A recently-introduced bill in the West Virginia Senate would impose a new tax on companies that provide digital advertising services. SB 605, introduced on March 9 by Senator Rupie Phillips (R-Logan 07), would impose a gross receipts tax on the annual gross revenues of a taxpayer derived from digital advertising services in the state.

“Digital advertising services” are defined in the bill as “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.” “Digital interface” means any type of software, including a website, part of a website, or application, that a user is able to access.

Annual gross revenues from digital advertising services are determined by an apportionment fraction comprised of the taxpayer’s gross revenues derived from digital advertising services in West Virginia compared to digital advertising services in the United States. The bill directs the West Virginia Tax Commissioner to promulgate sourcing regulations.

The digital advertising gross revenues tax rate proposed by the bill is

  • 2.5% of the assessable base for a party with global annual gross revenues of $100,000,000 through $1,000,000,000;
  • 5% of the assessable base for a party with global annual gross revenues of $1,000,000,001 through $5,000,000,000;
  • 7.5% of the assessable base for a party with global annual gross revenues of $5,000,000,001 through $15,000,000,000; and
  • 10% of the assessable base for a party with global annual gross revenues exceeding $15,000,000,000.

The bill requires returns to be filed by each party that has at least $1 million in annual gross digital advertising revenues derived in West Virginia in a calendar year. Returns for this tax would be due April 15, and estimated quarterly returns would be due on June 15, September 15, and December 15 each year.

The proposed tax in SB 605 strongly mirrors Maryland’s recently-enacted digital advertising tax legislation, which is subject to various and well-documented legal challenges.

The South Dakota Department of Revenue issued updated guidance regarding the application of sales tax to sales of Internet access and internet-related services. In particular, the Department added “Internet e-mail services” and “web hosting” to the list of exempt Internet-related services. However, the Department removed “live chat or conferencing fees” from the list. The Department also explained remote sellers’ and marketplace providers’ South Dakota sales tax collection and remittance obligations.

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This week’s question: What pending state house resolution urges a governor and state revenue department to devise a plan to allow wealthy individuals to voluntarily pay more money to the state?

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On March 6, a bill to tax capital gains passed the Washington state senate. S.B. 5096, introduced on Jan. 6 by state senators Hunt Robinson and Wilson Nguyen, would impose an excise tax equal to seven percent of a Washington resident’s capital gains, starting January 1, 2022.

Only individuals are subject to the tax, and the bill exempts an individual’s first $250,000 of adjusted capital gains. “Adjusted capital gains” are federal net long-term capital gains with various specified modifications based primarily on Washington tax exemptions and allocation factors.

The first $350 million in revenue raised by this new tax each fiscal year are earmarked for the state’s education legacy trust account. The next $100 million collected annually would go toward the general fund, and the rest of the revenues would be placed in a “taxpayer fairness account” used “to offset existing tax burdens via policies such as the funding of the working families’ tax exemption.”

The bill, as amended, contains several carve-outs for this new tax, such as the sale of:

  • Real estate.
  • A controlling interest in an entity only to the extent that any long-term capital gain or loss from such sale or exchange is directly attributable to the entity’s interest in real property and the sale or exchange was subject to real estate tax.
  • Certain retirement accounts and employee benefit plans.
  • Assets under imminent threat of condemnation proceedings.
  • Depreciable property under IRC Sec. 167(a)(1) or property that qualifies for expensing under IRC Sec. 179.
  • Timber, timberland, or the receipt of capital gains as dividends and distributions from related real estate investment trusts.
  • Goodwill from the sale of an auto dealership.
  • The sale of a qualified family-owned small business.

The bill also includes a residency test for determining whether an individual qualifies as a statutory Washington resident, and apportionment provisions for capital gains. If passed by the House and signed by the Governor, the bill is expected to be the subject of a court challenge (as many see this as an income tax in violation of Washington case law) and/or referred to voters.

