In February 2021, the Illinois Department of Revenue issued a Compliance Alert on the tax remittance obligations of remote retailers, marketplace sellers, and marketplace facilitators. It concluded that remote retailers and marketplace facilitators must collect and remit state and local retailers’ occupation taxes (ROT) administered by the Illinois Department of Revenue – including the Chicago Home Rule Municipal Soft Drink ROT. However, marketplace facilitators are not required to collect and remit other (non-ROT) taxes administered by the Department on sales made by marketplace sellers over the marketplace and remote retailers, including the Prepaid Wireless E911 Surcharge, Illinois Telecommunications Access Corporation Assessment, and Tire User Fee.

In another Compliance Alert, the Department clarified that the Metropolitan Pier and Exposition Authority Food and Beverage Retailers’ Occupation Tax– imposed on certain persons engaged in the business of selling food, alcoholic beverages, or soft drinks – must continue to be remitted by the restaurants. Marketplaces, including food delivery services, should not remit the MPEA Food and Beverage Tax.

Georgia’s income tax conformity bill, HB 265, unanimously passed the state House on February 9, 2021, and is now pending the Senate’s review. Georgia’s conformity to the federal Internal Revenue Code (IRC) is updated annually to adopt the most recent federal tax law changes. As such, HB 265 seeks to conform Georgia’s tax code to the IRC as of January 1, 2021 for taxable years beginning on or after January 1, 2020 with no further decoupling from existing Georgia law. By conforming to the Consolidated Appropriations Act, 2021, dated December 21, 2020, the legislation would resolve any uncertainty as to whether the expenses paid with forgiven Paycheck Protection Program loans would be deductible for Georgia income tax purposes.

In 2018, Georgia’s conformity bill adopted provisions reducing the state’s highest marginal rate from 6.00% to 5.75% for 2019, and provided for further reduction to 5.50% in 2020 upon approval by the General Assembly and the Governor. However, due to the upheaval caused by COVID-19 in the prior legislative session, the General Assembly did not take up implementing further rate reductions for 2020 and after.  While the current conformity bill (HB 265) does not include any rate reductions, it remains to be seen if other legislative proposals may reduce tax rates or provide other tax relief.

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’s tax tribunal recently considered a domicile and residency case involving an eye doctor who moved to the Middle East after a divorce?

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!

A digital advertising tax proposal (LC 3237) has been drafted in Montana at the request of a Republican legislator. The bill, currently in draft form, would impose a new 10 percent tax on the annual gross revenues derived from digital advertising services in Montana on each person with worldwide annual gross revenue from digital advertising services of $25 million or more beginning January 1, 2022.

The bill defines a “digital advertising service” broadly as “an advertisement service on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.” A “digital interface” would include “any type of software, including a website, part of a website, or application, that a user is able to access.”

Similar to Maryland’s digital advertising tax proposal, Montana’s proposal would use an undeveloped apportionment fraction to apportion the tax to Montana – the numerator of which is the annual gross revenue derived from digital advertising services in the state and the denominator of which is the annual gross revenue derived from digital advertising services in the United States.  The bill would permit the Montana Department of Revenue to adopt administrative rules to implement the tax, including how to source digital advertising service revenues to the state.

LC 3237 was drafted at the request of Republican Representative Jeremy Trebas.  The draft bill was delivered to Rep. Trebas on February 8 and must be introduced within two legislative days. Montana will now join several other states considering a tax on digital advertising including, Connecticut, Maryland, and New York.

If the bill is enacted, legal challenges will follow. The tax likely violates federal and constitutional law, including the Permanent Internet Tax Freedom Act and the Commerce Clause of the United States Constitution. The Eversheds Sutherland SALT team will continue to follow this proposal and provide updates.

Like other classic combinations before them, Moe and Larry go together like peanut butter and jelly! Read on to find out more about this month’s SALT pets belonging to Linda Klang, Senior Vice President at Lehman Brothers Holdings Inc.

 

 

 

Moe and Larry are 6-year-old domestic shorthair cats that joined the Klang household thanks to Linda’s niece, Sarah. Sarah was in New Orleans for an internship in 2014 and discovered a cat in her neighborhood gave birth to three kittens. After taking care of them for an entire summer, she successfully (and lovingly) snuck two of them on her flight back to New York, and gifted what she initially thought were two female cats to Linda and her husband, Mark.

