The Washington Court of Appeals held that taxpayer’s receipts for referral services are sourced to Washington for B&O tax purposes to the extent that such receipts are received from a lender located in Washington. The taxpayer operates an online platform through which the taxpayer offers educational tools on the loan process to prospective borrowers, analyzes their financial information and other data and refers them to potential lenders. Washington B&O tax law provides that a service-related business must apportion the receipts from its services to the state “[w]here the customer received the benefit of the taxpayer’s service.” RCW 82.04.462(3)(b)(i). Further, “the benefit is received where the customer’s related business activities occur.” WAC 458-20-19402(303)(c). Here, the Washington Court of Appeals determined that the benefit of the taxpayer’s referral services is received at the business location of the taxpayer’s customer. The Department argued that the taxpayer provides advertising services for its customers, i.e. the lenders, and thus the benefit of the taxpayer’s services is received in the states where prospective borrowers are located. The court disagreed with the Department’s characterization of the taxpayer’s services and the related business activity of the lenders. The court found that the taxpayer does not provide advertising services, citing that the taxpayer does not use the lenders’ names in its advertisements to prospective borrowers and the relationship with each borrower is initiated by the taxpayer and remains with the taxpayer until a referral is made. Therefore, the court held that the services provided by the taxpayer were most closely related to its customers’ lending services, which occurred at the customers’ places of business.

LendingTree LLC v. State, Dept. of Revenue, No. 80637-8-I (Ct. of App. Wash., March 30, 2020).

The Tennessee Governor signed a bill that requires marketplace facilitators to collect and remit sales and use tax on behalf of third party sellers on April 1, 2020. Under S.B. 2182, marketplace facilitators that made or facilitated total sales of more than $500,000 during the previous 12 months to consumers in Tennessee will be required to collect and remit sales and use tax. The bill will take effect on October 1.

On March 31, the South Carolina Department of Revenue issued a private letter ruling (PLR) finding that a car rental company in the state is responsible for sales tax on short-term rentals because it qualifies as a marketplace facilitator. The DOR determined that the company was a marketplace facilitator because it operates on a website through which cars are listed for rent from one third party user to another.

The Missouri Supreme Court held that a company’s sales of linens, mattresses, desks, garbage cans, and DVD players to a company operating a chain of hotels were not exempt from sales tax as sales for resale. The court rejected the furnishing company’s argument that the sales were exempt because the hotels built the cost of the furnishings into their nightly room rates. The court explained the sale-for-resale exemption applies only if there is a transfer of title or ownership for consideration. Hotel guests may have received the right to use the furnishings, like linens, mattresses, and desks, but they did not acquire title or ownership of those items.

The court acknowledged that prior cases suggested that mere use would be sufficient, and attributed that to the court’s prior “tangled analysis” conflating the sales tax and use tax definitions of “sale.” The court clarified that for purposes of the sale-for-resale exemption, one must look only to the sales tax definition of “sale,” and not the use tax definition.

DI Supply I, LLC v. Missouri Director of Revenue, No. SC97932 (Mo. Mar. 17, 2020) (en banc).

The recently enacted federal CARES Act makes significant changes to the I.R.C., including rolling back certain limitations on NOL utilization and increasing the interest expense limitation in I.R.C. § 163(j). Because of states’ differing rules on NOLs and conformity to the I.R.C., the CARES Act’s changes to the federal rules will have varying SALT implications. While designed to alleviate the economic repercussions of the COVID-19 pandemic, companies should consider the interaction of the changes made by the CARES Act with other provisions of the I.R.C. and states’ conformity therewith. Paramount is the interaction of the NOL and I.R.C. § 163(j) changes with companies’ GILTI calculation and states’ conformity to the I.R.C. § 250 deduction. Please join Todd Betor and Justin Brown on Tuesday, April 14 at 12 pm ET as discuss these points and other SALT implications of the CARES Act.

Register here.

 

The New York Legislature has approved budget legislation for the Fiscal Year 2021 (the Budget Bill). Consistent with Governor Andrew Cuomo’s earlier promises, the Budget Bill does not contain significant revenue raising provisions, but there are some notable tax changes. The Budget Bill was finalized as the New York State Department of Taxation and Finance has separately extended certain payment and filing deadlines.

