Earlier today, the D.C. Council voted to amend the Fiscal Year 2021 Local Budget Act of 2020 (“LBA”) and effectively eliminate the proposed sales tax expansion to advertising services and personal information.

On July 21st, the Council first attempted to vote on the LBA (which sets the District’s expenditures), but the Council was unable to agree on: (1) whether to retain the sales tax expansion in full; (2) whether to amend the advertising tax to impact only the placement of advertising; and (3) how to account for the $18.4 million that the advertising tax was expected to generate, if they chose to eliminate the tax. Chairman Mendelson then recessed the meeting until today to attempt to reduce the budget by the $18.4 million. Late on July 22nd, the Council’s and Chairman Mendelson’s offices distributed documents detailing his proposal.

At today’s Legislative Meeting, numerous councilmembers commented that they disagreed with the advertising tax and were glad to come to a compromise that eliminated it. However, Councilmember Grosso noted that he still supports the advertising tax. He wants to broaden the sales tax base and ultimately decrease the tax rate. The Council then approved the revised budget by a vote of 11-2. On July 28th, the Council will formally eliminate the proposed taxes by amending the Fiscal Year 2021 Budget Support Act of 2020.

While today was a victory against the advertising service and personal information sales taxes, the Council expects that they will revisit the budget in approximately two months after the District government understands the full impact of the COVID-19 pandemic. In a recent press release, Chairman Mendelson also announced that he is scheduling a hearing on the Tax Revision Commission Reestablishment Amendment Act of 2019, which would re-establish the Tax Revision Commission and require it to submit tax recommendations to the Mayor and Council. The Tax Revision Commission last released a Final Report in May 2014 that made numerous recommendations, including: (1) reducing the business franchise tax from 9.975% to 8.25%; (2) raising the sales tax rate from 5.75% to 6%; and (3) creating separate income tax brackets for single and married people. If re-established, the Tax Revision Commission may address advertising service and personal information sales taxes, among numerous other issues affecting multistate taxpayers. Eversheds Sutherland SALT will closely monitor any developments of the re-established Commission.

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Which state is the latest state to enact legislation complying with the Streamlined Sales & Use Tax Agreement?

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During the July 21st Legislative Meeting, the D.C. Council voted to postpone consideration of the Fiscal Year 2021 Local Budget Act of 2020 (“LBA”) (which establishes the expenditures of D.C. revenue) to Thursday, July 23rd at 12:30 p.m. Prior to that meeting, the D.C. budget office will attempt to trim $18.4 million from the LBA, which will allow the Council to later eliminate the proposed sales tax on advertising services from the Fiscal Year 2021 Budget Support Act of 2020 (“BSA”). It is unclear whether the Council would also eliminate the proposed sales tax on sales of personal information.

A proposed amendment to the LBA (along with a forthcoming amendment to the BSA) is also pending, in case the D.C. Council does not eliminate the advertising tax. Chairman Mendelson proposed a funding reduction to the D.C. libraries budget in order to remedy an unexpected impact of the advertising tax. He expressed surprise that, as written, the tax would apply to each step of the advertising process. Instead, he explained, “the intention of the tax was only to apply to the placement and display of advertisements, and not on the planning or creation of those advertisements.” Without proposed language, it is not yet known whether the proposed fix would be to amend the definition of “advertising services” or incorporate a specific sale for resale exemption.

The Eversheds Sutherland SALT Team will continue to follow the breaking news on these potential taxes as it unfolds over the next week.

Join Todd Lard, Charlie Kearns and Stephanie Do from the Council on State Taxation (COST) on Wednesday, July 22 at 3:00 PM ET for a webcast discussion on the technical aspects and current status of the District’s proposed advertising services and personal information taxes.

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In what could best be described as a “tax on talking,” the DC Council will vote on a budget tomorrow that relies on revenue from expanding the sales tax to advertising services and personal information. The rate is generally 3%, but could rise to 7.25% for certain taxpayers.

The legislation quickly moved through the Council with virtually no debate. As a result, taxpayers and policymakers struggle to understand the exact scope of the new tax. Given the broad definition of advertising services, the tax could apply to a broad swath of services. Examples of new taxable services subject to a 3% rate include traditional print and broadcast advertising; banner ads; marketing fees paid to food delivery platforms; marketing and click fees paid to real estate platforms; sign spinners; podcast product promotions; promoted search results; Instagram influencers; YouTube vloggers; sponsorships on sports team jerseys; naming rights for stadiums and arenas; sponsorships for non-profit organizations; and advertising at local conventions. Advertising at the Capital One Arena and Nationals Park could be subject to not just the 3% advertising service sales tax, but additionally the 4.25% arena-specific sales tax. Complicating the question of what is taxed is the absence of any language that sources advertising services that occur in multiple jurisdictions. Would DC tax every ad that is seen by a DC resident?

