The Massachusetts Appellate Tax Board determined that three licensors of software properly sought refunds (or “abatements”) to apportion sales tax based upon proof of their purchasers’ intent to use the software in multiple locations, including outside of Massachusetts. In doing so, the Board rejected the Commissioner of Revenue’s argument that the taxpayers could apportion sales tax, but only on their original reports.

The Board concluded that the Commissioner’s regulation did not prohibit taxpayers from seeking apportionment through the abatement process, contrasting the apportionment regulation with several other regulations that required certain actions – such as elections – to be made on original reports. The Board also pointed to the regulation’s retroactive application – it took effect in October 2006, but applied to transactions in April 2006 – as proof that there is no original-report requirement. If there were, retroactive application would be impossible.

Oracle USA, Inc., et al v. Commissioner of Revenue, No. C318441 (Mass. App. Tax Bd. Nov. 27, 2019)

On October 22, 2019, the Ohio Board of Tax Appeals (BTA) held that an insurance company was entitled to a refund of sales tax paid on its purchase of CAT-5 and CAT-6 communication cabling for internet and Voice over Internet Protocol (“VoIP”) installed in its headquarters office building. The company purchased the cabling as part of a construction contract for the renovation of its headquarters and paid sales tax to the contractor at the time of the purchase. The company then filed a refund claim, asserting that since the cabling was incorporated into the real property, the charges for the cabling and its installation constituted a construction contract under Ohio Rev. Code Ann. § 5739.01(B)(5) and not a retail sale subject to sales tax. The Ohio Tax Commissioner argued that the construction contract rule did not apply because the cabling constituted a “business fixture” under Ohio Rev. Code Ann. § 5701.03(B). In support of its position, the Commissioner cited a 1998 decision where the BTA held that communications cabling was a business fixture because it benefitted the business occupant and was not a communication line common to buildings. Newcome Corp. v. Tracy, Case No. 97-M-320 (Oh. Bd. Tax App. Dec. 11, 1998).

The BTA ruled in favor of the company, finding that the communications lines were not a business fixture, because they were not designed to meet the specific needs of the company’s business, but could be installed in any office building for VoIP and internet communications, “and are as common to commercial property as telephone lines and coaxial cables were in the past.” The BTA also held that Ohio Department of Taxation Information Release ST 1999-01 (Mar. 1999), which applies the Newcome decision and provides that the sale and installation of all computer cabling constitutes a taxable sale of a “business fixture,” is incorrect “given the ubiquitous presence of industry-standard cabling in commercial buildings.” Nationwide Mutual Insurance Co. v. McClain, Case Nos. 2018-313, 2018-315, 2108-316, 2018-317, and 2018-318 (Oh. Bd. Tax App. Oct. 22, 2019).

The New Mexico Administrative Hearings Office determined that UPS may depart from the statutory apportionment method for trucking companies, based on mileage driven in the state, because it produces a result that bears no rational relationship to UPS’s New Mexico business activity.

Echoing a 1992 Montana Supreme Court case also involving UPS, the Administrative Hearings Office explained that the mileage method can cause distortion in large geographic states with small populations – like New Mexico – because drivers travel farther to reach fewer customers than in smaller, more densely populated states. The Administrative Hearings Office determined that the mileage method was grossly distortive for UPS because it resulted in a more than ten-fold increase in sales attributed to New Mexico compared to actual revenue from New Mexico customers.

In place of the statutory method, UPS was permitted to use the “state-to-state volume method,” which instead assigned half of the receipts from a sale to the state of origination and the remaining half to the destination state.

In re United Parcel Service Inc. (Ohio) & Affiliates, No. 19-27 (N.M. Admin. Hearings Office Oct. 25, 2019)

On October 17, 2019, the Hawaii Department of Taxation released Tax Information Release No. 2019-03 (“TIR”), which provided guidance regarding Hawaii’s Gross Excise Tax (“GET”) marketplace collection provisions effective January 1, 2020. On December 13, 2019, the Department issued a Revised 2019-03 to clarify the GET and use tax liability of marketplace facilitators and marketplace sellers. Specifically, the TIR clarifies that marketplace facilitators are liable for GET at the retail rate of four percent on the following activities:

  • The marketplace facilitator’s own sales made into the State, and
  • Sales made through its marketplace into the State, regardless of whether the marketplace seller is registered to do business in the State.

However, marketplace facilitators are subject to use tax at the wholesale rate of 0.5% for:

  • Sales of tangible personal property through the marketplace where the marketplace seller is not engaged in business in the State;
  • Sales of tangible personal property that are delivered to the marketplace facilitator outside of the State prior to the sale through the marketplace, and
  • Sales of services through the marketplace where the marketplace seller is not engaged in business in the State and the services are ultimately used and consumed in the State.

