The Colorado Department of Revenue (Department) released a non-binding general information letter, concluding that a marketplace provider’s payment of sales tax on transactions involving “jointly responsible” third-party retailers discharges the obligations of the third-party retailers to collect and remit sales tax. By statute, the Department has discretionary authority to treat an agent for a retailer as “jointly responsible” for the collection and remittance of sales tax, and can pursue the retailer’s agent when it is “necessary for the efficient administration” of the sales tax. Here, the marketplace provider, which operates a marketplace for third-party digital products such as games, apps, movies and books, and collects and remits sales tax on purchases of the third-party products, stated that it did so as a “jointly responsible” retailer. Relying on the principles of contract law, the Department determined that while both parties were liable for the full amount of sales tax, the marketplace provider’s payment of the correct amount of sales tax discharged the third-party retailers’ sales tax obligations. However, even though the third-party retailers were relieved of their immediate sales tax obligations, the Department could still collect the tax from either the marketplace provider or the third-party retailers, if a deficiency were to occur in the future. The Department added that if the marketplace provider exercises reasonable diligence when accepting an exemption certificate or sales tax license, then both of the jointly responsible retailers would be relieved of liability for collecting tax if the Department later determines that the exemption did not apply. Colo. Gen. Info. Letter No. GIL-16-020 (Colo. Dep’t Revenue Oct. 4, 2016, released Dec. 7, 2016). Colo. Gen. Info. Letter No. GIL-16-020 (Colo. Dep’t Revenue Oct. 4, 2016, released Dec. 7, 2016).
Tennessee Joint Government Operations Committee Expresses Concerns with Proposed Economic Nexus Standard for Sales Tax
By Christopher Lutz and Jeff Friedman
On December 15, 2016, the Tennessee Joint Government Operations Committee held a hearing regarding the governor’s proposal to establish an economic nexus standard for the state sales tax. Under the proposal, remote sellers would be subject to collection obligations in the state if their Tennessee sales exceed $500,000. The rule would require out of state dealers to register with the DOR by 3/1/2017 and to begin collecting and remitting July 1, 2017. Testifying on behalf of the proposal were Larry Martin (Commissioner of Dept. of Finance and Administration), David Gerregano (Commissioner of Revenue); and Herbert Slatery (Attorney General). The proposed regulation was allowed to go forward with a vote of “no recommendation.”
The principal skeptic of the proposed regulation was Rep. Mike Stewart (D-Nashville), who gave the rule a negative recommendation. During the hearing, Stewart noted that the State just passed legislation addressing physical presence with respect to franchise/excise and business taxes. Rep. Stewart observed that “it would seem if we chose to use statutes to get rid of physical presence for other taxes, isn’t what we’re doing here today most appropriately done through the legislation and not a regulation?” This question came up several times during the hearing, and the Department relied on Public Chapter 789 (1988), a 1988 bill, that it says establishes an economic nexus standard for sales tax (to this, Rep. John Ragan (R- Oak Ridge) replied, “We’ve also heard that a 1992 case is old, so I’d say that about the 1988 statute too”). Chairman Mike Bell (R- Riceville) also explicitly stated that the change should be “brought as a statute rather than a rule.” Others were explicit in their belief that this is something the US Congress, and not Tennessee, should do, such as Senator Mae Beavers (R- Mt. Juliet), who said, “I think this is something that federal congress should do. I think this is completely out of our purview and we’ve wasted a lot of tax dollars here in something that is not our decision to make.” In summarizing his thoughts, Rep. Stewart said, “I want to point out that Colorado specifically suggested to the court in a brief that they use this DMA case as the vehicle to overturn Quill, and the fact that the Supreme Court didn’t suggest that, as with Streamlined Sales Tax, which never got off the ground, I’m just not sure that the landscape is really changing, and this regulation would put Tennessee at odds with most other states. We don’t do things to businesses that are unusual or strange, and I worry that this regulation would make us the odd man out. I recognize some states have deviated, but most states stick with physical presence.”
Another issue that came up in the meeting, a question raised by Rep. Ron Lollar (R-Bartlett), was whether the state would “consider giving relief to businesses in the state” upon adoption of the economic nexus standard. Mr. Martin reiterated that this was something the Governor’s office is certainly open to.
From the community, 4 people spoke, 3 against the proposal, and one in favor. Against the proposal was Steve Roth, general counsel of Jewelry Television; Carl Szabo, counsel at Net Choice; and George Gruhn, CEO of Gruhn Guitars Incorporated. In favor was Allen Dotty, co-owner of Cumberland Transit. Bill Fox, of University of Tennessee, also provided a presentation in favor of the proposal.
