2021 will be remembered for many reasons: the continuation of the pandemic, the commercialization of space travel, and the rise of meme stocks among others. 2021 also will be remembered for the frenetic pace of state tax developments. The Eversheds Sutherland SALT team was kept busy tracking and summarizing state and local tax developments – more than 360 were posted to this site (note, that if you would like to receive our posts by email, please register here.)
The following selected developments exemplify interesting 2021 SALT trends. Please follow our writing in 2022 – it promises to be another interesting – and volatile – year.
Tax Jurisdiction: Nexus and Public Law 86-272
Three years after the U.S. Supreme Court’s decision in Wayfair, state and local tax nexus remains an area of significant controversy. Pre-Wayfair cases (yes, they still are lingering), the application of the post-Wayfair repudiation of the physical presence nexus rule, special pandemic nexus rules, and controversies surrounding the application of federal Public Law 86-272 continue to plague taxpayers and tax administrators.
- That’s the Way the “Cookie” Crumbles: Massachusetts ATB Abates Sales Tax Assessment Based on “Cookie Nexus” Determination
- Ohio Department of Taxation clarifies that economic nexus threshold includes only taxable receipts
- Washington ALJ Rules Video Game Developer’s Attendance at Trade Show Created Substantial Nexus
- Taxpayer kicks asparagus: New Jersey Tax Court rules produce distributor protected by P.L. 86-272
- Legal Alert: New Jersey to restore pre-pandemic nexus standards
Sales Tax Marketplace Collection
Along with Wayfair’s sales tax nexus re-write, the adoption of marketplace collection laws – by every sales tax state – has led to substantial changes to tax collection. These new laws require substantial adjustments by states and taxpayers, some of which were unanticipated. We expect substantial administrative guidance in 2022.
- California implements marketplace facilitator fee collection
- Illinois’ marketplace facilitator law – insights and analysis
- Tennessee Department of Revenue issues marketplace facilitator ruling for a delivery network company
- Washington provides guidance regarding marketplace facilitators & the delivery of restaurant and grocery food
Corporate Income Tax Apportionment Battles Continue
The amount of controversies associated with formulary apportionment of state corporate income could lead one to wonder whether it is “broken.” Relying heavily (or solely) on a sales factor and newly enacted market-based sourcing regimes will lead to additional controversies in 2022.
- Michigan Court of Appeals reaffirms decision finding unconstitutional distortion
- Oregon Tax Court Issues Ruling on Inclusion of Commodity Hedging Receipts in Sales Apportionment Factor
- Not so fast – Indiana Tax Court upholds pharmacy benefit management company’s sourcing of receipts from services
- The Ol’ Switcheroo: Franchise Tax Board Now Says a Board Hearing on Alternative Apportionment Petition Not Required to Exhaust Administrative Remedies
Personal Income Tax: Residency, Domicile, Withholding and PTE Tax
Remote worker issues are not new – they have challenged state personal income tax systems for years. The pandemic has stressed these systems even more, as evidenced by New Hampshire’s attempt to invalidate Massachusetts taxation of out-of-state residents and the multitude of remote workers. The federal limitation on the deductibility of state and local taxes (also known as the “SALT cap”), has led to the enactment of pass-through entity (PTE) taxes – that are – wait for it – inconsistently implemented by the states.
