The South Carolina Court of Appeals affirmed the Administrative Law Court’s holding that proceeds from a book retailer’s sales of book club memberships should have been included in the retailer’s “gross proceeds of sales” and subject to sales tax. The Court of Appeals concluded that South Carolina case law provides that the gross proceeds of sales includes all value that comes from or is a direct result of the sale of tangible personal property. The Court explained that the retailer’s membership fees are a direct result of the sale of tangible personal property, i.e., books, magazines, etc., because the retailer would not be able to sell the memberships but for its sale of tangible personal property.

Books-A-Million, Inc. v. South Carolina Dep’t of Revenue, No. 2017-001519 (S.C. Ct. App. Apr. 29, 2020).

The Maine Supreme Judicial Court recently held that a taxpayer was not entitled to alternative apportionment for approximately $3 billion in gains earned from the sale of a business unit.

The taxpayer was a food and beverage manufacturer that sold its frozen pizza division in 2010 for $3.6 billion. The taxpayer took the position on its 2010 returns that gains from the division’s sale were not taxable by Maine and accordingly excluded $3 billion of the sale proceeds when calculating its taxable income under Maine’s single sales factor formula. On audit, Maine Revenue Services disallowed the taxpayer’s exclusion of income derived from the sale of the frozen pizza division and assessed an additional $1.8 million in tax plus interest and penalties.

The taxpayer appealed the assessment to the Board of Tax Appeals, where it argued that an alternative apportionment formula was required because Maine’s standard formula did not fairly reflect the extent of the taxpayer’s business activities in Maine in 2010. Finding in favor the taxpayer, the Board determined that the use of an alternative apportionment formula consisting of two different sales factors was warranted.

  1. The taxpayer’s unitary business income, excluding gain from the pizza division sale, would be calculated by dividing the taxpayer’s Maine sales by its sales everywhere. Resulting in a sales factor of 0.7026%.
  2. Meanwhile, the gain from the sale of the pizza division would be apportioned using a sales factor, calculated by dividing the taxpayer’s pizza sales in Maine by its pizza sales everywhere. Resulting in a sales factor of 0.3322%.

The Board also fully abated the substantial understatement penalty on the ground that there was “substantial authority” for the taxpayer’s original filing position.

The Superior Court subsequently reversed the Board of Tax Appeals, holding that the taxpayer was not entitled to alternative apportionment and only entitled to a partial penalty abatement. The Supreme Judicial Court affirmed the Superior Court’s decision on the grounds that pizza division was part of the taxpayer’s unitary business and the taxpayer’s unitary sales factor (0.8193%) fairly represented the extent of the taxpayer’s business activity in Maine. This was despite the taxpayer’s showing, among other arguments, that (1) the sale of the frozen business division was an extraordinary event (the gain generating 94% of the taxpayer’s federal taxable income); and (2) the application of its general unitary combined group’s sales factor to the gain from the frozen pizza would increase the amount of that gain attributed to Maine by at least 247% or as much as 630%. In rejecting the taxpayer’s arguments, the court focused on the consistency of the taxpayer’s sales factor for the year of the sale with previous years, and the sale’s increase of the taxpayer’s overall income was insufficient to justify alternative apportionment.

Finally, the court held that the taxpayer was not entitled to an abatement of the underpayment penalty because it had insufficient authority for excluding the gain from the pizza division altogether on its original returns given the unitary nature of the business.

The Supreme Judicial Court’s decision also dealt with a secondary issue regarding whether a second assessment, for the same tax period at issue in the substantive decision, issued to the taxpayer was barred by the statute of limitations. The second assessment being issued approximately five and a half years after the taxpayer filed its 2010 Maine corporate income tax return. Upholding the Superior Court’s decision that the assessment was not barred, the Supreme Judicial Court laid out Maine’s statute of limitations rule in 36 M.R.S. § 141(2)(A), which extends the statute of limitations for assessments from the standard 3 years to 6 years from the date the return was filed when the tax liability shown is less than half of the tax liability determined by the assessor—Maine Revenue Services. Because the taxpayer had excluded the $3 billion of income from the sale of its pizza division, filing its 2010 return reflecting income equal to one-sixth of the excluded amount, the court held that the second assessment had been issued within the extended 6-year statute of limitations.

