The taxpayer, a wholesale drug distributor, was subject to the Wholesale Drug Distributor Tax which is imposed on the taxpayer’s gross revenues from selling prescription drugs. The taxpayer offered rebate programs which provided a discount on future invoices based on a customer’s purchases from the prior month/quarter. The taxpayer did not previously include the rebate amounts in its reported gross revenues and the Commissioner issued an assessment to add back the rebates. The taxpayer argued that gross revenues are defined as the “total amounts received in money or otherwise” and the taxpayer never received the rebate amounts because it was contractually obligated to return the rebates to customers. While the Commissioner argued that since the taxpayer pays rebates to customers in the month/quarter after the purchase is originally made, the taxpayer does receive the full invoiced amount.

The Minnesota Supreme Court determined that the plain meaning of the definition of gross revenues “is the entire amount that a taxpayer comes into possession of either through money or non-monetary benefits and goods.” Then, the court held that since the taxpayer does not have discretion in paying the rebate amounts to customers once they are earned, the taxpayer could not reasonably come into possession of the rebate amounts and thus the rebates should not be included in the taxpayer’s gross revenues for purposes of determining the amount of tax owed. The court rejected the Commissioner’s arguments that gross revenues should be interpreted as “the full amounts invoiced,” citing examples of returned goods or unpaid invoices that reflect amounts invoiced but not amounts received for purposes of the Wholesale Drug Distributor Tax.

Dakota Drug, Inc. v. Commissioner of Revenue, No. A23-1973 (Minn. Nov. 6, 2024).

Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

We will award prizes for the smartest (and fastest) participants.

This week’s question: Which state is currently considering the adoption of single-sales factor appointment for financial institutions?

E-mail your response to SALTonline@eversheds-sutherland.com.

The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!

The New Jersey Tax Court determined that a New Jersey-based couple was not required to include Section 965 amounts in New Jersey income, as deemed repatriated dividends are not subject to the New Jersey Gross Income Tax (GIT), New Jersey’s personal income tax.

The taxpayers owned several interests in controlled foreign corporations (CFCs) and in accordance with Section 965, included nearly $17 million in income on their federal Form 1040, despite not receiving any portion of this amount in cash or property. For New Jersey purposes, however, the taxpayers did not report any portion of the Section 965 income that was included in their federal taxable income. The Division audited the taxpayers, assessing a nearly $2.1 million deficiency.

The taxpayers appealed the deficiency directly to the New Jersey Tax Court, arguing that Section 965 income is not a specified category of taxable income under the GIT Act. The taxpayers further asserted that because Section 965 income is not dividend income, it cannot be considered a “deemed” dividend. In contrast, the Division asserted that Section 965 income is considered a deemed dividend at the federal level, and as such, should be taxable under the GIT Act.

The court ruled in favor of the taxpayers, noting that Federal taxable income is not used as the starting point for computing a taxpayer’s New Jersey GIT. Instead, when the state legislature enacted the GIT, it made a conscious decision not to incorporate the federal income tax model of including income from all sources and chose instead to limit income to specific categories. The GIT includes “dividends” as a specific category of income to be included in income, and defines a “dividend” to include only “distributions” in cash or kind.  N.J.S.A. 54A:5-1(f). Because the amounts required to be recognized under section 965 did not represent actual distributions of cash or property, the court determined that they were not “dividends” and that the taxpayers were therefore not required to include Section 965 income in their New Jersey income. The court also rejected the Division’s alternative argument that the amounts should be treated as “deemed” dividends, pointing out that the definition of “dividend” in section 54A:5-1(f) does not embrace “deemed” payments, in marked contrast to other provisions of the GIT.

Amin v. Director, Div of Tax., Docket No. 007430-2022 (N.J. Tax Ct. December 31, 2024).

Meet Hercules Mulligan, our January SALT Pet of the Month! Named after a character from the Broadway show “Hamilton,” Hercules lives with Dan Hopper, a SALT Associate in New York.

This adorable 4.5-year-old Boxer was adopted from a shelter in a Houston suburb. These days, Hercules is full of energy and loves chasing frisbees and taking nature walks through Central Park in NYC. His favorite treats are salmon skin and cheese. Despite sharing the name with a Greek hero, Hercules can be a bit skittish and skeptical, sometimes reminding his family of a cat. However, his bravery shone through when he recently alerted his family to an approaching black bear during a campfire outing. Kudos to courageous Hercules!

We are thrilled to welcome such a brave and heroic pup to the SALT family. Welcome, Hercules!

