On June 4, 2021, the California Franchise Tax Board (“FTB”) held its sixth interested parties meeting (“IPM”) to discuss the latest proposed amendments to FTB’s market-based sourcing regulation, Cal. Code Regs., Title 18, Section 25136-2.  At the IPM, FTB staff provided an explanation of the newly-proposed regulation language, which includes:

  1. A definition of “asset management services;”
  2. A definition of “professional services” that includes “management services, tax services, payroll and accounting services, … legal services, business advisory consulting services, [and] technology consulting services,” among others;
  3. A special assignment rule for “professional services” providing for the use of a customer’s billing address where the taxpayer provides “substantially similar professional services” to more than 250 customers;
  4. A change to the applicability date of the amendments to taxable years beginning on or after January 1, 2023; and
  5. The removal of a proposed election to apply the amendments retroactively.

Responding to a comment that some taxpayers already have taken return positions consistent with the proposed amendments based on the now-deleted retroactive election provision, Staff reiterated that under the latest draft, the amendments are intended to apply prospectively only.

Please see our previous posts here and here for additional background on FTB’s proposed amendments to the market-based sourcing regulation.  FTB will accept written comments on the proposed regulation language until July 5th and will release a summary of the comments received after that date.  There was no discussion about whether FTB’s next step will be to issue another round of proposed amendments or proceed to the formal rulemaking process.

On May 14, 2021, the Indiana Tax Court upheld a pharmacy benefit management company’s sourcing of its receipts under Indiana’s costs of performance rules applicable to receipts from services. The court rejected the Indiana Department of Revenue’s position that the receipts should instead be sourced according to the rules for sales of tangible personal property. The taxpayer was engaged in the business of administering the prescription drug and pharmacy benefits of health insurers. As part of this service, the taxpayer negotiated contracts with over 60,000 pharmacies, specifying negotiated rates to be charged when filling the subscriptions of its insurer client’s members. When a member had their prescription filled at the pharmacy, the member would pay the pharmacy their copayment, and the taxpayer would pay the pharmacy the difference between the negotiated rate and the member’s copayment. The taxpayer would then get paid by billing its insurer clients a service charge comprised of both (i) the amount paid to the pharmacies for the prescription drugs dispensed and (ii) the taxpayer’s administrative fee.

On motion for summary judgment, the Department argued that the taxpayer’s receipts should be sourced according to the rules applicable to sales of tangible personal property, because the taxpayer was not a mere conduit through which payment for prescription drugs passed but instead it exercised a right, interest and title in the prescription drugs sold to its members and that the taxpayer had admitted it sold prescription drugs. The tax court rejected the Department’s position as unsupported under the record. Based on the taxpayer’s designated affidavits and contracts stating that its clients engage it and pay for the provision of services and that it does not purchase any drugs for resale or ever acquire possession or title of any drugs sold to its insurer client’s members, the tax court found that the taxpayer properly apportioned its income as a service provider and granted summary judgment in favor of the taxpayer.

Express Scripts Inc. v. Ind. Dep’t of State Revenue, Dkt. No. 19T-TA-00018 (Ind. Tax Ct. May 14, 2021).

On May 30, 2021, the Illinois Legislature passed S.B. 2066, which creates an exemption and retroactive credit for marketplace sellers for transactions in 2020 where tax was paid by the marketplace seller and the marketplace facilitator. Previously, Illinois’s marketplace law imposed a use tax (UT) obligation on a marketplace facilitator on all taxable sales of tangible personal property made by the marketplace facilitator or facilitated for the marketplace seller to customers in Illinois. However, marketplace transactions fulfilled with in-state inventory created a retailer’s occupation tax (ROT) liability for marketplace sellers. The imposition of the two taxes on the same transaction resulted in a problem because there was no mechanism to credit a marketplace facilitator’s remittance of UT against a marketplace seller’s ROT obligation on the same sale. The Department previously issued a compliance alert stating that it had no authority to provide a marketplace seller with a credit against ROT for the tax that was remitted by the marketplace facilitator. The bill adds a new subsection to the ROT exemption statute providing that “beginning January 1, 2020 and through December 31, 2020, sales of tangible personal property made by a marketplace seller over a marketplace for which tax is due under this Act but for which use tax has been collected and remitted to the Department by a marketplace facilitator under Section 2d of the Use Tax Act are exempt from tax under this Act.” Further, “marketplace sellers that have properly remitted tax under this Act on such sales may file a claim for credit as provided in Section 6 of this Act.” However the credit is not permitted if the marketplace facilitator has received or filed a claim for a credit or refund for such taxes.

