In this episode we discuss, “A Call for Clarity – New York Appeals Deadlines,” an article featured in Tax Notes and written by Ted Friedman, Counsel, Michael Hilkin, Counsel, and Peter Hull.

Two of these authors, Michael Hilkin and Peter Hull, join host Chris Lee, an Associate in the Atlanta Office, to discuss the state of procedural affairs in New York regarding COVID-19 and their call on Governor Andrew Cuomo (D) to provide clarity to taxpayers by issuing an executive order confirming that his prior executive orders tolling statutes of limitations apply to proceedings before both the state and city tax appeals agencies.

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In Determination 18-0255, the Washington Department of Revenue determined that a marketplace seller established substantial nexus in Washington for business and occupation tax purposes by participating in the marketplace facilitator’s “digital reassignment” process.  This process allows the facilitator to ship to the marketplace seller’s customers a competitor’s equivalent product if the marketplace seller’s product is not available at a nearby fulfillment center, while also transferring back ownership of one unit of the marketplace seller’s product in another fulfillment center to that competitor to refill the competitor’s inventory.  The Department concluded that this digital reassignment process resulted in the marketplace seller owning inventory in Washington fulfillment centers at various points in time and establishing physical presence in state.

The Indiana Department of Revenue has updated Information Bulletin No. 89, providing guidance for remote sellers and marketplace facilitators regarding the state’s sales tax physical presence standards. The updated guidance, which is effective July 1, 2020, explains the applicable factors for remote sellers and marketplace facilitators to consider when determining whether they have physical presence in the state. It also notes that remote sellers and marketplace facilitators that do not have physical presence in the state still must determine whether they meet the state’s economic nexus thresholds.

Last week, California voters passed Proposition 22 – which considers app-based drivers for rideshare and delivery companies to be independent contractors – and San Francisco voters passed Proposition L – which imposes an additional tax on businesses where compensation for executives significantly exceeds the median compensation of San Francisco employees. These ballot measures could have substantial financial impacts on employers with workers in the Golden State. The measures also raise important questions that businesses should consider regarding the classification of their workers as employees or independent contractors for purposes of applying San Francisco’s new CEO Tax under Proposition L.

Read our full Legal Alert here.

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 the unusual sourcing case from last July where a state attorney general argued that a department of revenue’s position was incorrect.

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!

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).