How the tax will apply to the sale of personal information is equally uncertain. The 3% tax applies to any “person” that sells personal information. Person includes not only individuals, but also corporations and other entities. The definition of personal information includes a list of examples of personal information and can be as simple as charging another person a fee for someone’s name. In the modern economy, there are numerous instances where this type of information exchange occurs on a routine basis. For example, making a restaurant reservation on OpenTable involves the reservation system transmitting personal information to a restaurant for a fee. Should restaurants expect to pay sales tax on their fees from OpenTable?

Despite many concerns with the imposition of the new taxes, the Council seems determined to enact a budget that relies on this new revenue. A final vote on the taxes will occur next Tuesday, after which it will await the Mayor’s signature and a congressional review period.

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For more on the DC proposed tax on advertising services and personal information, register for our July 22 webcast here.

The DC Council is considering a new sales tax on advertising services, including digital advertising services, and personal information.

On July 6, the DC Council released the Committee Print of the Fiscal Year 2021 Budget Support Act of 2020, which includes a sales tax expansion to those services beginning October 1, 2020 at the reduced rate of 3% instead of the general 6% sales tax rate. On July 28, the DC Council will hold its second (and final) vote on the Fiscal Year 2021 Budget Support Act of 2020. If enacted, the District of Columbia would become the first jurisdiction to target sales of digital advertising services and personal information.

Join Todd Lard, Charlie Kearns and Stephanie Do from the Council on State Taxation (COST) on Wednesday, July 22 at 3:00 PM ET for a webcast discussion on the technical aspects and current status of the District’s proposed advertising services and personal information taxes.

Register Now

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Enacted in 1976, which federal law prohibits state and local governments from imposing discriminatory taxes against railroad companies?

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In a recently issued revenue ruling, the Tennessee Department of Revenue determined that a taxpayer’s digital services provided to other businesses were taxable “specified digital products,” a broad term based on definitions (and subject to detailed operating rules) in the Streamlined Sales and Use Tax Agreement. Sellers of business-to-business digital services should review this ruling to determine whether their offerings may be subject to Tennessee sales tax as a specified digital product, which historically has been associated with consumer digital goods like digital video and digital music.

First, the DOR determined that overhead music services and on-hold messaging services are taxable “digital audio works.” The taxpayer’s overhead music services consist of pre-programmed, commercial-free music, along with optional add-on services involving the insertion of customer-specific promotional messages into the music playlists, all of which were determined to be taxable. Its on-hold messaging services include the production of customized recorded messages, including script (advertising/marketing/copyrighting), consultation services, any music licensing fees incurred in production of the messaging, and professional talent options used to produce the messages.

The DOR further ruled that the taxpayer’s customized videocast programming services, which allow custom promotional content to be played on video screens at customers’ locations, are subject to sales and use tax as a “digital audio-visual work.” However, the DOR concluded that optional weather, news, and stock-ticker feeds that could be included with the videocast programming services are exempt information services pursuant to Tenn. Code Ann. § 67-6-233(d).

Finally, for each digital service under consideration, the DOR found that the taxpayer did not permit its customers to retransmit the content. Accordingly, the customers bore the incidence of the tax as end users, thereby obligating the taxpayer to collect.

Tenn. Dep’t Revenue, Ruling #20-03 (May 4, 2020)

The Delaware Supreme Court reversed a lower court’s ruling and held that Overstock.com was not liable for nearly $7 million in damages because there was insufficient evidence to show that Overstock violated the Delaware False Claims Act by not reporting gift card unredeemed balances. The Plaintiffs – Delaware and the whistleblower who brought this case under Delaware’s whistleblower law – argued that Overstock engaged in a scheme to avoid paying abandoned gift card balances to the State because Overstock did not file escheat reports. The court disagreed, holding that in order for Overstock to be found liable for making a reverse false claim, it must have submitted a false record or statement that gave the State the impression that Overstock either did not owe the State money or owed the State less money than Overstock was required to pay. “The absence of a record or statement cannot form the basis of a reverse false claim…,” the Court ruled. Accordingly, the Court held that the lower court’s jury instruction “that the failure to file an escheat report in the face of an obligation to do so was the equivalent of a false record of statement for purposes of a reverse false claims” was a reversible error.

State of Delaware ex. rel. William Sean French, C.A. No. N13C-06-289 (Del. 2020)

On June 24, the Rhode Island Governor signed into law S2650 Substitute A, which clarifies the state’s sales taxation of cloud computing and streaming digital products to comply with the Streamlined Sales & Use Tax Agreement. The bill amends the definition of a taxable sale to include any license, lease, or rental of prewritten or vendor-hosted computer software and specified digital products.  The bill also amends the sales tax base for specified digital products, confirming that the tax is only on sales to end-users and is imposed regardless of whether the right to use the specified digital products is on a permanent or less than permanent basis and whether the purchaser must make continued payments for such right. The act is immediately effective.