Finally, Rep. Ragan ended by noting that if the governor would like to proceed with legislation rather than a regulation, the opportunity exists. The filing deadline is not until February. Ragan stated that he thinks “the administration would be well served by suggesting this to some of us willing to carry it. That way we avoid the concern that it is a regulation rather than legislation.”
More Taxes Coming in Oregon?
By Eric Coffill
New Oregon Gross Receipts Tax Proposal. On December 14, 2016, the group behind Measure 97 (which was defeated at the November 2016 general election), released a booklet setting forth its 2017 legislative proposals. The document includes the basic structure for a new “$100 Million Business Tax” “and is “calling on the Legislature to create this tax.” Highlights of this new gross receipts tax are (1) A 2% tax on Oregon gross receipts (M97 was 2.5%.): (2) All types of businesses would be subject to the tax. (M97 only applied to C corporations.); (3) Utility companies would be exempt; and (4) The threshold for applying the tax would be $100 million of Oregon gross receipts. (M97 had a $25 million threshold.) The booklet states this gross receipts tax would raise $4 billion per biennium (as opposed to the $6 billion that M97 was projected to raise). It is not entirely clear whether this proposal would operate like Measure 97, which modified Oregon’s corporate minimum tax, or if it would replace Oregon’s corporate income tax. However, the $4 billion revenue estimate suggests it would operate as would Measure 97, i.e., as a corporate minimum tax. To date, there is no Oregon legislative sponsor or author identified with this proposal (nor any draft bill language). “A Better Oregon Budget Report,” Dec. 14, 2016, http://www.abetteroregon.org/time-finally-invest/.
City of Portland Enacts Surtax on CEO Pay. On December 7, 2016, on a 3-1 vote (with one absence),the City Counsel of Portland approved a surtax (in addition to the 2.2% tax Business License Tax) on publicly traded companies operating there whose Chief Executive Officers earn at least 100 times as much as their median workers. Specifically, for tax years beginning on or after January 1, 2017, a 10% surtax is imposed if a company subject to the (2015 adopted) U.S. Securities and Exchange Commission pay ratio reporting requirement reports a pay ratio of at least 100:1, but less than 250:1, on SEC disclosures. If the reported pay ratio is 250:1 or greater, a 25% surtax is imposed. The Portland Revenue Division estimates there are approximately 550 public traded companies that are subject to and paying the City’s Business License Tax with collective liability of $17.9 million annually, and that the new surtax would increase revenue by $2.5 million to $3.5 million annually. Portland City Ordinance 7.02.500, as amended; see also Portland Revenue Division Impact Statement, December 2014 Version.
Washington Supreme Court Holds B&O Tax Applies to Drop Shipments
By Charles Capouet and Andrew Appleby
The Washington Supreme Court held that drop shipments and sales from out-of-state are subject to the Washington business and occupation (B&O) tax even when an in-state office was not involved in placing or completing the sales. A wholesaler of electronic components and computer technology worldwide sold products through its Arizona headquarters and its many regional sales offices, including one in Washington, but excluded its national and drop-shipped sales from its B&O tax liabilities. The taxpayer shipped goods into Washington from an out-of-state warehouse. The products were delivered to the customers at its Washington branch, but the goods were billed to the out-of-state office.
The taxpayer argued that the substantial nexus prong of the dormant Commerce Clause was not met because the Washington office was not involved with the sales. The court held that “merely showing that an in-state office was not involved in the placing or completion of a national or drop-shipped sale is insufficient to dissociate from the bundle of in-state activities that are essential to establishing and holding the market for its products.” The Washington employees provided the corporate office with market intelligence regarding Washington markets, met with the taxpayer’s sales teams and suppliers to strategize on how to create a greater demand for the products and services, and worked with customers to improve products and design new prototypes. The in-state activities created nexus and satisfied the dormant Commerce Clause for the taxpayer because they were “at least minimally associated with [the taxpayer’s] ability to establish and maintain a market in Washington for the sale of its products.”
The taxpayer also argued that a Washington regulation barred the imposition of the B&O tax on both categories of sales. The rule stated that “Washington does not assert B&O tax on sales of goods which originate outside this state unless the goods are received by the purchaser in this state and the seller has nexus.” The court held that the imposition of the B&O tax to the taxpayer’s sales was proper because the rule defined “received” as including the purchaser’s agent receiving the goods. Thus, the taxpayer’s buyer would qualify as either the purchaser or as the purchaser’s agent. Avnet, Inc. v. Washington Department of Revenue, No. 92080-0 (Wash. Nov. 23, 2016) (en banc).
