Consistent with a prior decision of a sister appellate court, Texas’ Texarkana Court of Appeals held that the sale of telecommunication products and signals constitutes the sale of a service for purposes of Texas’ franchise tax. The taxpayer sold electrical, light and radio signals to customers through copper wire, fiber-optic cable and leased telephone lines. At trial and on appeal, the taxpayer argued it sold tangible personal property because the signals were perceptible to the senses and, because it sold tangible personal property, it was entitled to a deduction for costs of goods sold from its taxable margin. The taxpayer also argued that although it sold signals, it did not provide a telecommunications service because it did not have the infrastructure to deliver, transmit, or convey the signals. Like the trial court before it, the Court of Appeals found these arguments unpersuasive, concluding first that leasing “the means by which it made its signals available to customers did not transform its business” to anything other than transmitting, conveying, or routing its signals to customers. The court also held it was “bound by the precedent” of a sister court, NTS Commc’ns, Inc. v. Hegar,1 which “already decided that provision of telecommunications products constitutes the provision of services, not goods.” Consequently, the taxpayer was not entitled to a costs of goods sold deduction.

Metro. Telecommunications Holding Co. v. Hegar, No. 06-19-00016-CV, 2019 WL 3938496 (Tex. App. Aug. 21, 2019).

1 NTS Commc’ns, Inc. v. Hegar, No. 03-16-00771-CV, 2018 WL 2728065, at 2, 4-5 (Tex. App. June 7, 2018).

The shift in tax collection responsibility to marketplace facilitators raises issues regarding which party will bear the burden of any additional sales tax liability resulting from a state audit of marketplace transactions. These issues include the extent to which marketplace facilitators can rely on information provided by marketplace sellers, and to what extent marketplace sellers remain subject to audit for transactions facilitated via a marketplace.

Audit Liability Relief for Marketplace Facilitators

Some states provide broad audit protection for marketplace facilitators where the failure to collect and remit the correct amount of tax is a result of incorrect or insufficient information provided by a marketplace seller, so long as the marketplace seller is not an affiliate of the marketplace facilitator. For example, Arkansas provides relief for marketplace facilitators who do not collect and remit the correct amount of tax “to the extent that the failure was due to incorrect or insufficient information given to the marketplace facilitator by the marketplace seller.” Ark. Code Ann. § 26-52-111(f). In Arkansas and similar states, where a marketplace facilitator seeks relief based on a marketplace seller’s provision of incorrect or insufficient information, the marketplace seller becomes subject to audit with respect to its marketplace sales. E.g., Ark. Code Ann. § 26-52-111(e)(2).

Exception – Liability for Sourcing Errors

A number of states exclude errors related to sourcing of transactions from their marketplace facilitator relief provisions. Indiana, for example, requires a marketplace facilitator to show to the department’s satisfaction that the failure to collect sales tax was not due to an error in sourcing the transaction in order to qualify for relief. Ind. Code § 6-2.5-9-3.5(b) (applicable to transactions occurring before Jan. 1, 2022). Similarly, Utah provides relief for marketplace facilitators where the failure to collect tax “was due to a good faith error other than an error in sourcing.” Utah Code Ann. § 59-12-107.6(7)(a)(iv). Massachusetts, on the other hand, expressly provides relief to marketplace facilitators from liability if the error is due to reasonable reliance on incorrect information provided by the marketplace seller or purchaser regarding the proper sourcing of an item or transaction, so long as the marketplace facilitator can show that it made a reasonable effort to obtain accurate information from the seller or purchaser. Mass. Gen. Laws ch. 64H, § 34(i).

