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 Code r. 810-27-4.13(a)(3) (repealed in 2016).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.)

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:
Which Supreme Court justice penned the majority opinion in Quill Corp. v. North Dakota?

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 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.

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