Massachusetts consumers if data is collected from more than 6 million Massachusetts consumers.
  • SD 1768 would require persons who sell personal information or exchange personal information for consideration in the state to register with the Department of Revenue, and provide certain detailed information concerning the data and the collection of such data. The bill does not specifically impose a tax, but requires the Department to recommend ways to tax businesses selling personal information to the legislature, “to ensure appropriate compensation to the people of the Commonwealth.”

Meet our January Pet of the Month, Belle! She belongs to Jonnell Quarrie, Director of Tax at MOD Pizza.

Belle recently turned two in December, and is a delightful mix of Lhasa Apso and Cocker Spaniel. She joined Jonnell’s family on St. Patrick’s Day in 2021, and looks like Lady from the Disney classic Lady and the Tramp. Jonnell and her family almost renamed her. However, they decided there was enough change with her shifting households that they didn’t want to add a name change on top!

When it comes to food, Belle likes to have whatever everyone else is having! She prefers the large dog food of Jonnell’s daughter’s German Shepard, Henny, even though it barely fits in her mouth! If the cats are getting canned food, she wants some of that – and if her humans are eating, she is always willing to do the pre-wash before they put the dishes in the dishwasher!

For a puppy, Belle is pretty mellow, and loves to sleeps a lot. However, what she lacks in size she makes up for in volume! She is also fearless – she will run up to tackle Henny (who is 115 pounds!) to play with him. She also loves to have a great view. Since she was a puppy, she’s had her dog bed on top of Jonnell’s desk so that she can look out the window and see what’s happening in the neighborhood.

Welcome to the SALT Pet of the Month family, Belle!

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: Which two states recently proposed digital advertising/data tax bills (again)?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be posted on Saturday in our SALT Shaker Weekly Digest. Be sure to check back then!

The Supreme Court of Virginia recently upheld a circuit court decision invalidating a county’s plan to claw back tax refunds because it violated the state constitution’s uniform taxation requirement.

The Isle of Wight County changed the valuation methodology for its machinery and tools tax (“M&T tax”), resulting in approximately $5.6 million in refunds for tax years 2013-2015. In response to the significant budgetary shortfall caused by the refunds, the county enacted a large one-year hike of its M&T tax rate for 2017 coupled with a “M&T Tax Relief Program” that provided “grants” to certain taxpayers. The grants were for the differential between the 2016 and 2017 rates, minus any refund amounts that a taxpayer may have received for the 2013-2015 period.  The net effect of this approach is that the only taxpayers who had to pay the significantly increased M&T tax rate were the ones who received refunds, and the increased amounts they owed were limited to the amount of the M&T tax refund they had received from the county.

International Paper, one of the affected taxpayers, challenged its tax assessment for 2017.  The Supreme Court held that the M&T Tax Relief Program operated effectively as a partial tax exemption, which made International Paper’s 2017 M&T tax assessment non-uniform, invalid and illegal. Because the M&T tax rate hike was enacted in tandem with the M&T Tax Relief Program, both were invalidated. Additionally, the county procedurally defaulted on its argument that it was entitled to rely on 2016 rates, so the taxpayer was entitled to a full M&T tax refund for 2017.

County of Isle of Wight v. International Paper Company, 881 S.E.2d 776 (Va. 2022).

Representative J.D. Prescott (R) introduced Indiana HB 1517, which would impose a surcharge tax on social media providers. HB 1517 is similar to legislation introduced by Representative Prescott during the 2021 and 2022 legislative sessions that did not make it out of committee.

Specifically, HB 1517 would impose a surcharge tax on social media providers equal to: (1) the annual gross revenue derived from social media advertising services in Indiana in a calendar year multiplied by seven percent; plus (2) the total number of the social media provider’s active Indiana account holders in a calendar year multiplied by $1.

A “social media provider” is defined as a social media company that: (1) maintains a public social media platform; (2) has more than one million active Indiana account holders; (3) has annual gross revenue derived from social media advertising services in Indiana of at least one million dollars; and (4) derives economic benefit from the data individuals in Indiana share with the company. The bill defines a “social media platform” to mean an internet website or internet medium that: (1) allows account holders to create, share, and view user generated content through an account or profile; and (2) primarily serves as a medium for users to interact with content generated by other third party users of the medium.

“Social media advertising services” means advertising services that are placed or served on a social media platform. The term includes advertisements in the form of banner advertising, promoted content, interstitial advertising, and other comparable advertising services.

The bill contains an apportionment provision, which provides that the apportionment of annual gross revenue derived from social media advertising services in Indiana shall be determined using an allocation fraction, the numerator of which is the annual gross revenue derived from social media advertising in Indiana, and the denominator of which is the annual gross revenue derived from social media advertising in the United States, during the calendar year.

The bill would be effective January 1, 2024. According to the bill’s fiscal note, the surcharge is expected to raise between $64.6 million and $88.3 million in FY 2024 and between $118.5 million and $173.9 million in FY 2025. The revenue would be distributed to an online bulling, social isolation, and suicide prevention fund.

A number of Connecticut digital advertising bills and a New York data tax bill have been introduced to jumpstart the 2023 legislative sessions. Both states have considered – but ultimately rejected – legislation that would adopt targeted taxes on the digital economy in recent years.