Marketplace sellers may also have GET tax obligations. The TIR further clarifies marketplace sellers that are engaged in business in the State are subject to GET at the retail rate on their own retail sales in the State. Marketplace sellers that are engaged in business in the State are also subject to GET at the wholesale rate on sales of tangible personal property made through a marketplace facilitator that the marketplace seller sends to a purchaser in the State. Marketplace sellers are also liable for GET at the wholesale rate on sales of tangible personal property that is delivered to a marketplace facilitator in the State and sales of services that are sold through a marketplace facilitator that are ultimately used and consumed in the State.

Why this is important: Marketplace facilitators and marketplace sellers involved in marketplace and non-marketplace transactions need to make sure that they are paying and collecting GET at the correct tax rate. In marketplace transactions, the GET tax rate will vary depending on who the seller is, who the purchaser is and where the transaction occurs.

What to prepare for: Hawaii’s marketplace law is effective January 1, 2020. Marketplace facilitators and marketplace sellers will want to make sure they have adjusted their tax collection obligations and contractual arrangements to make sure they are properly collecting Hawaii GET.

As we near the end of 2019, Michigan appears to be closing in on being the 39th state to pass a state tax marketplace collection law. The legislation passed a Republican-led Senate unanimously last week, and it is headed to the Governor who is expected to sign the bill.

In addition to marketplace collection requirements, the legislation also codifies Michigan’s Wayfair guidance issued in 2018. Remote sellers are required to collect Michigan sales tax under guidance and legislation if they have more than $100,000 in sales or 200 transactions in Michigan. Marketplace facilitators would also be subject to the same threshold.

For marketplace facilitators, the legislation would be effective January 1, 2020.

Why this is important: Michigan is one of the last states in 2019 to potentially enact a marketplace collection law. Only a handful of states have not yet enacted marketplace collection laws. However, it is anticipated that these remaining states may propose and enact such legislation in 2020.

What to prepare for: Because Michigan’s marketplace collection law will become effective in less than 30 days if it is signed by the Governor, marketplaces will have a short time period to prepare for turn on of sales tax. It is important to take steps now to prepare for a January 1, 2020 turn on date.

On October 3, 2019, California’s Office of Tax Appeals (OTA) held that value-added tax (VAT) imposed on the provision of services is included in the sales factor of California’s apportionment formula. The taxpayer, filing on a worldwide unitary basis, included VAT in its sales factor denominator that it billed, and collected, to its customers in foreign jurisdictions on service fee invoices. After auditing the taxpayer, the Franchise Tax Board (FTB) took the position that VAT was improperly included in the sales factor. On appeal, FTB argued that the definition of “sales” in California Code of Regulations 25134(b) only allows for excise or sales tax (including VAT) in the sales factor for sales of tangible personal property—not for sales of services. OTA rejected FTB’s position and concluded that the term “sales” for purposes of calculating the sales factor is defined in California’s Rev. & Tax. Code section 25120(e) as “all gross receipts” in agreement with a California court’s prior broad construction of the term to include “the whole amount received.” See Microsoft Corp. v. FTB, 39 Cal.4th 750, 759 (Cal. 2006). OTA also rejected FTB’s deference argument because Regulation 25134 is based on a Multistate Tax Commission model regulation, not unique to FTB, and not ambiguous.

In the Matter of the Appeal of: Robert Half International Inc. and Subsidiaries, OTA Case No. 18011756 (October 3, 2019).

Most kids leave cookies or biscuits for Santa, but for Beth Anne Stanford’s kids, Santa was the one who left Biscuit. Of course, we are talking about this adorable Goldendoodle, who was appropriately named for his light, fluffy and irresistible qualities.

Beth Anne, Tax Counsel at InterContinental Hotels Group, adopted 10-month-old Biscuit right before the holidays as a surprise for her kids. Now six-years-old, Biscuit has fully embraced his new family. He enjoys serving as the family vacuum cleaner, eating anything and everything that lands on the floor. He also tries to help his family find their shoes. Any time someone walks in the front door, Biscuit immediately feels the need to bring that person their shoes from the mudroom. While his heart is in the right place, family members are more often than not left trying to track down where their other shoe is.

Biscuit enjoys going off-leash hiking in the mountains, where his herding instincts can fully kick in – running ahead to check the trail then looping back to make sure the family is still with him, then run ahead again. He will repeat the herding cycle for miles!

We are thrilled to feature Biscuit as our November pet of the month!

