The Merrimack County Superior Court held that the carryback long-term capital losses of one member of a unitary combined group can be used to offset the long-term capital gains of a different member of the group for purposes of computing the group’s Business Profits Tax. The New Hampshire Department of Revenue Administration argued that the group was not allowed to offset because its rule, N.H. Admin. R. Rev. 302.09, required each member of a unitary combined group to compute its gross business profits on an individual basis and did not allow the losses from one member to offset the gains of another member. The court held that the statute that required unitary combined reporting was ambiguous regarding the treatment of capital gains and losses. The legislative history, however, made clear that the purpose of unitary combined reporting was to treat the parent corporation and its subsidiaries as a single taxpayer and to prevent profit shifting across state lines. Thus, unitary combined groups are authorized to net the gains and losses of the group for purposes of computing the group’s gross business profits. The court also held that the rule improperly added and modified the statute, N.H. Rev. Stat. Ann. 77-A:6, IV, which “requires that members of a water’s edge combined to be treated as ‘one business organization.’”

Hologic, Inc. v. Stepp, Dkt. No. 217-2023-CV-282 (N.H. Super. Ct. Feb. 21, 2025).

Maryland is facing a $3 billion budget gap and is considering a host of tax hikes. On March 24, 2025, the Maryland House of Representatives Committee on Appropriations amended the state’s budget bill, House Bill 352 (cross-filed with Senate Bill 321) to include, among other things, a proposal to expand the sales and use tax base “to the licensing of media or software rights and other intellectual property,” certain “data or information technology service[s]” and “software or application software publishing service[s].”

If enacted, Maryland would become the first state to impose a retail sales and use tax on media rights in such a broad manner.[1] In 2021, Maryland expanded its tax to include streaming services. Now, under this proposal, Maryland would expand its tax to include the content licensed by the streaming services. A little bit of silver lining stems from the fact that this tax expansion is only at 3%, which is half of Maryland’s general sales tax rate. These changes – if enacted – take effect July 1, 2025. 

Background

The Maryland General Assembly has considered a number of business tax proposals to raise revenues to close the state’s significant budget gap. Assuming House Bill 352, as amended, is approved by the House, the legislation and its Senate companion will be finalized in conference committee where negotiations may result in subsequent amendments before the final version of the budget bill must be passed no later than Monday, April 7, 2025.

Media Rights and Other Intellectual Property

Examples of taxable media rights subject to sales and use tax in House Bill 352 include:

(i) software protected by copyright; licensing of rights to produce and distribute computer; (ii) licensing of rights to use intellectual property, including intellectual property protected by trademark or copyright; (iii) licensing of sporting event broadcast and other media rights; (iv) licensing of rights to broadcast television programs; (v) licensing of rights to broadcast television programs; licensing of rights to distribute specialty programming content; and (vi) licensing of rights to syndicated media content.

At this point, it is unclear how expansive “other intellectual property” will be interpreted by the Comptroller.

Data Processing, Information Services, and Software Publishing

House Bill 352 would also tax data processing and information technology services, including information services, as described in the 2022 Edition of the North American Industry Classification System (NAICS) sectors 518, 519, or 5415. Similarly, software publishing as described in NAICS sector 5132 would be subject to sales and use tax. This base expansion follows Maryland’s tax on digital products, including SaaS, that took effect on March 14, 2021. 

[1] Some states that impose broad gross receipts taxes, like New Mexico and Hawaii, tax some forms of intellectual property transactions, but not to the extent contemplated by House Bill 352, as amended.

On January 29, 2025, the Commonwealth Court of Pennsylvania held that a telecommunications company’s “non-voice” private line services were subject to the state’s gross receipts tax (GRT). The taxpayer described its services as offering “a dedicated, uninterrupted communications channel” by which their customers could “securely … and continuously transport voice, video and/or data as packets between specific fixed points.” After the Board of Appeals denied the taxpayer’s GRT refund petitions, the taxpayer appealed to the Commonwealth Court of Pennsylvania.

Pennsylvania imposes its GRT on the gross receipts from the “telegraph or telephone messages transmitted” of “every telephone company, telegraph company or provider of mobile telecommunications services.” 72 Pa. Stat. Ann. § 8101(a)(2). The taxpayer contended that its services were not subject to the GRT because they were “not voice services or otherwise telephone related.” Its private line services transported “high volumes of data at a capacity far in excess of low-capacity telephone messaging transmission to sophisticated customers.” 

However, in Verizon, the Pennsylvania Supreme Court previously made “clear that the [GRT] statute encompasses all technologies that have the function of transmitting messages, regardless of whether the mode is ‘voice, data, and/or video.’” (Emphasis added.) Further, the Pennsylvania Supreme Court had interpreted “telephone messages transmitted” to mean any service that makes “telephone communication more satisfactory.” The court also found persuasive that the Pennsylvania legislature has specifically exempted certain services sold by telecommunications companies, but not the non-voice private line services at issue here. The court thus concluded that the private line services were subject to the GRT because they “fulfill the purpose of making the process of transmitting messages more satisfactory.”

Level 3 Communications, LLC v. Commonwealth of Pennsylvania, Nos. 121 & 122 F.R. 2018 (Pa. Commw. Ct. Jan. 29, 2025) (unreported).

The California Franchise Tax Board’s method of taxing banks and financial institutions is consistently complex, and a bit messy. This complexity would worsen under the January budget proposal of California Governor Gavin Newsom to tax banks (and savings and loans) using single-sales-factor apportionment.

