On January 29, Connecticut Rep. Josh Elliot, D-Hamden, and twenty-four other co-sponsors filed proposed HB 6187, which proposes to establish a 10 percent tax on the annual gross revenues derived from digital advertising services in the state for any business with annual worldwide gross revenues exceeding $10 billion. The proposed bill calls for the revenue of this new tax along with several other revenue-raising measures in the proposed bill to be used to provide a one-time direct payment of $500 to individuals who experienced economic hardships due to the COVID-19 pandemic and received unemployment compensation during certain periods in 2020.

Because Connecticut legislators may introduced legislation as a short statement in non-statutory language, HB 6187 lacks the formal statutory language normally expected. The Joint Committee on Finance, Revenue and Bonding will now consider the proposed bill and determine if it should be sent to the Legislative Commissioners’ Office for full drafting of the bill’s text.

Connecticut will now join those states considering a tax on digital advertising, including Maryland and New York.

In this episode of the SALT Shaker Podcast policy series, Partner Nikki Dobay discusses the recently released New York State budget with Michael Hilkin, Counsel in the New York office. There doesn’t seem to be a lot to see here for businesses, or is there? Although there aren’t any significant revenue raisers aimed specifically at businesses, there is a provision that would eliminate a very important appeal protection. This proposed adjustment would be a costly and time-consuming change to the New York State tax appeal process.

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 Partners Nikki Dobay, Charlie Kearns and Todd Lard, who each have extensive backgrounds in tax policy.

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

 

 

 

 

 

 

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State legislators have been actively proposing state tax legislation. In this webcast, Partners Jeff Friedman and Michele Borens provide an update on the latest legislative proposals across the country that will impact marketplace facilitators and sellers with Associate Sam Trencs.

Listen to the full webcast here, or view the presentation slides here.

After a successful trial-run, the Illinois Department of Revenue (IDOR) recently announced plans to expand its Audit Fast Track Resolution (FTR) program to general income tax disputes in October.

The FTR program allows for the expedited resolution of audit disputes through a conference with a neutral mediator while a case is still under the jurisdiction of the IDOR Audit Bureau. The IDOR launched the FTR program as a pilot in December 2018, targeting certain “cash businesses,” such as restaurants, that may lack formal tax record-keeping processes. The IDOR then made the program permanent in September 2020 and expanded its scope to all sales tax audits except for Motor Fuel Use Tax.

Officials from the IDOR told Bloomberg Tax that the decision to expand the program follows the successful resolution of 80 percent of FTR cases that have gone through the conference process. Although the FTR program has mostly resolved cases involving cash-based businesses, the IDOR expects the mix of participants to evolve as the program starts processing income tax disputes, Audit Bureau manager Roger Koss told Bloomberg Tax.

Illinois FTR Program Basics

The primary goal of the FTR program is to resolve disputed audit adjustments through a one-day conference with a neutral mediator, called an “FTR Facilitator.”

  • Currently, the IDOR will send a taxpayer a “Fast Track Eligible” notice, which triggers a 20 day deadline to file the FTR application via email.
  • If a taxpayer is accepted into the program, a mediation session, called an FTR Conference, is scheduled within 60 days.
  • The FTR Facilitator will notify the taxpayer of approval within 15 days after the filing of an application.

The single-day FTR Conference can be attended by the taxpayer’s authorized designee and will only cover the documents and issues presented during the audit. The FTR program is optional, allowing a taxpayer to withdraw at any time without losing statutory rights.

Statute of Limitations
The FTR application includes a waiver of the statute of limitations period that runs from the application filed date through 120 days after the issuance of a closing memorandum that formally ends the FTR process.

Mandatory Confidentiality Agreement
The FTR application contains a confidentiality agreement that must be executed at the time the application is filed.  A taxpayer must agree that any discussions, offers, counter-offers or proposed audit adjustments or resolutions are confidential and shall not be disclosed nor used as evidence or admissions in any subsequent administrative or judicial proceedings. Any violation of the agreement constitutes a material breach which may result in the voidance of any related FTR resolution and/or disqualification in subsequent participation in the FTR program.

Other FTR Program Considerations
Although the FTR program is an attractive option for taxpayers seeking to wrap up an audit and avoid the costs of litigation, acceptance is not guaranteed – the IDOR retains complete discretion regarding whether to accept a taxpayer into the FTR program. Reasons for rejection from the FTR Program include:

  • Untimely application;
  • Taxpayer’s failure to comply with the auditor’s document requests, or other taxpayer audit delays;
  • The presence of issues or evidence that are not part of the audit record;
  • Any audit-related criminal investigation by the state of Illinois;
  • The taxpayer seeks an offer in compromise based on an ability to pay.

Finally, the IDOR states that it may reject an application if “one or more of the audit issues sought for FTR resolution requires judicial interpretation or is otherwise reserved for litigation and not appropriate for FTR consideration.” This last open-ended consideration means that it remains to be seen whether the IDOR will accept FTR applications involving high-dollar disputes or complex issues.  It is also unclear whether the expansion of the FTR program will impact the willingness of auditors to resolve adjustment disagreements during the course of an audit, or if auditors will rely on FTR Facilitators to make difficult calls. We expect to see further guidance regarding the FTR program expansion later in the year.

