In Notice 20-20, the Tennessee Department of Revenue addressed the implementation of S.B. 1778, which will require marketplace facilitators to collect and remit local occupancy taxes levied on short-term rental units beginning January 1, 2021. Marketplace facilitators must collect and remit the Tourist Accommodation Tax, the Hotel Occupancy Tax, and similar local occupancy taxes imposed on the rental of dwellings for less than 30 continuous days.

The Ohio Supreme Court held that under the Commercial Activity Tax (“CAT”), Defender Security Company’s (“Taxpayer”) gross receipts from selling alarm monitoring service contracts to ADT Security Services, Inc. (“ADT”) should be sourced to the location where ADT itself receives the benefit from purchasing these contracts, rather than the location of the ultimate consumer of the monitoring services. Taxpayer, an authorized dealer of ADT, sold and installed security systems in Ohio and entered into ongoing alarm monitoring service contracts with these Ohio consumers. Taxpayer would then sell the monitoring service contracts to ADT, and ADT would provide the monitoring services remotely from outside of Ohio. The issue before the Ohio Supreme Court was the proper sourcing for CAT purposes of the amounts Taxpayer received for ADT’s purchase of the Ohio service contracts.

Ohio’s catch-all sourcing rule applicable to the case requires that receipts be sourced in proportion to the purchaser’s benefit in Ohio and provides that the “physical location where the purchaser ultimately uses or receives the benefit of what was purchased” is the most important factor in the determination. The lower courts had agreed with the tax commissioner that the sourcing for the sale of the alarm monitoring contracts from the Taxpayer to ADT should, in effect, look through the contracts to the location where the ultimate alarm customer received the benefit of the alarm monitoring services. After confirming that the proper appellate standard of review was de novo and without deference due to the tax commissioner’s determination, the Ohio Supreme Court disagreed with the tax commissioner and the lower courts.

The Ohio Supreme Court reasoned that under the statute, the proper sourcing of ADT’s payments to the Taxpayer for the contracts should focus on the benefit ADT received from purchasing the contracts from the Taxpayer, rather than the benefit Ohio consumers received from ADT. The court explained that the physical location at which ADT uses and receives benefit from its purchase of the intangible contract rights was the location where it receives payments and performs the services, all of which occurred at the ADT offices and monitoring locations outside Ohio. Therefore, the receipts from ADT’s purchases of customer contracts were not Ohio receipts, and the Ohio Supreme Court ruled that Taxpayer was due a refund for CAT paid on the receipts.

Defender Security Co. v. McClain, Slip Op. No. 2020-Ohio-4594 (Sept. 29, 2020).

On November 5, the Uniformity Committee of the Multistate Tax Commission (MTC) met virtually—the first of its 2020 Fall Committee Meetings that will be held virtually throughout the month. The Eversheds Sutherland SALT group attended this meeting, where updates were provided on uniformity efforts, the RAR/partnership model and new projects, and approximately 20 states provided updates during the state roundtable.

The Committee MTC staff provided a few minor updates on the uniformity front, noting that the MTC was closely following the OECD’s Pillar One and Pillar Two Blueprints based on the OECD’s reliance on state-like sourcing and nexus rules. The OECD sourcing rules have some similarities with the approach taken by the MTC’s model apportionment regulations.

Read full Legal Alert here.

The New Jersey Division of Taxation issued a notice on November 5th solving the “trapped dividend exclusion” issue faced by many taxpayers as they prepared to file their first New Jersey combined Corporate Business Tax (CBT) returns for the 2019 year. The issue arose due to New Jersey’s adoption of combined reporting and its proposed method for calculating the dividend received exclusion. Specifically, a combined group that includes a member with a zero allocation factor would not be able to utilize that member’s dividend exclusion.

The Division issued its notice one day after Governor Murphy’s approval of a technical corrections bill, Assembly 4809, which among other things, amended the definition of “taxpayer” to include “any combined group filing a mandatory or elective New Jersey combined return.”

Read the full Legal Alert here.