On January 8, 2025, a group of New York State Senators introduced S953, which proposes to increase the gross amount of GILTI under IRC § 951A included in the New York State business income base from 5% to 50%. This increase to corporations’ tax base is done by reducing the amount of GILTI excluded as “exempt CFC income” from 95% to 50%. A change to a 50% GILTI inclusion will put New York State on equal footing with New York City with respect to the amount of GILTI subject to tax. Presumably, New York State would continue to provide a sales factor denominator inclusion equal to the amount of GILTI included in business income – the inclusion going from 5% of GILTI to 50% of GILTI. The legislation does not change New York State’s nonconformity to the IRC § 250 deductions for GILTI and FDII. Those deductions are not included in calculating a corporation’s New York State business income bases.

Further, S953 proposes a graduated tax rate imposed on corporations starting in tax years beginning on or after January 1, 2026. This proposal raises the top rate from 7.25% to 14% for taxpayers with a business income base of more than $20 million. The rate is 8% for taxpayers with business income bases higher than $2.5 million and 12% for taxpayers with business income bases higher than $10 million.

As with most New York State tax legislation, the likelihood of either of S953’s proposals being enacted is generally dependent on whether they make it into the New York State budget legislation. The Eversheds Sutherland SALT team is monitoring S953, as well as all other New York State tax legislative proposals, and will continue to provide updates.

In his draft budget plan for Fiscal Year 2025-2026 released on January 10, 2025, California Governor Gavin Newsom proposed to bring financial institutions in line with most other corporate taxpayers when it comes to apportioning multistate income. Banks and “financial corporations” currently use a three-factor apportionment formula consisting of property, payroll and sales to apportion income. For California purposes, a financial corporation is a corporation that “predominantly deals in money or moneyed capital in substantial competition with the business of national banks,” except for a corporation whose principal business activity consists of leasing tangible personal property. (18 Cal. Code Regs. § 23183(a).) The governor’s proposal would replace the three-factor formula with the single sales factor formula that applies to most other multistate corporations. California’s special rules for computing a financial institution’s sales factor likely would remain the same. (See 18 Cal. Code Regs. § 25137-4.2(c).) The proposal is estimated to increase revenue by hundreds of millions of dollars each year.

The Washington Department of Revenue issued proposed guidance limiting the application of the multiple points of use (MPU) sales tax exemption for bundled software maintenance agreements.

The MPU exemption provides a retail sales tax exemption for the purchase of digital goods, prewritten computer software, remotely accessed prewritten computer software, digital automated services, and digital codes (MPU-eligible products) when those products will be concurrently available for use at one or more locations inside and outside of Washington.

The proposed guidance addresses retail sales in which a single nonitemized price is charged for the sale of a software maintenance agreement that provides both retail-taxable products, such as prewritten computer software updates, and non-retail-taxable products, like help desk services. These mixed element software maintenance agreements (MESMAs) are generally subject to retail sales tax, unless the retail-taxable products are a de minimis part of the agreement. The guidance aims to clarify how the MPU exemption applies to these agreements.

Under the proposed guidance, a MESMA that is otherwise subject to retail sales tax is eligible for the MPU if each of the following criteria is met:

  1. The MESMA includes one or more MPU-eligible products (e.g., prewritten computer software), and each MPU-eligible product is concurrently available for use inside and outside of Washington;
  2. The non-retail taxable products provided under the MESMA relate to the MPU-eligible product(s) of the MESMA (e.g., customer help desk support for the prewritten computer software); and
  3. The MESMA does not contain any retail-taxable product other than the MPU-eligible product(s) that are concurrently available for use inside and outside of Washington. 

The first of these criteria is particularly notable: if the MESMA includes an MPU-eligible product that is not made available outside of Washington, the entire MESMA is subject to retail sales tax. Take, for example, a MESMA that entitles a company to routine software updates and telephonic help desk support, with 40 of 100 users located in Washington, and to access to an online software self-help platform that is utilized by 5 IT staff in Washington. Because the self-help platform only has users in-state, the first criterion is not met. The third criterion likewise is not met because the self-help platform is not eligible for the MPU exemption. Thus, under the proposed guidance, the entire MESMA is subject to retail sales tax.

    Calling all trivia fans! Don’t miss out on a chance to show off your SALT knowledge!

    We will award prizes for the smartest (and fastest) participants.

    This week’s question: Bills were introduced in the Michigan Senate that would increase the rate on sin taxes that apply to what type of activity?

    E-mail your response to SALTonline@eversheds-sutherland.com.

    The prize for the first response to today’s question is a $25 UBER Eats gift card. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!