The Michigan Court of Appeals reversed the Court of Claims and held that an assessment of additional franchise tax on a bank was invalid because the Department of Revenue had improperly calculated the tax base of the bank’s unitary business group (“UBG”). The Michigan Business Tax Act provides that, for a financial institution, the “tax base means the financial institution’s net capital.” The Department had calculated the UBG’s net capital by applying a statutory averaging formula (adding net capital at the close of the current tax year and the preceding four tax years, and dividing the resulting sum by five) to individual members of the group, and then adding the resulting sums together. The Court explained, however, that the relevant statute requires treating UBG members as one taxpayer for filing purposes, and that a UBG’s net capital is determined by adding together the net capital of the group members, making elimination adjustments for intramember investments, and then applying the statutory averaging provision to the UBG. TCF Nat’l Bank v. Dep’t of Treasury, Nos. 344892, 344906 (Mich. Ct. App. Dec. 12, 2019).

The New Jersey Tax Court held that distributions made to a corporation’s two shareholders constituted dividends, and rejected the corporation’s argument that the distributions should be treated as compensation for managerial services that could be deducted for New Jersey Corporation Business Tax purposes. The Court explained that New Jersey has adopted the federal test to determine whether a distribution constitutes compensation for services rendered, which provides that: (1) the amount of the compensation must be reasonable, and (2) the payments must, in fact, be purely for services. The Court explained that proof of the second prong can be difficult to establish, so courts generally concentrate on the first prong. To determine whether compensation is reasonable under the first prong, courts consider: (1) the employee’s role in the corporation; (2) a comparison of the compensation payment with those paid by similar companies for similar services; (3) the size and complexity of the company’s business; (4) the existence of a relationship between the company and its employee which would permit disguising of nondeductible dividends as salary, and (5) whether internal consistency exists in the corporation’s treatment of payments to employees. Having analyzed the factors, the Court determined that there was no evidence in the record establishing that it would be reasonable for the shareholders to receive the distributed amounts as compensation for services, and concluded that a reasonable independent shareholder would view the distributions as dividend payments.

Shore Bldg. Contractors, Inc. v. Dir., Div. of Taxation, No. 002027-2012 (N.J. Tax Ct. Oct. 3, 2019).

The Maryland Court of Special Appeals upheld the Comptroller’s determination that an out-of-state pet food seller did not qualify for Public Law 86-272 protection because the seller’s collection of competitive information in Maryland by its employees was not ancillary to solicitation of sales and not de minimis. The out-of-state pet food seller maintained a limited number of employees in Maryland, including several dozen “Pet Detectives” and one Account Manager, who were responsible for encouraging customers and retailers to buy the out-of-state pet food seller’s products. These employees also engaged in various forms of quality control and provided information regarding market opportunities and competitor activities in regular reports to regional managers. The Comptroller argued, and the appellate court agreed, that such activities in Maryland exceeded the solicitation protection of P.L. 86-272, as the activities were not ancillary to the solicitation of sales. The appellate court concluded the seller’s quality control efforts were de minimis, though, with only two instances in the record of a Pet Detective either restocking or pulling bad product from retailer shelves. In contrast, the court held the gathering of competitive intelligence constituted “a nontrivial additional business activity conducted in the State of Maryland,” despite the fact that less than five percent of the employees’ reports discussed competitors and their activities. Because the “collection of competitive information was carried out on a regular basis as a continuing matter of company policy,” the court held such activity was sufficient to forfeit P.L. 86-272 immunity. Blue Buffalo Company, Ltd. v. Comptroller of the Treasury, — A.3d — (Dec. 20, 2019).

Meet Ruby, a Cavalier King Charles Spaniel mix, who eight years ago became a pupil of Richard Pomp, the Alva P. Loiselle Professor of Law at UConn School of Law. While Ruby is very much the teacher’s pet, enjoying anything that gives her extra class time with Professor Pomp, she’s always looking for extra credit for that time when on cue, she unplugged the Professor’s connection to a video deposition with her furry tail.

When the Professor is not teaching or giving a deposition, he and Ruby bond over a few of their favorite things, including sushi dinners and hot tubbing. Ruby loves sushi that has festered on the counter for three days driving the cat crazy. Ruby always demands the hot tub be cooled down to a chilly 80 degrees before she gets in, though. Ruby also loves holidays, and her favorite holiday is Halloween. She enjoys wearing costumes in the hopes of getting treats from her neighbors, but she only wants the good stuff. So if you see her around, don’t even think of trying to give her a dog biscuit – she’s looking for the full-size candy bars!