On January 18, 2023, proposed legislation was filed in the Connecticut House (HB 5673) and Senate (SB 351) that would establish a 10 percent tax on the annual gross revenues of any business with annual gross revenues exceeding $10 billion from digital advertising services. HB 5658 was also proposed, which similarly calls for a 10 percent tax on the annual gross revenues from digital advertising services on any business with annual gross revenues exceeding $10 billion, with no caveat that revenues be from digital advertising services. Similar proposals were introduced in Connecticut during the 2021 legislative session. Because Connecticut legislators may introduce legislation as a short statement in non-statutory language, HB 3573, SB 351, and HB 5658 lack the formal statutory language normally found in other states. The Joint Committee on Finance, Revenue and Bonding will now consider these proposed bills and determine if it should be sent to the Legislative Commissioners’ Office for full drafting of the bill’s text.  

New York legislators are back at it again, too. On January 17, 2023, S1845 was filed and referred to the Budget and Revenue Committee. The legislation proposes to impose a 5 percent tax on the gross income of every corporation that derives income from the data New York individuals share with such corporations. The bill says little about how the tax will work – and fails to define or use existing defined terms within New York’s franchise tax.  As written, it is unclear whether the income to be taxed is limited to gross income earned from data procured from New York individuals or if a broader base (i.e., any gross income) applies.  This bill is similar to legislation introduced in both the 2021 and 2022 legislative sessions that did not make it out of committee.

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: Eversheds Sutherland attorneys Jeff Friedman and Cyavash Ahmadi examined which New York False Claims Act related case in a recent article?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be posted on Saturday in our SALT Shaker Weekly Digest. Be sure to check back then!

The Illinois Court of Appeals held that an energy company’s book-out transactions, which do not involve the physical transfer of fuel, are taxable sales under the Cook County fuel tax ordinance because they involve the transfer of an ownership interest as to the fuel. The company enters into book-out transactions to settle forward contracts (i.e., agreements to deliver fuel on a specified date in the future) financially rather than through physical delivery of fuel. 

Reversing the circuit court, the Court of Appeals rejected the taxpayer’s argument that no taxable event occurred because the fuel tax applied to the retail sale of gasoline and other fuel, and the “book-out” transactions were purely financial, without any physical transfer of property. The court agreed with the Department that the fuel tax ordinance “broadly” defined a taxable “sale” to include “any transfer of ownership . . . by any means whatsoever.” In the court’s view, the taxpayer’s forward contracts involved taxable transfers of intangible ownership interest.

However, the court declined to apply penalties, concluding that the taxpayer’s position was a reasonable, albeit incorrect, interpretation of the law considering no physical transfer of property occurred.

Marathon Petroleum Co. v. The Cook Cnty. Dep’t of Revenue, 2022 Ill. App. 210635 (Ill. App. Ct. 2022)

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: Which state supreme court recently held that proceeds from sales of book club memberships are taxable?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be posted on Saturday in our SALT Shaker Weekly Digest. Be sure to check back then!

In this installment of A Pinch of SALT for Tax Notes State, Eversheds Sutherland attorneys Jeff Friedman and Cyavash Ahmadi examine Egon Zehnder, a case they argue demonstrates why New York’s False Claims Act should never have been expanded to tax cases. The case reflects fundamental problems that go to the heart of sound tax administration policies.

Read the full article here.

State and local authorities recently have used decisions and enforcement to go beyond the language in tax statutes.

In this edition of “A Closer Look” in Bloomberg Tax, Eversheds Sutherland attorneys Jeff Friedman and Liz Cha look at examples of these attempts to expand the tax base and the challenges faced by those who litigate such cases.

Read the full article here.

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: Which super cute pup was the last SALT Pet of the Month for 2022, and who does it belong to?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be posted on Saturday in our SALT Shaker Weekly Digest. Be sure to check back then!

2022 was a year of transition – we emerged from the pandemic and its fully-remote environment, and welcomed the return of face-to-face meetings and in-person conferences. Likewise, there was significant transition in the state and local tax world – while certain issues maintained their prominence (marketplace and apportionment developments, to name a few), new issues moved to the forefront of SALT conversations across the country (digital advertising taxes, digital goods, and crypto/virtual currencies, among others).

The Eversheds Sutherland SALT team was kept busy throughout the year tracking interesting state and local tax developments – more than 280 were posted to this site. The items highlighted below exemplify the trends in 2022. (Note: If you would like to receive our posts by email, please register here).

Digital Advertising Taxes

Developments regarding digital advertising taxes grabbed headlines throughout 2022, and much of the spotlight was on Maryland.

Digital Goods and Services

Throughout the year, states and localities issued decisions and guidance addressing the ever-expanding modern digital economy. The rapid pace of guidance will certainly continue in 2023, and will likely give rise to additional controversies.

Marketplace Issues Continue

As in prior years, developments regarding marketplaces and marketplace facilitators continued with some frequency. Marketplace laws have significantly impacted sales tax collection and remittance obligations, and jurisdictions continued to provide guidance regarding these new regimes.

Apportionment Disputes

Apportionment maintained its status as a leading corporate income tax policy and controversy issue in 2022, and we see no sign of that changing in 2023.

Crypto/Virtual Currencies and NFTs

In 2022, we saw new and notable guidance regarding the treatment of crypto/virtual currencies and non-fungible tokens (NFTs), as states grappled with the wide-ranging state and local tax implications of their mainstream adoption.

Remote Work, Worker Classification, Domicile and Residency

Worker classification, domicile and residency continued to be hot topics in 2022, owing both to the increasing prevalence of remote work, and to on-going litigation involving personal income tax disputes across the country. While the pandemic began to recede in 2022, issues arising from the new(ish) remote and partially-remote working environment are certain to continue in 2023.

The Multistate Tax Commission

The Multistate Tax Commission (MTC) – an organization representing states’ interests in imposing state and local taxes – had another active year in 2022. The MTC focused on a variety of significant projects, from its transfer pricing effort, to the taxation of partnerships, to the taxation of digital products.