The Maryland House of Delegates is considering legislation (House Bill 426) that would impose sales and use tax on digital products and sales tax on digital codes. If signed into law, Maryland would begin taxing digital products and digital codes on July 1, 2019. House Bill 426 was read for the first time in the Ways and Means Committee on January 31, 2019.
The federal Tax Cuts and Jobs Act (TCJA) created a new economic development program designed to spur investment in certain low-income communities designated as “Opportunity Zones.” The new federal tax provisions offer significant opportunities to defer, and in some instances permanently reduce, gains that are invested in Opportunity Zones, as well as to abate gains earned post-investment. This legal alert discusses the state and local tax considerations for taxpayers taking advantage of the federal Opportunity Zone provisions.
· Conformity to the federal Opportunity Zone provisions varies among the states.
· The favorable tax treatment of gains invested in Opportunity Zones or gains earned post-investment will not apply in states that do not conform to the IRC post-TCJA and do not otherwise adopt the federal Opportunity Zone provisions, or that have specifically decoupled from those provisions.
· Disparate federal and state tax treatment of investments in Opportunity Zones will require taxpayers to examine their income and apportionment calculations and keep detailed schedules to separately track the federal and state tax treatment of these investments.
View the full Legal Alert
A new landmark sales tax statute has been adopted in Minnesota, which expands sales tax collection requirements to those retailers that sell their goods on certain “marketplaces.” Generally, only a retailer that is physically present in a state is required to collect and remit the state’s sales tax. The US Constitution’s dormant Commerce Clause requires that a person or transaction have “substantial nexus” with a state before the state may impose its sales tax on that person or transaction. Complete Auto Transit v. Brady, 430 U.S. 274 (1977).
In 1992, the US Supreme Court clarified in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), that “substantial nexus” only exists when there is a non-trivial physical presence for sales tax purposes. Given the changes in technology and consumer sophistication since Quill was decided, states have been enacting broader sales tax nexus laws in an effort to increase revenues, especially from ecommerce. There also have been various attempts to expand the definition of substantial nexus or what constitutes a physical presence.
In the most recent attempt, Minnesota statutorily expanded its sales tax collection obligation to “marketplace providers” that provide their platforms to retailers to sell their goods. On May 30, 2017, H.F. 1 was passed, which effectively creates a sales tax collection requirement for any retailer that makes sales through a “marketplace provider,” even if the retailer is not actually physically present in Minnesota. The legislation also requires a “marketplace provider” to collect and remit sales tax for the retailer’s sales it facilitates. A “marketplace provider” is defined as “any person who facilitates a retail sale by a retailer” by: (1) listing or advertising sales by the retailer; and (2) collecting payments from the retailer’s customers and transmitting those payments to the retailer.
A marketplace provider is obligated to collect and remit Minnesota sales tax regardless of whether it facilitates payment collection and transmission or whether the marketplace provider is compensated for its services. The marketplace provider is relieved of its collection obligation if the retailer is already registered to collect Minnesota sales tax. There is also a de minimis threshold—if a retailer makes less than $10,000 in taxable sales in the previous year, then there is no collection obligation. The law goes into effect on July 1, 2019, or sooner if the US Supreme Court overturns Quill. Minnesota became the first state to enact this type of law. Other states are quickly joining Minnesota, including Washington, which also extended sales tax collection obligations to marketplace operators on July 7, 2017 (H.B. 2163).
A New York State Division of Tax Appeals administrative law judge (ALJ) determined that a telecommunications provider’s electricity purchases were not exempt from sales tax as sales for resale. In so doing, the ALJ rejected the taxpayer’s assertion that it resold electricity by incorporating it into its telecommunications services, explaining that the regulation on which the taxpayer relied applies to tangible personal property purchases, which electricity is not. The ALJ further held that the taxpayer was not exempt under a separate provision for resales of electricity, finding that the taxpayer was not reselling electricity upon sale of its telecommunications services and that the electronic signals powering its network were only incidental to the services for which its customers contracted. Matter of XO Communications Services, LLC, DTA Nos. 826686 & 827014 (N.Y. Div. Tax App. Mar. 9, 2017).
On January 30, 2017, the California Legislature Assembly Committee on Revenue and Taxation held an informational hearing on “Life after Lucent: Administering California’s Technology Transfer Agreement Law.” The California State Board of Equalization and the Board’s staff are currently wrestling with the meaning of the Technology Transfer Act provisions in sections 6011 and 6012 of the Revenue and Taxation Code in connection with implementation of the California Court of Appeal decision in Lucent Technologies v. Board of Equalization, 241 Cal. App. 4th 19 (2015). The January 30 hearing demonstrates that the Legislature is now apparently interested in this issue.