Read the full Legal Alert here.

On Friday, April 3 the Texas Supreme Court issued three decisions addressing the availability and scope of the cost of goods sold, or “COGS,” deduction.

Hegar v. American Multi-Cinema Inc.

The first, and most anticipated, decision is Hegar v. American Multi-Cinema, Inc.1  This case concerned whether AMC, the movie-theater chain, was eligible to deduct COGS for its costs of exhibiting films.

Read the full Legal Alert here.

The Utah Governor signed a law amending sales and use tax exemptions in relation to certain data centers on March 31, 2020. S.B. 114 includes several measures including the definition of a qualifying data center for purposes of the Sales and Use Tax Act; the exemption for an occupant of a qualifying data center for the purchase of certain equipment; and the clarification that an amount paid or charged for a lesson is not subject to sales tax as a user fee. Additionally, the bill also excludes from the definition of a marketplace facilitator persons facilitating a sale for a seller that is a restaurant. The law is to take effect on July 1.

Given the dramatic limitations on business travel and mandatory work-from home policies caused by COVID-19 concerns, multistate employers should evaluate how these disruptions impact their state and local tax obligations related to employment. Following is a brief summary of the state and local employment tax issues that multistate employers may need to address during the COVID-19 pandemic.

Crossing the line
Many employees have severely and unexpectedly restricted their business travel due to COVID-19. Those employees may not cross a state’s or locality’s withholding threshold during the applicable period and, therefore, their employers may not be obligated to withhold tax in the jurisdiction(s). As a result, employers may need to adjust their employees’ nonresident withholding certifications or allocations to avoid over- or under-withholding state or local taxes from wages.

Location, location, location
Moreover, mandatory work-from-home policies may affect state or local withholding reporting and remittance obligations. In the case where an employee normally works in one state but currently teleworks in another state, the employer may need to adjust withholding because states generally require employers to withhold tax based on where an employee works, i.e., the “source” of their taxable wages. Numerous exceptions exist to the general source taxation rule, most notably state reciprocity agreements and so-called convenience of the employer rules. Both of these exceptions may be traps for the unwary, potentially creating additional tax compliance issues for employers. To mitigate this risk, employers may need to update their withholding compliance, polices, and procedures in the jurisdictions where their employees are now teleworking and those of their usual work locations.

Work-from-home contributions
In light of current work-from-home policies, multistate employers also should review their compliance with the state unemployment insurance (UI) localization rules and reciprocal agreements, which determine where an employer pays UI tax for an employee working in multiple states. While the UI localization rules are generally uniform across states and reciprocity frequently applies, the UI rules may materially differ from employer withholding source taxation. Thus, work-from-home policies may affect an employer’s UI tax compliance (especially if such policies are extended) and, even worse, may increase an employer’s UI tax liability. Given the dramatic limitations on business travel and mandatory work-from home policies caused by COVID-19 concerns, multistate employers should evaluate how these disruptions impact their state and local tax obligations related to employment. Following is a brief summary of the state and local employment tax issues that multistate employers may need to address during the COVID-19 pandemic.

Other state employment tax obligations, like paid family leave or disability contributions, may be based on the UI localization rules and should also be reviewed given the recent changes to employee work locations.

Keeping up-to-date on state guidance
Finally, work-from-home policies also may impact general state and local tax obligations, like corporate income and sales taxes, most notably by creating nexus with the teleworker’s residence state. However, several states already have issued guidance stating they will not assert nexus over an out-of-state business solely because of teleworking due to COVID-19. It is imperative that employers track these developments to minimize their nexus footprint to avoid new state and local tax obligations during this unprecedented period.

Why this is important:
The elimination of business travel and surge in teleworking creates several state and local tax concerns, from withholding and unemployment insurance taxes to corporate income and sales/use taxes. Now is the appropriate time for US employers to proactively evaluate their employment and other state and local obligations to mitigate compliance and audit issues down the road.