Earlier today, the Maryland legislature passed H.B. 732, which proposes a first of its kind Digital Advertising Gross Revenues Tax. The legislature also passed H.B. 932, which would expand Maryland’s sales tax to sales of digital products (both downloads and streaming). The bills will now be sent to Governor Hogan for signature or veto. If he vetoes H.B. 732, as expected, it will return to the General Assembly for the legislature to attempt to override the veto.

Background:

Lawmakers rushed to consider legislation before the legislature adjourned today due to COVID-19 concerns. The House passed H.B. 732 on March 12th and the Senate passed the bill on March 17 by a margin of 29-16. H.B. 732 was then sent back to the House for consideration of the Senate’s amendments. Earlier today, the House concurred with the Senate’s amendments and passed the bill by a margin of 88-47.

Digital Advertising Gross Revenues Tax:

H.B. 732 proposes 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.

Determining whether digital advertising taxes are “in Maryland” is problematic. The introduced version of the digital advertising tax proposed to source (and tax) digital advertising services to Maryland based on either: (1) a user’s IP address; or (2) the knowledge or reasonable suspicion that a user is using its device (which receives the advertising) in the state. However, the final version of the tax strikes these provisions and instead uses an undeveloped apportionment fraction to apportion the tax to Maryland. The legislation directs the Comptroller to adopt regulations that will entirely determine how to source digital advertising service revenues to the state.

House Debate:

Multiple delegates made a last ditch effort today to derail the bill and expressed their disapproval of the digital advertising tax. The delegates argued:

  • The tax revenue would come from Maryland residents;
  • The digital advertising tax would violate federal law; and
  • The revenues from the proposed digital advertising tax will not support Maryland’s public education reforms because the tax will be tied up in court for years and possibly be found invalid.

What’s Next:

The bill will now head to Governor Hogan, and he has thirty days upon presentment to veto the bill, sign it into law, or allow the bill to become law without his signature. Governor Hogan has been very vocal against any tax increases, and he is expected to veto the legislation. Even if the legislation is vetoed, the General Assembly could override the veto by a three-fifths vote of both chambers’ members. The legislature adjourned sine die today, March 18th, but a special legislative session is tentatively scheduled for the end of May. The lawmakers would then consider any vetoes by the governor.

Eversheds Sutherland Observation:

If the bill is enacted, legal challenges will follow. The tax likely violates federal and constitutional law, including the Permanent Internet Tax Freedom Act and the Commerce Clause of the United States Constitution.

Turning now to the numbers, the Maryland Senate has 47 representatives and the House of Delegate has 141 representatives. Lawmakers need 29 out of 47 members in the Senate and 85 out of 141 members in the House of Delegates to override the expected veto. Thus, either 19 members in the Senate or 57 members in the House would be required to sustain the veto.

As H.B. 732 passed with three-fifths support of each chamber, some lawmakers would need to change their mind regarding the new taxes imposed under this bill to defeat a veto override. Given the current economic climate, lawmakers may return to Annapolis with a change of heart in May, as the burdens of these taxes are likely to fall ultimately on Maryland’s small businesses and consumers who are already being hit hard by the struggling economy.

The Eversheds Sutherland SALT Team will continue to follow the Maryland Digital Advertising Gross Revenues Tax and provide updates.

Connecticut H.B. 5458 would include “marketplace facilitators” as persons responsible for the dollar-a-day surcharge imposed on the short-term rental of a passenger vehicle. The legislation incorporates by reference the definition of “marketplace facilitator” in the sales tax code – a person who is compensated for the facilitation of at least $250,000 in retail sales of tangible personal property or taxable services. The leasing of tangible personal property is a “sale” under existing Connecticut tax law. If passed, the tax would apply beginning July 1, 2020.

To submit your pet for our SALT Pets Working from Home series, send us a photo of your pet working from home on Twitter using #SALTPets or email saltonline@eversheds-sutherland.com.

Lincoln is a three-month-old Bernedoodle, Bernese Mountain Dog & Poodle mix, weighing in at almost 25 lbs!!  While working from home, Lincoln keeps a very tight schedule.  He starts his day with breakfast, followed by a quick check of his emails.

Once Lincoln sifts through the junk mail, he conducts a one-on-one with his direct report – Justin Pagliaccetti of the SALT team at Amazon.

After barking his orders, Lincoln settles in for his morning belly rub.

He rounds off his morning with a little hockey, performing his best Broad Street Bullies impression.

Lincoln spends all afternoon keeping a close eye on his direct report, sleeping under his chair to ensure he doesn’t leave his work station before quitting time.