On June 3, 2021, the Maryland Comptroller of Treasury issued a revised version of Business Tax Tip #29, which clarifies the Comptroller’s interpretation of its sales and use tax on “digital products,” including software. With particular attention given to recently-effective amendments by S.B. 787, the revised version explains the Comptroller’s interpretation and application of the sales and use tax to:

  1. The expanded exemption for certain software offerings – including a long list of potentially non-taxable customized, configured, or modified software and eleven explanatory examples;
  2. Services provided electronically, including personal, professional, or insurance services;
  3. Advertising agencies’ services and creation of tangible personal property and digital products; and
  4. Continuing education classes, seminars, or conferences – including those performed by non-profit organizations – and courses and lectures by schools.

2020 H.B. 932 – Chapter 38 of the Acts of the General Assembly of 2021

Effective March 14, 2021, the Maryland General Assembly’s passage of H.B. 932 – over the veto of Governor Lawrence Hogan, Jr. – expanded the sales and use tax to digital products and digital codes. “Digital product” means “a product that is obtained electronically by the buyer or delivered by means other than tangible storage media through the use of technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.”

Business Tax Tip #29 – Original

Following the enactment of H.B. 932, the Comptroller issued Business Tax Tip #29, Sales of Digital Products and Digital Code. The Comptroller indicated numerous items that it will subject to sales tax as digital products, including:

  1. E-Books;
  2. Downloaded or streamed motion pictures, music videos, news and entertainment programs, live events, sporting events, tutorials, etc.;
  3. Access to or use of video or online games; and
  4. Prerecorded or live music, performances, audio books or other written materials, and speeches.

However, relying on a brief reference in the fiscal note, the Comptroller interpreted the sales tax on digital products to apply to sales of canned or commercial-off-the-shelf software if obtained electronically by the buyer, as well as sales of software as a service.

2021 S.B. 787 – Chapter 669 of the Acts of the General Assembly of 2021

Pursuant to Article II, Section 17(c) of the Maryland Constitution, S.B. 787 took effect on May 30, 2021 without Governor Hogan’s signature. The legislation amends Maryland’s sales and use tax on digital products “to reflect the intent of the General Assembly” by remedying unintended effects of the H.B. 932 sales tax expansion. Therefore, S.B. 787 applies retroactively to March 14, 2021 – the effective date of H.B. 932. In particular, S.B. 787 made the following amendments:

  1. Excluding from taxation certain prerecorded and live instruction, seminars, discussions, or similar events;
  2. Excluding from taxation professional services obtained electronically or delivered through the use of technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities;
  3. Consistently addressing the taxation of digital codes;
  4. Revising the definition of “retail sale” to clarify the taxation of digital codes and digital products; and
  5. Expanding the exemption for sales or use of custom computer software to “configured” or “modified” software, regardless of the method transferred or accessed. Specifically, S.B. 787 amends Md. Code Ann., Tax-Gen. § 11-219(b), which now exempts software or software as a service (SaaS) as follows:
    1. The sales and use tax does not apply to a sale of custom computer software, regardless of the method transferred or accessed, or a service relating to custom computer software that:
      1. would otherwise be taxable under this title;
      2. is to be used by a specific person;
      3. (i) is created for that person; or (ii) contains standard or proprietary routines requiring significant creative input to customize, configure, or modify the procedures and programs that are necessary to perform the functions required for the software to operate as intended; and
      4. do not constitute a program, procedure, or documentation that is mass produced and sold to:
        1. the general public; or
        2. persons engaged in a trade, profession, or industry, except as provided in item (3) of this subsection.

