On June 30, Mississippi became the latest state to enact a marketplace facilitator law after Governor Tate Reeves signed House Bill 379, also known as the “Mississippi Marketplace Facilitator Act of 2020.” The law requires most marketplace facilitators to collect sales and use tax on behalf of marketplace sellers beginning on July 1, 2020. The collection requirement applies to marketplace facilitators and remote sellers that exceed $250,000 in direct or facilitated sales in a consecutive 12-month period.

Not all marketplace sales will be covered under the new law. Third-party food delivery marketplaces are explicitly excluded from the new sales tax collection requirements. In order to impose the new sales tax collection obligations, the new legislation updates Mississippi’s definition of a “retail sale” to include, in part, “a sale made or facilitated by a person regularly engaged in the sale or facilitation of sales of services or tangible personal property.” However, the law clarifies that the term “retail sale” does not include sales “by a third-party food delivery service that delivers food from an unrelated restaurant to a customer, regardless of whether the customer orders and pays for the food through the delivery service or whether the delivery services adds fees or upcharges for the price of the food.”

Additionally, although the new law shifts sales tax collection obligations to marketplace facilitators, it also allows marketplace sellers with over $1 billion in annual sales to retain sales tax collection and remittance obligations by agreement with the marketplace facilitator.

The Ninth Circuit concluded that a plaintiff had standing to continue her lawsuit against a clothing company alleging that the company wrongly failed to pay interest on refunded Alaska sales taxes. After a related lawsuit was filed alleging that sales taxes were incorrectly collected, LuLaRoe, Inc. refunded the plaintiff $531.25 in sales tax charges. The company did not pay interest on the refunded sales taxes. Plaintiff brought a putative class action in federal district court alleging that the failure to pay interest was unlawful and the district court dismissed the case, concluding that the $3.76 in estimated interest charges was insufficient to establish an injury in fact. The Ninth Circuit reversed, holding that the loss of the $531.25 in sales tax, although temporary, was sufficient to show that the plaintiff suffered a cognizable and concrete injury. The court relied on Habitat Education Center v. U.S. Forest Services,¹ which held that “[e]very day that a sum of money is wrongfully withheld, its rightful owner loses the time value of the money.”

Katie Van v. LLR, Inc., DBA LuLaRoe; LuLaRoe, LLC, Case No. 19-35242 (9th Cir. June 24, 2020).

¹607 F.3d 453, 457 (7th Cir. 2010).

On June 30, Tennessee’s governor signed SB 2932 into law as Public Chapter 759. Effective October 1, 2020, the law requires a dealer or marketplace facilitator with no physical presence in the state and $100,000 in total sales in the state in the previous 12 months to register and collect sales and use tax. The previous threshold was $500,000 of total sales.

The New York State Assembly will consider AB 10706, the Digital Ad Tax Act or DATA, which would impose a sliding scale of taxes on digital advertising services that use personal information about the people the advertisements are targeting. The tax starts at 2.5% imposed on the annual gross revenues derived from digital advertising services in New York of a taxpayer with global annual gross revenue of $100 million to $1 billion, increases to 5% on revenues over $1 billion through $5 billion, 7.5% on revenues above $5- to $15 billion, and tops out at 10% on revenues exceeding $15 billion. If passed, the measure would go into effect immediately and apply to taxable years after Jan. 1, 2021. Note that the bill is identical to SB 8056A, which was introduced in March. For additional coverage, please see this Eversheds Sutherland legal alert.

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In 2019, these two states entered into a “truce” to limit offering incentives for companies relocating between their borders.

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The Arkansas Department of Finance & Administration issued an opinion stating that the provision of certain “virtual services,” including bookkeeping, project management, business analysis, email management, research, and customer service, provided via the Internet, are not subject to Arkansas sales tax. Arkansas sales tax is imposed on the gross proceeds from all sales of tangible personal property, specified digital products, and certain enumerated services. The opinion states that the services at issue are not specifically enumerated services subject to sales tax, regardless of whether the services are performed virtually or in person.

On June 5th, the Maryland Court of Appeals held that a reduced interest rate on refunds paid to taxpayers as a result of the U.S. Supreme Court’s decision in Comptroller of Maryland v. Wynne did not violate the U.S. Constitution’s dormant Commerce Clause.

In 2018, the U.S. Supreme Court held that a Maryland statute that authorized a credit for taxes paid to other states was unconstitutional to the extent it applied only to the state portion of Maryland’s income tax, and not to the county “piggyback.” After the Court’s ruling, the Maryland General Assembly made two relevant amendments to the law. It amended the credit so that it would also apply to the county portion, and it also authorized interest on refunds related to the county portion of the credit at a prime rate of 3%, rather than the 13% interest rate paid on certain other tax refunds.

