On December 17, 2020, a California Court of Appeal in the state’s Fifth Appellate District reversed a Fresno trial court decision, which held the California Constitution’s requirement that local taxes be approved by a supermajority vote applies to taxes imposed by voter initiative.  The Fifth District followed in the footsteps of the First Appellate District, which reached a similar conclusion in June.  For background on these and related cases, see our special local tax edition of the Eversheds Sutherland SALT Scoreboard.

Drawing heavily on 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, the Court stated “[w]e fully agree with and endorse the holdings and reasoning of All Persons, and find that case controls the outcome here.”  Consequently, following the First District, the Fifth District Court held that Article XIIIA, section 4 of the Constitution, which provides that “Cities, Counties and special districts” may impose certain special taxes “by a two-thirds vote of the qualified electors of such district,” does not “impose[] a supermajority voting requirement on the electorate for passage of voter initiatives.” Next, the Court likewise found that Article XIIIC, section 2(d) of the Constitution, which precludes a “local government” from imposing, extending or increasing a special tax absent approval by a two-thirds vote, does not apply to taxes proposed by voter initiative. Again following its sister district’s lead, the Court applied the reasoning of the California Supreme Court in California Cannabis Coalition v. City of Upland (a case interpreting a similar provision of the state Constitution) to conclude that the text of Article XIII, section 2 applies only to actions taken by local government and “does not constrain the people’s initiative power.”  Finally, the Court rejected “the notion that all initiative petitions are transmuted into local government ‘impositions’” by virtue of the election process itself.

This is the second published appellate court decision applying the reasoning in Upland to validate a local special tax passed by only a simple majority.  With two appellate districts now reaching the same result, and with the California Supreme Court already passing on the opportunity to review the First District’s decision, the chances of the state’s highest court granting review here are slim to none.  While there are other “Upland” cases currently pending before the appellate courts, a proverbial third strike seems inevitable at this point.  We will keep watch on California localities and how they respond to what looks to be a lower threshold for enacting special taxes going into 2021. 

On June 30, 2020, the New York State Department of Taxation and Finance issued an advisory opinion stating that a clothing rental company’s monthly subscription fees are exempt from state sales tax. The taxpayer operated a clothing rental business, offering monthly subscriptions with fees ranging from $35 – $159 per month based on the number of garments a customer has in their possession at one time. For example, customers could rent one garment at a time for $35 per month; or five garments at a time for $99; or seven garments at a time for $129.

New York imposes sales tax on receipts from the rental of tangible personal property, however, pursuant to Tax Law § 1115(a)(30), footwear and clothing is exempt from the state sales tax provided that each item is sold for less than $110. The Department evaluated the taxpayer’s monthly subscription fees to see if they fell within the $110 price limit included in the sales tax exemption, and concluded that all of the taxpayer’s subscriptions were within this price limit. The Department noted that although the subscriptions for seven garments or more each month do in fact cost more than $110, those subscriptions include multiple garments and the cost to rent a single garment was below the statutory limit. Finally, the Department noted that local sales tax will still apply to the taxpayer’s subscription fees to the extent garments are delivered to customers in localities that have not elected to adopt this exemption.

N.Y. Adv. Op. TSB-A-20(26)S, N.Y.S. Dep’t of Tax. & Fin. (June 30, 2020).

The California Department of Tax and Fee Administration has informed the public that it intends to commence formal rulemaking to permanently adopt Emergency Sales and Use Tax Regulation 1684.5, Marketplace Sales. The regulation addresses issues regarding marketplace facilitators’ and marketplace sellers’ registration and tax collection obligations. The Department asks for interested parties to submit comments or suggestions, including proposed regulatory language, by January 15, 2021.

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: Name a New England Internet Tax Freedom Act (ITFA) case decided in September that involved a telecom company’s offer of screening software.

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

The prize for the first response to today’s question is a $20 UBER Eats gift card.

Answers will be posted on Saturdays in our SALT Weekly Digest. Be sure to check back then!

A Missouri legislator pre-filed House Bill No. 244, which would require, beginning January 1, 2022, use tax nexus for remote vendors if their cumulative gross receipts from sales of tangible personal property, digital goods, and services to purchasers in Missouri is at least $100,000 annually.  The bill would also require, beginning no later than January 1, 2022, marketplace facilitators to register with the Missouri Department of Revenue to collect and remit sales and use tax on sales made through the marketplace facilitator’s marketplace by or on behalf of marketplace sellers that are purchased in or delivered into the state.

On June 9, 2020, the New York State Department of Taxation and Finance issued an advisory opinion concluding that coupon clearing and processing products sold to advertisers that issue discount coupons and the retailers that accept them are not subject to New York sales and use tax. The taxpayers’ customers included both advertisers and retailers.  For both types of customers, the taxpayer managed coupon information and the monetary transactions connected with the coupons’ redemptions, including manual screening and transmission of coupon data to its servers for storage. As part of its product, the taxpayer also provided customers with access to prewritten software to enable each customer to run reports to view its coupon and payment data applicable to the customer. For its advertiser customers only, the taxpayer’s product included certain additional features, including review of coupons for fraud prevention, and its embedded software included additional functionality, including promotion planning analyses and a budget management function.