Business Tax Tip #29 – Revised

On June 3, 2021, the Comptroller issued a revised version of Business Tax Tip #29. The revised version incorporates S.B. 787’s amendments and also provides numerous explanatory examples. In particular:

  1. Gift Cards and Gift Certificates. Gift cards and gift certificates with a monetary value are not taxable digital codes when redeemable for an item other than a digital product. The Comptroller delineates three examples explaining when gift cards and gift certificates are taxable.
  2. Services Performed Electronically. Per S.B. 787 and COMAR, Maryland excludes from taxation as digital products certain personal, professional, or insurance services that involve a sale of a digital code or digital product as an inconsequential element for which no separate charge is made. The Comptroller interprets these non-taxable services to be those rendered by, for example, physicians, dentists, lawyers, accountants, and insurance agents. The examples illustrate that the following items are not taxable: (1) non-enumerated PDFs of estate planning documents provided with legal services; (2) reports generated following an employment applicant’s reference check; (3) the placement of employment advertisements online; and (4) a tele-health appointment.
  3. Advertising Agencies. Advertising agency contracts may involve both non-taxable services and the production of tangible personal property or a digital product. The Comptroller enumerates five non-taxable advertising services: (1) the preparation and placement of advertisement in media; (2) public relations; (3) setting up press conferences; (4) conducting market research; and (5) creative concept development. However, advertising agencies are selling digital products when the transaction is for the production and delivery of specific property, including digital photographs, artwork, illustrations, graphics, and videos.
  4. Education. The Comptroller issued numerous examples of when continuing education classes, seminars, or conferences delivered electronically – including those by non-profit organizations – or online courses and lectures by schools are subject to sales tax.
  5. Entertainment. Digital downloads and streaming of prerecorded motion pictures, music videos, news and entertainment programs, live events – including live concerts, sporting events, and tutorials are subject to sales and use tax as digital products.
  6. Data and Documents and Electronic Communications. The Comptroller is applying the sales and use tax on digital products to: (1) the sale of customer lists, mailing lists, medical records, and similar products and (2) a charge to access or a subscription to a chat room, discussion, weblog, or any other venue that permits users to communicate electronically in real time.
  7. Software. Generally, software is subject to Maryland sales and use tax. However, certain software is not taxable so long as it requires “significant creative input to customize, configure, or modify the procedures and programs that are necessary to perform the functions required for the software or SaaS to operate as intended are not subject to the sales and use tax.” Business Tax Tip #29 (June 3, 2021) at n. 41, citing Md. Code Ann., Tax-Gen. § 11-219(b). In addition to numerous examples, the Comptroller issued a long list of potentially non-taxable “custom, configured, or modified” software, including:
    1. General Ledger Systems;
    2. Budgeting and Forecasting Systems;
    3. Vendor Management and Payment Systems;
    4. Tax Engine, Provision and Compliance Systems;
    5. Human Resource Management Systems;
    6. Data Management Systems;
    7. Data Hosting, Archival, and Recovery Software and Systems;
    8. IT Infrastructure and Application Management Systems;
    9. Reservation Systems, including hotel reservation systems, and Event Management Systems;
    10. Collaboration, Video Conferencing, Email, and Messaging Systems; and
    11. Etc.
  8. Sales of Digital Codes and Products Prior to the Effective Date. Generally, the sales and use tax does not apply to sales or subscriptions that were entered into before March 14, 2021. The examples clarify that: (1) for subscriptions that renew monthly, no sales and use tax will be due until the first charge occurring after March 14, 2021, and (2) no sales and use tax is owed for contracts entered into before March 14, 2021, even when delivery and payment of such digital products does not occur until after March 14, 2021.

The Eversheds Sutherland SALT Team will continue to monitor Maryland’s sales and use tax on digital products and any further revisions to Business Tax Tip #29.

In this episode of the SALT Shaker Podcast, host and Associate Chris Lee is joined by Associate Jeremy Gove to discuss a decision by the Indiana Tax Court involving Express Scripts.