To submit your pet for our SALT Pets Working from Home series, send us a photo of your pet working from home on Twitter using #SALTPets or email saltonline@eversheds-sutherland.com.

Significant state tax legislation will move forward through the Georgia General Assembly. “Crossover Day” was Thursday, March 11 — the 28th legislative day of 40 total legislative days – the day by which all bills must have passed one legislative chamber in order to cross over and be considered by the other chamber. Bills that have not passed one chamber prior to crossover are generally dead for the year. Georgia’s Constitution requires that all revenue related bills originate in the House, so the vast majority of bills still alive for the year now go over to the Senate. However, after a brief session on Friday, March 12, the General Assembly has suspended its session until further notice. So it is unknown when the remaining 11 legislative days will occur, although the General Assembly is still constitutionally required to meet and pass a budget for the upcoming fiscal year.

Read the full Legal Alert here.

During the evening of St. Patrick’s Day, the Maryland State Senate passed on third reading (i.e., a floor vote) H.B. 732, which would impose a new Digital Advertising Gross Revenues Tax and H.B. 932, which would expand Maryland’s sales tax to digital products, including streaming. H.B. 732 passed by a vote of 29-16, and H.B. 932 passed by the slightly tighter margin of 30-15. Two senators were absent from the vote.

Multiple senators argued against the passage of H.B. 732. One senator contended that, because of COVID-19 concerns, the state should not enact these new or expanded taxes at this time. The senator also took umbrage that the Senate was passing a large tax increase when they should be in session only to consider budget legislation. Another senator commented that she had received numerous messages from small businesses opposing these tax increases during a challenging economic environment.

What’s Next:

There is a tight time line to deal with these bills given that legislative session is expected to end tomorrow (March 18). Both H.B. 732 and H.B. 932 will now return to the Maryland House of Delegates for consideration of the Senate’s respective amendments. If the House of Delegates agrees with the Senate’s amendments, the bills will be voted on and passed. If the House of Delegates rejects the Senate’s amendments, the Senate may be asked to withdraw its amendments. If the Senate refuses, a conference committee may be appointed to resolve the differences between the two chambers tomorrow.

Governor Hogan is expected to veto both bills if passed. The General Assembly could override the vetoes by a three-fifths vote of both chambers’ members.

Otherwise, the legislature would need to return to Annapolis for a special session (which is currently planned for the end of May) to continue discussion and pass the legislation.

The New Jersey Tax Court ruled that an individual owner of a single-member limited liability company (“SMLLC”) correctly reported his distributive share of partnership income reported by the SMLCC. The SMLLC owned a 50% interest in a partnership that reported losses. On his New Jersey gross income tax return, the individual owner of the SMLCC reported the partnership losses that flowed through the SMLCC as New Jersey “partnership losses” that may be used to offset other partnership income on his New Jersey return. The New Jersey Division of Taxation took the position that when the partnership’s losses passed through the SMLLC, their character changed to “business losses” that cannot be used to offset partnership income. Although the court agreed with the Division’s classification of the SMLLC as a sole proprietorship, the court found that the SMLCC was not in the business of investing in partnerships, and rejected the argument that the SMLLC’s distributive share of the partnership losses was a “business loss.” Instead, the court upheld the individual’s treatment of the partnership losses that flowed through the SMLCC as partnership losses that properly offset other partnership income on the individual’s return. Stanard v. Dir., Div. of Taxation, No. 008149-2018, 2020 WL 895759 (N.J. Tax Ct. Feb. 24, 2020).

On January 9, 2020, the New Jersey Superior Court, Appellate Division, upheld a New Jersey Tax Court decision that income, or “receipts,” earned by a taxpayer from providing broadcast fax, email and voice messaging services were performed within New Jersey and thus the majority of such receipts were properly sourced to New Jersey for purposes of calculating the New Jersey Corporations Business Tax (CBT). The court held that the taxpayer’s services were primarily performed at its headquarters, using its hardware and proprietary software—not at the location of where the taxpayer billed its customers.

The taxpayer provides services for the broadcast of fax, email and voice messaging transmissions. Customers initially send contact lists to taxpayer’s headquarters and such lists are then uploaded into taxpayer’s proprietary software. Once contacts are uploaded, taxpayer’s customers can send a single transmission through taxpayer’s software to broadcast customized transmissions to multiple recipients. Taxpayer’s system optimizes routing, verifies required information and generates reports regarding receipt of transmissions and click-through rates.

