Following up on our recent coverage of the California budget negotiations, on June 29th Governor Newsom signed a package of bills comprising the state’s budget for the 2020-2021 fiscal year. The budget package is composed of the primary budget bills, AB 89 and SB 74, along with numerous budget trailer bills. One trailer bill included in the budget package, AB 85, raises taxes on business taxpayers by suspending net operating loss deductions and limiting the amount of business tax credits that can be claimed annually to $5 million. These provisions are now law for tax years 2020 to 2022.

On June 18, 2020, the Ohio Court of Appeals held that Cincinnati’s excise tax on the gross receipts generated by billboards does not violate the First Amendment to the United States Constitution. The court found persuasive Clear Channel Outdoor, Inc. v. Director, Department of Finance of Baltimore, 223 A.3d 1050 (Md. Ct. Spec. App. 2020), where the Maryland Court of Special Appeals held that that Baltimore’s excise tax on billboards did not violate the First Amendment. That case is on appeal at the Maryland Court of Appeals. Here, the advertising company plaintiffs and the city did not dispute that billboards are a means of speech entitled to First Amendment protection. But the court concluded that Cincinnati’s billboard tax did not offend the First Amendment because the tax: (1) applies to billboards regardless of the message displayed and is, therefore, content neutral; (2) does not threaten to suppress the expression of certain viewpoints; and (3) does not single out a particular group of billboard operators to bear the tax burden.

However, the court concluded that the city violated the First Amendment by prohibiting billboard operators from issuing bills to advertisers displaying the tax or even making indirect statements that the advertisers will absorb the tax. This provision failed to satisfy the intermediate scrutiny standard applicable to commercial speech. This prohibition was broader than necessary to achieve the city’s interest in ensuring that the billboard tax remains an excise tax and not a sales tax. Rather, “a simple disclaimer to the customers would clear up any would-be confusion that the billboard tax remains the operators’ responsibility to pay.”

Lamar Advantage GP Co. v. City of Cincinnati, 2020-Ohio-3377 (Ohio Ct. App. June 18, 2020).

On June 19, the Mississippi House and Senate adopted the conference report on HB 379, bringing the state one step closer to adopting marketplace facilitator legislation. The bill would mandate marketplace facilitators to collect and remit tax on behalf of marketplace sellers if the facilitator makes more than $250,000 in sales into the state in any consecutive 12-month period. The bill excludes from marketplace facilitator collection certain sales by third-party food delivery services. It also allows certain marketplace sellers with over $1B in United States gross sales to contractually agree with marketplace facilitators to retain collection responsibilities. The bill will now go to the governor. If enacted, the legislation would take effect July 1, 2020.

On June 12, 2020, a federal court partially denied Kroger Co.’s motion to dismiss a putative class action complaint regarding Oregon’s bottle deposit on beverages. The complaint alleged that Kroger had misrepresented the cost of certain beverages by charging a ten-cent bottle deposit for beverages that were exempt from the bottle deposit and failing to disclose that the exempt containers could not be returned for a ten-cent refund. Kroger argued that the federal court did not have jurisdiction based on the Tax Injunction Act (TIA), that the plaintiffs failed to allege causation and damages, and that the plaintiffs failed to allege unlawful trade practices or willful conduct necessary for a claim under Oregon’s Unfair Trade Practices Act (UTPA).

The court found that the bottle deposits did not constitute a tax for purposes of the TIA and therefore the TIA did not bar federal court jurisdiction because the bottle deposit does not raise revenue and has only an indirect public benefit. The court further held that principles of comity did not require dismissal of the case because the complaint did not involve a challenge to the bottle deposit statute but was instead a challenge of Kroger’s practice of charging its customers for the deposit on exempt containers. Therefore, the court held that Kroger had not shown why a state court would be in a better position to address the issues presented. The court granted Kroger’s motion to dismiss based on Kroger’s other arguments, but provided the plaintiffs the opportunity to amend their complaint to cure the deficiencies.