Limitations on Relief for Marketplace Facilitators

Further, certain states provide for a cap on the amount of protection accorded to marketplace facilitators, limiting the amount of uncollected and unremitted taxes to a certain percentage of total sales or the total amount of tax that should have been collected. In Arizona for example, for calendar year 2019, relief for marketplace facilitators where the failure to pay the correct amount of tax is due to an error other than an error in sourcing, but not due to incorrect information provided by the marketplace seller, the amount of liability relief is limited to five percent of the total tax due on taxable sales facilitated by the marketplace facilitator on behalf of a marketplace seller and sourced to Arizona. Ariz. Rev. Stat. Ann. § 42-5043(A), (B). The amount of relief drops from five percent to three percent of total tax due for calendar year 2020, and for calendar years 2021 and later the relief provision is eliminated. Id. at (B).

Contractual Relief

Other states do not provide for similar broad relief for marketplace facilitators, but instead clarify that marketplace facilitators are free to contract with their marketplace sellers for the recovery of sales tax and any related interest or penalties to the extent that such tax is assessed by the state in an audit of the marketplace facilitator and where the marketplace facilitator has relied on incorrect or incomplete information provided by the marketplace seller. E.g., Utah Code Ann. § 59-12-107.6(6)(b). As a result, in states such as Utah, the contractual agreements between marketplace facilitators and their marketplace sellers will determine which party bears the risk of additional tax being assessed as a result of an audit.

Why this is important: State rules regarding audit liability and relief from liability will be significant for marketplace facilitators who have been forced to comply with state marketplace collection laws in over half of the states with limited time to implement procedures for collection, reporting and documentation. In order to take advantage of these provisions, it will be important for marketplace facilitators to carefully document: (1) information received from marketplace sellers regarding characterization of the product, and (2) sourcing determinations. Marketplace facilitators may also want to consider contractual indemnification provisions with their marketplace sellers. Marketplace facilitators may also want to consider more frequent state audits or self-audits in order to more timely understand any collection issues.

What to prepare for: Marketplace facilitators should review state marketplace collection laws to inform their potential exposure and defenses in case of an audit, to determine which aspects of accurately reporting and remitting sales tax to prioritize, and to determine the tax responsibility language to include in their contracts with marketplace sellers so as to minimize their potential exposure.

Next Monday: Sourcing of Marketplace Sales

In this post-Labor Day update, we wanted to highlight the following marketplace discussions to watch for this fall:

  • Northeastern States Tax Officials Association Annual Meeting September 9th through 12th in Providence, Rhode Island. There will be a panel discussion on what states are doing to tax online marketplaces.
  • Multistate Tax Commission (MTC) Marketplace Facilitator Work Group Teleconferences:
    • September 19th
    • October 3rd
  • Fall MTC Committee Meetings November 4th through 7th in San Antonio, Texas. It is expected that the Marketplace Facilitator Work Group will make recommendations for certain revisions to state tax marketplace collection laws.
  • California Marketplace Interested Parties Meeting expected in October regarding draft marketplace regulations.

Next Monday: Audits of Marketplace

Eversheds Sutherland’s newest SALT associate, Peter Hull, recently joined our New York office and brought along the latest addition to our SALT pet family, Luna.

An adorable, but sometimes troublesome, two-year-old golden retriever, Luna has a knack for mischief – including the time she became “that dog,” and ate Peter’s law school notebook at the end of the semester. Her hijinks don’t end there. Luna will often wait for Peter to leave home and jump on his bed to nap on his pillows. While she thinks she’s sly and can jump off the bed right when he gets home, the dog hair on the pillow is a clear giveaway.

If she’s not at home, you can generally find Luna at the dog park, where she is the life of the party. Always on the lookout for a mud pit to roll around in, Luna spends most of her mornings running around and playing with the other dogs, usually tiring herself out for the nap as mentioned above.

We’re pleased to welcome both Peter and Luna to the Eversheds Sutherland SALT family, and excited to feature Luna as our August pet of the month!