Moe and Larry are tried and true brothers – unfortunately without a third brother named Curly – that like to pal around together, eat and occasionally sleep side by side. They will also horse around, but not to worry – no one gets hurt. When it comes to tricks, only Larry likes jump up on a chair or bed if Linda snaps her fingers and calls his name. Moe, meanwhile, has no time to entertain those requests.

When they aren’t after their next dose of catnip, they love to watch TV and run around the living room as fast as they can. Thanks to the work-from-home environment, they have become even more attached to Linda and Mark.

We’re happy to highlight this furry pair for our February Pet(s) of the Month!

The Massachusetts Appellate Tax Board (ATB) granted summary judgement for taxpayer U.S. Auto Parts Network, Inc. (U.S. Auto Parts), abating the Department of Revenue’s sales and use tax assessment based on a finding that the online auto parts seller had acquired “cookie nexus” with the state. The Department’s economic nexus regulation, the “Internet Vendor Rule,” was adopted nine months before the South Dakota v. Wayfair decision. The Department determined that with this regulation,  the pre-Wayfair physical presence nexus requirement is satisfied if sellers place “cookies” on the browsers of in-state customers or if they make apps available for in-state customers to download.  The Department continued to enforce this “cookie nexus” rule post-Wayfair.

The ATB’s one-page ruling did not provide its legal analysis or findings of fact – and indicated a more detailed decision is forthcoming.  U.S. Auto Parts had argued that “cookies” do not qualify as physical presence. It also argued that the assessment violated the Internet Tax Freedom Act and the Due Process clause. The ATB’s decision in this case is significant because previous litigation had failed to overturn the Department’s “cookie nexus” rule and its attempt to enforce an economic nexus rule pre-Wayfair.

U.S. Auto Parts Network, Inc. v. Commissioner of Revenue, Dkt. No. C339523 (Mass. App. Tax Bd. Jan. 28, 2021)

On December 2, 2020, a three-judge panel of California’s Office of Tax Appeals (“OTA”) issued a non-precedential decision ruling that a husband and wife remained domiciled in and residents of California for the 2013 tax year despite the husband leaving the state for an alleged “permanent” job in Alaska that lasted from April to July of that year. The taxpayers filed a joint 2013 California Resident Income Tax Return but subtracted wages earned by the husband when he was living and working in Alaska.  At audit, the California Franchise Tax Board found that the taxpayers were California residents during the entire year. On appeal the taxpayers argued they were no longer domiciled in California as of April 2013, when the husband “moved” to Alaska.

Basing its decision on the written record, the OTA concluded that the taxpayers did not provide any evidence demonstrating their intent to remain in Alaska permanently or indefinitely such that they did not surrender their California domicile. For example, the taxpayers did not provide any documents or other evidence showing that the husband’s job in Alaska was anything other than a temporary position or that the taxpayers searched for a permanent home during the four months the husband worked in the state. Further, despite the wife’s claims that she returned to California after traveling to Alaska “only to sell the family home, quit her job, and sever ties with her community for good,” the taxpayers did not produce any evidence that the taxpayers owned – as opposed to rented – a California home in 2013 or that the wife quit – or gave notice of an intent to quit – her California job in 2013. Instead, the evidence showed the wife continued to live in the taxpayers’ rented California home while the husband was working in Alaska and that both taxpayers lived in the home when the husband returned to California in July.

The OTA also explained that other than their unsupported assertions, the taxpayers did not provide any evidence demonstrating that their absences from California during 2013 were “for other than temporary or transitory purposes.” In addition to the lack of evidence regarding the husband being offered a permanent job and the taxpayers searching for a permanent home in Alaska, the taxpayers did not provide evidence showing that they established any significant connections in Alaska.  Accordingly, the OTA concluded that the taxpayers’ closest connections were with California, that their visits to Alaska were for temporary or transitory purposes, and that the taxpayers remained California residents during the entire year.

For an overview of California law regarding domicile and residency, see our prior post on “What Makes a California Resident?”