On January 19, 2021, House Bill 1303 was filed, which would amend the Business and Occupation Tax to impose a tax of 1.8% on gross income of a business engaged in selling or exchanging personal data within Washington. The bill defines “personal data” to include any information that is linked or reasonably linked to an identified or identifiable natural person but does not include deidentified data, publicly available information or certain information sold by a state agency. “Gross income” subject to the 1.8% tax is calculated based on the ratio of Washington addresses (both physical and internet protocol addresses) in the personal data to all addresses, or if this information is not available, the ratio is based on Washington’s relative percentage of US population. This tax would become effective January 1, 2022.

On January 27, 2021, a California Court of Appeal in the state’s First Appellate District affirmed a San Francisco trial court decision which held the California Constitution’s requirement that local taxes be approved by a supermajority vote does not apply to taxes imposed by voter initiative. This is the second decision out of the First District to address the issue, with the Court reaching a similar conclusion last June. It also follows on the heels of a decision out of the Fifth Appellate District from December, wherein that Court likewise ruled the state Constitution’s supermajority requirement did not apply voter-initiated local special taxes. For background on these and related cases, see our prior coverage here and here.

The Court concluded that the First District’s June 30, 2020 opinion in City and County of San Francisco v. All Persons Interested in the Matter of Proposition C governed the outcome of the case, finding that decision to be “well-reasoned and sound.” The Court rejected attempts to distinguish the case from the prior opinion, including arguments related to the involvement of elective officials in the initiative process. Regarding the latter, the Court concluded that neither of the Propositions that added the constitutional provisions at issue “intended to constrain the initiative power when an official is involved in the initiative process.”

This is the third published appellate court decision (two from the same Appellate District) validating local special tax passed by only a simple majority.  Thus far, the California Supreme Court has shown no interest in granting review of these decisions. All eyes now turn to a case out of Oakland, where a trial court ruled the two-thirds vote requirement applies to voter-initiated local special taxes. That case is currently pending on appeal before a separate Division of the First Appellate District.  Is the proverbial strike three on its way? We’ll wait and see. And if it arrives, we’ll turn our attention to the California localities to see just how they respond. 

A “proposed bill” introduced in the Connecticut General Assembly (No. 5645) proposes the establishment of a tax on “social media provider companies,” which would be measured by “apportioned annual gross revenue derived from social media advertising services” in Connecticut. The proposed bill calls for the revenue from such tax to be partially dedicated to funding online bullying prevention efforts, training and research to address social isolation, and suicide prevention.

The legislation lacks formal statutory language because in Connecticut, legislators may introduce a proposed bill as a short statement in non-statutory language. A proposed bill is submitted to the relevant committee that has responsibility for the proposal’s subject matter (in this case, the Joint Committee on Finance, Revenue and Bonding), which may (or may not) take the concept in the proposed bill and draft it into formal statutory language.

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: Which state, known for its potatoes, has a recently-introduced market-based sourcing bill?

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!

The New York State Department of Taxation and Finance issued an advisory opinion concluding that a taxpayer’s e-mail and consulting services are not subject to New York sales tax. The service allows customers to remotely send e-mails using its platform. The Department concluded that it was an e-mail service not taxable as “Internet access” under the Internet Tax Freedom Act. The Department also concluded that: (1) a charge for multiple dedicated IP addresses is a non-taxable Internet access service; and (2) the consulting services of assisting customers with setting up their accounts correctly, managing large contact lists, and developing e-mail strategies (advice is provided orally or by video-conference) are not taxable because they are not information services.

On January 26, the South Carolina Department of Revenue issued Revenue Ruling #21-2, which provides guidance regarding the state’s conformity to Internal Revenue Code (IRC) Section 163(j).

IRC Section 163(j) Background:

  • For tax years beginning before January 1, 2018, IRC Section 163(j) limited business interest expense deductions for certain interest paid or accrued by corporations.
  • The Tax Cuts and Jobs Act of 2017 (TCJA) significantly altered IRC Section 163(j), limiting a taxpayer’s deduction for business interest expense (BIE) to the sum of 30% of the taxpayer’s adjusted taxable income (ATI), the taxpayer’s current year business interest income and certain floor plan financing interest expense (FFI).
  • The provision was further amended in 2020 by the Coronavirus Aid, Relief, and Economic Security (CARES) Act for taxable years beginning in 2019 and 2020, to adjust the limitation 30% BIE limitation to 50% of a taxpayer’s ATI, BII and FFI.
  • IRC Section 163(j) also contains interest expense carryforward provisions for disallowed expenses. These changes made by the TCJA were effective for tax years beginning on or after January 1, 2018.

South Carolina’s Tax Treatment

In October 2018, South Carolina enacted legislation decoupling the state from IRC Section 163(j) as amended by the TCJA.

Revenue Ruling #21-2 provides, that for tax years beginning after 2017, there is no South Carolina business interest tax limitation and no carryforward.  As such, any interest expense that cannot be deducted against income in the year incurred may create a South Carolina net operating loss, and any federal interest expense carryforward allowed for federal income tax purposes is disallowed for South Carolina income tax purposes and is treated as an addition to South Carolina taxable income.

Reference: South Carolina Department of Revenue, SC Revenue Ruling #21-2 (Jan. 26, 2021).

In case you missed it: More IRC conformity and TCJA developments: