On February 13, 2020, the Nebraska Legislature’s Revenue Committee heard testimony on Legislative Bill 989, which would expand Nebraska’s sales tax base to include sales of digital advertisements.

After an introduction by the bill’s sponsor, Senator Justin Wayne, the Revenue Committee heard testimony from four witnesses, each opposing the bill. The Committee also received numerous letters in opposition, including from the Council On State Taxation, the Internet Association, and the Nebraska Press Association, along with 57 additional letters.

Summary of Legislative Bill 989

On January 14, 2020, the Nebraska Legislature introduced L.B. 989, which proposes to expand Nebraska’s existing sales and use tax law to retail sales of “digital advertisements.” The bill defines “digital advertisement” as “an advertising message delivered over the Internet that markets or promotes a particular good, service, or political candidate or message.” The bill does not contain any mechanism for sourcing digital advertisements to Nebraska. If enacted, sales of digital advertisements would be subject to sales tax, beginning October 1, 2020.

The fiscal note estimates that the bill would raise $27.1 million in revenue for FY 2020-21, $43.7 million for FY 2021-22, $47.1 million for FY 2022-23, and $50.6 million for FY 2023-24.

Revenue Committee Hearing

Senator Wayne, in support of his bill, testified that there should be parity between the purchase of physical advertisements and online advertisements. He questioned why he paid sales tax on the purchase of yard signs for his campaign and construction company, but did not pay sales tax when he placed a similar advertisement online. Senator Wayne acknowledged that there are some issues with the bill, but he believes that it does not violate federal or constitutional law. Senator Wayne passed out amendments to the bill to the Committee members, but he did not discuss or read the amendments into the record. After being asked by the Committee how L.B. 989 would impact newspapers, he stated that he would support exempting newspaper advertisements and commercials from sales tax; he stressed his desire to impose sales tax on the digital equivalent of yard signs.

Representatives from the Nebraska Broadcasters Association, Lincoln Independent Business Association, and Nebraska Grocery Industry Association, along with a lobbyist representing 29 businesses and associations (including the Motion Picture Association, Lincoln Chamber of Commerce, Nebraska Licensed Beverage Association, Nebraska Press Association, Nebraska Broadband Coalition, and Nebraska Retail Federation) testified in opposition to the bill. They raised various concerns, including:

  • The bill would drive business out of the state;
  • Media outlets would receive less advertising revenue because companies would not raise their advertising budgets to account for the new tax;
  • The tax would be passed on to Nebraska businesses and customers;
  • The tax may violate the Internet Tax Freedom Act because it does not apply to non-digital advertising; and
  • The tax may violate the First Amendment of the United States Constitution because it specifically taxes advertising for a political candidate or message.

One of Many

Nebraska is not alone in its efforts. Several other states (Maryland, New York, and South Dakota) have proposed legislation to expand their sales taxes to advertising services or proposed entirely new taxes on digital advertising services or data.

Next Steps

Nebraska has a unicameral legislature. Thus, the bill will only need to pass one house before being sent to the governor for signature. However, the legislature will need to move quickly as Nebraska has a relatively short legislative session. The legislature is scheduled to adjourn on April 23rd.

The Eversheds Sutherland SALT team will continue to follow Nebraska Legislative Bill 989 during the legislative session, along with the other advertising service and data tax bills.

In 2018, Maryland S.B. 743 temporarily extended the 8% sales tax on short-term vehicle rentals to reach peer-to-peer car sharing companies. That temporary tax is due to sunset June 30, 2020. S.B. 573 seeks to make the tax upon peer-to-peer car sharing companies permanent and increase the sales tax rate to 10% for both traditional rentals and peer-to-peer sharing.

S.B. 1174, a bill seeking to simplify and reform the Florida communications services tax, has advanced in committee. The bill would expand the definition of taxable “video services” to expressly include streaming services where access to content expires at a specific time or on the occurrence of a condition subsequent. Per the legislative analysis and fiscal impact statement, the bill is an attempt to codify the position already being taken by the state Department of Revenue.

The bill also attempts to streamline the communications services tax rates, setting one tax rate for all municipalities and charter counties and a second tax rate for non-charter counties. Currently, 482 localities set their own caps. Under S.B. 1174, charter counties and municipalities may charge at either 0.0% or 4.0%, and non-charter counties may charge at either 0.0% or 2.0%. The changes to local rates would take effect January 1, 2021.

On January 16, 2020, the Supreme Court of Washington, in an en banc decision, held that a retailer was entitled to take bad debt deductions for sales and Business and Occupation (“B&O”) taxes when its customers defaulted on purchases made using private label credit cards.

The retailer contracted with banks to offer private label credit cards to the retailer’s customers. The banks offered credit to cardholders who purchased the retailer’s goods. After the purchases, the banks would send the full payments and sales tax to the retailer, which would then remit the sales tax to the Department of Revenue. The retailer agreed to reimburse the banks for losses they sustained on defaulting customer accounts, up to a 7% cap. In such instances, the retailer claimed bad debt deductions on its federal income tax returns, and sought refunds of sales and B&O taxes from the Department.