A Chiropractor’s Delight: Taxpayer’s “PoP” Makes Internet Backbone Service Not Taxable in Pennsylvania (Again)
By Stephen Burroughs and Maria Todorova
The Commonwealth Court of Pennsylvania recently reaffirmed its decision that Level 3’s network infrastructure services (including local dial networks, telephone numbers and modems, i.e., Internet “backbone”) sold to retail Internet service providers (ISPs) constitute non-taxable Internet access services. The Commonwealth Court previously held that the taxpayer’s facility was an access point (point of presence or PoP) that enabled ISP end users to access the Internet, and its services were, therefore, Internet access services exempt from sales and use tax (see previous coverage of the court’s holding here). The Commonwealth sought reconsideration of the court’s holding, primarily arguing that: (1) the taxpayer’s services constituted a mere technological advancement to otherwise taxable telecommunications services (such as port modem management (PMM) services—see America Online, Inc. v. Commonwealth, 932 A.2d 332 (Pa. Cmwlth. 2007) here); and (2) the taxpayer merely directed end users to an ISP homepage and it was the ISP and its PoP—and not the taxpayer—that enabled end users to initiate a connection to the Internet. The court disagreed with the Commonwealth and reaffirmed its prior reasoning that: (1) the “fundamental technological differences” between taxable PMM services and the taxpayer’s Internet backbone services related to what services were provided and not how the services were provided; and (2) it was the taxpayer’s PoP that provided the access point for ISP end users to establish an Internet connection. The Commonwealth has filed a Notice of Appeal to the Pennsylvania Supreme Court. Level 3 Communications, LLC v. Commonwealth, 166 F.R. 2007 (Pa. Cmwlth. Dec. 8, 2016) (en banc).
Happy Holidays from the Sutherland SALT Team!
Atlanta Office
Pictured from the left: Maria Todorova, Todd Lard, Jonathan Feldman, Pearis Carr, Melissa Bragg, Scott Wright, Hanish Patel, Zack Atkins, Suzanne Palms, Admin Rether White, Stephen Burroughs, Alla Raykin, Madison Barnett
New York Office
Pictured from left: Marc Simonetti, Open Weaver Banks, Admin Barbara Keihani-Dubison, Doug Upton, Amy Nogid, Evan Hamme, Leah Robinson, Andy Appleby, Nicole Boutros, Chelsea Marmor
Sacramento Office
Pictured from left: Eric Coffill, Admin Stephanie Fulps, Nick Kump, Robert Merten, Tim Gustafson, Jessica Allen
Washington, DC Office
Pictured from left: Todd Betor, Admin Candice Alba, Charlie Kearns, Jeff Friedman, Admin Debbie Manders, Sam Trencs, DeAndre Morrow, Mike Kerman, Jessie Eisenmenger, Charles Capouet, Stephanie Do
2016-2017 Maryland State Bar Association State Tax Study Group
The Maryland State Bar Association (MSBA) Taxation Section works to further the mutual interest of MSBA members concerned with the law relating to taxes through stimulating the interest of MSBA members and informing them in the law concerning Maryland and Federal taxation; studying proposed improvements and reforms in such laws through legislation and otherwise; and generally promoting the interests and welfare of Bar members and the public in the areas of taxation.
Through 2017, Sutherland SALT will be hosting a live videocast of the MSBA State Tax Study Group’s meetings from 8:30 – 9:30 a.m. Eastern in our Washington, DC office (700 Sixth Street, NW, Suite 700, Washington, DC).
Following is the 2016-2017 MSBA State Tax Study Group schedule:
- December 20, 2016
Speaker Renee Nacrelli on “Recent and Pending Litigation; Maryland General Assembly Prognosis” - January 17, 2017
Speaker Vince Guida Jr., Bill Hammond and Jeff Comen on “Update of Cases; Recent and Pending Legislation regarding SDAT” - February 21, 2017
Speaker Michael Higgs on “SDAT Reorganization; Personal Property Tax Developments” - March 21, 2017
Speaker Jay Mascus on “Comptroller Business Collections and Unclaimed Property Issues” - April 25, 2017
Speaker Wally Eddelman and Sarah Dufresne on “Analysis of the Last Session of the Maryland General Assembly; Income Tax Developments” - May 16, 2017
Speaker Chris Riley on “Pending and Enacted Maryland Legislation; Developments in the Maryland Comptroller’s Office”
Members attending are required to sign in and show a photo ID at the lobby security desk, as well as check in with our reception on the 7th floor.
For questions regarding the DC simulcast, please contact DeAndre Morrow at deandre.morrow@sutherland.com.
