On January 14, 2021, California’s Supreme Court concluded in Vasquez v. Jan-Pro Franchising Int’l, Inc. (2021) 10 Cal.5th 944, 273 Cal.Rptr.3d 741, 478 P.3d 1207 that its Dynamex decision and its use of the so-called ABC test, later codified after the passage of Assembly Bill 5, applies retroactively.  The Vasquez holding subjects taxpayers, potentially even those currently protected by enumerated carve-outs, to years of state employment tax liability (and so much more!) before Dynamex was codified by AB 5.  See Cal. Labor Code §§ 3351, 2750.3 and Cal. Unemp. Ins. Code §§ 606.5, 621.

For context, AB 5 passed the California Legislature and was signed into law by Governor Gavin Newsom in September 2019.  The legislation codified Dynamex, which applied the “ABC” test for certain worker classification purposes.  The ABC test requires that a person providing labor or services for remuneration be considered an employee rather than an independent contractor unless the hiring entity demonstrates that the person is: (A) free from the control and direction of the hiring entity in connection with the performance of the work; (B) the person performs work that is outside the usual course of the hiring entity’s business; and (C) the person is customarily engaged in an independently established trade, occupation, or business. AB 5 generally expanded the application of the ABC test described in Dynamex to the Unemployment Insurance Code (CUIC), the wage orders of the Industrial Welfare Commission, and the Labor Code, subject to numerous exemptions.

If a hiring entity cannot satisfy each prong of the ABC test, California law classifies the worker as an employee and the following provisions of the CUIC apply to that employment relationship – wage withholding, unemployment insurance contributions, state disability insurance withholding, and employment training tax.  And, of course, there are numerous non-tax issues that flow from an employment determination under the ABC test, such as minimum wage payment, overtime pay, meal and rest breaks, reimbursement of necessary business expenses, and payment of workers compensation benefits.

While AB 5 generally applies the three-part ABC test for determining a worker’s classification, the law provides over fifty specific carve-outs and establishes different standards and tests for certain professions, occupations, and industries.  One of particular note is the carve-outs provided by the passage of Proposition 22, on California’s November 2020 ballot, for app-based rideshare and delivery drivers.

California’s Office of Tax Appeals issued a non-precedential decision on the state’s taxation of restricted stock units (RSUs), affirming the Franchise Tax Board’s “grant-to-vest” allocation method. In Appeal of Prince, the OTA approved the FTB’s long-standing position that nonresident income from RSUs should be allocated to California based on the employee’s working days in the state during the period from the date the RSUs were granted to the date the employee recognized income when the RSUs vested.

From 2007 to 2010, the taxpayer received six grants of RSUs as compensation from his California employer. The RSUs all vested in 2012, two years after the taxpayer became a California nonresident after moving abroad. Originally reporting the full value of the RSUs on his California nonresident return, the taxpayer subsequently filed an amended return and claimed a refund based on the stock price when he left California. On audit, the FTB applied the grant-to-vest allocation to determine California source income from the RSUs.

The taxpayer argued the FTB’s allocation method was not reasonable because the RSUs “sky-rocketed” in value after he left California, and his personal services directly contributed to the stock’s appreciation. But, the OTA rejected this “in-state appreciation” argument because the taxpayer did not provide enough evidence showing his services as a nonresident had a significant impact on the stock’s value increase after 2010. Rather, the evidence showed that the taxpayer’s income from the RSUs was equally attributable to the taxpayer’s services provided to his employer throughout the entire vesting period. The OTA noted that, while FTB’s working days formula is not mandatory in every case, it was appropriate here based on the facts.

Finding the taxpayer failed to meet his burden of showing that the FTB’s allocation method was not “inherently arbitrary” and did not “yield[] an unreasonable result,” the OTA explained that the RSUs should be taxed by California based on the grant-to-vest allocation method, describing the method as “reasonable” and “consistent with California law.”

The North Carolina Department of Revenue issued a private letter ruling, concluding that subscription fees for a Software as a Service (SaaS) product are non-taxable. The taxpayer licenses a cloud-based SaaS platform for customer engagement and marketing, which customers access via the Internet.  The taxpayer charges customers a subscription fee for monthly access. The Department states within the ruling, that the state “does not currently impose sales and use tax on revenue from access to cloud based software accessed electronically via an internet connection.” Because “the subscription fees do not provide Taxpayer’s customers the right to download, copy, or modify the software, and the software is not transferred to the customers[,]” the Department concluded that the fees were not subject to sales and use tax.

