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What year was the Internet Tax Freedom Act (ITFA) originally enacted?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

On June 15, 2020, the California Legislature passed SB 74, the state budget for the 2020-2021 fiscal year. The California Constitution requires a balanced budget to be finalized by June 15th of each year. SB 74 relies on additional federal aid to balance the budget and only invokes spending cuts if federal aid is not provided.

The Legislature also approved budget trailer bill AB 85, “State Taxes and Charges.” The bill includes two significant tax increases on business taxpayers, as proposed in Governor Newsom’s May Revise. AB 85 suspends use of net operating losses for business taxpayers with net business income of $1 million dollars or more during tax years 2020 to 2022. The bill also limits the amount of business tax credits that taxpayers can claim annually to $5 million dollars during the same period – tax years 2020 to 2022. The business tax credit cap applies to specific tax credits, including the Research Tax Credit, the California Competes Tax Credit, the Jobs Tax Credit, and the Motion Picture Tax Credits. AB 85 passed by the required two-thirds majority vote for tax increases, with a 27-11 vote in the Senate and a 55-21 vote in the Assembly.

Governor Newsom is expected to sign both the budget and the budget trailer bill into law. The Governor and the Legislature likely will continue negotiating and revising the budget in the coming months.

The Tennessee Court of Appeals held that a manufacturer’s proceeds from a legal malpractice action are business earnings subject to the Tennessee excise tax. The malpractice action arose when the taxpayer’s attorneys improperly filed a European patent. The damages awarded in settlement of the claim were based on profits the taxpayer would have earned if the patent had been properly filed. The court concluded that the tax classification of the settlement proceeds should be determined by looking to the nature of the right that was compromised. Because the settlement proceeds represented lost business revenue derived from the taxpayer’s intangible property – an integral part of its business – they were taxable business earnings. Also, the court determined that the taxpayer was not entitled to apportion the settlement proceeds because it conducted all of its business in Tennessee, even though it was organized in Delaware. Note that this conclusion seems to be at odds with PopularCategories.com, Inc. v. Gerregano, Dkt. No. M2017-01382-COA-R3-CV (Tenn. Ct. App. Dec. 20, 2018), in which the Tennessee Court of Appeals held that a taxpayer’s incorporation in Florida entitled it to apportion its net earnings and net worth.

Additionally, the court did not permit the taxpayer to file consolidated franchise and excise tax returns with its wholly-owned LLC subsidiaries because it is a partnership for federal tax purposes. Tennessee allows wholly-owned LLCs to file consolidated returns with their single member parents, only if the single member is a corporation.

EmeraChem Power, LLC v. Gerregano, Dkt. No. E2019-00292-COA-R3-CV (Tenn. Ct. App. June 1, 2020).

Oral argument was held June 11 in the highly unusual case of Synthes USA HQ Inc. v. Commonwealth of Pennsylvania.

  • The Attorney General faced skeptical questioning from the Commonwealth Court, with one judge suggesting that the Attorney General was “defeating,” rather than representing, the interests of the Department of Revenue.
  • Synthes involves the question of how receipts from services were required to be sourced in tax year 2011, before Pennsylvania’s legislative change to market-based sourcing in 2014.
  • Synthes, a Pennsylvania-based company, seeks a refund of tax pursuant to a market-based interpretation of Pennsylvania’s pre-2014 cost-of-performance (COP) statute.

Read our full Legal Alert here.