In a pending precedential decision, the California Office of Tax Appeals (OTA) held that the California Department of Tax and Fee Administration (CDTFA) is bound to follow its own regulation and could not rely on its audit manual to disregard that regulatory authority.  Regulation 1595 provides that the agency will use “book value” as the selling price of tangible personal property for sales and use tax purposes where parties to the sale of a business do not otherwise agree to a selling price.  The regulation also sets forth how to determine book value.  However, CDTFA argued that book value is unreliable in this instance because it permitted an accelerated depreciation method and thus did not provide a reasonable indication of the true value of the taxpayer’s assets.  As authority for rejecting the regulatory derived book value, CDTFA argued that it is “bound to follow” its audit manual, which instructs that an auditor may disregard book value and instead value property based on “true value” under certain circumstances.  Disagreeing with CDTFA, OTA held that CDTFA is bound by its own regulation because there are no provisions in the regulation that permit a rebuttal or rejection of the regulatory presumption.  And thus, CDTFA may not turn to other valuation methods when book value is available.  OTA further concluded that the audit manual had no precedential value in an OTA appeal.

In re Micelle Lab’ys, Inc., 2020-OTA-290P (Cal. Off. Tax App., Aug. 12, 2020) (pending precedential).

Voters headed to the polls (or mailboxes) this Election Day not only to choose the next president of the United States but also to make decisions on a range of significant tax issues across the country.

Although voters in California and the Portland-Metro area struck down significant business tax increases and the voters of Illinois rejected a graduated income tax, San Francisco voters hammered the business community with a slew of new local taxes and changes to the City’s already existing taxes.  In addition, high-earners taxes have been approved in the Portland-area and likely Arizona, and app-based rideshare drivers will remain independent contractors for certain purposes in California. These are just a few of the measures that were on the ballot this Election Day.

Please read a full list in our Legal Alert here.

Voters in California headed to the polls (or mailboxes) this Election Day not only to choose the next president of the United States but also to make decisions on a range of tax policy questions.  From removing property tax protections for commercial properties to imposing new and increased business gross receipts taxes in San Francisco, voters weighed in on a range of significant tax measures in the Golden State.  Below is a summary of the significant tax ballot measures and the latest results.

Property Taxes

Behind in early returns.  California Proposition 15 proposed a split-roll property tax system by carving out commercial and industrial property worth more than $3,000,000 from the state constitution’s property tax limitations.  The initiative would not have changed the way residential property is valued and assessed for property tax purposes.  Commercial and industrial property, however, would have been reassessed at least once every three years at full market value (with certain exceptions) regardless of whether there was a change of ownership.  Revenues generated by the measure would have been used to fund local governments and schools.

Results: may fail but too close to officially call.  Currently, 99% of precincts have partially reported their vote (72% of the vote) with the results as follows:

  • 48.3% yes votes (5,593,236)
  • 51.7% no votes (5,993,478)

Fiscal Impact: proposed to raise up to $11.5 billion annually for local governments and schools and increase California property tax collections by about 20%.

This initiative proposed to remove commercial and industrial properties from property tax limitations established by Proposition 13 in 1978, which essentially froze property taxes in place throughout the state until an owner sold their land or property.  The measure is meant to apply to large commercial and industrial properties, as businesses with less than $3 million in aggregate real estate holdings in the state would not be subject to the new valuation method.  In addition to the significant opposition this measure received from the business community, the California Assessors’ Association also opposed the measure (talk about strange bedfellows), stating that county assessors are not equipped to handle the change in methodology from the historic approach under Proposition 13 to valuing commercial and industrial properties at fair market value on a regular basis.

Will likely pass.  California Proposition 19 amends the state constitution to allow California property owners who are over the age of 55, severely disabled, or victims of a wildfire or natural disaster to transfer their base-year value to replacement properties without regard for the replacement property’s location or value.  The proposition also limits the parent-child and grandparent-grandchild exclusion from change-in-ownership reassessment, thus increasing property tax revenues in the state.  The net revenue gain generated by this property tax increase is earmarked for fire services and reimbursement of counties with “negative gain” resulting from the amendment.

