The Washington Court of Appeals held that Seattle’s method of apportioning the City’s business and occupation tax (B&O tax) was unconstitutionally applied and unfairly apportioned when the City excluded compensation paid to independent representatives from the apportionment payroll factor. The taxpayer, a financial services firm headquartered in Seattle, generated most of its income through the sale of securities by registered representatives based outside the City. In calculating the payroll factor for its B&O tax liability, the taxpayer included the compensation paid to these registered representatives. The City disagreed with this method and argued that the taxpayer’s representatives were independent contractors, not employees, and therefore should be excluded from the payroll factor (which roughly tripled the taxpayer’s B&O tax liability). The court, however, concluded that the City’s method was not externally consistent as applied to the taxpayer because the City failed to consider where and how the taxpayer generated its income. It did not matter whether income was generated by independent contractors or employees working outside the city. The court reasoned that “either way they are not working in the city” and thus, “the city has no claim to a ‘fair share’ of the income they generate.”

City of Seattle v. KMS Financial Srvs. Inc., Dkt No. 78946-5-I (Wash. Ct. App. Feb. 24, 2020).

On March 2, 2020, the Oregon Tax Court held that the application of the state’s E911 Tax to a provider of interconnected VoIP services (“Taxpayer”) did not violate the Due Process and Commerce Clauses of the U.S. Constitution. The E911 Tax is imposed on each person with access to Oregon’s emergency communications system, whether through VoIP or through a wired or wireless telecommunications service. The Oregon Department of Revenue assessed E911 Tax on VoIP services for the quarters ending March 2013 through March 2016. Rather than challenge the taxability of the VoIP services, Taxpayer protested the assessment on Due Process and Commerce Clause grounds. The Tax Court succinctly rejected these arguments. First, the court held that the E911 Tax satisfied the Due Process Clause. Taxpayer had minimum contacts with the state. It purposefully availed itself of Oregon’s market based on the nature of its business as a seller of ongoing services, the number and dollar volume of its Oregon sales, and the pattern of its growth. And the E911 Tax was rationally related to values connected with Oregon. The tax revenue is spent to maintain Oregon’s emergency communication network, to which, by federal law, Taxpayer must provide its customers access. Second, the court held that the E911 Tax satisfied the Commerce Clause. Rejecting Taxpayer’s argument that the court should apply a physical presence nexus standard, the court held that Taxpayer had substantial nexus with the state because its annual Oregon revenue exceeded the $100,000 South Dakota threshold approved by the U.S. Supreme Court in South Dakota v. Wayfair, Inc. And the E911 Tax was sufficiently related to the services Oregon provides because the tax applies on a “per line” basis—finding there to be a strong connection between the number of lines and Taxpayer’s revenue. Ooma, Inc. v. Oregon Dep’t of Revenue, No. TC 5331 (Or. Tax Ct., Reg. Div. Mar. 2, 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.

Meet Whiskey, a six-and-a-half-year-old Cavalier King Charles Spaniel. With his doggy-day-office recently closed until further notice, Whiskey began a work-from-home internship with his boss-mom, Teresa Chiftis, Director, Tax Controversies, at Microsoft.

So far, Whiskey has embraced his new responsibilities, which include fetching coffee, making leash payments, serving as office security, and greeting visitors. Whiskey is the first to admit that the mornings have been a little ruff, but after that first cup of joe, his team is ready to tackle the day.

In his new position, Whiskey has tried to make it a point to stand up for himself, and not roll over to unnecessary demands. To that end, he insists on sitting on Teresa’s lap throughout the work day, and when it comes to the heavy lifting, he leaves that to his office mate and big-brother, Rocky!

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 state proposals related to the Interstate Compact Agreement to Phase Out Corporate Incentives, which attempt to create an agreement among state governments to curtail company-specific tax incentives and grants as a method to lure companies into relocating existing facilities by member states.

It discusses:

  • current states considering adoption of the Interstate Compact Agreement to Phase Out Corporate Giveaways (the Compact)
  • the potential effect and application of the Compact
  • exclusions from the Compact and potential trends for future legislative sessions

Listen to the full podcast here.

Not even state taxes are immune from the COVID-19 pandemic. Below is a quick checklist – as of the time of publication – of coronavirus-related items and concerns affecting California state taxes.

