The Ohio Department of Taxation recently proposed amendments to its rule governing the determination of resident status for personal income tax purposes.  The current rule identifies factors considered in making a determination of an individual’s domicile (e.g., the number of contact periods in Ohio during a taxable year and the individual’s activities in tax years preceding or following the year(s) in issue) and factors not considered in making that determination (e.g., the location of financial institutions where an individual holds an account, the location of an individual’s professional service providers, and the location of an individual’s health care providers).  According to the Department’s website, the purpose of the revision is to “modernize the factors that can, and cannot, be considered when determining a taxpayer’s residency status” and “increase the rule’s readability, clarity, and brevity.”

The proposed amendments add the jurisdiction in which an individual is registered to vote and the failure of an individual to meet requirements related to a statutory presumption of domicile outside the state to the list of factors the Department may consider in determining domicile.  The draft revisions also rearrange and streamline the list of factors the Department may not consider in making its determination.  Lastly, the new rule streamlines the language for counting contact periods an individual has with Ohio.  To this end, express references to the preponderance of evidence standard for proving contacts with the state and presumptions in favor of the Department with respect to the same in the current rule have been removed.

In an effort to curb the Texas Comptroller’s recent expansion of the tax imposed on data processing services, the Texas legislature has specifically excluded payment processing services from sales and use tax. Texas taxes data processing services, which includes “word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production . . . and other computerized data and information storage or manipulation.” Tex. Tax Code § 151.0035. The Texas Comptroller has traditionally excluded merchant credit/debit card processing from the definition of “data processing services” but has recently begun questioning this exclusion according to the Sponsor’s Statement of Intent. The Comptroller’s change in policy to subject payment processors to tax could have resulted in “Texas businesses paying hundreds of millions of dollars in additional taxes each year.” On June 14, 2021, Texas Governor Greg Abbott signed S.B. 153, which specifically excludes from the tax on data processing certain payment processing services, such as (i) “services exclusively to encrypt electronic payment information for acceptance onto a payment card network”, or (ii) settling an electronic payment transaction by a downstream payment processor, a point of sale payment processor, a taxpayer in the business of money transmission, a federally insured financial institution, and a payment card network.

On June 17, 2021, the Standing Subcommittee of the Multistate Tax Commission’s (“MTC”) Uniformity Committee discussed a potential new project recommendation for the Uniformity Committee. During the meeting, MTC staff presented a draft memo outlining the pros and cons of creating a uniform model statute for the taxation of digital products. Ultimately, however, the Committee voted to recommend a survey of the taxation of digital products in the form of a white paper rather than a uniform law.

The scope of the proposed project is fairly broad and will survey states on a number of issues including:

  • How the state defines and describes a “digital product” and other applicable terms,
  • What specific types of digital products the state currently taxes,
  • How the state addresses a bundled transaction, and
  • How the state sources digital products, particularly where digital products have multiple points of use.

Citing its prior work on the market based sourcing regulations for income tax purposes, MTC staff asserted the MTC was particularly well suited to provide important thought leadership on sourcing of digital products. The Committee did, however, recognize the Streamlined Sales States Governing Board’s (“SSTGB”) long history of working on these issues, and MTC Staff committed to working closely with the SSTGB as it develops the white paper. Importantly, both MTC and SSTGB staff recognized the importance of including the business community in the development of the white paper.

The Committee also voted to narrow the scope of the proposed project and it will not consider the state taxation of cryptocurrency or non-fungible tokens as part of this project—both of which will be dealt with in a separate undertaking.

The development of the white paper will be an ongoing effort, and Eversheds Sutherland attorneys plan to participate in the development of the white paper and provide timely updates.

On June 15, 2021, the Multistate Tax Commission (“MTC”) held its first meeting to discuss the “Project on State Taxation of Partnerships.” The work group intends to focus on the “underdeveloped” state partnership tax rules and provide guidance and structure in the state partnership taxation realm.

During the first meeting, the work group focused on an issue outline drafted by MTC staff that contemplates areas where state partnership taxation rules either differ from one another or lack specificity. Based on feedback received from the states and the MTC Standing Subcommittee, the issue outline is divided into three general categories: (1) issues related to taxing partnership income, (2) issues related to gain or loss on the sale of a partnership interest, and (3) administration and other issues.

  1. Issues Related to Taxing Partnership Income. The issues outline discusses the states’ conflicting jurisdictional rules that affect administrative obligations imposed on partnerships. Similarly, it discusses the confusion regarding nexus rules for nonresident and corporate partners as well as how the factor presence nexus standard might apply. In addition, the outline notes that the states have distinct sourcing and apportionment rules, exceptions and exemptions, transfer pricing statues and state income adjustments that should be contemplated in pursuit of uniformity, and the working group’s discussion seemed to hone in on the need for guidance in the transfer pricing area.
  2. Issues Related to Gain or Loss on Sale of a Partnership Interest. The issue outline discusses that nexus is considered when determining whether a state can tax gain or loss on the sale of a partnership interest. Likewise, the outline notes that sourcing and reporting rules regarding the sale of partnership interest could be harmonized.
  1. Administration and other Issues. The issue outline concludes that the states’ rules lack guidance on the application of tax credits for partnership income, centralized audits and the functionality of the state and local tax deduction cap.