In this episode of the SALT Shaker Podcast policy series, Doug Lindholm, president and executive director of the Council On State Taxation (COST), joins host Nikki Dobay to discuss sales tax base and whether expansion of that base is modernization.

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 Partner Nikki Dobay, who has an extensive background in tax policy.

Questions or comments? Email SALTonline@eversheds-sutherland.com. To review articles referenced in the discussion, see below:

  • Karl Frieden and Doug Linholm, S. State Sales Tax Systems: Inefficient, Ineffective, and Obsolete, Tax Notes State, (November 30, 2020)
  • Nikki Dobay, Sales Tax Base Expansion Is Not the Answer, Tax Notes State, (March 3, 2021)

 

 

 

 

Listen now: 

For a transcript of the podcast, click here.

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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: What southern county’s sales tax increase was recently struck down by a state supreme court as unconstitutional?

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.

Answers will be posted on Saturdays in our SALT Weekly Digest. Be sure to check back then!

On March 23, the State Intercompany Transactions Advisory Service (SITAS) Committee of the Multistate Tax Commission (MTC) met via videoconference for its first meeting since November of 2016. During the meeting, there was a presentation regarding the Committee’s history and goals going forward, discussion of training opportunities for states, discussion of the Committee’s information exchange agreement, and a review of survey results from a survey of Committee members.

Read the full Legal Alert here.

The New York State Department of Taxation and Finance issued an advisory opinion explaining that a taxpayer’s payments from nonqualified deferred compensation plans to nonresident former employees, after termination of employment of the nonresidents, constitute retirement income and are therefore not subject to New York personal income tax, income tax withholding, or reporting. The Department’s determination was based on the federal Pension Source Law, codified at 4 U.S.C. § 114, which provides that no state may impose an income tax on any “retirement income” of an individual who is not a resident or domiciliary of such state. Specifically, the Department determined that the nonqualified plans at issue are described in IRC § 3121(v)(2)(C) and meet the other requirements in 4 U.S.C. § 114(b)(1)(I), thereby qualifying as “retirement income” under the federal law. However, the Department also determined that payments made prior to termination of employment do not constitute retirement income for purposes of the Pension Source Law and therefore any income, gain, loss, or deduction derived from New York sources with respect to the distributions to the nonresident individuals are subject to New York personal income tax. Because these payments are considered wages for federal income tax withholding purposes, the Department concluded that the payments will also be considered wages for New York State withholding tax purposes. Therefore, the taxpayer is required to deduct and withhold New York State personal income tax from these payments, based on a reasonable estimate of the tax due, and to file a New York State withholding tax return and pay to the state the taxes required to be deducted and withheld.

Advisory Op. TSB-A-20(8)I, N.Y.S. Dep’t of Tax & Fin. (Oct. 6, 2020) (Published Feb. 19, 2021).

The New York Commissioner of Taxation and Finance issued an Advisory Opinion explaining that a petitioner’s service that allows customers to access its database and run reports of the customers’ data is not subject to sales tax.  The petitioner enters into agreements with customers to maintain their fleet of vehicles, and the petitioner compiles data on the maintenance performed on the vehicles.  For a separate monthly charge, the petitioner allows a customer access to the data through a website, and a customer can run reports regarding maintenance performed on its vehicles.  Under New York law, sales tax is imposed on the service of furnishing information, except for information “which is personal or individual in nature and which is or may not be substantially incorporated into reports furnished to other persons.”  The Commissioner explained that the petitioner’s database service is an information service, but determined that it was not subject to sales tax because the petitioner compiles and organizes information about a customer’s own vehicles, and each customer’s information is provided only to that customer and, therefore, the petitioner’s service is personal or individual in nature.

Advisory Op. TSB-A-20(38)S, N.Y.S. Dep’t of Tax & Fin. (July 28, 2020) (Published Feb. 19, 2021).