The Montana Supreme Court held that the Department erred in determining that Exxon Mobil was entitled to only an 80% exclusion for dividends received from domestic corporations excluded from the water’s-edge combined return, and concluded that 100% of the actual dividends it received from such entities are excluded from income. Pursuant to Montana statute, Exxon Mobil excluded certain domestic subsidiaries that have less than 20% domestic payroll and property from the combined return (“80/20 corporations”). Also, under IRC § 243 dividend deduction rules it excluded from the combined return income, 100% of dividends actually received from these entities. The court stated that unlike certain types of deemed distribution income, Montana statute did not address the treatment of dividends actually received from 80/20 corporations and Montana statute does not expressly prohibit the IRC § 243 dividend deduction. The court reasoned that unless the legislature expressly provided otherwise, a corporation is entitled to federal deductions for purposes of computing its Montana tax liability.

Exxon Mobil Corporation v. Montana Department of Revenue, 2019 MT 156 (July 9, 2019)

The shift in tax collection responsibility to marketplace facilitators raises questions on how to address exempt sales and related documentation requirements. States generally require sellers responsible for collecting sales and use tax to maintain that (i) sales or use tax was charged on all taxable sales, and (ii) the tax collected was subsequently reported and remitted to the state. When a seller does not charge sales or use tax on transactions, a valid exemption or resale certificate or other record must be maintained to demonstrate that the transaction was not subject to tax. However, when it comes to marketplace sales, the application of these general principles becomes less clear.

The major issues with exempt marketplace sales is determining who is responsible for collecting the exemption or resale certificates and who the certificate should be issued to – the marketplace seller, the marketplace facilitator, or both. For example, New York grants marketplace facilitators “the right to accept a certificate or other documentation from a customer substantiating an exemption or exclusion from tax.” N.Y. Tax Law § 1132(l)(1). Marketplace facilitators are then required to “keep such records and information and cooperate with the commissioner to ensure the property collection and remittance of tax imposed, collected or required to be collected [under New York law].” Id.

Similarly, Connecticut considers a marketplace facilitator the retailer of each sale facilitated on its marketplace. Conn. Gen. Stat. § 12-408e(b). As such, the marketplace facilitator is required to comply with all obligations that a retailer otherwise would. Id. Although not explicit, the retailer’s obligation to accept exemption certificates and retain those certificates for a period of six (6) years would thereby be imposed upon marketplace facilitators. Conn. Info. Pub. No. 2018(5) (Dec. 19, 2018). The Connecticut Department of Revenue Services has indicated it is developing additional guidance specific to the record-keeping requirements for marketplace facilitators. Conn. Dep’t of Revenue Services, Office of the Comm’r Guidance – OCG-8 Regarding Marketplace Facilitators and Marketplace Sellers (Nov. 16, 2018).

Other state marketplace laws indicate that the marketplace facilitator is generally the entity subject to audit. See, e.g., N.J.S.A. § 54:32B-3.6(f). Where this is the case, a best practice would be for a marketplace facilitator to obtain such certificates to ensure the marketplace facilitator can demonstrate that the transaction was not subject to tax.

With the collection and record retention burden falling upon the marketplace facilitator in numerous states, some states provide protections for the marketplace facilitators. For example, Virginia’s marketplace law provides protection to marketplace facilitators who reasonably rely on exemption certificates. Va. Code § 58.1-612.1(E). Specifically, a marketplace facilitator is relieved of liability for incorrect collection or remittance of tax on transactions for which it acted as a facilitator if the error is due to reasonable reliance on an invalid exemption certificate provided by the marketplace seller or purchaser. Id. In Indiana, if the purchaser was entitled to an exemption, but the marketplace facilitator collected the sales tax in error, the purchaser does not have a cause of action to bring a sales tax claim against the marketplace facilitator. Instead, the purchaser must file a claim for refund with the Department of Revenue for the recovery of the overpayment of sales tax. Ind. Dep’t of Revenue, Information Bulletin No. 89 (July 1, 2019).

