The New York Department of Taxation and Finance recently published an advisory opinion stating that a taxpayer’s New York corporate income tax filing status should be determined by “what activity [a taxpayer] is principally engaged in” and by whether 50% of its aggregate gross receipts in a taxable reporting period are from such activities. The Department concluded that the purpose of a taxpayer’s formation was not dispositive of whether it is an Article 9 or Article 9-A filer for New York state purposes.

The petitioner was a limited liability company providing long-distance telecommunications services and an Article 9 filer, which merged with an Article 9-A franchise tax filing company. Following the merger, the petitioner asserted that it will derive more than 50% of its receipts from activities subject to taxation under Article 9-A. Under the Department’s advisory, to the extent that more than 50% of the Petitioner’s aggregate gross receipts in a taxable reporting period were derived from other than Article 9 activities, it should therefore be classified as an Article 9-A filer.

Advisory Op. TSB-A-20(1)C, N.Y.S. Dep’t of Tax. & Fin. (Jan. 8, 2019) (published April 20, 2020).

The Ohio Board of Tax Appeals upheld the Tax Commissioner’s disallowance of the “bulk credit” upon a second audit of the same transactions. During an initial audit, the taxpayer had provided purchases throughout the country, and the auditor estimated those purchases with an Ohio ship-to address and then applied a “last resort” bulk credit against the assessment to account for use tax accrued and report on the taxpayer’s use tax returns. At the taxpayer’s request, a re-audit was conducted, with additional information to tie individual transactions. Upon re-audit, the total assessment was reduced, but the bulk credit was disallowed. The Tax Commissioner stated that for the re-audit, the auditor used a more accurate line item audit, and eliminated the need for the estimated bulk credit, since applying the credit would result in double counting of non-taxable transactions.

The Board of Tax Appeals determined that the second method was more accurate, and rejected the taxpayer’s argument that the re-audit did not account for use tax actually paid. However, the Board of Tax Appeals would not address the issue of whether the transactions were taxable, because that issue had not been raised in the appeal. The Board rejected the taxpayer’s argument that it was entitled to a refund based on the original audit. Instead, the Board of Tax Appeals stated that the methodology used in the second method was more accurate, and there was no evidence that the transactions had been double taxed.

Computer Svcs. Corp. v. McClain, No. 2017-65 (Apr. 20, 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
In the early twentieth century, states commonly hired private tax collectors on a contingency-fee basis, and they were referred to as this prying animal.

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 Monday, May 11, 2020, the California Assembly Judiciary Committee approved AB 2570 (Stone), which expands the state’s False Claims Act (FCA) to cover certain tax matters. Specifically, AB 2570 applies the FCA to claims, records, or statements made on or after January 1, 2021, under the Revenue and Taxation Code if damages pleaded in an action under the act exceed $200,000. The bill passed along party lines, with Democrats voting in favor and Republicans opposing, and now moves to the Assembly Appropriations Committee. We are following this legislation closely and will provide updates on future developments.

On May 12, Eversheds Sutherland SALT lawyers will present at the TEI Denver SALT Seminar on a variety of state and local tax topics. PowerPoint slides for our presentations can be found below.

Presentations include:

Thank you to everyone who participated in last week’s trivia question!

Last Week’s Question:
What are the only two states without some form of tax uniformity clause in their constitutions?

The Answer:
While nearly all state constitutions include some requirement that taxation be uniform or equal, the constitutions of Connecticut and New York do not contain any such provisions. In fact, the word “tax” does not appear at all in the Connecticut constitution.

Keep an eye out for our next trivia question on Wednesday!

The Michigan Court of Appeals reversed and vacated the Tax Tribunal’s order and held that merged entities that are a unitary business group (“UBG”) must be treated as single entity for purposes of calculating the franchise tax and that corporate income tax credits carried over to the new entity. The taxpayer, Comerica, Inc., was a bank holding corporation, which owned subsidiary financial corporations. For financial corporations, the franchise tax is imposed on the financial corporation’s net capital, which means the equity capital less goodwill and obligations. The taxpayer argued that the Department of Treasury double-counted its tax base because it did not treat the taxpayer and the entity with whom it merged as a single entity. The court agreed with the taxpayer relying on its recent decision in TCF Nat’l Bank v. Dep’t of Treasury, which held that the averaging formula – adding net capital at the close of the current tax year and the preceding years at issue , and dividing the resulting sum by the total number of years at issue – of the additional franchise tax must be applied to a unitary business group as a single taxpayer rather than at the individual member level. In addition, the court reserved the Tribunal’s order that the tax credits could not be transferred because they were subject to single-assignment limitation. The Department argued that the credits were extinguished because they were assigned previously. The court disagreed and held that tax credits are property that fell within the merger statute. Accordingly, the merger did not cause the credits to be assigned but instead the credits transferred by operation of law.