  • Concerned with an upcoming California tax return filing date? On March 12, 2020, Governor Newsom issued Executive Order N-25-20 which, among other items, delays the deadline for state tax filings by 60 days for individuals and businesses unable to timely file due to compliance with public health requirements related to COVID-19. The Franchise Tax Board (FTB) has posted “COVID-19 Frequently Asked Questions” on its website to further explain these delays. The Employment Development Department (EDD) has informed employers statewide that they may request up to a 60-day extension of time to file state payroll reports and/or deposit payroll taxes without penalty or interest. The request must be in writing and be received by the EDD within 60 days from the original delinquent date of the payment or return. Note, the EDD has limited in-person access to its offices, and Tax Offices are now by appointment only, but employers can call a representative during business hours. View the Office Locator and more information here.
  • Planning to attend a tax agency meeting? On March 17, 2020, Governor Newsom issued Executive Order N-29-20 (amending Executive Order N-25-20 in part), which allows local or state legislative bodies to hold meetings via teleconference and to make meetings accessible electronically without being in violation of the open meeting laws found in the Bagley-Keene Act or the Brown Act.
  • Have any other state tax concerns that you wish addressed as a result of COVID-19, such as an upcoming date regarding a pending administrative proceeding? Executive Order N-25-20 provides “The [FTB], the Board of Equalization [BOE], the Department of Tax and Fee Administration [CDTFA], and the Office of Tax Appeals [OTA] shall use their administrative powers where appropriate to provide those individuals and businesses impacted by complying with a state or local public health official’s imposition or recommendation of social distancing measures related to COVID-19 with the extensions for filing, payment, audits, billing, notices, assessments, claims for refund, and relief from subsequent penalties and interest.” The CDTFA already has spoken out on this new authority and has stated that this assistance includes granting extensions for filing returns and making payments, relief from interest and penalties, and filing a claim for refund. Taxpayers may request assistance by contacting the CDTFA.
  • Will anyone pick up the phone if you call one of the tax agencies? On March 18, 2020, the California Department of Human Resources directed state government personnel offices to establish a staff management plan that takes into consideration stay-at-home directives from state and local public health departments, and a telework schedule for all non-critical employees. This guidance applies to state employees at the FTB (income/franchise), the BOE (centrally-assessed property and misc. taxes), the CDTFA (sales/use and misc. taxes), the EDD (employment taxes), and the OTA (administrative appellate body) as state agencies.
  • Have a case pending at the OTA? For appeals that have a briefing or other deadline that falls between March 1, 2020, and May 18, 2020, an automatic 60-calendar day extension of the deadline will be granted. Oral and video hearings will continue to be held, but in-person hearings currently are discouraged.
  • What about city/local tax concerns? Cities are addressing concerns on an ad hoc basis. For example, Los Angeles County is not currently accepting in-person property tax payments because county buildings are closed at this time. As another example, the City of San Francisco is deferring quarterly business taxes for small businesses. Quarterly estimated tax payments of the Gross Receipts Tax, Payroll Expense Tax, Commercial Rents Tax, and Homelessness Gross Receipts Tax that would otherwise be due on April 30, 2020, are waived for taxpayers or combined groups that had combined San Francisco gross receipts in calendar year 2019 of $10 million or less. These quarterly estimated tax liabilities must instead be paid along with annual tax payments for tax year 2020, which will generally be due by March 1, 2021. The City of San Francisco is also extending the Annual Small Business License Fee, which is otherwise due on March 31, 2020, to June 30, 2020. The San Francisco Business Community is separately calling for an economic recovery package.
  • Watching a tax bill in the Legislature? The California Legislature announced on March 16, 2020, that it was adjourning until April 13. All legislation is now on hold, including bills to extend California’s False Claims Act to taxes and to impose a statewide headcount tax. Essentially, this is an acceleration of the beginning of the Legislature’s annual Spring Recess, which was already scheduled to begin on April 2, with the Legislature reconvening on April 13. The recess may extend beyond April 13 if the Governor declares that preventive measures such as continued home isolation are necessary to address the current state of emergency.
  • Have or watching a case in court? On March 16, the California Judicial Council announced that it continues to closely monitor the evolving COVID-19 coronavirus situation and share information with all courts. Courts have been advised to follow guidance provided by the Department of Public Health, and the federal Centers for Disease Control and Prevention to limit the spread of the virus. Any updates will be communicated through local court websites as appropriate. Other than this broad, statewide guidance, California courts are generally open for business, but on an ad hoc basis that changes from day-to-day. For example, on March 17, San Francisco County Superior Courts updated the information regarding a “drastic[]” reduction of operations, closing 75% of courtrooms and all clerks’ offices. All San Francisco civil trials set between March 17, 2020, and April 15, 2020, will be continued on a rolling basis for 90 days from the current trial date. Additionally, on March 16 the California Supreme Court issued an order suspending in-person oral arguments and setting all oral arguments at the Court’s San Francisco headquarters. Also on March 16, Los Angeles County Superior Courts announced they will “scale down operations” and close all non-essential functions from March 17 through March 19.

The Michigan Court of Appeals recently held that the state’s statutory apportionment formula was unconstitutionally distortive as applied to a taxpayer’s Michigan Business Tax (MBT) liability. Therefore, the taxpayer was entitled to use an alternative formula. The court noted that this is an exceptional case where the taxpayer met its burden to show that the business activity attributed to it was “out of all appropriate proportion to the actual business activity transacted in Michigan,” leading to a grossly distorted result.

The taxpayer is the successor company to MLI, an S corporation engaged in oil and gas pipelines and providing HAZMAT response services. During the period prior to the sale, MLI was retained to assist in the cleanup of a severe oil pipeline spill in Kalamazoo, Michigan. MLI operated a multistate business but did not maintain a permanent business location in Michigan or retain permanent employees in the state. During the cleanup project, MLI sold all its assets to the taxpayer on March 31, 2011 and elected to treat the sale of its stock as a sale of its assets under IRC § 338(h)(10).).

In its return for the short year, MLI included the sale in its tax base and in the denominator of the sales factor, resulting in a sales factor of approximately 15 percent. On audit, Michigan excluded the sale from the sales factor denominator, increasing it to almost 70 percent due to the Kalamazoo cleanup activity compared to its historic 7% Michigan sales factor.

The court held that to impose a tax on 70 percent of the gain of the sale was not commensurate with the “protection, opportunities and benefits” that Michigan conferred on MLI, where the majority of the activities making up MLI’s fair market value at the time of the sale had occurred outside Michigan’s borders. By looking at the short year and its unusual concentration of activity in Michigan, an unconstitutional distortion was created that ran afoul of the Due Process and Commerce Clauses, incorporated in Michigan’s apportionment statute, because it did not fairly determine the portion of income from the sale reasonably attributed to in-state activities.

Vectren Infrastructure Services Corp. v. Department of Treasury, Mich. Ct. App., Dkt. No. 345462 (March 12, 2020)

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.