The Washington Department of Revenue determined that a taxpayer did not qualify for the B&O tax deduction for payments made to an affiliate for the provision of “paymaster services” under R.C.W. § 82.04.43393. The paymaster services deduction did not apply to the taxpayer, which provided payroll services to affiliate restaurant employers, because the taxpayer had a “functional employment relationship” with the affiliates’ employees. Washington allows taxpayers that are “qualified employers of record” to deduct amounts received for the provision of paymaster services to cover the costs of a “qualified employee,” i.e., the employee of an affiliate. To qualify for the deduction, the taxpayer must limit its relationship with its affiliate’s employees and may only provide payroll services on behalf of the affiliate. The deduction does not apply if the taxpayer has a functional employment relationship with such affiliate’s employees, including control over the employee’s work schedule, salary, discipline, hiring and termination.

The Department found that the taxpayer had control over certain decisions relating to its affiliate’s employees, such as the provision of health insurance plan options and qualifications for a full-time employee because the taxpayer provided its affiliate’s employees with a handbook that outlined policies and conditions of employment. Further, the taxpayer did not have any documentation or agreements with its affiliates that stated the relationship between the taxpayer, its affiliates and its affiliates’ employees. The taxpayer has the burden of showing that they qualify for a tax deduction and was required to keep records to demonstrate that the taxpayer had no functional employment relationship with the employees. Because the taxpayer did not meet this burden, the Department determined that it did not qualify for the deduction for paymaster services.


Washington Tax Det. No. 18-0184, 38 WTD 242 (2019).

This is the third edition of the Eversheds Sutherland SALT Scoreboard for 2019. Since 2016, we have tallied the results of what we deem to be significant taxpayer wins and losses and analyzed those results. This edition of the SALT Scoreboard includes a discussion of the Illinois Appellate Court’s recent decision in Labell v. City of Chicago, insights regarding Maryland’s net operating loss deduction, and, to celebrate the opening of our new San Diego office, a spotlight on California tax cases.

Check out the scoreboard here.

After 46 years, the United Kingdom is braced for the impact of leaving the European Union. Brexit will inevitably have a significant impact on trade in goods and services not only with the EU but the rest of the world. The UK has negotiated a Withdrawal Agreement with the EU. This effectively sets out the details of the divorce and provides a transitional period until the end of December 2020 to allow for a new agreement for the future trading relationship with the EU. At the moment, the UK Parliament has agreed in principle to the Withdrawal Agreement but cannot agree on a timetable to implement this agreement into UK law, and there is a stalemate currently which is likely to lead to a general election. Looming over this remains the specter of a “no-deal Brexit,” where no transitional measures apply, and the UK moves directly to third country status with the EU.

The EU has now granted the UK an extension to January 31, 2020. On this date, the UK will crash out of the EU, unless the deal negotiated by the Prime Minister, Boris Johnson, and the EU Member States is agreed by UK Parliament and ratified, or an alternative deal is agreed or further time is agreed with the EU.

So Brexit is really just the beginning of a new chapter of uncertainty as to how the UK will trade with the EU and whether it will be able to secure any free trade deals with other countries, including the US. If the current EU Withdrawal Agreement is ratified by the EU Member States and the UK, there is a transitional period, where the UK will remain effectively in the EU, until December 31, 2020. It is hoped that the UK and EU will be able to agree on a future trading relationship but if it does not, then the parties may agree on a further extension to the transitional period of up to two years, or in theory the UK might still crash out without a deal at the end of the transitional period if no agreement is reached.

Brexit under the Withdrawal Agreement

During a transitional period, the UK’s trading relationship will remain unchanged, so goods and services may be traded freely between the EU and UK without the imposition of customs duties, and the VAT rules will remain unchanged. The UK Government has legislated for a number of significant changes to the VAT system, which we anticipate will be imposed in the event of a no-deal Brexit or may become a feature of the UK VAT system depending on the nature of any free trade agreement.

One potentially important tax implication that would arise on Brexit even under the Withdrawal Agreement is that the EU Parent-Subsidiary and Interest and Royalties Directives will no longer directly apply to the UK. Broadly, these directives remove taxes on dividend, interest and royalty payments between European group companies. This could impact marketplace and other tech businesses with operations in Europe. The degree of impact depends upon whether existing double tax treaties replicate the effect of these directives but also the domestic Brexit legislation of other EU member states since many member states are introducing legislation that seeks to address the impact of Brexit for taxpayers in their jurisdictions.