In this installment of “A Pinch of SALT” published by Tax Notes State, Eversheds Sutherland attorneys Eric Coffill and Megan Long explore the governor’s proposal and its potential implications. 

Read the full article here.

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award a prize for the smartest (and fastest) participant.

This week’s question: Which state’s governor recently proposed eliminating its sales tax on groceries?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!

In November 2024, voters approved Proposition M which provided for an overhaul of San Francisco’s gross receipts tax. (See our prior coverage here.) Proposition M changed the allocation and apportionment rules for most industries, generally requiring that three quarters of a taxpayer’s total receipts are allocated to the city on a market basis and one quarter are apportioned to the city using a payroll factor. On February 28, 2025, the Office of the Treasurer & Tax Collector released a draft market-based sourcing regulation (Proposed Regulation No. 2025-01) in the first step to provide official guidance on how to determine when receipts are allocated to the city. It was also announced that a public hearing held will be held on Tuesday, April 8, 2025 at 2:00 PM PST. The effective date for the proposed regulation is for tax years beginning on or after January 1, 2025.

Read the full Legal Alert here.

A content delivery network (CDN) services provider appealed the Department’s assessment of retail sales tax in which the Department determined that the taxpayer’s CDN services were “digital automated services” subject to the retailing B&O tax and retail sales tax. The taxpayer disagreed, noting that its CDN is a “backbone” component of the internet that its customers use to transmit their content to end users, and therefore falls within an exclusion for “the internet and internet access.” The taxpayer argued in the alternative that its CDN services qualify for a separate exclusion for “the mere storage of digital products” including “providing space on a server for web hosting.” Finally, the taxpayer contended that the Department improperly sourced its non-excluded retailing revenues to Washington. 

The Board found that the exclusion for “the internet and internet access” applies only to the “narrow range of services” the state is prohibited from taxing under the Internet Tax Freedom Act and the Supremacy Clause. The Board further found that while the CDN services that qualified as “web hosting” services were excluded from the definition of digital automated services, the amounts the taxpayer charged for services that enabled customers to modify or enhance their digital content were not excluded from the definition of digital automated services and were therefore subject to the retail sales tax. Finally, the Board found that the Department reasonably relied on the taxpayer’s “traffic reports” to source sales of digital automated services based on the location where the digital content is retrieved by end-users.

Limelight Networks, Inc. v. Washington Department of Revenue, No. 20-129 (Wash. Bd. Tax App. Jan. 8, 2025).

The Michigan Supreme Court held that a franchise fee imposed by the City of East Lansing and charged to customers by the Lansing Board of Water and Light (LBWL) violated Michigan’s constitution because the fee constituted a new local tax that was imposed without voter approval.

Under an agreement with the City, LBWL collected franchise fees from consumers. The plaintiff filed a class action against the City arguing that the franchise fee constituted a tax that was imposed in violation of the Headlee Amendment to the Michigan constitution, which requires voter approval for all new local taxes.

In ruling for the plaintiff, the Michigan Supreme Court determined that the franchise fee operated as a tax that was never approved by voters. The court applied the Bolt factors which distinguish between a tax and fee by looking to whether 1) the fee has a regulatory purpose and not a general revenue raising purpose; 2) the fee is proportionate to the cost of the service; and 3) the fee is voluntary.

The court reasoned that the fee was imposed for a general revenue raising purpose, as the amounts collected and remitted each year went into the City’s general fund. Next, the fee was not proportionate to costs incurred by the City for granting LBWL the right to provide electricity because the fee was not collected for purposes of providing electrical services—rather, the funds were used for general purposes. Finally, the fee was not voluntary because if consumers did not pay the fee, they risked the loss of electricity, and in effect, were compelled to pay the fee. Accordingly, the court concluded that the City’s imposition of the franchise fee through LBWL operated as a new local tax without voter approval and as such, violated the Michigan constitution.

Heos v. City of E. Lansing, No. 165763, 2025 WL 377503 (Mich. Feb. 3, 2025).

This week, we’re pleased to support Tax Executives Institute’s (TEI) 75th Midyear Conference, held in Washington, DC.

SALT Partners Michele Borens and Todd Betor will present during the conference, covering the below topics:

  • Audits and Litigation in SALT: Top Emerging Trends
  • SALT Income Tax Sourcing vs. Indirect Tax Sourcing: Key Differences and Implications

For more information, including this year’s complete agenda, click here.

The New York Tax Appeals Tribunal affirmed a Division of Tax Appeals (DTA) ruling, holding that deferred compensation earned by a partnership should be allocated to New York based on the business allocation percentage (BAP) from the year in which the services were performed, rather than the year in which the deferred income was recognized.

Taxpayers were individual nonresident partners of a partnership that recognized management fees in 2017 that it had earned and deferred in prior years pursuant to IRC § 457A. The partnership had operated exclusively in New York during the years in which the fees were earned and deferred, such that the BAP for those years would be 100%, but operated on a multistate basis in 2017, with a resulting lower BAP. Taxpayers sought to apportion the deferred fees recognized in 2017 using the lower BAP for that year. The Tribunal held that the deferred compensation is allocated by utilizing the BAP of the partnership for each of the tax years the services were performed, despite the compensation having been only been recognized in 2017. The Tribunal also upheld penalties, despite the taxpayer’s reliance on written advice from an accounting firm, stating that the taxpayer had failed to show that its reliance was reasonable where the professional advice contradicted guidance provided by the State.

Decision Nos. 830479 and 830481, N.Y. Tax App. Trib. (12/12/24).