Why this is important: If proper documentation is not maintained, marketplace facilitators run the risk of being liable for tax on transactions that would otherwise be exempt. In the absence of clear guidance, marketplace facilitators should consider retaining copies of exemption certificates and otherwise document any exempt sales. Marketplace facilitators should also consider ensuring procedures are in place for obtaining any exemption certificates from marketplace sellers if the exemption certificate is not obtained directly from the consumer.

What to prepare for: Marketplace facilitators should review marketplace collection state tax laws to confirm who is responsible for collecting exemption certificates or otherwise documenting exempt sales. Marketplace facilitators should also consider procedures to accept and verify exemption certificates. The exact information needed to verify an exemption certificate will vary by jurisdiction and type of transaction.

Next Monday: Marketplace Audits

The New York Appellate Division ruled that telecommunication companies’ fiber optic cables do not qualify for a property tax exemption for such property that transmits radio and television signals. (New York Real Property Tax Law, §102(12)(i)(D).) The New York Court of Appeals had previously ruled in T-Mobile Northeast LLC v. DeBellis (December 13, 2018) that telecommunications installations and fiber optic cables are taxable as real property under New York law but did not address this particular exemption.

Reversing the lower court, the Appellate Division rejected the telecommunications companies’ position that any exempt usage of the property, no matter how slight, would be sufficient to satisfy the exemption. Any other interpretation, the court stated, would allow all fiber optics cables that allow cell phones to “stream video, television, and other programming,” to be excluded from taxation even if the property is used to a minuscule degree in such manner. “That, however, conflicts with the Court of Appeals’ determination in T-Mobile Northeast, LLC that such property is taxable.” Rather, the court concluded that the only reasonable construction of the statute would be that fiber-optic installations are exempt only when primarily or exclusively used for an exempt purpose.

1) Level 3 Communications LLC v. Erie County, Case No. 18-01598.
2) Level 3 Communications LLC v. Chautauqua County, Case No. 18-01575.

Marketplace collection laws are a departure from traditional state sales tax rules that contemplate a single buyer and seller. The addition of the marketplace facilitator to a transaction, as the party responsible for collecting and remitting sales and use tax, raises the question of who is the “seller” or “retailer” (hereinafter “seller”) in a marketplace transaction. Not surprisingly, states do not provide a uniform answer to this question.

In California, for example, marketplace facilitators are deemed to be the “seller and retailer for each sale facilitated through its marketplace.” Cal. Rev. & Tax. Cd. § 6042. Indiana similarly deems a marketplace facilitator to be “the retail merchant of each retail transaction . . . that is facilitated for sellers on its marketplace when it . . . (1) Collects the sales price or purchase price of the seller’s products[;] (2) Provides access to payment processing services, either directly or indirectly[; or] (3) Charges, collects, or otherwise receives fees or other consideration for transactions made on its electronic marketplace.” Ind. Code § 6-2.5-4-18(a).

Washington State takes an alternative route, deeming a marketplace facilitator “to be an agent of any marketplace seller making retail sales through the marketplace facilitator’s marketplace.” RCW § 82.08.0531(1). Similarly, in Iowa, a marketplace facilitator is deemed “to be an agent of any marketplace seller making retail sales through a marketplace of the marketplace facilitator.” Iowa Code § 423.14A.d(3)(d).

In contrast, in New York, a marketplace facilitator is granted certain rights and obligations but is not explicitly deemed the seller. New York law grants to a marketplace facilitator “all the obligations and rights of a vendor.” N.Y. Tax Law § 1132(l)(1). These obligations and rights include, but are not limited to, “the duty to obtain a certificate of authority, to collect tax, file returns, remit tax, . . . accept [exemption certificates], the right to receive [a] refunds authorized [by New York law] and the credit [allowed by N.Y. Tax Law § 1137(f)].” Id.

Finally, certain states, including the District of Columbia and New Mexico, do not deem a marketplace facilitator to be a seller or agent. Nor do their laws explicitly confer upon a marketplace facilitator the obligations and rights of a seller.

