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.

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