Appeal of W. Smoot and K. Smoot, 2021-OTA-041 (Dec. 2, 2020) (non-precedential)

On December 21, 2020, a three-judge panel of California’s Office of Tax Appeals (“OTA”) ruled in a non-precedential opinion that an ophthalmologist successfully abandoned his California domicile and became a California nonresident from May 25, 2013 through December 31, 2013 after moving to Saudi Arabia. For a brief overview of the various legal concepts involved in and tests applied during California’s residency analysis, see our prior post on “What Makes a California Resident?”

Here, the OTA found that the taxpayer moved to Saudi Arabia in May 2013 with the intention of staying indefinitely, despite the fact the taxpayer ultimately returned to California to reside in 2015. The panel based its ruling on a number of uncontroverted facts, including: the taxpayer’s marriage to his former spouse was irreparably broken when he moved, as the two had separated 20 months prior; the taxpayer sold his property in California, including his cars, and closed his California bank accounts; and the taxpayer rented an apartment in Saudi Arabia under a two-year lease, joined a mosque, found a job as an ophthalmologist, bought a new car, obtained a local driver’s license (valid for 10 years), and became engaged to a Saudi woman. The taxpayer supported his position with testimony from a number of individuals, including family members and work colleagues, which the OTA found to be credible and consistent.

The OTA rejected the Franchise Tax Board’s (“FTB”) argument that the taxpayer continued to be a California domiciliary and was in Saudi Arabia for a temporary and transitory purpose. The FTB’s principal contention was that the taxpayer remained a California domiciliary because his minor children continued to reside in the state during his absence. The OTA concluded that the taxpayer had no choice but to leave the children with their mother because she had commenced a dissolution action against him and would not allow the children to go to Saudi Arabia.  The FTB also noted that the taxpayer did not cancel his California voter registration, driver’s license, or license to practice medicine.  However, during the period the taxpayer resided in Saudi Arabia, “he did not vote in California, and neither his California driver’s license nor his California license to practice medicine came up for renewal.” Additionally, while the taxpayer passively maintained a medical license, he did not practice medicine in California from May 2013 through the end of the year. Lastly, the OTA found that the taxpayer’s use of his parents’ mailing address in California did not show an intention to return to California, but instead reflected the difficulty of forwarding mail to Saudi Arabia.

Appeal of A. Kahn, 2021 – OTA – 064 (Dec. 21, 2020) (non-precedential).

A taxpayer’s services measuring the effectiveness of advertising campaigns constitute taxable information services, according to a Jan. 14 ruling by the New York Division of Tax Appeals.

The taxpayer measured its clients’ advertising effectiveness using end user surveys. The taxpayer provided the resulting data to its clients with corresponding analysis. While the taxpayer retained the rights to copy, distribute, resell, modify and otherwise use the data it collected from end users, its clients were authorized to furnish the survey data to third parties. The taxpayer also offered a subscription-based ad effectiveness benchmarking product, which was powered by anonymized and aggregated results from the surveys. The benchmarking product allowed subscribers to compare the effectiveness of their advertising campaigns to industry peers.

The New York Division of Taxation audited the taxpayer and took the position that the taxpayer’s services constituted taxable information services under Tax Law § 1105(c). The taxpayer took the position that it furnished nontaxable consulting services where the information provided was merely a component of the service.

In ruling against the taxpayer, an administrative law judge held that the taxpayer’s services fell “squarely within the realm of Tax Law § 1105(c),” explaining that the “process of collecting, compiling and analyzing information is the very essence of an information service.” Additionally, the judge noted that the relevant regulation provides that  “[t]he collecting, compiling or analyzing information of any kind or nature and the furnishing reports thereof to other persons is an information service,” including, “analysis reports and product and marketing surveys.” 20 NYCRR 527.3(a)(2), (3).  Further, the fact that the survey data could be shared by the taxpayer’s clients and was included in the benchmarking product rendered the statutory exclusion for “the furnishing of information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to other persons” inapplicable.

In the Matter of Dynamic Logic, Inc. (By Kantar LLC, as Successor-in-Interest), DTA No. 828619 (N.Y. Div. Tax App., ALJ Det’n Jan. 14, 2021).