No deal Brexit

One of the key areas that will be impacted by a no-deal Brexit is VAT on imports and Customs duties. Because if after Brexit the UK is no longer in a customs union with the EU, goods imported into the UK from third countries will no longer be able to move freely into the rest of the EU without complying with customs formalities and paying VAT at the border. If your company, a branch or subsidiary in the UK, is responsible for paying import VAT and duties, new arrangements will need to be put in place to make sure that you can move goods from the UK to the EU and vice versa. The additional costs in terms of tax and time to cross the borders may need to be factored into the pricing of those goods.

Following a no-deal Brexit, the UK will put the onus on third country suppliers to pay import VAT on goods entering the UK at or below £135 (currently about $174). The £15 (currently about $19) Low-Value Consignment Relief will no longer apply either. This will have a significant impact on suppliers who use online marketplaces. Thought, therefore, needs to be given to the contractual arrangements between suppliers and consumers as to who is liable for the import VAT and customs duties.

Postal service operators can register and pay this import VAT and duties for suppliers, but we are hearing that this new procedure is likely to cause delays at the border when goods are entering the UK because of the massive increase in goods now having to comply with VAT and customs clearance. You should, therefore, make sure that you are ready to deal with this and have contingency measures in place. We anticipate that the UK is likely to implement this additional obligation on suppliers in the event that the UK is able to adapt its UK VAT system once it has left the EU.

More generally in relation to VAT, the UK says that it will maintain its VAT system which is currently aligned with that in the rest of the EU, but once the UK is no longer bound by EU law, there is greater opportunity for the UK to diverge and adapt its VAT system.

Outside of sales and other indirect taxes, in addition to the point about the EU directives above, other EU laws such as State Aid laws (used in recent years to challenge the contracting structures of marketplace businesses) and the overriding EU fundamental freedoms that have had a big impact on UK tax law, will no longer directly apply. This will give the UK the ability to take divergent approaches to the EU, although it is unknown yet whether that could be positive or negative for the tech sector.

What to prepare for: The tech sector and the gig economy is under massive pressure from taxing authorities. The UK is also responding to VAT efficient arrangements where services are from one country but delivered to consumers in another. If the UK leaves the EU without a deal (or in the longer term after the transitional period under the Withdrawal Agreement), the UK may become more attractive as there will be VAT advantages to making cross border supplies, particularly of financial services such as banking and payment type services.

On October 16, 2019, the Pennsylvania Commonwealth Court held that a bank was required to pay sales tax on its purchases of computer hardware, canned computer software, and related services because a statutory amendment superseded the bank’s relied-upon exemption regulation. The court held that the bank complied with the regulation, which exempted from sales tax purchases of security equipment, as “construction contracts,” if: (1) the sellers or their designees installed the computer hardware; and (2) the bank used the equipment for its protection or convenience in conducting financial transactions. Rather, the seller is considered to be the consumer of the property and must pay sales or use tax on the installed equipment’s purchase price. At the time of the regulation’s promulgation, Pennsylvania’s statutes did not define “construction contract.” But, despite the regulation, the General Assembly later statutorily limited the term “construction contract” to “real estate” and “real estate structures.” Contrary to the bank’s argument, the court held that to invalidate the regulation, the state did not have to comply with the Commonwealth Documents Law’s regulation publication requirements. The statutory amendment rendered the regulation inconsistent with the underlying statute. Regardless of whether a regulation’s promulgation follows the proper procedures, a regulation must be consistent with the enabling statute. Victory Bank v. Pennsylvania, 236 F.R. 2014 (Pa. Cmwlth. Ct. Oct. 16, 2019).

On October 17, 2019, the Hawaii Department of Taxation released Tax Information Release No. 2019-03 (“TIR”), which provides guidance regarding Hawaii’s Gross Excise Tax (“GET”) marketplace collection provisions effective January 1, 2020. Specifically, the TIR clarified the types of businesses that qualify as marketplaces and administratively carved out certain taxpayers from the definition of marketplace facilitators and the marketplace payment requirements.

In the TIR, the Department indicated that it interprets Hawaii’s marketplace law to exclude travel agents or tour packagers who either: (1) arrange for the furnishing of transient accommodations, or (2) merely arrange for the furnishing of tourism-related services.