The court rejected the Department’s argument that the retailer is not entitled to the deductions because it fully recovered the sales tax funds from the banks and incurred no bad debt. The court reasoned that the retailer was entitled to take the bad debt deduction on the sales tax because it: (1) was the retail seller; (2) remitted the sales tax to the Department; and (3) was the guarantor of the unpaid sales tax. Even though the banks fully paid the retailer, the retailer did not receive payment from the defaulting buyers, and the retailer was the guarantor to the banks for the unpaid sales tax. The court concluded that it was irrelevant that the bad debt was created in two steps rather than one; the policy behind the bad debt deduction was to provide relief to vendors left holding uncollectible sales tax, including the retailer. For the same reasons, the court also determined that the retailer had incurred bad debt and was entitled to a bad debt deduction for B&O tax purposes.

Lowe’s Home Centers, LLC v. Washington Dep’t of Revenue, No. 96383-5 (Wash. Jan. 16, 2020) (en banc).

The Colorado Court of Appeals held that the City of Aurora correctly levied use tax on American Multi-Cinema, Inc.’s (AMC’s) license agreements with film distributors. The court concluded that the true object of the arrangement was to obtain tangible personal property (i.e., the data files) rather than being a nontaxable, intangible right. In the past, AMC had received motion pictures from distributors in the form of film reels, but now AMC receives motion pictures via digital files on portable hard drives. AMC argued that the intangible right to exhibit the film was more valuable than the tangible good (i.e., the data files), which was provided at no cost. Unpersuaded, the court stated that without the transfer of the actual film, the license to exhibit it would be valueless. Thus, the data files were not “merely incidental” to the licensing agreements, and the true object of the agreements was to obtain the tangible data files.

The court also rejected AMC’s contention that the transactions were exempt sales for resale. AMC argued that because it could not alter the data files and could use only unaltered versions to exhibit to its movie patrons, the final consumers of the film were its patrons. In rejecting AMC’s argument, the court relied on prior decisions holding that a theater’s exhibition of films was not a resale. Because AMC acquired and displayed a final product, the court concluded that AMC was the final consumer of the data files and was not exempt from the City’s use tax.

Am. Multi-Cinema Inc. v. City of Aurora, Dkt No. 18CA2165 (Colo. Ct. App. Jan. 2, 2020).

On January 30, 2020, Governor Kemp signed Georgia’s marketplace facilitator bill, H.B. 276, into law. Effective April 1, 2020, the law will require marketplace facilitators to collect and remit sales and use tax on behalf of marketplace sellers. It will apply to marketplace facilitators with sales in excess of $100,000 in the state.

A marketplace facilitator is defined as a person that contracts with a seller to facilitate a retail sale on behalf of such seller to: (i) provide a service that makes available or facilitates a retail sale including promoting, marketing, taking orders or reservations, providing the physical or electronic infrastructure connecting sellers and purchasers, or otherwise similarly assisting the seller, but excluding merely processing the payment; and (ii) collecting, charging, processing, or otherwise similarly facilitating payment .

The law contains exceptions for franchisors with sales in excess of $500 million nationwide and for facilitated sales of dealers with sales in excess of $500 million in the state. The bill also prohibits class actions against marketplace facilitators arising from the facilitator’s overpayments of sales taxes.

Although Georgia previously enacted bright-line nexus standards under Wayfair, Georgia’s initial marketplace legislation failed to pass in last year’s legislative session.

Over 40 state legislatures have convened their 2020 legislative sessions. Last year, states moved quickly to impose collection and remittance obligations on remote sellers and marketplace facilitators in light of Wayfair. This year, states are charting a new course – proposing legislation to expand sales taxes to include advertising services or proposing entirely new taxes on advertising and data. Currently, tax proposals are percolating in:

  • Maryland proposes an entirely new gross receipts tax on gross revenues earned from online advertisements (SB 2 & HB 695)
  • Nebraska proposes to expand the sales and use tax base to include online advertisements (LB 989)
  • New York proposes an entirely new tax on gross income corporations derive from the data individuals share with corporations (AB 9112 & SB 6102)
  • South Dakota proposes to subject advertising services to sales and use taxes (HB 1284)

As states often adopt proposals considered by sister states, we expect additional tax proposals. Buckle up.

The Colorado Department of Revenue will hold a stakeholder work group to discuss a draft sales tax rule that will “clarify the Department’s treatment of digital goods as tangible personal property.”  In advance of the meeting, the Department has prepared a draft rule.  Interested parties can attend the work group meeting on March 4, 2020 at 10:00 a.m. at 1313 Sherman Street, Room 220, Denver, CO 80261 or participate via conference call.  The Department also encourages interested parties to submit comments on the draft rule to dor_taxrules@state.co.us.

For more information, please contact the Eversheds Sutherland SALT Team.

A 2018 Arizona ballot initiative banned the imposition or increase of transaction-based taxes on services. A December 2019 ordinance in Phoenix increases the fee charged on pickups by on-demand drivers at the Phoenix airport. The ordinance was supposed to take effect February 1, 2020, but the city agreed to suspend collection as the state of Arizona challenges the ordinance in the state courts.