Transactions are becoming increasingly more complex. They can involve multiple parties, and multiple types of property and services. There’s also increasing complexity around determining what a party is selling and the type and amount of receipts attributable to that taxpayer. The case Chris and Jeremy discuss addresses income tax apportionment, and whether an activity should be treated as a service, or as a sale of tangible personal property for purposes of a sales factor calculation.

Chris and Jeremy also discuss the evidence used to reach the Indiana Tax Court’s decision.  

Questions or comments? Email SALTonline@eversheds-sutherland.com.








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On May 24, 2021, the North Carolina Department of Revenue published Private Letter Ruling No. SUPLR 2021-0019 (dated April 29, 2021). The taxpayer is a North Carolina based company that provides subscriptions to information hosted in the cloud which its customers access through a web portal in exchange for a subscription fee. The industry-specific information is provided as separate reports for each industry, and the taxpayer’s customers may view, print, or create a PDF of the information, but do not receive any tangible items. The information provided in each report is not customized; however, if a customer purchases a license it may add additional information to its reports. The customers typically use the industry reports to gain insights that help inform their client acquisition and client retention practices. North Carolina imposes sales tax on “certain digital property” which is “[s]pecified digital products and additional digital goods. “Additional digital goods” includes reports or other publications that are transferred electronically. The Department determined that the web-based reports are taxable “certain digital property” and thus the subscription fees to access the reports are taxable.

On May 17, 2021, the New York Tax Appeals Tribunal (“Tribunal”) held that when determining whether a New York C corporation must mandatorily elect to be treated as an S corporation as a result of the investment ratio test provided by New York Tax Law § 660(i), such test requires that “federal gross income” adopt the same definition as is provided under the Internal Revenue Code (“IRC”) and as is reported on federal returns for the corporation.

In 2012, a third-party acquirer purchased from taxpayers all of the outstanding shares of Lepage, Inc. and Bakeast, Inc. Both Lepage and Bakeast had elected to be treated for federal income tax purposes as subchapter S corporations.  However, neither entity filed New York S corporation elections. In connection with the sales, valid elections under IRC § 338(h)(10) were made and thus the sales were treated as deemed asset sales by Lepage and Bakeast followed by a liquidating distribution of the consideration to the taxpayers.

After audit, the Division of Taxation (“Division”) concluded that under NY Tax Law § 660(i), both Lepage and Bakeast should be treated as New York S corporations for tax year 2012. NY Tax Law § 660(i) includes an investment ratio test whereby a New York S corporation election is mandatory if a federal S corporation’s investment income in a taxable year exceeds 50% of its “federal gross income” for that year.  Because the sales of Lepage and Bakeast were treated as asset sales under IRC § 338(h)(10), the Division concluded that portions of the gain from such sales that met the definition of investment income were included in the determination of federal gross income of Lepage and Bakeast. As a result of including these amounts in federal gross income, both Lepage and Bakeast exceeded the investment ratio for 2012 and thus the Division asserted they should be treated as New York S corporations.

Taxpayers argued that Lepage and Bakeast did not exceed the investment ratio and therefore the criteria for the mandatory New York S corporation election had not been met.  As part of their argument, the taxpayers asserted that the term “federal gross income” should not include income that would not have been included in federal gross income if the corporations were treated as C corporations for federal income tax purposes.  Although both Lepage and Bakeast reported gains from the asset sales when reporting federal gross income at the federal level for purposes of reporting income apportioned to New York, both Lepage and Bakeast reported amounts for federal taxable income that had been reduced by the gain from the deemed asset sales. Taxpayers justified the reduction, arguing that, because Lepage and Bakeast were C corporations within New York, for purposes of the calculation under NY Tax Law § 660(i) their “federal gross income” should be limited to items that would be counted as “federal gross income” as if the corporations were treated for federal income tax purposes as C corporations as well.  Taxpayers further argued that NY Tax Law § 660(i) should follow a similar standard and the meaning of federal gross income should be limited to only amounts that would be treated as federal gross income if the corporation were treated as a C corporation for federal income tax purposes.