The determination of whether a travel agent or tour packager “merely arranges” for the furnishing of tourism-related services depends on the extent of the taxpayer’s involvement in the furnishing of the tourism-related service itself. The guidance lists the following activities that indicate involvement in the furnishing of tourism-related services, including:

• Ensuring that the tourism-related services are provided or that customers are refunded if the service provider fails to provide the service;
• Accepting any responsibility for the quality of the tourism-related service;
• Enforcing uniformity standards on service providers (e.g., cleanliness, comfort, or communication standards or health and safety standards in excess of the standards required by law);
• Controlling the amount and type of charges service providers may charge for ancillary items (e.g., prohibiting tips or payments other than those through the marketplace platform);
• Limiting payment methods service providers may accept (e.g., prohibiting cash payments);
• Providing insurance coverage for the service, customer or property used in furnishing the tourism-related service;
• Imposing exclusivity terms on the service providers selling through the marketplace (e.g., prohibiting service providers from listing services on other platforms);
• Hosting direct communications between the customer and the service provider, and
• Directing customers to communicate with service providers only through the marketplace’s communication channel.

No further guidance is provided, whether one or all these criteria must be met.

For those marketplace facilitators subject to the marketplace collection provisions, the TIR clarifies that the marketplace is the retail seller of all products and services sold through their marketplaces at the 4% GET rate plus any applicable county surcharge. The TIR also noted that sales of marketplace sellers made through marketplace facilitators are sales at wholesale at the 0.5% GET rate. However, the wholesale GET rate only applies to sales of tangible personal property and services by marketplace sellers.

Why this is important: Those marketplaces that furnish tourism-related services should carefully evaluate their activities and determine if their level of involvement is considered “merely arranging” for the furnishing of tourism-related services. If the taxpayer’s level of involvement is minimal, the taxpayer may qualify for the administrative carve-out and may not be responsible for the payment of Hawaii’s GET on entire proceeds from marketplace seller sales. Instead, the marketplace will continue to pay GET on only its proceeds from marketplace transactions.

What to prepare for: The inconsistent classification of marketplace facilitators among the states may result in marketplaces being deemed a marketplace facilitator in some states, while not in others. This may create some confusion for some marketplace sellers and will require additional communication and coordination with marketplace sellers.

The California Office of Tax Appeals (OTA) found that a foreign single-member LLC domiciled in Georgia was “doing business” in California by reason of its 50 percent interest in a pass-through LLC operating in California (LLC) and thus, was subject to the state’s annual LLC tax. The OTA focused on California’s definition of “doing business” in Cal. Rev. & Tax Code § 23101(a), which provides that a person is doing business in the state if it “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” In ruling against the taxpayer, the OTA distinguished the taxpayer’s facts from Swart Enterprises, Inc. v. Franchise Tax Bd., 7 Cal. App. 5th 497 (Ct. App. 2017), which held that an out-of-state taxpayer was not “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit” – i.e., not “doing business” – in California by reason of its small (0.2%), non-managing member interest in a manager-managed LLC investment fund. The OTA reasoned that unlike in Swart (and because the taxpayer failed to provide requested supplemental briefing on the relevant issue), the doing business status of the LLC was attributable to the taxpayer because: (1) the taxpayer failed to show it was not a managing member of the LLC doing business in California; (2) the taxpayer would have significant authority over the activities of the LLC by virtue of its 50 percent interest; (3) although the taxpayer did not have a controlling interest, no other member of the LLC had a larger interest; and (4) the taxpayer presumably could have used its 50 percent interest to block the LLC from taking actions it disagreed with, if it was so inclined.

Appeal of Wright Capital Holdings LLC, Dkt. No. 2019-OTA-219P (Ca. Office of Tax App. Aug. 21, 2019).

A Virginia statute gives circuit courts original jurisdiction to hear declaratory judgment actions brought by businesses to challenge another state’s assertion of sales or use tax nexus. Va. Code Ann. § 8.01-184.1. In a case of first impression, on October 9, 2019, a Virginia circuit court granted the Massachusetts Department of Revenue’s motion to dismiss such a suit challenging the Department’s “cookie nexus” standard for sales tax collection. The Department notified the plaintiff, a Virginia-based company, of the cookie nexus standard in three separate letters. The plaintiff did not allege that the Department had any other contacts with the plaintiff in Virginia. The court dismissed the litigation, finding that the Department’s three letters sent to plaintiff were insufficient to establish jurisdiction under the Due Process Clause of the 14th Amendment of the United States Constitution.