The United Kingdom and other European Union member states have been introducing measures to ensure that overseas sellers selling goods in the UK via online marketplaces are paying the right amount of VAT on those goods.

In December 2018, the European Commission announced that beginning in 2021, large online marketplaces will become responsible for ensuring that VAT is collected on sales of goods by non-EU companies to EU consumers taking place on their platforms.

Joint and Several Liability – Knew or should have known test

The UK introduced legislation in 2016 that made online marketplaces jointly liable with a non-UK seller for UK VAT. This was extended in March 2018 for UK sellers too.
Beginning March 15, 2018, new UK legislation allows HM Revenue & Customs (HMRC) to hold the operator of an online marketplace jointly and severally liable for the unpaid VAT of non-UK sellers operating on its marketplace where:

• a non-UK seller operating on its marketplace has not registered for UK VAT; and

• the operator of the online marketplace knew or should have known that the seller should be registered for UK VAT.

These rules also extend existing rules, so that the online operator can also be held jointly and severally liable if HMRC tells the online marketplace operator that a UK or overseas seller operating its marketplace is not meeting its VAT obligations.

HMRC has invited online marketplaces to sign up to an agreement that is intended to build a collaborative relationship between online marketplaces and HMRC, and to promote VAT compliance by users of the marketplaces. However, it requires the marketplace to find a legally compliant way to disclose huge amounts of data to the tax authorities.

Other Measures

The EU Commission has also suggested that payment intermediaries, who are involved in over 90% of online sales, could be a useful source of data in identifying sellers who should be registered for VAT.

Meanwhile in other EU member states, the German tax authorities have proposed new VAT rules requiring online marketplace operators to provide a paper certificate in Germany to comply with German VAT law. The EU Commission has deemed this process to be inefficient and will require more strenuous compliance measures. The EU Commission has proposed extending its one-stop-shop system for goods so that sellers can register in one EU member state for all their sales in the EU.

A California Superior Court ruled that a City of Oakland ballot measure seeking to impose a 30 year parcel tax to fund educational programs required a two-thirds vote. Ballot measure AA was the result of a citizens’ initiative. In publicly circulated materials prior to the election, the City Attorney indicated that passage of Measure AA required approval by two-thirds of voters. However, after Measure AA received only 62.7% of the vote, the Oakland City Council passed a resolution stating that Measure AA had passed. The City contended that the two-thirds requirement did not apply because Measure AA was not imposed by a local government because it was a voter-sponsored initiative. The court classified the tax proposed in Measure AA as a “special tax,” meaning a tax dedicated to a specific purpose, and held that special taxes are subject to the state constitution’s two-thirds voting requirement regardless of whether they are proposed directly by local governments or by voter initiatives. The court further concluded that Measure AA was not enforceable because the City’s pre-election materials “unambiguously advised voters that Measure AA would require two-thirds of the votes to pass,” and to subsequently enforce the tax “would constitute a fraud on the voters.”

Jobs and Housing Coalition v. City of Oakland, Order on Motion for Judgment on the Pleadings, Case No. RG19005204 (Ca. Super. Ct., Alameda Cty., Oct. 15, 2019)

On October 25, 2019, the Oregon Tax Court upheld the Department of Revenue’s proposed increase in the real market value of Level 3’s centrally assessed property. Level 3 operated an optical fiber network and provided various communication services. It argued that the Oregon Department of Revenue should not have included in its “unit” certain “investment attributes” it claimed do not qualify as property. The taxpayer argued that the first four attributes (future tangible and intangible property, present value of growth opportunities and potential mergers and acquisitions) “inhere in Taxpayer’s shares of stock and are not property that Taxpayer itself owns.” The court rejected this argument because “the potential for revenue growth may derive from an attribute of the unit of assembled equipment, real property, customer relationships and workforce in place, or from the ability of the company to attract merger partners and additional capital investment.” The legislature intended any or all of these factors to “‘count’ in the valuation of the unit of real, tangible and intangible property in place on any given assessment date.” The court then considered the remaining attributes, including stock liquidity, expected appreciation and favorable income tax treatment. The court rejected the taxpayer’s argument that, while the attributes have value, that value belongs to the taxpayer’s shareholders, not to the taxpayer as a company. The court was skeptical that some of the attributes created value for the taxpayer’s shareholders, and the taxpayer did not attempt to quantify any increment of value associated with any particular attribute. As a result, the court accepted the Department’s revenue growth rates, which resulted in an increase in the value of the property relative to the original assessed value.

Level 3 Commc’ns, LLC v. Oregon Dep’t of Revenue, TC 5236, 5269, 5291 (Or. Tax Ct., Reg. Div. Oct. 25, 2019) (unpublished).