The Tribunal rejected the taxpayers’ arguments, stating that nothing in NY Tax Law § 660(i) indicated that “federal gross income” should be so limited.  The Tribunal upheld the determination that New York S corporation status was mandatorily elected for both Lepage and Bakeast and thus taxpayers were subject to liability as S corporation shareholders on the gains from the sales.


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 recently proposed to amend the definition of “tangible personal property” in the sales and use tax statutes to include “digital goods”?

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.

Answers will be posted on Saturdays in our SALT Weekly Digest. Be sure to check back then!

On Memorial Day, and stretching into the early hours of June 1, the Illinois Legislature approved the state’s $42 billion budget for fiscal year 2022. It is anticipated that the budget’s tax provisions are expected to generate more than $600 million in additional revenue by addressing what governor J.B. Pritzker and others in the General Assembly have deemed corporate tax “loopholes.” While there are many provisions included in the bill aimed at raising that additional revenue, below are four of the most impactful:

First, taxpayers will be required to addback certain deductions for purposes of computing their Illinois base income subject to tax under 35 ILCS 5/203(b)(2)(E-19) and (E-20) for taxable years ending on or after June 30, 2021: (i) GILTI deductions under IRC § 250(a)(1)(B)(i); (ii) dividends received from foreign corporations under IRC § 243(e); and (iii) deduction for the foreign source-portion of dividends received by domestic corporations from specified 10% owned foreign corporations under IRC § 245A(a).  The budget also modifies the definition of the term “dividend” for purposes of the foreign dividend subtraction, such that dividend “does not include any amount treated as a dividend under Section 1248 of the Internal Revenue Code”, which governs the treatment of gain from certain sales or exchanges of stock in certain foreign corporations.

Second, Illinois joins numerous other states in decoupling from federal 100% bonus depreciation provided in the Tax Cuts and Jobs Act.  Under § 203(b)(2)(T)(3)(iii), Illinois now treats property on which a 100% bonus depreciation deduction was taken at the federal level as if the taxpayer made the election offered under IRC § 168(k)(7) to not claim the bonus depreciation.  Section 203(b)(2)(T)(3)(iv) provides a calculation for taxpayers to use in determining their resulting allowable Illinois depreciation, after accounting for the state’s modified bonus depreciation calculation.

Third, the bill limits corporations’ use of net operating losses up to $100,000 per year for “any taxable year ending on or after December 31, 2021 and prior to December 31, 2024” by amending 35 ILCS 5/207(d).  This section brings back the previous $100,000 net operating loss limitation that had been in effect for tax years ending on or after December 31, 2012 through December 31, 2014.  It is noteworthy, however, that taxable years for purposes of determining a taxpayer’s net operating loss carryforward period are not counted when the $100,000 net operating loss cap is in place, and a taxpayer’s net operating loss deduction would have exceeded $100,000 but for the cap.

Fourth, the budget eliminates the phase-out of the state’s franchise tax previously found in ILCS § 5/15.65(e).  Under prior law, the franchise tax was set to completely expire for tax years beginning on or after January 1, 2024, and was gradually being minimized in the interim.    While it is little consolation to taxpayers who had been anticipating the elimination of the franchise tax, the budget does retain the exemption for the first $1,000 in liability.

While there are other revenue raisers in the budget the General Assembly approved, and the Governor is expected to sign, these are four of the most impactful.  The Eversheds Sutherland SALT Team will continue to monitor developments as the budget is implemented, and will keep you apprised of any Departmental guidance that is provided as these tax changes take effect.

In this episode of the SALT Shaker Podcast, host and Associate Chris Lee is joined by Associate Justin Brown to discuss transfer pricing and how it affects state tax and in particular how states may use transfer pricing or other theories to make adjustments to sales tax. Recently, some jurisdictions have challenged sales tax on intercompany transactions by arguing that the sales price and amount of gross receipts should be increased. In their discussion, Chris and Justin reference an article by Eversheds Sutherland attorneys Tim Gustafson, Eric Tresh and Liz Cha from Tax Notes State, addressing California’s attempt to extend transfer pricing to sales tax.

Questions or comments? Email SALTonline@eversheds-sutherland.com.












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