State Tax Assessor v. Kraft Foods Group, Inc., 2020 ME 81, ___ A.3d ___ (2020).

The California Department of Tax and Fee Administration has introduced clarifying proposed regulations for its marketplace facilitator regime. The regulations include definitions of statutory terms and clarify that: the $500,000 sales threshold for a marketplace facilitator includes both facilitated sales and direct sales; marketplace facilitators are required to register for a sellers permit or use tax registration; a registered marketplace facilitator is the “retailer” for California tax purposes; and delivery network companies, defined as a website or application used to facilitate delivery for the sale of local products, may elect to be treated as a marketplace facilitator. The proposed regulations also contain examples for application of the law and proposed rules.

In order to provide guidance as quickly as possible, the regulations were introduced as emergency regulations. Generally, emergency regulations are effective for two years unless amended or repealed earlier.

Join Michele Borens and Liz Cha for a webinar on Tuesday, June 23 at 12:00 pm ET. Liz and Michele will take a look at marketplace collection laws, and discuss how to implement a multistate compliance strategy.

This program will address the top ten issues that should be considered when evaluating and implementing marketplace collection laws.

After completing this course, participants will be able to:

  • Learn about the scope of marketplace laws including exemptions or exceptions that might apply.
  • Understand the practical implications of marketplace laws, including which party is responsible for collecting taxes and what types of taxes they are liable for.
  • Gain a better understanding of other issues encountered by marketplaces including: records and documentation, responses to audits, indemnification provisions, and rules regarding class actions.

View the Presentation Slides Here

The Mississippi Senate has passed HB 379, a marketplace facilitator bill, by a vote of 43-0. The bill requires marketplace facilitators with annual in-state revenues above $250,000 to collect and remit sales tax. The Senate amended the House bill – adding an exemption for third-party food delivery and adding an election for marketplace sellers with more than $1 billion in national revenue (including sales of affiliates and franchised entities) to directly collect sales and use tax. The amended bill must now be re-considered by the House, which passed the original bill in late February by a vote of 106-13. If signed into law, the marketplace facilitator rule will be effective July 1, 2020.

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
What year was the Internet Tax Freedom Act (ITFA) originally enacted?

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 Monday. Be sure to check back then!

On June 30th, 2020, the Internet Tax Freedom Act’s grandfather clause will expire. ITFA prohibits states and political subdivisions from imposing taxes on Internet access. But the grandfather clause has permitted such taxes if they were generally imposed and actually enforced prior to October 1, 1998. In particular, Ohio and Texas have imposed their sales taxes on Internet access under the grandfather clause. They both recently issued guidance on the grandfather clause expiration.

Texas confirmed that, beginning July 1st, it will no longer impose sales tax on separately stated Internet access charges. If the Internet access provider bundles the Internet access service with a taxable service, the full amount will be taxable. But the service provider should not collect tax on the Internet access portion if it can establish through its books and records “a reasonable allocation” for the services.

Ohio also explained the impact of the grandfather clause expiration. The state has imposed sales tax on Internet access services as “electronic information services,” if used in business. Beginning July 1st, the Internet access charge will no longer be subject to the sales tax. Also, any automatic data processing or electronic information services that are accompanying but not a significant part of the Internet access will no longer be subject to sales tax. If an online service provider provides certain proprietary services over the Internet, but not Internet access itself, ITFA will prohibit their taxation only if “the activity is a multiple or discriminatory tax on electronic commerce.”

No. ST 2020-01: Internet Tax Freedom Act Summary, Ohio Dep’t of Taxation (June 2020); Tex. Tax Policy News, No. 202005016L (May 2020).

In a 3-2 split vote, the California State Board of Equalization (BOE) voted against issuing formal guidance to county assessors regarding mid-year re-assessments due to declines in value caused by the COVID-19 pandemic.

  • Similar to a number of other states, California law provides valuation relief for property tax purposes due to calamities, emergencies, and disasters.
  • These property tax relief provisions provide an opportunity for immediate tax reductions as a result of disaster declarations, stay at home orders, and other mandatory restrictions caused by the COVID-19 epidemic.
  • Despite the BOE’s decision to forgo issuing formal guidance, taxpayers should still consider filing such disaster relief claims with local assessors.