Crutchfield v. Commonwealth of Massachusetts, No. No. CL17001145-00 (Va. Commw. Ct. Oct. 9, 2019).

The Utah Supreme Court upheld the constitutionality of Utah’s taxing scheme, which provides a credit against taxes paid to other states, but not against taxes paid to foreign governments.

The taxpayers – Utah residents who owned interests in a Subchapter S corporation doing business throughout the world – argued that this scheme taxed a disproportionate share of their income compared to the share actually earned from Utah sources. The court determined that this analysis was irrelevant, holding that the US Supreme Court’s decisions only require a credit for taxes paid to other states, not to other nations.

The court noted that the Utah taxing scheme must pass the fair apportionment internal consistency test, which requires a theoretical replication of the Utah tax system by every other state to determine whether it would result in multiple taxation. Shockingly, the court rejected the taxpayer’s position that the taxing scheme must also pass the fair apportionment external consistency test, which instead considers whether the taxing scheme includes extraterritorial value.

The court determined that the US Supreme Court implicitly rejected the external consistency requirement in Comptroller of the Treasury of Maryland v. Wynne, 135 S. Ct. 1787 (2015). In Wynne, the court struck down Maryland’s internally inconsistent taxing scheme, but in doing so, suggested that Maryland’s scheme would not need to satisfy external consistency. The Utah Supreme Court relied on this language to determine that external consistency – at least in the context of residence-based taxation – is dead.

The court also rejected the taxpayer’s claim that the lack of a credit for foreign taxes violated the dormant Foreign Commerce Clause. Because the US Supreme Court has not rendered a decision regarding the application of the Foreign Commerce Clause to a resident’s tax, the Utah Supreme Court declined to do so here. Nevertheless, the court reasoned that the tax did not violate the Foreign Commerce Clause (if it did apply) because the taxpayers received a credit for foreign taxes paid on their federal tax returns. This decision is also noteworthy for its harsh criticism of the Dormant Commerce Clause.

Steiner v. Utah State Tax Comm’n, No. 20180223 (Utah Aug. 14, 2019)

The Supreme Judicial Court of Massachusetts held that pipes and appurtenant equipment used by a taxpayer to produce, store and distribute steam for heating and power generation were exempt from local personal property tax as manufacturing property. Affirming the Appellate Tax Board, the court applied the “great integral machine” doctrine to find that the pipes and appurtenant equipment comprised an integral part of the taxpayer’s steam production and distribution system, thereby qualifying for the manufacturing exemption. Notwithstanding the local board of assessors’ argument that the manufacturing exemption statute specifically excludes “underground conduits, wires and pipes,” the court reasoned that the statutory exclusion does not abrogate the doctrine, which “has endured without legislative interference for well over one hundred years” and “enjoys continued vitality.” In reaching its decision, the court noted that it accorded the Appellate Tax Board’s decision “great deference” and will not disturb the board’s decision if it is based on “substantial evidence and correct application of the law,” as the board is an agency charged with administering the tax law and it has expertise in tax matters.

Veolia Energy Boston, Inc. v. Board of Assessors of Boston, 130 N.E.3d 767 (Ma. 2019)

The New Jersey Appellate Division held that New Jersey’s insurance premium tax (IPT) for self-procured insurance coverage is based only on the risks insured in the state, and not based on risk insured throughout the United States. In reversing the New Jersey Tax Court, the appellate court noted the differences between self-procured insurance and surplus lines insurance noting that the plain language of the IPT statute applies a “home state rule” imposing the IPT on the premiums paid on all risks in the United States, while self-procured insurance is only subject to tax on risks within New Jersey. Because the taxpayer self-procured the insurance from a subsidiary captive insurance company, the court concluded that the insurance was not a surplus lines policy and not subject to IPT on all of its risks in the United States. Although the four relied on the plain language of the statute to resolve the case, the court noted that even if the IPT statute’s reference to surplus lines policies was ambiguous, any ambiguity would need to be resolved in the taxpayer’s favor.


Johnson & Johnson v. Dir., Div. of Taxation, & Comm’r, No. A-5423-17T3 (N.J. Super. Ct. App. Div. Sept. 25, 2019)