The MTC will hold meetings every two weeks to continue their work on this issue. As a result of the work group’s ongoing discussions, it is likely that the states will start paying increased attention to rules and regulations dealing with the taxation of partnership income.

 

The Illinois Department of Revenue Issued letter ruling ST 21-0001, addressing the retailer’s occupation tax and use tax treatment of a company’s fleet management service. The company provided a web-based management service for the administration, management, and record-keeping of motor vehicle fleets. The company used a Software as a Service (SaaS) model that allows customers to remotely access software applications. Customers have the option to download the company’s application or to use the platform through the internet. However, customers can enter information into the application only when connected to the internet. Customers can view fleet management data through a web portal on their computers or through the application. Illinois taxes electronically delivered software but does not tax SaaS models. The Department concluded that computer software provided through a cloud-based delivery system in which the software is never downloaded and is only accessible remotely, is not taxable in Illinois. Revenues received from subscriptions of SaaS model web-based fleet management services are not subject to tax. The Department also concluded that an application downloaded for free by the service subscriber from a server located in another state is not subject to tax as the taxpayer has not exercised power or control over the property in Illinois and the customer would not have made any taxable use of the property in Illinois.

This week, the SALT Shaker Podcast team welcomes Pilar Mata, the new Executive Director of TEI, for a discussion with host and Eversheds Sutherland Partner Nikki Dobay. Pilar and Nikki cover TEI’s work, including its focus on administrative and structural tax matters, its continuing education initiatives and how TEI expects to return to in-person meetings. Then, they get personal – chatting about their passion for state tax policy work.

The Eversheds Sutherland State and Local Tax team has been engaged in state tax policy work for years, tracking tax legislation, helping clients gauge the impact of various proposals, drafting talking points and rewriting legislation. This series, which is focused on state and local tax policy issues, is hosted by Nikki Dobay, who has an extensive background in tax policy.

Questions or comments? Email SALTonline@eversheds-sutherland.com.

 

 

 

 

 

 

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This week’s question: Which Midwestern state’s tax court recently upheld a pharmacy benefit management company’s sourcing of its receipts?

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

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The Department of Taxation and Finance recently issued advisory opinion numbered TSB-A-20(63)S (dated November 17, 2020) in which it concluded that the primary purpose of a marketing-consulting service was a nontaxable service, even though the taxpayer’s customers had access to software. The taxpayer assists automotive industry clients in designing and launching effective marketing campaigns and uses its proprietary software to gather sales data from its clients to identify marketing success rates and trends, which it then uses to create analytical models to develop new advertising campaigns. The taxpayer’s clients use a secure website to access personalized data reports and the results of their own campaigns, but cannot access data or reports related to any of the taxpayer’s other clients. In concluding that the taxpayer’s service was a nontaxable service, rather than the provision of a taxable information service or the taxable sale of pre-written computer software, the Department looked to the primary function of the service—the creation and development of advertising campaigns. While clients had access to the secure website to communicate with the taxpayer, and to view only their own reports and data, that access was not the primary purpose of the transaction, and was not sufficient to find the service taxable.

On May 24, 2021, the Magistrate Division of the Oregon Tax Court denied a taxpayer’s motions for summary judgment, finding the taxpayer’s claim for refund was filed beyond the statute of limitations.  Specifically, on December 4, 2015, the taxpayer filed its Oregon corporation excise tax return for tax year end February 28, 2015. The taxpayer subsequently filed an amended federal tax return, which the IRS accepted and issued a refund for on January 8, 2019 (without issuing a Revenue Agent’s Report). The taxpayer then filed its amended Oregon corporation excise tax return on February 1, 2019, reporting those same changes.  The taxpayer’s amended return was filed three years, one month and 28 days after the taxpayer’s originally filed Oregon return.

Oregon law generally requires a taxpayer file a refund claim within three years after the original return was filed, pursuant to ORS § 314.415(2)(a). An exception to the general rule is found in ORS § 314.380(2)(b), which provides that a change or correction made by the IRS or another state revenue authority giving rise to a claim for refund will extend the general statute of limitation. ORS § 314.380(2)(c) requires a taxpayer to file an amended Oregon return to report a change in Oregon tax liability based on the filing of an amended federal or other state return; however, that provision makes no reference to a claim a refund.  Considering these provisions, the court concluded that the filing of the taxpayer’s amended Oregon return was governed by ORS § 314.380(2)(c), based on the filing of the federal amended return, and that although the taxpayer filed within the 90 day filing requirement, that provision of ORS § 314.380 does not provide a statute of limitations extension for refund claims. Thus, the court determined that the taxpayer’s claim for refund was bared by the general claim for refund provision (ORS § 314.415(2)(a)) since the taxpayer’s amended Oregon return was filed more than three years after the date its original return was filed.

Bed Bath & Beyond Inc. v. Dep’t of Revenue, TC-MD 200272G, (Or. Tax Ct., Mag. Div., May 24, 2021) (unpublished)