Read our full legal alert here.

On April 22, 2020, the Pennsylvania Supreme Court issued an opinion that could have a material impact on the unemployment insurance obligations of businesses that engage independent contractors in the state. In A Special Touch v. Pennsylvania Dep’t of Labor & Indust., involving a nail salon, the state supreme court construed the second prong of Pennsylvania’s “employment” definition to require that an independent contractor must actually be engaged in a trade, occupation, profession, or business.

The Special Touch court reversed the lower court and held that a worker’s “mere ability to be” involved in an “independently established trade, occupation, profession, or business” is not enough to rebut the strong presumption that a worker is an “employee” under Pennsylvania’s version of the “ABC” test that determines coverage under the state’s Unemployment Compensation Law. Because the state supreme court found that the workers were “employees” under the ABC test and not independent contractors (as they were originally classified by the business), the business became subject to Pennsylvania unemployment compensation tax withholding and contributions on the wages paid to those workers. Importantly, however, the Pennsylvania Supreme Court made clear that its ruling was limited to the facts of the case.

In this article for the Journal of Multistate Taxation and Incentives, Charlie Kearns and Lexi Louderback review the Special Touch decision and the potential scope of its impact.

The Ohio Board of Tax Appeals (BTA) affirmed the Cleveland Board of Income Tax Review’s (Board) decision that it properly denied a refund claim of municipal income tax paid on income from stock options that a nonresident was granted while working in the city but exercised after she retired and moved to Florida. Willacy v. Cleveland Bd. of Income Tax Review, No. 2018-758 (Ohio BTA May 27, 2020).

The taxpayer in this BTA decision received options from her employer for work performed in Cleveland. Such options vested after one year of receipt, but would expire on the tenth anniversary of the grant date. Following her retirement in 2009, the taxpayer established tax residency in Florida. Thus, by the time the taxpayer exercised the options in 2016 and immediately sold the stock, she was neither employed nor resident in Ohio. The taxpayer’s employer withheld Cleveland municipal income tax on the full amount of income from the 2016 exercise of the options, i.e., the difference between the fair-market-value at the time of exercise and the taxpayer’s strike price of the options. The taxpayer then filed a refund claim with the Board.

The BTA first disposed of the taxpayer’s statutory and constitutional challenges that were recently addressed by the Ohio Supreme Court with respect to the taxpayer’s exercise of options in the 2014 and 2015 tax years. In Willacy v. Cleveland Bd. of Income Tax Review, 2020 Ohio 314 (2020) (Willacy I), the Ohio Supreme Court held in a per curiam opinion that exercising stock options generated taxable compensation – “qualifying wages” – for purposes of the Cleveland municipal income tax in the year the options were exercised. In so doing, the state supreme court rejected the taxpayer’s argument that the option income was intangible that should be sourced to her out-of-state domicile, citing the federal tax treatment of income from the exercise of options as compensatory, as well as prior Ohio case law reaching a similar conclusion. The majority in Willacy I also rejected the taxpayer’s federal and Ohio Due Process Clause challenges, as the taxpayer earned the options from work performed entirely in Cleveland prior to her 2009 retirement and those options were exercisable as early as 2008. The Ohio Supreme Court explained in Willacy I, “the income came from work she performed in Cleveland, and she thus satisfies the [Due Process Clause’s] minimum-connection requirement. Because all the stock-option income was compensation for that work, all the stock-option income is fairly attributable to her activity in Cleveland.”

In addition to the substantive arguments based on the Willacy I decision, the BTA also rejected the taxpayer’s res judicata and estoppel arguments, specifically noting that “estoppel generally does not apply against the state, though it may be applied “in a very limited context” where the taxing authority committed himself in writing over an extended period of time to a particular construction of tax law as applied to the taxpayer.” Citing Crown Commc’n, Inc. v. Testa, 992 N.E.2d 1135, 1140–41 (Ohio 2013).

 

Willacy v. City of Cleveland, No. 2018-758 (Ohio BTA May 27, 2020).