Why this is important: If the marketplace facilitator is considered the seller, this may impact the rights and obligations of the marketplace and may also create tax implications. For example, it may impact whether the marketplace facilitator is able to file a refund claim, is eligible for vendor compensation or is able to claim sales and use tax credits. Additionally, if the marketplace facilitator is considered the seller, then other charges that are included as part of the sale may thereby become taxable. Finally, the classification of a marketplace facilitator as a seller could also impact the treatment of coupons or other promotional items offered by the marketplace.

What to prepare for: The inconsistent classification of marketplace facilitators among the states may result in the same marketplace transaction having different taxability consequences in different states. This may create some confusion for purchasers. Marketplaces may need to anticipate these issues in order to determine how to handle purchaser inquiries.

Next Monday: Exemptions Certificates

The Multistate Tax Commission (MTC) held its annual meeting in Boise, Idaho August 5, 2019 through August 8, 2019. As part of the meeting, the MTC’s Uniformity Committee (“Committee”), which established the Marketplace Facilitator Work Group (“Work Group”) in 2018, provided an update. By way of background, at its April 25, 2019 meeting in Denver, Colorado, the Uniformity Committee approved a new project to reconvene the Marketplace Facilitator Work Group, to address any follow-up issues arising from the recent enactment of marketplace collection laws in approximately 36 states. The follow-up issues primarily focused on implementation and compliance problems with marketplace collection tax laws. The Work Group sent a survey to Uniformity member states on July 11, 2019 requesting that the states identify and rank the “top 12” issues by priority, from a list of 19 issues provided. The purpose of the survey and study was to develop recommendations to be considered by the Committee at its next meet in San Antonio in November.

The Committee presented the results of the survey at the annual meeting. The Committee indicated that 22 states participated in the study and prioritized the issues as follows:

  1. Definition of marketplace facilitator/provider
  2. Whether marketplace facilitators should have the same rights as a retailer
  3. Recordkeeping, audit exposure and liability protection for marketplace facilitators and remote sellers
  4. Marketplace seller-marketplace facilitator/provider information requirements
  5. Collection responsibility determination between marketplace facilitator and marketplace seller
  6. Marketplace seller economic nexus threshold calculation
  7. Remote Seller sales/use tax economic nexus threshold issues
  8. Development of certification requirements for marketplace facilitators
  9. State information sharing to assist in noncompliance by marketplace facilitators
  10. Whether states should publish clear guidance on taxability and exemptions to assist marketplace facilitators
  11. Return simplification for marketplace facilitators and sellers
  12. Enforcement considerations for foreign sellers

There were seven issues that did not make the “top 12” issues list. These issues include class action lawsuit protection, retroactivity, local sales/use taxes, assessment and notices, registration, security protocols and overall information on implementation.

Based on the survey results, the Work Group will develop recommendations to present back to the Committee. The Committee decided that based on the recommendations, a white paper will be prepared in time for the 2020 state legislative sessions. It was decided that the Committee would not have adequate time before the 2020 legislative sessions to draft and approve a model statute.

The Committee also noted that the National Conference of State Legislatures (NCSL) SALT Task Force met in Nashville, Tennessee on August 4th and August 5th. The Task Force is currently working on considering proposed model statutory provisions to address some of these issues. The Committee indicated that the Work Group efforts ideally would dovetail with the work of the Task Force.

Why this is important: States will likely consider legislative amendments to their marketplace collection laws in the 2020 legislative sessions. The Work Group and Task Force efforts will be influential in legislative revisions proposed by states. To the extent that there are specific concerns or challenges with marketplace collection laws, it will be important to monitor and provide feedback to the Work Group and Task Force.

Next Monday: Treatment of Marketplace Facilitator (Retailer or Not a Retailer)

The New York State Tax Appeals Tribunal held that a taxpayer was required, for years before 2015, to apportion its receipts based on the location of the work that generated its receipts, and not based on the location of its customers.

Read our full Legal Alert here.