The Evanston City Council voted on May 26, 2020 to introduce an ordinance that would extend its 5% amusement tax to reach online gaming and streaming. The Council stated that the increase is a reaction to a projected decrease in tax revenue from in-person amusement events. Given the “rise in popularity of streaming amusements, staff recommends expansion of the tax to cover these activities.”

The Michigan Supreme Court held that revenue from the performance of services must be sourced to the location where the service provider’s employees performed the work, not where the services were delivered, for purposes of the City of Detroit’s income tax. Detroit imposes an income tax under the Uniform City Income Tax Ordinance (“UCITO”), which is authorized under the state’s City Income Tax Act. Under the UCITO, receipts from services are sourced to the City if the services are “rendered in the city.” The taxpayer, a law firm, contended that its revenue derived from legal services performed by its attorneys in Detroit but delivered to clients located outside the City was not revenue from services “rendered in the city” and thus was not includable in its revenue factor. The law firm pointed out that because the city tax’s payroll sourcing rules used a different term – “services performed” – to focus on the location of employees, the use of different language – “services rendered” – in the sales sourcing provision indicated that it was the client’s location that was determinative for revenue sourcing purposes.

The Court of Appeals previously agreed with the taxpayer and held that service receipts are sourced to the location of the service provider’s clients. In reversing the Court of Appeals decision, the Michigan Supreme Court found that the legislature adopted an origin test, rather than a destination or market-based test. In the court’s view, the use of different words did not imply two different meanings and thus, the term “rendered” focuses on the location of where the service was done, not where it was delivered.

Accordingly, the court concluded that the firm was required to source revenues from its legal services to Detroit, where the lawyers rendering the services were located, regardless of where the services were delivered.

Honigman Miller Schwartz and Cohn LLP v. City of Detroit, Dkt. No. 157522, (Mich. S. Ct., May 19, 2020)

The New York State Tax Appeals Tribunal struck down the retroactive application of legislative amendments to a taxpayer who reasonably relied on a precedential decision of the Tribunal that was final and irrevocable at the time the taxpayer sold his shares in an S corporation.

On July 31, 2009, the non-resident taxpayer sold shares in an S corporation and elected under IRC § 338(h)(10) to treat the sale as an asset sale instead of a sale of stock. In making the federal election, the taxpayer relied on the Tribunal’s decision in Matter of Baum (February 12, 2009), in which the Tribunal held that, notwithstanding the deemed treatment of IRC § 338(h)(10) transactions for federal tax purposes, for the purpose of determining a taxpayer’s New York income tax, the transaction would be treated as a sale of stock and not a sale of assets. In 2010, subsequent to the taxpayer’s sale, the New York legislature amended Tax Law § 632(a)(2) to provide that a non-resident S corporation shareholder must treat the sale of stock subject to an IRC § 338(h)(10) election as the sale of assets and apportion the sale proceeds to New York in accordance with the S corporation’s business allocation percentage. The amendment was retroactively effective for tax years beginning on or after January 1, 2007, and any other taxable year in which the period of limitations on assessment remained open.

In striking down the retroactive application of the amendments to the taxpayer, the Tribunal held that the taxpayer’s reliance on Baum was reasonable and that public policy considerations supporting the integrity of Tribunal decisions outweighed public policy considerations supporting correction of an erroneous Tribunal decision. Under these circumstances, the retroactive application of the 2010 amendment to the taxpayer’s 2009 tax year violated the taxpayer’s rights under the Due Process Clauses of the U.S. and New York Constitutions. The Tribunal distinguished other decisions that upheld the retroactive of the same legislation on the basis that the taxpayers in the other decisions entered into their transactions before the Tribunal’s decision in Baum and, therefore, did not rely on a final, precedential opinion of the Tribunal.