For more information, please visit the MSBA webpage.
Sutherland SALT Shaker: November 2016 Digest
Read our November 2016 posts on stateandlocaltax.com or read each article by clicking on the title. For the latest coverage and commentary on state and local tax developments delivered directly to your phone, download the latest version of the Sutherland SALT Shaker app.
- Illinois Appellate Court Finds Retailer Not Liable Under State’s False Claims Act
The Illinois Appellate Court held that a defendant out-of-state retailer was not liable under the state’s False Claims Act because it conducted a good faith inquiry into its use tax collection obligations for both its Internet and catalog sales. - SALT Pets of the Month: Lemon and Lime
Meet Lemon and Lime, the one-year-old parakeets belonging to Sutherland SALT Legal Secretary, Barbara Keihani-Dubison. - Keep on Streamin’: Kentucky Court Holds Taxes Inapplicable to Streaming Video Service
The Franklin County Circuit Court held that Netflix’s subscription-based streaming video service was not subject to Kentucky’s gross revenues tax, excise tax and school tax (telecommunications taxes) imposed on “multichannel video programming service” (MVPS). - New Jersey Tax Court Rejects Application of 100% Apportionment Factor But Denies In-State Company’s Bid to Use Three-Factor Formula
The New Jersey Tax Court held that apportioning all of a company’s income to New Jersey for corporate business tax purposes, even with the allowance of a credit for taxes paid to separate-return states, failed to fairly reflect the company’s business activities in New Jersey. - New Jersey Tax Court Analyzes Credit Card Receipt Sourcing
The New Jersey Tax Court determined that credit card issuers must source to New Jersey all of their interest and interchange fee receipts, and half of their credit card service fees, from New Jersey accountholders. - New Mexico Hearing Officer Rules Equitable Recoupment Does Not Offset Gross Receipts Tax on Seller of Software Licenses
A New Mexico Taxation and Revenue Department administrative hearing officer found that a seller could not use equitable recoupment as a defense to offset gross receipts (sales) tax assessed on its sales of software licenses. - NYC Tax Appeals Tribunal Allocates Consulting Service Provider’s Receipts Based on Location of Consultants
The New York City Tax Appeals Tribunal administrative law judge (ALJ) determined that a taxpayer’s receipts for consulting services should be allocated based on where the services were rendered, not where the solicitation and payment for the services occurred. - Two Bites, Zero Success: South Carolina Court of Appeals Determines Department Did Not Satisfy Its Burden to Justify Alternative Apportionment
On October 26, 2016, the South Carolina Court of Appeals reversed a lower court ruling and determined the Department of Revenue (Department) failed to satisfy its burden of showing that the statutory apportionment formula did not fairly represent Rent-A-Center West Inc.’s (RAC) business activities in South Carolina.
SALT Pets of the Month: Lemon and Lime
Meet Lemon and Lime, the one-year-old parakeets belonging to Sutherland SALT Legal Secretary, Barbara Keihani-Dubison.
Barbara received these two little sweeties as a gift from her mom almost six months ago. Lemon is a bright yellow female with streaks of green, and Lime is a yellow male with a green belly.
They love to chirp and sing. Both have a lot to say and are quite sociable. Barbara wishes she could interpret their “chirps” so that she could understand what it is they are arguing over when they fight. The same goes for when they are content, and the chirping or singing is very steady and sweet.
Lemon and Lime are delighted to be the only birds ever featured as Pets of the Month!
NYC Tax Appeals Tribunal Allocates Consulting Service Provider’s Receipts Based on Location of Consultants
By Jessica Allen and Jonathan Feldman
The New York City Tax Appeals Tribunal administrative law judge (ALJ) determined that a taxpayer’s receipts for consulting services should be allocated based on where the services were rendered, not where the solicitation and payment for the services occurred. The taxpayer’s non-commissioned salespeople entered into lump-sum subscription agreements with clients providing access to the taxpayer’s network of independent industry expert consultants. Its research consultants paired clients with the appropriate expert consultants. The Department of Finance excluded the expert consultants from the allocation analysis as independent contractors and allocated receipts based on the location of the taxpayer’s salespeople. However, the ALJ found that the receipts for services should be allocated based on the location of the research managers and consultants, but not the salespeople. Although the salespeople collected the receipts, their efforts did not represent the services for which the client paid the taxpayer. In the Matter of the Petitions of Gerson Lehrman Group, Inc., New York City Tax Appeals Tribunal, Administrative Law Judge Division, TAT(H)08-79(GC), TAT(H)12-38(GC), and TAT(H)12-39(GC), Oct. 4, 2016.