With the threat of COVID-19 looming, several state legislatures will halt or temporarily suspend their legislative sessions, including: Colorado, Delaware, Connecticut, Georgia, Kentucky, Maine, Maryland, New Hampshire, and Vermont. For many states, this is an unprecedented move while in others, the legislature has not adjourned early since the Civil War. Other state legislatures, like California’s and Nebraska’s, are grappling with the decision of whether to continue to meet as a legislative body to aid in the state’s response to the COVID-19 or adjourn temporarily to lessen the risk of virus spread. Some states, like Arkansas, have limited access to the state houses.

Amidst this legislative pause, several high-profile tax bills will be in limbo. In Maryland, the legislative session is set to adjourn, effective March 18, with plans to hold a special session at the end of May to pass any further legislation. The announcement came as legislative members in the Senate were actively considering several tax bills over the weekend – including a digital advertising tax, a digital goods and service tax, and combined reporting – to fund the state’s education initiatives. In Missouri, the legislature is suspending all legislative activities until March 30, leaving discussions of marketplace collection legislation pending in the meantime. Other state legislatures, including Maine’s and Georgia’s have decided to indefinitely end the session due to COVID-19 concerns. In adjourning early, lawmakers could let several tax bills die if the body does not reconvene in 2020.

On March 13, 2020, New York State Senator and Deputy Majority Leader Michael Gianaris (Democrat) introduced New York S.8056, which would establish a tax on a digital advertiser’s annual gross revenues derived from digital advertisements in the state.

New York’s proposed digital advertising tax is very similar to the tax proposed in Maryland. The major difference is that while the Maryland tax would apply to all digital advertisement services, the New York tax would be limited to targeted advertisements, i.e., those “that use personal information about the people the ads are being served to.”

Read the full Legal Alert here.

Earlier today, the Maryland Senate considered Senate Bill 2, which would impose a new tax on digital advertising services. The Senate retained the Budget and Taxation Committee amendments that revise the sourcing provisions. However, the amendments provide authority to the Maryland Comptroller of the Treasury to determine when gross revenues are derived from digital advertising services in Maryland. The Senate also added additional amendments to SB 2, which appears to combine SB 2 with two other significant (and unrelated) tax bills – the combined reporting bill for corporate income tax purposes applicable only to retail trade and food services corporations (separately proposed in SB 24 i.e., the “Small Business Fairness Act”) and a proposal that, among other things, would increase the tobacco tax rate and impose a tax on electric smoking devices (separately proposed in SB 3).

SB 2 will next be voted on by the full Maryland Senate on second and third reading. We will likely see movement in the near future as Maryland’s crossover deadline of March 16th is approaching. Maryland lawmakers generally aim to have legislation they intend to pass clear the chamber of origin and move to the other chamber by the crossover date. If SB 2 clears both houses, the bill will be sent to Governor Larry Hogan who is expected to veto it. The General Assembly could override the Governor’s veto with a 3/5 majority vote of the elected members of each house. If enacted, the digital advertising tax is expected to face a bevy of legal challenges.

The Washington Court of Appeals held that a laboratory created by the University of Utah was not a government entity exempt from Washington taxation.

Affirming the lower court’s decision, the Washington Court of Appeals rejected Arup Laboratories, Inc.’s arguments that it should be excluded from paying B&O taxes because it is an “arm of the State of Utah.” The court held that because Arup has non-university employees and is responsible for its own liability in legal actions, it was not an arm of the state and thus not exempt from the B&O tax.

Arup further contended that even if it were subject to the tax, its income should be attributed to Utah rather than Washington. The court disagreed, reasoning that the revenue from testing samples in Utah that are sent by Washington customers was properly sourced to Washington because the actual benefit was received in the state, where the medical providers receive the results of the tests were located.

ARUP Laboratories Inc. v. Washington Department of Revenue, case number 52349-3-II, in the Washington State Court of Appeals, Division II

We understand that many companies are taking significant steps to combat COVID-19, including asking employees to work remotely from their homes.

Working from home has advantages and disadvantages, but there is one significant perk that is undeniably putting smiles on our faces – working closely with our adorable pets! We want to see how you and your newest office-mate are getting through the remote workday!

Send us photos of you and your pet on Twitter using #SALTPets or email saltonline@eversheds-sutherland.com.

The Mississippi Senate will take up a proposal to require marketplace facilitators to collect and remit sales taxes. S.B. 2773 would require marketplace facilitators that meet a sales threshold of $250,000 in any consecutive 12-month period to collect and remit sales use tax. The bill is similar to H.B. 379, a sales and use tax requirement for marketplace facilitators approved by the Mississippi House of Representatives last week.