After their successful challenge to the constitutionality of the underlying credit provision, the Wynnes brought a new action challenging the reduced interest rate. The Wynnes again invoked the dormant Commerce Clause, arguing that the Comptroller must pay the same 13% interest rate that it uses for other income tax refunds.

The Maryland Court of Appeals disagreed. The court first determined that a tax refund is distinct from interest paid on a refund, and that the latter does not “implicate[] interstate commerce sufficiently to awaken the dormant Commerce Clause.” The court explained that the payment of interest on tax refunds is a matter of legislative grace, and that the legislature may periodically adjust the interest rate. The court noted that in many instances, the Comptroller pays no interest, and here, the 3% rate paid was tied to the prime rate used by banks, which ensured “fair compensation,” while maintaining the state’s “fiscal integrity.” By reducing the rate from 13% to 3% for Wynne refunds, the state saved an estimated $38 million.

Although the court determined that interest rates do not implicate the dormant Commerce Clause, it nevertheless analyzed the constitutional issue and determined that even if the dormant Commerce Clause were implicated, the reduced interest rate did not create interstate discrimination. Rather, the court reasoned that both the reduced 3% rate and the ordinary 13% rate would produce windfalls for the Wynnes, because both rates exceeded the rate of inflation. Thus, the court determined that even with the reduced interest rate, the Wynnes are better off than taxpayers who engaged solely in intrastate business, received full credit for income taxes they paid to other states, and never had to seek refunds.

Wynne v. Comptroller of Maryland, No. 12 (Md. June 5, 2020)

The D.C. Council is considering a new sales tax on advertising services, including digital advertising services, and personal information.

  • On July 6th, the D.C. Council released the Committee Print of the Fiscal Year 2021 Budget Support Act of 2020, which includes a sales tax expansion to those services beginning October 1, 2020 at the reduced rate of 3% instead of the general 6% sales tax rate.
  • Today, the Council will hold its first vote on, and possibly consider amendments to, the proposed Budget Support Act. A second and final vote will occur later this month.
  • The legislation would then need sign-off from the Mayor, who has publicly opposed new taxes this year in a letter to the Council on July 4th. The legislation also would be subject to congressional review under the District’s Home Rule Act of 1973.

Read our full Legal Alert here.

The U.S. Supreme Court recently denied cert in Altera Corp. v. Commissioner. This podcast addresses the Altera decision’s impact on transfer pricing and deference. This podcast also addresses prior state transfer pricing decisions and strategies to defend state transfer pricing audits.

For more information on this topic here is a link to a recent article by Eversheds Sutherland.

 

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The North Carolina Supreme Court affirmed a lower court decision that held that a manufacturer of brake pads used by railroads did not qualify for an exception to the state’s standard three-factor apportionment formula that allows “public utilities” to instead apportion their income using a single-sales factor formula.

In February 2019, the North Carolina Superior Court reasoned that the taxpayer did not meet either of the two statutory requirements for qualifying as a “public utility.” First, the statute requires that a public utility be subject to the control of certain specified entities, including the North Carolina Utilities Commission and the Interstate Commerce Commission. The taxpayer conceded that it was not regulated by any of the specified entities, but argued that it was regulated by a successor to the Interstate Commerce Commission and thus qualified as a public utility. The court disagreed, explaining that the plain language of the statute included only specific, enumerated entities, and did not extend to successor agencies.

Second, the statute requires that a public utility own property used for the transmission of communications or the transportation of goods or persons. The court determined that the taxpayer failed to meet this requirement as well, because the taxpayer did not use the property to transport goods or persons. Rather, the taxpayer sold brake pads to railroads, like Amtrak, who then used the brake pads as part of their own transportation of goods or persons. The court reasoned that the taxpayer’s argument would extend the public-utility exception to every manufacturer or retailer who supplies parts and equipment to public utilities.

Eversheds Observation: Notwithstanding the NC Supreme Court’s decision, the issue of whether companies that are subject to some forms of regulations, e.g., federal versus state regulation, is a recurring issue and can have significant impacts on how taxpayers apportion their income.

Railroad Friction Prods. Corp. v. North Carolina Dep’t Revenue, No. 18 CVS 3868 (N.C. Super. Ct. Feb. 21, 2019), aff’d, No. 278A19 (N.C. Apr. 3, 2020)