Earlier today, the Maryland Senate passed S.B. 787, Digital Advertising Gross Revenues Tax and Tobacco Tax – Alterations and Implementation, on third reading (46-0). As amended, S.B. 787 makes the following relevant changes to the digital advertising tax:

  1. Exempts advertisement services on digital interfaces owned or operated by or operated on behalf of a broadcast entity or news media entity;
  2. Prohibits taxpayers from directly passing on the cost of the digital advertising tax to a customer who purchases the digital advertising services by means of a separate fee, surcharge, or line-item;
  3. Delays the start of the digital advertising tax to January 1, 2022; and
  4. Designates the bill as an emergency measure, meaning that it will take effect when enacted, rather than 30 days after the legislative override of any Governor veto.

S.B. 787 is scheduled to be introduced in the House of Delegates on Monday, March 8, 2021.

In this episode of the SALT Shaker Podcast, host Chris Lee discusses a New York letter ruling concerning sales tax treatment of a database service, a New York Tax Appeals Tribunal decision concerning residency for individual income tax, an Illinois letter ruling addressing sourcing of sales for sales tax and a California Office of Tax Appeals decision concerning the sales tax treatment of ultrasound services.

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At a March 4, 2021 meeting of the California Franchise Tax Board’s (FTB) three-member Board, FTB Staff announced on the record that a Board hearing on an alternative apportionment petition is not required to exhaust administrative remedies. The announcement was made during Staff’s recommendation to the Board to begin the formal regulatory process to amend FTB Regulation 25137 and establish detailed procedures for such petitions. The announcement constitutes a surprising reversal of the FTB’s longstanding – but unwritten – policy regarding taxpayer petitions for relief under California’s alternative apportionment statute, California Revenue and Taxation Code section 25137. It remains to be seen if the FTB will issue a written notice in line with FTB Staff’s on the record remarks.  Notably, the proposed regulatory amendments are silent on the exhaustion issue. Nevertheless, based on the remarks, taxpayers seeking alternative apportionment may no longer feel pressured to go before the Board in an open hearing prior to bringing an appeal before the Office of Tax Appeals or a refund action in court.

On February 22, 2021, the Georgia House of Representatives introduced H.B. 594, which would impose the Georgia sales tax on digital goods or services. The bill amends the definition of tangible personal property, subject to sales tax, to include “digital goods or services.” It defines digital goods or services to include: (1) specified digital products or prewritten computer software delivered electronically to an end user, (2) a digital code that provides a purchaser with a right to obtain one or more specified digital products (excluding gift cards), (3) specified digital products or prewritten computer software for which rights may be permitted for access or use and for which possession is maintained by the seller or a third party, and (4) rights, licenses, or benefits delivered electronically to enhance, maintain, update, renew, upgrade, or expand benefits for specified digital products or prewritten computer software. However, the bill does not specifically repeal O.C.G.A. 48-8-3-(91) which provides an exemption for “sales of prewritten software which has been delivered to the purchaser electronically or by means of load and leave.” A specified digital product includes digital: audiovisual works, audio works, books, artwork, photographs, periodicals, newspapers, magazines, video greeting cards, audio greeting cards, or video games. If passed, this law would become effective on July 1, 2021 and would be applicable to transactions occurring after that date.

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This week’s question: Which state is considering enacting a wealth tax on individuals with net assets worth $50 million or more?

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

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On February 19, 2021, the New York Senate introduced S4959, which would impose a monthly excise tax on the collection of the consumer data of individual New York consumers by commercial data collectors. The tax rate varies based on the number of New York consumers the commercial data collector collects data on within the month, ranging from $0 per month (less than or equal to one million New York consumers) to $2,250,000 per month plus 50 cents per month on the number of New York consumers over ten million (over ten million New York consumers).

“Commercial data collector” is defined as “a for-profit entity that: (i) collects, maintains, uses, processes, sells or shares consumer data in support of its business activities; and (ii) collects consumer data, other than consumer contact information, on more than one million individual New York consumers in a month within the calendar year.” “Consumer data” is defined as “any information that identifies, relates to, describes, is capable of being associated with, or could reasonably be linked with a consumer, whether directly submitted to the commercial data collector by the consumer or derived from other sources.”

If passed, the tax would apply to all tax years commencing on or after the first day of the first month that begins more than six months after the law takes effect.