Solano v. Kroger Co, Case No. 3:18-cv-01488-AC (D. Or. June 12, 2020).

The Texas Comptroller has delayed until October 2021 the effective date of a new regulation that affects where local sales tax is allocated. The rule, which amends 34 TAC § 3.334, is meant to reduce the portion of sales tax revenue received by localities that host online retailer’s order-processing centers. The current rule generally provides that, when an internet order is received by a seller at a place of business in Texas, the sale is consummated at the place of business at which the order is received, and thus is the situs for local tax imposition. The new rule amends the definition of a seller’s “place of business” to exclude “a computer server, an Internet protocol address, a domain name, a website, or a software application,” which will prevent internet order-processing facilities in the state from being treated as the “place of business” where residents’ orders are received by an in-state retailer.

The Alabama Tax Tribunal held that a taxpayer’s payments to an affiliated entity for employee services were not included in the payroll factor of the apportionment formula for business-income tax purposes because the payments were not made directly to the taxpayer’s employees.

During the years at issue, an Alabama regulation stated that only amounts paid directly to employees were included in the payroll factor. Payments to independent contractors or persons not properly classified as an employee were excluded from the payroll factor. Ala. Admin. Code r. 810-27-4.13(a)(3) (repealed in 2016). Thus, the taxpayer apportioned its income to Alabama with no payroll factor because it had no employees in Alabama or elsewhere. The Department of Revenue, however, adjusted the taxpayers reported payroll factor to include in both the numerator (for Alabama services) and denominator (for total services) the payments to the affiliated entity for the employee services based on prior Administrative Law Division rulings.

Even though prior rulings of the Administrative Law Division (the Tax Tribunal’s predecessor) held that the regulation impermissibly enlarged the statute, the Tax Tribunal concluded that it was not required to follow the rulings because the Legislature did not reference the Administrative Law Division or expressly state that the Tax Tribunal was bound by the Administrative Law Division’s prior decisions. Rather, the Tax Tribunal was established as independent from the Department of Revenue and the Administrative Law Division. Thus, based on the Tax Tribunal review, the language in the regulations was consistent with the statutory provisions. The Tax Tribunal looked to the statutory definition of “compensation,” which was defined as “wages, salaries, commissions any other form of remuneration paid to employees for personal services.” Because the definition stated that compensation is paid “to employees,” the regulation’s language clarifying that payments must be made directly to employees to be considered “compensation” was consistent with the statute. Therefore, the taxpayer’s payments for employee services to its affiliated entity were properly excluded from the payroll factor.

Complete Payment Recovery Servs. Inc. v. Dep’t of Revenue, Docket Nos. BIT. 17-583-LP, BIT. 17-751-LP, BIT. 17-752-LP (A.T.T. Jun.)

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On June 11, Louisiana’s Governor signed SB 138 into law. The law, which takes effect July 1, will mandate sales tax collection and remittance by marketplace facilitators with either $100,000 of in-state sales or 200 in-state transactions. The law (now known as Act 216) excludes from its requirements third-party payment processors, derivatives clearing organizations, advertising services platforms, businesses reselling hotel rooms, certain lodging platforms, and car rental businesses. It also allows certain marketplace sellers with over $1B in annual revenue to contractually agree with marketplace facilitators to retain collections responsibilities. The collected tax must be reported and remitted to a central entity – the Louisiana Sales and Use Tax Commission for Remote Sellers.

In addition, the Louisiana Sales and Use Tax Commission for Remote Sellers approved a draft information bulletin that will provide guidance for marketplace facilitators and sellers under the provisions of Act 216.

On June 18, Rhode Island’s legislature passed H 7532, which expands the state’s tax base to computer software and streaming entertainment to comply with the Streamlined Sales & Use Tax Agreement. The bill expands the definition of a taxable sale to include any license, lease, or rental of prewritten or vendor-hosted computer software and specified digital products. It also clarifies the definition of the “end-user” of a digital product. The Governor is expected to sign the cleanup legislation into law, which will take effect immediately.