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:

The Iowa Department of Revenue issued a bulletin explaining its sales tax exemption for purchases of computers, along with the recently-enacted exemption for purchases of computer peripherals. The exemption applies to computers and computer peripherals used in processing or storage of data or information by an insurance company, financial institution, or commercial enterprise. The guidance provides a list of exempt items, including keyboards, monitors, hard drives, printers, docking stations, routers, and webcams. Taxable items include cables, hardware maintenance agreements, uninterruptible power supplies, and firewall hardware.

On January 21, 2021, the Idaho House Committee on Taxation introduced a market-based sourcing bill, which if enacted would change the state’s approach to sourcing the sales of certain multistate businesses. The state currently sources sales other than sales of tangible property to Idaho if the income-producing activity is performed in the state, or if the income-producing activity takes place in multiple states, based on the costs of performance.  Idaho continues to utilize a three-factor apportionment formula with double-weighted sales.

The proposed legislation, HB 19, would implement the Multistate Tax Commission’s market-based approach for sourcing sales receipts:

  • Sales, rental, licenses, or leases of real property are sourced to Idaho if the property is within the state.
  • Similarly, the rental, licensing, or leasing of tangible personal property is sourced to Idaho if the property is within the state.
  • The sale of a service is sourced to Idaho if and to the extent the service is delivered to a location in the state.
  • Intangible personal property that is rented, leased, or licensed is sourced to Idaho to the extent that the property is used within the state. Sales of intangible personal property that are contingent on the productivity, use or disposition of the property are treated the same way.
  • Sales of intangible personal property are sourced to Idaho if the contract right, government license, or similar intangible property authorizes the holder to conduct a business activity in a geographic area that includes part of the state.
  • All other receipts from the sale of intangible property are excluded from the numerator and denominator of the receipts factor.

The bill also includes a “throw out” provision, which would require taxpayers to exclude receipts from the denominator where the source state cannot be determined or if the taxpayer is not taxable in the state where the receipts are assigned. This provision is opposed by business groups. The bill would retroactively apply to January 1, 2021.

To ring in the New Year, this month’s SALT pet is not our typical cuddly mammal, but is a friendly part of the family all the same. Meet Greeny, the 4-inch goldfish!

Greeny belongs to Open Weaver Banks, Counsel in the New York office and joined the family in 2006 after Open received an urgent phone call from her daughter’s science teacher. Avery had a rough day, and was hoping she could take one of the class fish home with her as a result. Since that fateful call, Greeny has lived most of his life of luxury on the family’s kitchen counter. Fourteen years later (!) he was upgraded to a deluxe 10-gallon tank to better support his needs as a senior fish.

Greeny’s name might puzzle you, since his shiny, sleek green scales have evolved into his current orange color. But, that’s just how he has grown in the last 15 years! Beyond his daily routine of gobbling up fish flakes, he likes to get grooving once his owners play music, especially with a lot of percussion. He’s a big Richard Blade fan, and according to his family, has impressive lip sync abilities.

We hope Greeny continues to move and groove in 2021! We’re so happy to feature him as our January Pet of the Month.

Greeny and Stella

The topic of individuals leaving California, many of them for tax reasons, is a timely one. While some such moves are visible, the vast majority of these departures gather no publicity.

In an article for Bloomberg Tax, Eversheds Sutherland attorney Eric Coffill analyzes several recent decisions from the Office of Tax Appeals to see what it takes to prove an actual change in residency.

On January 13, 2021, the governor of Kansas released her budget report for fiscal year 2022, which would require marketplace facilitators to begin collecting retail sales and compensating use taxes on sales to Kansas customers on July 1, 2021. The budget also contains a proposal to impose sales tax on all sales of digital property and subscription services beginning July 1, 2021. Digital property and subscription services would include “digital audio-visual works, digital audio works, digital books, artwork, digital photographs and pictures, periodicals, newspapers, magazines, video, audio and other greeting cards, graphics, applications (desktop, mobile, web, and cloud-based), games (online, video, and electronic), digital codes, and streaming services.”