The Michigan Court of Appeals remanded a case on whether Detroit may impose its income tax on an out of state taxpayer, in light of the US Supreme Court’s Wayfair ruling. The Michigan Court of Appeals previously upheld the Tax Tribunal’s decision that the taxpayer lacked sufficient nexus with Detroit to be subject to its income tax because the taxpayer did not have a physical presence in Detroit and therefore was not doing business within the City. Apex Labs. Int’l Inc. v. City of Detroit, No. 338218, 2018 WL 2269748 (Mich. Ct. App. May 17, 2018), vacated and remanded, 503 Mich. 1034, 927 N.W.2d 243 (2019).

On appeal, the Michigan Supreme Court remanded the case back to the Court of Appeals in light of Wayfair. The Court of Appeals declined to rule and further remanded the case to the Tax Tribunal. The Court of Appeals concluded that it was not the appropriate venue to decide the case since the Tax Tribunal’s original decision focused only on whether the taxpayer had physical presence in Detroit, as understood under the now overturned Quill and Bellas Hess rule. Additionally, the appellate court could not simply overturn the case in Detroit’s favor, because the Tax Tribunal, disposing of the case on the physical presence issue, never considered the taxpayer’s alternative arguments against the assessment of Detroit’s tax. Apex Labs. Int’l Inc. v. City of Detroit, No. 338218, 2020 WL 34298 (Mich. Ct. App. Jan. 2, 2020). On remand, the Tax Tribunal will consider the parties’ arguments and whether to extend the US Supreme Court’s decision in Wayfair beyond sales and use tax.

Apex Labs. Int’l Inc. v. City of Detroit, No. 338218, 2020 WL 34298 (Mich. Ct. App. Jan. 2, 2020)

Massachusetts’ Supreme Judicial Court held that receipts from subscriptions to remote access software were subject to sales tax as taxable transfers of prewritten software.  Following a change in the law to tax sales of prewritten software regardless of medium of delivery, the Massachusetts Department of Revenue promulgated a regulation stating that such taxable sales include “transfers of rights to use software installed on a remote server.” In holding the remote access software was taxable, the Court deferred to the Department’s interpretation of law, as reflected in the regulation, noting that such interpretation is “rational” based on the legislative intent to tax prewritten software regardless of the medium of delivery. The Court, however, specifically noted that the taxpayer did not challenge the regulation as ultra vires (illegal because it is contrary to the statute). Finally, the Court held that the subscriptions to online products were not non-taxable services because the object of the transaction was acquiring access to the software.

Citrix Systems, Inc. v. Commissioner of Revenue, SJC-12741 (Mass. Feb. 5, 2020).

After nearly a decade of stalled litigation in Illinois state court, the US Court of Appeals for the Seventh Circuit permitted a group of taxpayers to proceed in federal court with their US constitutional challenge to property tax assessments, over Tax Injunction Act and comity objections by Cook County. While the district court held that the TIA barred the federal suit, the Seventh Circuit reversed, noting that this is the rare case where there is not a “plain, speedy and efficient remedy” in Illinois courts. And, for similar reasons, the Seventh Circuit rejected the county’s argument that the appeals court should decline jurisdiction on the principle of comity.

Here, the procedural statute at issue, (35 ILCS 200/23-15(b)(3)), solely permits a taxpayer to challenge the correctness of a property assessment, without regard to an assessor’s methods or intent. The taxpayers were able to show the appeals court that the statute limited who the taxpayers could name as a defendant, what evidence they could present and what arguments they could raise. Therefore, the Seventh Circuit concluded that the governing procedural statute effectively prohibits a taxpayer from raising an Equal Protection Clause challenge in state court because it ignores the assessor’s methods and intent, which are needed to meet the “no rational basis” test to prevail on such a challenge.

A.F. Moore & Associates, Inc., et al v. Maria Pappas, et al., Illinois Court of Appeals Case No. 19-1971 (Jan. 29, 2020)

The Maryland Senate Budget and Taxation Committee voted to pass out of committee Senate Bill 2, which would impose a new tax on digital advertising services. The committee amended the bill to include a new sourcing provision. Now, the Comptroller of the Treasury must determine when gross revenues are derived from digital advertising services in Maryland. The bill will next head to the entire Senate for second reading and consideration.

Read the full Legal Alert here.