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.

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.

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.

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.

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.

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.

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.

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.

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.