We are thrilled to feature Ruby as our December Pet of the Month!

For our final Marketplace Monday of 2019, we look back at what happened this year, what people are talking about and what to expect in 2020.  Prior to 2019, only seven states had marketplace collection laws or guidance requiring marketplace collection in effect.[1]  However, in 2019 a record number of states passed state tax marketplace collection laws.  We expect marketplace collection to be a hot topic in 2020 as the states continue to pass and tinker with these laws.

What Happened

  • In 2019, thirty-two states, including the District of Columbia (DC), enacted marketplace collection legislation and/or had marketplace collection laws go into effect on or after January 1, 2019.
  • As of December 23rd, thirty-nine states have enacted marketplace collection laws.
  • As of December 23rd, only seven states have not enacted marketplace collection laws – Florida, Georgia, Kansas, Louisiana, Mississippi, Missouri and Tennessee.
  • Four states amended their existing marketplace collection laws or guidance:
    • Minnesota passed a more common marketplace collection law to capture marketplace facilitators that do not have a physical presence in the state;
    • Oklahoma amended its marketplace collection law to modify, among other things, which marketplace facilitators are required to collect and remit sales tax or comply with notice and reporting requirements;
    • South Carolina passed S.B. 214 officially adopting marketplace collection after the South Carolina Department of Revenue issued Revenue Ruling 18-14 (9/19/2018) requiring marketplace collection, and
    • Washington State replaced its original marketplace collection law to, among other things, require marketplace facilitators (effective 1/1/2020) to expand its marketplace law to other Washington taxes imposed on a buyer and that the seller is required to collect and pay over to the Department of Revenue.
  • The Multistate Tax Commission (MTC) Wayfair Implementation and Marketplace Facilitator Work Group (the Marketplace Group) released a final white paper on 12/13/2019 addressing issues arising from the states’ marketplace facilitator laws. The white paper notes the Marketplace Group’s thirteen priority issues:
  1. Definition of marketplace facilitator/provider.
  2. Who is the retailer?
  3. Remote seller and marketplace seller vs. marketplace facilitator/provider recordkeeping, audit exposure and liability protection.
  4. Marketplace seller-marketplace facilitator/provider information requirements.
  5. Collection responsibility/determination.
  6. Marketplace seller economic nexus threshold calculation.
  7. Remote seller sales/use tax economic nexus threshold issues.
  8. Certification requirements.
  9. Information sharing.
  10. Taxability determination.
  11. Return simplification.
  12. Foreign sellers.
  13. Local sales/use taxes.

What Marketplaces are Talking About

  • A majority of the marketplace collection discussions are reflected in the Marketplace Group’s thirteen priority issues, with significant outstanding questions on the application of state marketplace collection laws to:
    • Local sales/use taxes;
    • Foreign sellers, and
    • Marketplace facilitator certification requirements.
  • What, if any, are the income tax implications from marketplace facilitator’s sales and use tax registrations?
  • Do/will marketplace collection laws require marketplaces to collect additional taxes and fees?
  • States and industry groups have been in discussions for explicit carve-outs from marketplace collection requirements for, among others, payment processors and online travel companies (OTCs).
  • Litigation in Louisiana and South Carolina challenging marketplace collection assertions by states/localities without marketplace collection laws.

What to Expect in 2020

  • It is anticipated that the remaining states (Florida, Georgia, Kansas, Louisiana, Mississippi, Missouri and Tennessee) will enact marketplace collection.
  • Those states with marketplace collection laws will further refine their collection laws to address concerns regarding the breadth of the current marketplace collection laws in some states.
  • A decision from the Louisiana Supreme Court in Normand v. Wal-Mart.com USA LLC, No. 2019-C-263, addressing whether there is a requirement for marketplaces to collect local sales and use taxes (Jefferson Parish) in the absence of a marketplace collection law.
  • Alaska localities implementation of a single-level statewide administration of marketplace collection pursuant to the Alaska Municipal League’s Alaska Intergovernmental Remote Sales Tax Agreement.

[1] Connecticut, Minnesota, New Jersey, Oklahoma, Pennsylvania, South Carolina and Washington.

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.