In the Matter of the Petition of Lewis, Dkt. No. 827791 (N.Y. Tax Appeals Tribunal May 21, 2020)

On June 4, 2020, the Mississippi Senate Finance Committee passed HB 379, which would require marketplace facilitators with more than $250,000 in sales into the state over a 12-month period to collect and remit sales and use tax starting July 1, 2020. The Committee also added an exemption for food delivery services and a provision allowing marketplace sellers with more than $1 billion in national sales to collect and remit taxes instead of turning the tax obligations over to marketplace facilitators. If passed by the state Senate, the amended version would still need to be passed by the state House. If passed, the legislation would take effect July 1, 2020. Mississippi is one of three states that have remote-seller collection obligations but lack marketplace facilitator laws.

On June 5, 2020, Governor Cooper signed HB 1079, which will exclude sales of certain digital audio and visual works from the state’s sales and use tax, and make other tax changes. The law exempts sales of digital educational services and the sales of digital audio or digital audiovisual works that consist of nontaxable service content when the transfer happens at the same time as a nontaxable service in real time, effective retroactively to Oct. 1, 2019. It also offers a grace period from sales and use tax enforcement on sales of some digital property by certain continuing education and professional development providers from Oct. 1, 2019, through Aug. 1, 2020.

 

The Colorado Department of Revenue has proposed several regulations related to taxation of digital goods, remote sales, and marketplace collection. First, it proposed a “doing-business” rule, which clarifies a person maintains a business in Colorado if the person meets the economic nexus test of $100,000 annual retail sales in Colorado. It also proposed another rule that provides guidance on when a retailer must obtain a sales tax license, including those doing business in Colorado for economic nexus purposes, as well as a sourcing rule clarifying when retail sales are sourced to Colorado.

Next, it proposed a special rule that establishes requirements and conditions for marketplace sales. The marketplace facilitator must collect and remit state-level and state-administered local taxes and must acquire a single sales tax license for both direct and facilitates sales unless functions performed by distinct entities. A marketplace seller is only relieved of collections obligations if they have obtained a certification that the marketplace facilitator will collect Colorado taxes.

In addition, the Department of Revenue also proposed amendments to its tangible personal property definition. The amendments note that the method of delivery does not impact the taxability of a sale of tangible personal property and offer clarifying examples: e.g., purchasing a downloaded movie is the same as purchasing a tangible DVD.

Kansas lawmakers did not take their second bite at the remote-seller and marketplace-facilitator apple during a special legislative session. On June 3, 2020, Representative Steven Johnson re-introduced HB 2014, which would have required remote sellers with $100,000 or more in annual in-state sales to collect and remit taxes and would have required marketplace facilitators meeting the $100,000 threshold to collect and remit taxes on behalf of their third-party sellers. It also would have made marketplace facilitators responsible for local transient guest taxes and some prepaid wireless 911 fees. The measure was previously introduced during the regular session, but it died in committee, and lawmakers failed to address it before the special session adjourned on June 4. Kansas remains the only state with a tax obligation for remote sellers without a legislative threshold.

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The Washington Department of Revenue’s Administrative Revenue and Hearings Division ruled that a company’s audit disqualifies its affiliates from participating in the state’s voluntary disclosure (VDA) program. One of the criteria for participating in the program requires that a business must have never been contacted by the Department for enforcement purposes including audits. The Division noted that the audit notice letters sent to the company indicated that the audit might reach the company’s affiliates and subsidiaries.
The Division concluded that while the separate treatment of incorporated entities is a key feature of the state’s tax structure, the audit of an affiliated entity constituted a prohibited contact for purposes of the voluntary disclosure program.

Wash. Dept. Rev. Det. No. 18-0070, 39 WTD 001 (2020).

States continue to consider tax legislation to balance their budgets in reaction to the COVID-19 pandemic. On May 27, 2020, Mayor Muriel Bowser signed D.C. Act 23-326, the Coronavirus Support Emergency Amendment Act of 2020. In part, this act limits net operating loss carryovers. For tax years beginning after December 31, 2017, corporations, unincorporated businesses, and financial institutions will now be allowed only an 80% deduction for their D.C. net operating loss carryovers.