Results: will likely pass.  Currently, 99% of precincts have partially reported their vote (72% of the vote) with the results being as follows:

  • 51.5% yes votes (5,850,160)
  • 48.5% no votes (5,500,719)

Fiscal Impact: while some parts of the measure increase property taxes and others decrease property taxes, it is estimated that overall, the measure would result in a net gain and that property taxes for local governments and schools would increase by tens of millions of dollars each year and grow to a few hundred million dollars per year.

Worker Classification

Passed.  California Proposition 22 considers app-based drivers for rideshare and delivery companies to be independent contractors and not employees or agents and adopts labor and wage policies specific to app-based drivers and companies, including requiring rideshare and delivery companies to provide minimum hourly earnings guarantees, healthcare contributions, and occupational and accident insurance for drivers.  This initiative was proposed in response to legislation passed last year that extended employee classification to gig workers.

Results: passed. Currently, 99% of precincts have partially reported their vote (72% of the vote) with the results being as follows:

  • 58.4% yes votes (6,720,240)
  • 41.6% no votes (4,780,140)

Fiscal Impact: the initiative’s analysis states that there will be “[m]inor increases in state income taxes paid by rideshare and delivery company drivers and investors.”

Local Ballot Measures

Passed.  San Francisco, California Proposition F repeals the City’s Payroll Expense Tax and increases the Gross Receipts Tax rates applicable to various business activities.  The proposition also creates two “backstop” taxes, which would be imposed if pending judicial decisions invalidate certain taxes enacted by ballot initiative in 2018.  The proposition also amends the Charter of the City and County of San Francisco to reduce the annual registration fee for businesses with $1,000,000 or less in gross receipts.  Lastly, the charter amendment also expands the small business exemption to include businesses with $2,000,000 or less in gross receipts, but increases the registration fee for businesses with $1,500,000.01 to $2,000,000 in gross receipts who benefit from the small business exemption.

Results: passed (approximately 76% reporting)

  • 68.27% yes votes (219,205)
  • 31.73% no votes (101,885)

Fiscal Impact: estimated to generate approximately $97 million annually once fully implemented.

San Francisco is currently litigating the validity of two local ordinances passed by a simple majority in 2018 – the Homelessness Gross Receipts Tax Ordinance and the Early Care and Education Commercial Rents Tax Ordinance.  See our prior coverage here.  In the event the City loses these law suits, the backstop taxes under Proposition F are meant to provide sufficient additional general fund revenue for the City to refund businesses as necessary and provide ongoing revenue.  One backstop tax would increase the gross receipts tax on certain taxpayers for 20 years if the Homelessness Gross Receipts Tax Ordinance is invalidated in court.  The other backstop tax would impose a new general tax on the gross receipts from the lease of certain commercial space for 20 years if the Early Care and Education Commercial Rents Tax Ordinance is invalidated in court.

Passed.  San Francisco, California Proposition I amends the Business and Tax Regulations Code to double the real property transfer tax rate from 2.75% to 5.5% on transfers of property with a consideration or value of at least $10,000,000 and less than $25,000,000.  The initiative also doubles the real property transfer tax rate from 3% to 6% on transfers of property with a consideration or value of at least $25,000,000.

Results: passed (approximately 76% reporting)

  • 57.97% yes votes (187,900)
  • 42.03% no votes (136,233)

Fiscal Impact: estimated to generate tax revenues of approximately $196 million a year.

Passed.  San Francisco, California Proposition J repeals the parcel tax included in the Living Wage for Educators Act of 2018 (Proposition G) – which is the subject of pending litigation – on July 1, 2021 and replaces it with a $288 parcel tax to be spent by the San Francisco Unified School District for educators’ compensation and educational improvements.

Results: passed (approximately 76% reporting)

  • 74.97% yes votes (239,977)
  • 25.03% no votes (80,100)

Fiscal Impact: estimated to generate tax revenues of approximately $48.1 million a year.