Comerica, Inc. v. Dep’t of Treasury, Mich. Ct. App., No. 344754, (Apr. 16, 2020).

 

Earlier today, Maryland Governor Larry Hogan vetoed H.B. 732, which proposed a first of its kind Digital Advertising Tax. The Governor also vetoed H.B. 932, which would have expanded Maryland’s sales tax to sales of digital products (both downloads and streaming).

Unless a special session is scheduled between now and the end of the year, the Maryland General Assembly will consider the Governor’s vetoes upon convening its regular session in January. As both the House of Delegates and the Senate have veto-proof Democratic majorities, lawmakers could override the Governor’s vetoes by a three-fifths vote of both chambers’ members.

Digital Advertising Tax:

H.B. 732 proposed a new tax on the annual gross revenues derived from digital advertising services in Maryland. The definition of “digital advertising services” broadly includes “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.”

The tax rate varies from 2.5% to 10% of the annual gross revenues derived from digital advertising services in Maryland, depending on a taxpayer’s global annual gross revenues. To be required to pay the tax, a taxpayer must have at least $100,000,000 of global annual gross revenues and at least $1,000,000 of annual gross revenues derived from digital advertising services in Maryland.

The proposed digital advertising tax has drawn scrutiny as violating federal law, including the Permanent Internet Tax Freedom Act and the dormant Commerce Clause. For Eversheds Sutherland’s critique of the tax, please see our recent article, If Md.’s Digital Ad Tax Is Passed, Court Challenges Will Follow.

Veto Letter:

Governor Hogan’s veto letter characterized the tax as “misguided” and noted that the state should not “raise taxes and fees on Marylanders at a time when many are already out of work and financially struggling.” Because of the ongoing concerns with COVID-19, the Governor declared that “it would be unconscionable to raise taxes and fees now. To do so would further add to the very heavy burden that our citizens are already facing.”

Next Steps:

The General Assembly must consider the Governor’s veto message as the first order of business at the next regular or special legislative session, unless the rules are otherwise suspended. While legislative leaders tentatively planned for a special session at the end of May to complete the shortened legislative session, this plan has been set aside due to COVID-19 concerns. If a special session is not scheduled, lawmakers may consider an override of the Governor’s vetoes at the next regular legislative session in January.

To override the Governor’s veto, a three-fifths vote of both chambers’ members is required. As both H.B. 732 and H.B. 932 passed with three-fifths support of each chamber, a veto override is possible unless some lawmakers reconsider their support of the bill.

The vetoed tax measures were intended to fund H.B. 1300, the Blueprint for Maryland’s Future (i.e., the Kirwan education reform package). The Governor also vetoed the education reform package.

Eversheds Sutherland’s State and Local Tax team will continue to monitor Maryland’s tax developments. If Maryland’s Digital Advertising Tax is ultimately enacted, litigation based on federal law principles will quickly ensue.

The Nebraska Department of Revenue (“Department”) issued guidance explaining that Nebraska Advantage Act (“Act”) project-holders may not have to repay incentives if they cannot meet their project obligations due to COVID-19. The Act provides incentives to businesses that commit to certain levels of employment and investment as part of an expansion project in Nebraska. The Act also contains a force majeure provision exempting project-holders from the obligation to repay incentives if they fail to meet employment or investment obligations due to an act of God or a national emergency. The Department considers the national emergency declared on March 13, 2020 to be a “triggering event” to invoke the force majeure provision. However, the Department notes that a project-holder must show the failure to meet its incentive obligations was caused by the COVID-19 national emergency. Specifically, the project-holder must provide evidence that its failure is “the direct result of forces beyond its control,” such as “a government order to cease or reduce operations, or a directed health measure that prevented the business from continuing its usual operations.” The Department stated that failure to meet obligations due to “financial hardship” or as “the result of a business decision within the control of the project-holder” is not sufficient to avoid recapture under the force majeure provision.

As the COVID-19 pandemic is likely to impair taxpayers’ abilities to comply with state incentive agreements, we encourage other states to consider the type of flexibility offered by Nebraska.

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 are the only two states without some form of tax uniformity clause in their constitutions?

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!