On December 29, 2016, a New York City administrative law judge (ALJ) determined that Sprint’s long distance telecommunications service fees were exempt from the City’s Utility Tax. In the Matter of the Petitions of U.S. Sprint Communications Co., LP, TAT (H) 14-12 (UT) et al. Sutherland represented Sprint in the matter.
- The ALJ concluded that the Utility Tax enabling statute—which limits the scope of the Utility Tax to transactions occurring within City limits—applies to “transactions” and not “services.” As such, once an exempt transaction has been identified, the exemption applies to the transaction itself plus all revenue associated with the transaction.
- Applied to telecommunications services, the ALJ determined that exempt long distance telecommunications transactions include not only the charge for the long distance telephone call itself but also charges related to the long distance transaction, regardless of the billing method.
- Additionally, charges for Internet access are exempt from the Utility Tax pursuant to the Internet Tax Freedom Act, as the City historically did not tax such charges prior to the moratorium on Internet taxes imposed by the Internet Tax Freedom Act.
The Georgia Department of Revenue (Department) released a letter ruling stating that a taxpayer’s sales of computer software and related services were not subject to sales and use tax. The taxpayer sold bundled packages for a single price that included electronically transferred computer software with corresponding updates and upgrades, as well as professional services and technical support. The Department explained the state imposes a tax on the sale and use of tangible personal property and certain enumerated services. The taxpayer’s bundled packages were not subject to tax because the software was not tangible personal property, and the related services were not enumerated services. Ga. Letter Ruling SUT-2016-09, Ga. Dep’t of Revenue (issued March 30, 2016).
The Alabama Tax Tribunal held that a taxpayer was entitled to a refund of sales taxes paid on purchases of software that was modified for its exclusive use because it constituted nontaxable custom software. Relying on its regulation, the Alabama Department of Revenue (DOR) denied the refund, stating the “software contained canned software that was customized and the nontaxable customized portion was not separated from the taxable canned portion[.]” However, Chief Tax Tribunal Judge Bill Thompson pointed out the DOR’s regulation is contradictory because although it states modified canned software only constitutes nontaxable custom software to the extent of the modification, the regulation’s definition of custom software includes the “pre-existing program” (i.e., the canned software). See Ala. Admin. Code r. 810-6-1-.37. Therefore, since there was no statutory or judicial authority to support the regulation’s limit on modifications to canned software, the Tax Tribunal ruled the taxpayer’s modified software constituted nontaxable custom software. Russell Cty. Cmty. Hosp. v. Ala. Dep’t of Revenue, No. S 15-1683 (Ala. Tax Trib. June 13, 2016).
The New York State Department of Taxation and Finance issued an Advisory Opinion concluding that a retail operator of kiosks selling various prepaid telecommunication plans and additional telecommunication rights for existing plans was subject to New York sales and use tax collection and remittance requirements, but was not subject to the additional excise tax on telecommunication service providers imposed by section 186-e.2(a) of the New York Tax Law. Specifically, the Department determined that the sale of the prepaid calling services was the sale of taxable telecommunication services subject to sales and use tax, unless the service charge was expressly for Internet access, either as a standalone charge or a broken-out component of other charges (charges for Internet access were not taxable because the Internet Tax Freedom Act, 47 U.S.C. § 151 n applied). However, the kiosk operator was not a telecommunication service provider subject to the additional excise tax because the kiosk operator was “merely facilitating the sale of telecommunication service between the carrier liable for the telecommunication services being sold, and the customer” and did not furnish or sell the transmission of the telecommunication service. N.Y. Advisory Opinion, TSB-A-16(2)C (Apr. 25, 2016).
In Hegar v. CheckFree Serv. Corp., a Texas Court of Appeals affirmed the trial court’s decision and held that the taxpayer’s online bill pay service was not a taxable data processing service for Texas sales tax purposes. Based on the trial court’s uncontested factual findings, the taxpayer provided “a professional service— facilitated by the use of computers and an electronic commerce system—that required the oversight and management of thousands of certified specialists to achieve the goal of paying the [customer’s bills].” The court of appeals noted that any activities the Comptroller labeled as data processing services were incidental to the professional services provided by the taxpayer. Thus, the court of appeals determined that the “essence of the transaction” was the sale of professional services, not data processing services. Hegar v. CheckFree Serv. Corp., No. 14-15-00027-CV (Tex. App. 14th Dist., April 19, 2016).