Passed.  San Francisco, California Proposition L (CEO Tax) amends the Business and Tax Regulations Code to impose an additional gross receipts tax (between 0.1% – 0.6% of gross receipts) or an administrative office tax (between 0.4% to 2.4% of payroll) on businesses with a greater than a 100:1 ratio of the compensation of the business’s highest paid managerial employee to the median compensation paid to the business’s employees based in San Francisco.  Additionally, the ordinance increases San Francisco’s appropriations limit by the amount collected under the additional tax for four years beginning November 3, 2020.

Results: passed (approximately 76% reporting)

  • 65.18% yes votes (212,464)
  • 34.82% no votes (113,510)

Fiscal Impact: estimated revenue between $60 million and $140 million a year.  The revenue impact varies due to the volatility of the tax (e.g., narrow base of expected payers, fluctuations and variances in executive compensation, etc.).

In addition to increasing a business’ tax liability, this measure is likely to create significant compliance challenges as it involves calculating a compensation ratio required for no other state or local tax filing.  Consequently, businesses affected by this tax likely will question their presence in San Francisco and evaluate the benefits of relocation.  Even the San Francisco Controller’s analysis for Proposition L notes the risk of potential relocation by businesses associated with the tax increase from the CEO Tax.  Considering the compliance burden and based on how the additional tax ultimately impacts business, legal challenges are also possible.

 Please check back for our full alert on the tax-related ballot initiatives results across the country.

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:The municipal net profit tax recently lapsed for what centuries-old Ohio community?

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!

Two significant tax ballot measures were on the ballot for voters in the Portland area this Election Day.  Here’s a look at what measures passed and which ones failed.

Failed.  The Portland Metro Council Measure 26-218 proposed authorizing a payroll tax on employers for workers in the metropolitan Portland areas to fund transit improvements and transportation programs along transit corridors in portions of Clackamas, Multnomah, and Washington counties.  The measure proposed allowing the Metro Council to set the payroll tax at a rate not to exceed 0.75% for employers with over 25 employees beginning in 2022.  Employers with 25 employees or less would have been exempt from this payroll tax.

Results: Failed (81.63% reporting)

  • 46.16% yes votes (195,543)
  • 53.84% no votes (228,068)

 Fiscal Impact:  it was projected that the payroll tax would have raised approximately $250 million each year for the proposed transit improvements and transportation programs using current employment numbers.

Passed.  Multnomah County, Oregon Preschool for All Program Measure 26-214 imposes a new personal income tax at a rate between 1.5% and 3.8% on residents of Multnomah County.  Beginning January 1, 2021, the measure imposes a 1.5% income tax on single filers with taxable income derived within the county over $125,000 and an additional 1.5% on taxable income over $250,000.  For joint filers, the measure imposes a 1.5% income tax on taxable income derived within the county over $200,000 and an additional 1.5% on taxable income over $400,000.  Beginning in January 1, 2026, the base income tax rate imposed by the measure increases from 1.5% to 2.6%.  Revenue generated by this measure would be used to fund tuition-free preschool and compensate teachers.

Results: Passed (81.63% reporting)

  • 64.14% yes votes (278,533)
  • 35.86% no votes (155,720)

Fiscal Impact: estimated to raise $133 million each year.

Local businesses and individuals are also still preparing to absorb tax increases imposed through past ballot measures.  During the May primary, Portland Metro voters approved Measure 26-210, which supports homeless services and imposes a business profits tax beginning in 2021 on the net income of each person doing business in the Portland Metro District (which combines three counties in the greater Portland area) that have total annual gross receipts over $5 million.  This measure also contained a personal income tax component, imposing an additional one percent personal income tax on taxable income over $200,000 for joint filers and over $125,000 for single filers on income over these thresholds. With the passage of the new County-wide personal income tax, Multnomah County, which includes Portland, will have a combined state and local personal income tax rate in the country of 14.6%. These tax increases are in addition to the new state Commercial Activities Tax that businesses also face.

Please check back for our full alert on the tax-related ballot initiatives results across the country.

In Private Letter Ruling 2020-14, the North Carolina Department of Revenue determined that an information technology company’s managed services – maintaining and monitoring its clients’ network equipment and software – were subject to sales and use tax. The taxpayer’s Terms of Use, which sets the scope of its services, qualified as a taxable service contract.