Massachusetts Court of Appeals held that a taxpayer could not rely on timely applications for refund of deficiency assessments to also seek refund resulting from alleged overstatement of sales factor in corresponding years’ returns, where the initial application for abatement did not include the sales factor argument and statute of limitations had since lapsed.

The Court of Appeals concluded that the taxpayer’s deficiency assessments only encompassed the stated amounts in the notices of deficiency assessment, not any differences between the amounts the taxpayer self-reported on its returns for the appealed years and the amounts “properly due.” The taxpayer sought to broaden the scope of its deficiency assessments appeals to also seek a refund for taxes paid because of an overstated sales factor. The Court of Appeals concluded that because the taxpayer had never applied for an abatement of the tax originally reported on the return, any challenge to the original self-assessment was time-barred.

Raytheon Co. v. Commissioner of Revenue, Case Nos. 18-P-790 and 18-P-1468, Mass. Court of Appeal (September 12, 2019)

On October 4, 2019, the California Department of Tax and Fee Administration (CDTFA) released its Initial Discussion Paper in anticipation of an Interested Parties Meeting (IPM) set for October 15, 2019 in Sacramento. The subject of both the IPM and the Discussion Paper is how to interpret, clarify and make specific the Marketplace Facilitator Act.

Assembly Bill (AB) No. 147 (Stats. 2019, ch. 5) was signed into law in April 2019 and, broadly speaking, has two components. First, as a result of Wayfair, AB 147 added California Revenue and Taxation Code section 6203(c)(4) which provides that a retailer engaged in business in California includes “Any retailer that, in the preceding calendar year or the current calendar year, has total combined sales of tangible personal property for delivery in this state by the retailer and all persons related to the retailer that exceed five hundred thousand dollars ($500,000). That new provision was operative as of April 1, 2019, and was the subject of a CDTFA Initial Discussion Paper released on May 10, 2019, and the subject of a CDTFA IPM held on May 23, 2019, regarding needed amendments to existing CDTFA regulations 1684 and 1827 to conform them to this statutory change.

Second, AB 147 expanded the definition of “retailer” to include marketplace facilitators, as defined, and those new provisions – known as The Marketplace Facilitator Act – were operative as of October 1, 2019. The IPM held on May 23, 2019 did not address the marketplace facilitator provisions of the bill, which CDTFA chose to address at a separate IPM, and which is now set for October 15th. The Initial Discussion Paper just released for that IPM includes a copy of Proposed Regulation 1684.5, “Marketplace Sales” and staff “looks forward to hearing the interested parties’ thoughts regarding the proposed regulation as well as any additional issues that may warrant further consideration.”

California Assembly Bill (AB) 1790 passed the Legislature on September 26, 2019 and was sent to the Governor.   The Governor has until October 13th to act on the bill.  The Legislative Counsel’s Digest for AB 1790 states the bill would require a marketplace, as defined, to ensure that their terms and conditions regarding commercial relationships with marketplace sellers meet specified requirements, including that the terms and conditions are drafted in plain and intelligible language.  The bill would define “marketplace seller” for these purposes as a person residing in the state who has an agreement with a marketplace and makes retail sales of services or tangible personal property through a marketplace owned, operated or controlled by that marketplace.  If a marketplace decides to suspend or terminate a marketplace seller based upon an alleged violation of law or a term, condition or policy of the marketplace, the bill would require the marketplace to provide the marketplace seller with a written statement of reasons for that decision, as specified.

Buffy Wicks, the author of AB 1790, placed a September 12, 2019 letter of legislative intent in the California Assembly Journal for September 14, 2019.  The letter states that while “marketplace” in AB 1790 is “intentionally broad,” it is not intended to apply to a company that simply advertises third-party sellers’ products and services on their website or platform or refers customers to third-party sellers through their respective company website, so long as any retail sales are completed on the third-party sellers’ own websites or otherwise completed outside of the company’s website or platform.   The letter also states the intent of the bill is for an online marketplace to post only the marketplace’s standard terms and conditions, which pertain to issues raised in AB 1790 rather than posting entire contracts with marketplace sellers.  The letter states that AB 1790 will help level the playing field for small businesses by requiring online e-commerce marketplaces to provide clear and specific information about their terms and policies, make that information available online to the businesses that use their platform to sell goods and set objective grounds for disputes about the disbursement of funds from the third-party sales that are in the platform’s possession.

  We interrupt our regularly scheduled SALT dog and cat programming to bring you our very first SALT duck and duckling of the month. Meet the mother-daughter duo, Natalia and Tatiana, two Muscovy ducks who could only fittingly be given Russian names. The mother-daughter duo is part of a larger flock of ducks and ducklings that live on a smallholding owned by Eversheds Sutherland’s UK Tax Partner, Giles Salmond.

Natalia, a two-year-old, just hatched her first flock of ducklings a couple of weeks ago. Tatiana is one of seven new ducklings in Natalia’s flock. While Tatiana is still young, she’s enjoying her time on the farm, eating the grass and any small bits of grain she can get her beak on.

Now that her ducks are in a row, Natalia is beginning to return to her everyday activities. Born with cunning wit, and a great sense of adventure, Natalia is an expert at escaping her fenced area and venturing off onto neighbors’ land. She also enjoys eating the plums that fall from the tree in her area of the garden, but most importantly, she enjoys hanging out with Giles. Although Giles is still waiting for her brood to get a little older before he can return to enjoying a cold vodka with her.