- Legal Alert: SCOTUS denies New Hampshire’s motion challenging Massachusetts’ taxation of nonresident remote workers during Covid-19
- Workaround this: No income tax credit for Maine taxpayer who paid Connecticut pass-through entity tax
- Apples and Oranges: New York Applies the Pension Source Law to Pre- and Post-Termination Nonqualified Plan Distributions
- Actions speak louder than words when determining New York domicile
- Bye-Bye Buckeye (State)? Ohio Department of Taxation proposes amendments to residency rules
- Know when to fold ‘em – OTA rules taxpayers residents of California despite renting apartment in Nevada
- C’est la vie: Nonresident must pay California tax on community income earned by resident spouse
- You have to prove the move: Virginia says relocation for work insufficient to show change of domicile
- No small potatoes: taxpayer domiciled in Idaho despite not residing in the state
- Buckeye State residency update: Ohio Department of Taxation finalizes residency rule
- Already home: New York ALJ determines taxpayer is a statutory resident in same year of establishing domicile
- Not my domicile: Indiana DOR drops assessment against taxpayer who moved out of state
- Hell (and tax residency) hath no fury: DC Court of Appeals upholds tax evasion conviction in residency dispute
Franchise Fee Battles Pits Localities versus Streamers
Franchise fees, which are usually 5% of video revenues, are often imposed on cable television providers. “Over the top” streamers – those companies that do not directly own the infrastructure used to deliver their video services – have become the target of lawsuits alleging that they are subject to franchise fees. Given the interest of contingency audit firms and law firms, these cases likely will continue into 2022 and beyond.
- Nevada Federal Court concludes streaming video providers not subject to local franchise fees
- At California State Court, streaming video providers notch another video service provider fee win
- Louisiana Court of Appeal overrules uneven application of franchise fees
The Rise of the Multistate Tax Commission
The Multistate Tax Commission (MTC) – an organization that represents states’ interests in imposing state and local taxes – has been active. The MTC has been taking on significant projects associated with transfer pricing (see separate discussion below), sales taxation of digital goods, and partner/partnership issues. Significantly, California’s reemergence as a MTC member not only bolsters the MTC’s finances, but also adds credibility to the organization’s efforts.
- Legal Alert: MTC Uniformity Committee update—hey partner, let’s tax your digital goods and services
- The MTC advances project to study taxation of digital products
- Smooth sailing – updates and insights on the MTC’s Project on State Taxation of Partnerships
- Legal Alert: Updates from the MTC – the Executive Committee approves California’s return, and the Uniformity Committee focuses on two projects
The States’ Bright Shiny Object: Digital Taxes
2021 will be remembered for Maryland’s unfortunate and controversial adoption of a digital advertising tax. Effective January 1, 2022, the Maryland tax is plagued with lawsuits, condemnation by the business community and copy-cat efforts by other states (which fortunately have been unsuccessful.) We’ll closely watch the 2022 legislative efforts to consider digital taxes and hope that state legislatures will follow the federal government’s rejection of them.
- Maryland Enacts the Nation’s First Digital Advertising Gross Receipts Tax
- Legal Alert: Not enough lipstick – Maryland Legislature amends digital ads and digital products taxes
- We got nothing: Maryland Comptroller finalizes digital advertising tax regs
- Bless your heart: Texas Considers Maryland-Style Digital Advertising Tax and Broad-based Service Tax proposals
- New York Senate introduces consumer data tax bill
- Connecticut Joins List of States Attempting to Tax Digital Advertising Services
- Oregon GRT on Personal Information Bill Introduced
- Washington proposes tax on sales of personal information and data
New Economy Transactions
Unlike Maryland’s wrong-headed digital advertising tax, several states have been issuing guidance as to how their generally-imposed sales taxes apply (or not) to high-technology transactions such as software as a service (SaaS). There will be more activity in 2022 as taxpayers seek certainty as to the taxability of what they are selling.
- Getting SaaSy: Mississippi proposed sales tax rule targets cloud computing
- Tennessee Department of Revenue finds cloud-based online platform not taxable
- Kentucky letter ruling says SaaS not subject to sales tax
- New York issues advisory opinion that creation and maintenance of mobile apps are nontaxable
- North Carolina Department of Revenue rules SaaS not subject to sales tax
- Delaware Unclaimed Property Act applies to cryptocurrency
Transfer Pricing
State tax administrators continue to pursue transfer pricing challenges associated with intercompany transactions. We covered several transfer pricing developments, including renewed activity by the MTC to organize state efforts.
- Legal Alert: MTC SITAS Committee meeting – transfer pricing group holds first meeting since 2016
- Legal Alert: Louisiana Department of Revenue implements Managed Audit Program to address transfer pricing issues
- California’s attempt to extend transfer pricing to sales tax
- Transfer pricing and its effects on state tax