Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

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This week’s question: Which state is considering a bill that would create a temporary “digital nomad” exemption for individual income taxes?

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 24, 2021, the Nevada Senate introduced Senate Bill No. 346, which would impose an excise tax on the retail sale of specified digital products to an end user in Nevada. “Specified digital products” is defined as electronically transferred digital audio works, digital audio-visual works, digital books, digital codes, and other digital products. “Other digital products” is defined as greeting cards, digital images, video or electronic games or news and prewritten computer software. The bill would also impose an excise tax at the rate of 5 percent of the gross receipts derived from providing direct-to-home satellite television service to customers in Nevada. The bill was referred to the Committee on Revenue and Economic Development. If passed, the tax expansion would take effect January 1, 2022.

The California Court of Appeal held that a county’s failure to comply with statutory notice requirements did not render an assessment a “legal nullity” that would excuse the taxpayer from the requirement to exhaust administrative remedies.

For property tax purposes, California requires a “Notice of Proposed Escape Assessment” (which levies a retroactive assessment to recapture any under-taxation in prior taxable years) be issued ten days before the assessments are enrolled. The assessor, however, mailed the taxpayer such Notices only five days before the assessments were enrolled. The taxpayer timely paid the property taxes assessed by the Notices, and filed a refund action in court arguing that because the Notices were issued less than ten days before enrollment the assessments were void and subject to refund.

The court held that the taxpayer’s claim was not reviewable because it did not exhaust its administrative remedies. For escape assessments, taxpayers are required to file an administrative request for reassessment and refund before filing a refund action in court unless the assessment is a “nullity as a matter of law.” The court concluded that the assessment may be treated as a nullity only when the real property at issue was not tax exempt, nonexistent, or outside the county’s jurisdiction—circumstances that did not exist in the taxpayer’s case.

LA Live Props. LLC v. Cty. of L.A., No. B298278 (Cal. Ct. App. Feb. 26, 2021).

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).