On March 22, 2021, the Georgia House of Representatives passed SB 185, which now heads to the Governor’s desk. The measure, which was previously unanimously passed by the state Senate, seeks to level the playing field in state tax litigation matters by reducing the level of deference accorded to the Department of Revenue’s interpretations of ambiguous laws. Specifically, SB 185 provides that “all questions of law decided by a court or the Georgia Tax Tribunal, including interpretations of constitutional, statutory, and regulatory provisions shall be made without any deference to any determination or interpretation, whether written or unwritten, that may have been made on the matter by the department, except such requirement shall have no effect on the judicial standard of deference accorded to rules promulgated pursuant to Chapter 13 of Title 50, the ‘Georgia Administrative Procedure Act.’” Accordingly, the legislation eliminates all subregulatory deference but makes no change to the current level of deference accorded (by judicial doctrine) to interpretations of the Department of Revenue within regulations that have been formally promulgated pursuant to the Georgia Administrative Procedure Act. The legislation would apply to tax cases commenced at the Georgia Tax Tribunal or a state Superior Court after the Governor’s approval or upon the bill’s becoming law without such approval if no action is taken by the Governor within 40 days after the end of the legislative session (Sine Die scheduled for March 31, 2021).

The reduction in administrative deference in SB 185 is similar to measures taken in recent years in Arizona, Arkansas, Florida, Mississippi and Wisconsin by legislation, ballot initiative, or judicial ruling. Furthermore, it aligns Georgia with the treatment of subregulatory deference at the federal level where the United States Treasury and the Internal Revenue Service stated in a 2019 Policy Statement that they will no longer argue for Auer or Chevron deference for any administrative guidance other than IRS regulations that are subject to public notice and comment and other statutory rulemaking procedures contained in the federal Administrative Procedures Act.

This legislation is primarily sponsored by state Senator Bo Hatchett and is the culmination of several years of efforts by the Metro Atlanta Chamber and state Representative Todd Jones and supported by the Coalition to Reform Administrative Deference. It further advances the goal of the Georgia Tax Tribunal, which was created by the state legislature in 2012, to establish an independent forum to settle disputes between a taxpayer and the Department of Revenue.

The Texas Court of Appeals held that a taxpayer’s refund claim sufficiently put the Comptroller on notice that the taxpayer claimed a manufacturing exemption. An electricity manufacturer filed a refund claim for sales taxes paid on various types of meters used in its business. The Comptroller denied the claim, and the taxpayer sought an administrative hearing. The administrative law judge concluded that the manufacturing exemption was not sufficiently raised within the deadline for the taxpayer to amend its statements of grounds. The taxpayer sought judicial review. The trial court: (1) rejected the Comptroller’s argument that the taxpayer had waived the opportunity to raise the manufacturing exemption claim; and (2) held that the manufacturing exemption applied to the taxpayer’s meters because they constituted “telemetry units related to step-down transformers.”

Texas law requires that a claim for refund “state fully and in detail” each reason or ground on which the claim is founded. The Comptroller contended that the taxpayer did not specifically assert that the legal basis of the refund claim was for telemetry units related to step-down transformers. Rather, the taxpayer cited to the relevant statute and mass quoted a list of numerous categories of exempted items, one of which was for telemetry units related to step-down transformers. Because the Comptroller did not know which specific category of exempt items was at issue, it claimed it could not determine the merits and validity of the refund claim.

Over two dissenting votes, the court of appeals rejected the Comptroller’s argument. The court found it to be sufficient that the taxpayer: (1) expressly referenced the manufacturing exemption and quoted the relevant statute in the statement of grounds; and (2) provided notice in the accompanying schedules, which referred to one of the relevant items as “mfg. equip. – 100% exempt” and referred to the applicable statute and rule.  Thus, the court concluded that the Comptroller was put on notice of the taxpayer’s manufacturing exemption claim.

The court also concluded that the manufacturing exemption applied to the taxpayer’s customer meters. These items were telemetry units related to step-down transformers – and thus not subject to sales tax – because the information collected and transmitted from the customer meters was used to analyze the step-down transformers’ performance, maintenance, and safety requirements.

Hegar v. El Paso Electric Co., No. 03-18-00790-CV (Tex. Ct. App. Mar. 5, 2021) (en banc).