The Ohio Board of Tax Appeals found that banking software was subject to sales tax in Cincinnati Federal Savings & Loan v. McClain, Case No. 2018-2247 (December 22, 2020). The banks purchased software for their online banking system. After initially paying tax on the purchases, the banks filed refund claims, claiming that the software was exempt as either: (i) customized personal and professional services; or (ii) accounting services. The Commissioner and the Board disagreed. The Board found that although the software package was mixed and matched to meet the banks’ needs, it was not “customized” for the banks. Further, the software was not exempt accounting services because the vendor only provided banking software; it did not provide advice on tax or similar matters. While the software provided detailed information to the banks, the Board concluded that those services did not rise to the level of accounting services.

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 New Jersey appellate court case from September featured a taxpayer loss that may be an unexpected boon to other corporate taxpayers?

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!

On December 1, 2020, the Colorado Department of Revenue adopted amendments to its tangible personal property rule – Rule 39-26-102(15) – that will impose sales tax on sales of streaming digital goods. The Department considers these amendments to be a “clarification” of their tangible personal property definition. Now, per the amended regulation, “[t]he method of delivery does not impact the taxability of a sale of tangible personal property” and includes tangible personal property delivered by compact disc, electronic download, or Internet streaming.  In particular, where a purchaser pays a monthly subscription fee “to select and stream movies and television shows from a library of available titles[,]” sales tax will be due on that monthly fee. However, non-taxable computer software will continue to not be subject to sales tax. If a purchase includes both tangible personal property and services, sales tax will be due on the purchase price if the true object of the purchase is the tangible personal property.

On December 18, 2020, the Colorado Office of the Attorney General reviewed the rule and found “no apparent constitutional or legal deficiency in their form or substance.” Now that the Attorney General has reviewed the rule, it will be published in the January 10, 2021 Colorado Register and take effect 20 days later, on January 30, 2021.

The New York State Department of Taxation and Finance issued an advisory opinion explaining that a taxpayer’s charges for digital marketing services are not subject to sales tax. The taxpayer provides digital marketing services to its customers which allow the customers the ability to track the effectiveness of their marketing strategies. The services provided by the taxpayer included consulting and professional services, digital search marketing support, auction management services, campaign management support services, and email marketing services. The taxpayer’s services often included a license for third-party marketing software. The charges for the license of this software were separately stated on taxpayer’s invoices to its customers. The Department determined that the taxpayer was making sales of an advertising service, which is not subject to New York sales tax. With respect to the software licenses, the Department held that the taxpayer’s resale of the software is a sale of pre-written computer software subject to sales tax. Where the charges for the software are separately stated, on the invoice and the charge is reasonable in relation to the overall charge, only the separately stated charge is subject to sales tax.

Advisory Op. TSB-A-20(27)S, N.Y.S. Dep’t of Tax. & Fin. (June 30, 2020) (Published Dec. 7, 2020).

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).