We are thrilled to feature Natalia and Tatiana as our SALT Pets of the Month!

The shift in tax collection responsibility to marketplace facilitators raises questions on how to accurately source sales made through the marketplaces. Depending on the state sourcing rules, a marketplace facilitator may need to know whether sourcing is determined based on the presence/location of the marketplace seller in the state or the presence/location of the marketplace facilitator. This may impact whether sales tax or use tax is required to be collected and the applicable tax rate.

As part of the marketplace facilitator provisions enacted in the states, some states have provided special sourcing provisions or guidance for sales made exclusively through marketplaces. For example, in Ohio, the marketplace facilitator provisions provide for specific sourcing for marketplace facilitators stating that they must collect tax based on a tiered set of rules that first require the marketplace facilitator to source to:

the location known to the marketplace facilitator where the consumer or the donee designated by the consumer receives the tangible personal property or service, including the location indicated by instructions for delivery to the consumer or the consumer’s done…” (Ohio R.C. 5741.05)

In Arizona, the Department of Revenue issued an FAQ clarifying the sourcing rules for marketplaces. The FAQ indicated that the sourcing rules for marketplaces depend on whether the marketplace facilitator is located in or outside of Arizona. For marketplace facilitators located in Arizona, sales are sourced based on the tax rates and code of the marketplace facilitator’s location in Arizona, if the order information is received in Arizona and the tax rates and codes of the customer’s address are outside of Arizona. If the marketplace facilitator is located outside of Arizona, then sales are sourced to the shipping address of the customer. If there is no shipping address, then the sales are sourced to the customer’s billing address.

Why this is important: If sales tax is not properly sourced using the states origin or destination-based sourcing rules, marketplace facilitators may be subject to additional tax, interest and penalties. Additionally, if the marketplace has under or over collected sales tax, there is a risk of consumer complaints, class action lawsuits and other state actions.

What to prepare for: Marketplace facilitators should review each of the state sourcing rules and marketplace collection laws to understand how sales made through the marketplace should be sourced.

Next Monday: MTC/NCSL Update

The California Office of Tax Appeals (OTA) reversed the Franchise Tax Board’s (FTB) determination that an out-of-state limited liability company (LLC) had taxable nexus with California solely because it held an ownership interest in an LLC operating in the state that ranged from 1.12% to 4.75%. California imposes an annual $800 tax on LLCs “doing business” in the state, with “doing business” defined by statute to mean “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” Cal. Rev. & Tax. Code § 23101(a). Relying on a Court of Appeal decision which held an out-of-state corporation with a 0.2% ownership interest in a California LLC investment fund was not “doing business” under the same definition, the FTB argued “0.2% is deemed to be the threshold between actively doing business and passively doing business” and because the out-of-state member’s interest in the LLC doing business in California was “well beyond the 0.2% … limit,” it too was doing business in the state. The OTA rejected the FTB’s “bright line” test and instead engaged in a more thorough inquiry of the relationship between the out-of-state member and the in-state LLC. The OTA concluded the out-of-state LLC did not have any ability or authority to influence or participate in the management or operation of the LLC doing business in the state based on such facts as: the LLC doing business in California was manager-managed; the out-of-state company had no power to manage the LLC or bind or act on its behalf in any way, and the out-of-state company had no interest in any specific property in the LLC. Accordingly, the OTA held the out-of-state LLC was not “doing business” in California.

Appeal of Jali, LLC, OTA Case No. 18073414 (July 8, 2019) (pending precedential).

The Eversheds Sutherland SALT Team is always excited to see what kind of pets our clients and friends have. Our team features a different pet at the end of every month, and we want to feature YOURS! Featured pets will receive a fun prize from the SALT Team. The deadline for September submissions is Friday, September 27.

To submit your pet to be featured, visit the Eversheds Sutherland SALT Shaker App, click “Pet of the Month” in the drop-down, then click “Submit A Pet.”

Don’t have the app? It is available for download in the Apple App Store, Google Play and the Amazon Appstore.

The Texas Comptroller adopted a proposed decision issued by an Administrative Law Judge (ALJ) finding that a company owed sales tax on its sales of online gaming services to Texas residents. The company, who had at least one employee in Texas, developed and maintained online interactive social gaming experiences for its registered users, including those allowing for the adoption of virtual pets. The ALJ determined that the company had sufficient nexus with the state and that the company provided taxable amusement services in Texas because in-state residents used its website services. The ALJ rejected the company’s argument that its services were provided at its out-of-state headquarters, and not where the Texas residents used the service. Instead, the ALJ ruled that an electronic game amusement service transaction “is consummated where the amusement service is provided or delivered, not at the seller’s place of business,” and that the company provided taxable amusement services in Texas.

Petitioner v. Texas Comptroller of Public Accounts, SOAH Docket No. 04-19-3723.26 (July 19, 2019)

The court held that the taxpayer, a freight broker, could deduct freight and delivery charges, which it received from its customers and remitted to third-party delivery providers, from gross receipts before calculating a city’s business privilege tax. A local regulation provides an exemption for freight delivery or transportation charges “paid by the seller for the purchaser.” The court rejected the city’s argument that the freight broker was not a “seller” eligible for the exemption, because the broker only procured services, but did not sell goods. Instead, the court held that the term “seller” could be read broadly to encompass the freight broker’s activities. The court noted that the exemption regulation was ambiguous and construed it in favor of the taxpayer. S&H Transport, Inc. v. City of York, 210 A.3d 1028 (2019)