New York imposes sales tax on prewritten software and taxable services, including information services and protective services.  The Department analyzed each of the taxpayer’s products to determine whether they were taxable under these provisions. The Department first concluded that the taxpayer’s coupon clearing product for retailers – which processes coupons and obtains payment from the issuing advertisers – is not subject to sales tax. The product was not a taxable service and the prewritten software component was only an incidental part of the service. The Department then concluded that the multi-component coupon processing service for advertisers – which included fraud prevention services, along with the promotion planning analyses and budget management function benchmark data – also was not taxable. The Department treated the product as a single unit for sales tax purposes because it was sold as a standardized, integrated product and its components could not be purchased from the taxpayer separately. It concluded that the product is not subject to sales tax because it is not a taxable service and the prewritten software is only an incidental part of the entire service.

N.Y. Adv. Op. TSB-A-20(28)S, N.Y.S. Dep’t of Tax. & Fin. (June 9, 2020).

On October 23, 2020, the Massachusetts Appellate Tax Board ruled that capital gain from a Florida S corporation’s sale of a subsidiary Massachusetts LLC was subject to Massachusetts corporate excise tax and nonresident composite tax. The taxpayer contended that the U.S. Constitution’s Due Process and Commerce Clauses forbade Massachusetts from taxing the income because the LLC’s sale did not involve a minimum connection to Massachusetts or availment of the protections and benefits of Massachusetts law. The S corporation did not have any activities in Massachusetts, and none of its shareholders were Massachusetts residents. However, the Board concluded that the increase in value of the subsidiary was “inextricably connected to and in large measure derived from property and business activities in Massachusetts.” The activities that derived the gain included improved management and staffing of a call center business and expansion of product offerings. The Board ruled that these business activities “necessarily involved availment of the protection, opportunities and benefits given by Massachusetts” and these facets “supplied the requisite connection between Massachusetts and business activities that resulted in the” capital gain.

VAS Holdings & Investments LLC v. Commissioner of Revenue, Dkt. Nos. C332269, C332270 (Mass. App. Tax Bd. Oct. 23, 2020).

The New Mexico Court of Appeals held that a taxpayer’s refund claim was timely even though it did not comply with a requirement found in the Department of Revenue’s regulation.  Specifically, the court concluded that the Department’s regulatory requirement to provide a “fully completed amended return” was not required prior to the expiration of the statute of limitations, because the requirement was not part of the New Mexico statute.

Citing New Mexico Supreme Court precedent for the proposition that the Department may not impose additional requirements by regulation that would abridge or modify a statute, the court determined that the regulation at issue was invalid because the regulation’s sixth requirement has the effect of abridging the taxpayer’s right to pursue an otherwise timely refund claim.  The court noted that the hearing officer below did not address this case law, and instead evaluated the Department’s regulation based only upon its reasonableness.

Lastly, the court noted that the New Mexico Legislature subsequently amended the statute to include the amended-return requirement, with no indication that it intended the requirement to apply retroactively.

CIBL, Inc. & Subs. v. New Mexico Taxation & Revenue Dep’t, No. A-1-CA-37122 (Oct. 2, 2020)

The pandemic has changed the physical and economic environment in which restaurants operate. Although food delivery has long been popular for certain types of food, pandemic restrictions and consumer preferences hastened the expansion of food delivery for almost all food and meals. Food delivery can be done either through the restaurant itself or through unrelated third party online food delivery services. Restaurants without pre-pandemic infrastructure for deliveries are now increasingly relying on regional or national online or app-based food delivery services. Delivery, particularly through these online food delivery services, unearth new challenges for restaurants’ compliance with state sales tax laws.

In this article published by Modern Restaurant Management, Eversheds Sutherland Partner Jonathan Feldman and Associate Alla Raykin discuss the new challenges for restaurants’ compliance with state sales tax laws.

Companion bills recently introduced in New York State (A. 11180 and S. 9112) would impose a temporary tax on businesses that provide broadband internet access service.  Revenues generated from the tax would be earmarked to fund the provision of broadband internet access services to students in the state during the COVID-19 pandemic.

The tax proposal would assess an “annual charge” on a provider’s “gross intrastate telecommunication revenue”— which remarkably is undefined.  Also astonishing is the lack of a tax rate — the New York State Department of Taxation and Finance is directed to determine the applicable rate “in consultation with the state education department” in order to fund the bills’ mandate to provide “high-quality internet access” to eligible students in the state.

Another unfortunate — and likely unconstitutional — component of the tax proposal is a prohibition that bars an internet access service provider from passing through the tax to customers “as a fee, charge, increased service cost, or by any other means.”  Finally, and somewhat more positively, the proposal contains a self-terminating provision that automatically repeals the tax on the last day of the school year in which Governor Cuomo’s declaration of an emergency related to the COVID-19 pandemic terminates.

The Eversheds Sutherland SALT Legislative Insider policy team will continue to track this and other New York tax legislative proposals in what is certain to be a very busy 2021 legislative session. The Eversheds Sutherland SALT Legislative Insider platform tracks state and local legislative developments and provides policy insights from the Eversheds Sutherland SALT Team to help you navigate evolving legislative developments with real-time policy insights. The platform offers customizable services to ensure you are aware of tax proposals that are of the highest impact to your company.

For more information about SALT legislative proposals or to learn about tracking bills with our SALT Legislative Insider platform, please contact the Eversheds Sutherland SALT Team.