For purposes of calculating its income subject to the CBT, the taxpayer sourced its receipts according to its customers’ billing addresses. The taxpayer relied on N.J.A.C. 18:7-8.10(a), which provides an example applicable to corporations that earn income from long-distance telephone calls. The example states that revenue from long-distance calls are to be allocated to New Jersey based upon the billings for calls originating in New Jersey. The taxpayer asserted that, similar to a long-distance telephone company, the taxpayer performs its services at the location where its customers receive the services, or where the customers’ transmissions originate.

The court disagreed. The court indicated that for CBT purposes, generally, a three-factor formula is utilized for allocating net income to New Jersey; only one of such factors is based on sales receipts from services performed within New Jersey. The court further held that the Director of the Division of Taxation (the Division) has broad authority to adjust an allocation factor if it does not properly reflect a taxpayer’s business activity attributable to New Jersey. In this case, the Division utilized a twenty-five – fifty – twenty-five allocation formula, according to the site of transmission origination (which was determined to be the taxpayer’s headquarters) location where services are performed (the taxpayer’s headquarters) and the site of termination (only a small percentage of which was inside New Jersey).

The court found that the taxpayer’s customers received services at taxpayer’s headquarters in New Jersey based on the fact that customers sent client lists to the headquarters prior to any transmission, and that taxpayer provided all its services of transmission processing, monitoring and reporting from its headquarters. The court also found that the Division had appropriately considered the taxpayer’s use of certain out-of-state equipment in providing its services and had devised a formula to fairly allocate income based on the realities of the taxpayer’s business. The court concluded that the Division’s allocation formula was within the Director’s discretion and supported by the record.

Xpedite Systems Inc. v. Director, Division of Taxation, No. A-0789-18T3 (N.J. Super. Ct. App. Jan. 9 2020).

Join us on March 18 at 12 pm ET for a webcast providing an overview of sales and use tax laws imposed on marketplaces. Nearly every state has enacted a marketplace collection statute, but there are many variations. This webcast will provide an overview of marketplace collection statutes, and describe their similarities and differences.

CLE credit is approved for this webcast in CA, GA, NY, NE and TX, and is pending in IL and VA. NY accreditation is available through the approved jurisdiction rule. An individual attorney application may be required for attorneys licensed outside these states. Please check with your respective state bar(s) for confirmation.

Reminder: distance learning courses should be attended in an educational setting that is free from distractions.

To submit your pet for our SALT Pets Working from Home series, send us a photo of your pet working from home on Twitter using #SALTPets or email saltonline@eversheds-sutherland.com.

This is Penny Lane. Penny is a five-month-old Shichon (Shih Tzu and Bichon Frise mix) that denies any association with Tyler Henderson of the State and Local Tax Team at Amazon. She would like readers to know that if you see her name and think she is named after the song by the Beatles, you’re probably a Baby Boomer. If you think she is named after the character from the movie Almost Famous, you’re likely a Millennial. For the sake of avoiding ongoing generational frictions, Penny refuses to reveal the true provenance of her name, preferring instead to acknowledge that she loves both the song and the movie.

Penny is currently working from home and greatly misses her friends at work, both human and fur.  While at home, Penny is engaging in her favorite pastimes, which include chewing up furniture and destroying any pair of shoes accidentally left on the floor.  Since she is spending so much time at home and getting bored in her time away from her friends at the office, she can typically be found either lounging in her bed or finding new and creative ways to fall asleep on the job.

After days of naps and boredom in her first week of working from home, Penny was so anxious to see her friends again that she considered returning to the office.

However, she quickly realized that even if she went back to the office, her friends still weren’t going to be there, and has since embraced the fact that this work from home thing could last a while. She has therefore resumed her workday activities, her favorite of which is obviously reading tax alerts from Eversheds Sutherland.

Penny opposes Maryland’s proposal to tax digital advertising and believes that the bill as drafted represents a violation of the Internet Tax Freedom Act and the Commerce Clause!

To submit your pet for our SALT Pets Working from Home series, send us a photo of your pet working from home on Twitter using #SALTPets or email saltonline@eversheds-sutherland.com.

This podcast discusses recent notices and assessments issued by the Massachusetts Department of Revenue denying taxpayers’ Economic Opportunity Area Credit and Economic Development Incentive Program Credit use and carryforward. It discusses:

  • the 2016 statute amendment that imposed additional credit requirements and led to this issue
  • the Department’s position on why it can deny new credit generation as well as credit carryforward
  • taxpayers’ potential arguments to challenge the Department’s adjustments

Listen to the podcast here.