The Washington Department of Revenue issued proposed guidance limiting the application of the multiple points of use (MPU) sales tax exemption for bundled software maintenance agreements.

The MPU exemption provides a retail sales tax exemption for the purchase of digital goods, prewritten computer software, remotely accessed prewritten computer software, digital automated services, and digital codes (MPU-eligible products) when those products will be concurrently available for use at one or more locations inside and outside of Washington.

The proposed guidance addresses retail sales in which a single nonitemized price is charged for the sale of a software maintenance agreement that provides both retail-taxable products, such as prewritten computer software updates, and non-retail-taxable products, like help desk services. These mixed element software maintenance agreements (MESMAs) are generally subject to retail sales tax, unless the retail-taxable products are a de minimis part of the agreement. The guidance aims to clarify how the MPU exemption applies to these agreements.

Under the proposed guidance, a MESMA that is otherwise subject to retail sales tax is eligible for the MPU if each of the following criteria is met:

  1. The MESMA includes one or more MPU-eligible products (e.g., prewritten computer software), and each MPU-eligible product is concurrently available for use inside and outside of Washington;
  2. The non-retail taxable products provided under the MESMA relate to the MPU-eligible product(s) of the MESMA (e.g., customer help desk support for the prewritten computer software); and
  3. The MESMA does not contain any retail-taxable product other than the MPU-eligible product(s) that are concurrently available for use inside and outside of Washington. 

The first of these criteria is particularly notable: if the MESMA includes an MPU-eligible product that is not made available outside of Washington, the entire MESMA is subject to retail sales tax. Take, for example, a MESMA that entitles a company to routine software updates and telephonic help desk support, with 40 of 100 users located in Washington, and to access to an online software self-help platform that is utilized by 5 IT staff in Washington. Because the self-help platform only has users in-state, the first criterion is not met. The third criterion likewise is not met because the self-help platform is not eligible for the MPU exemption. Thus, under the proposed guidance, the entire MESMA is subject to retail sales tax.

    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: Bills were introduced in the Michigan Senate that would increase the rate on sin taxes that apply to what type of activity?

    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. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!

    Apportionment formulas sometimes produce unfair results. To rectify the unfairness, taxpayers can (and should) use an alternative apportionment formula to apportion corporate income. In their article for TEI’s Tax Executive journal, Eversheds Sutherland attorneys Jeff Friedman and Sebastian Iagrossi focus on a troubling aspect of alternative apportionment— some states require pre-approval of an alternative apportionment formula. Pre-approval is not only bad tax policy, but it may also be illegal. 

    Read the full article here.

    The Arkansas Supreme Court held that a taxpayer’s interest expense is allocable to Arkansas resulting in a refund. This decision is an example of a taxpayer successfully arguing that it can fully deduct – rather than apportion – its interest expense in its state of commercial domicile. 

    Arkansas adopted the Uniform Division of Income for Tax Purposes Act (UDITPA). Pursuant to UDITPA, income and expenses are apportioned if they are, or are related to, business income. If, however, the income or expense constitutes, or relates to, nonbusiness income, the item is allocated to the taxpayer’s state of domicile. 

    The taxpayer, domiciled in Arkansas, was spun off from its parent company. As part of the spinoff transaction, the taxpayer incurred debt that was ultimately paid to its former parent company. On its originally filed Arkansas tax return, the interest expense related to this debt was deducted against its apportionable income. The taxpayer amended its Arkansas return to allocate (rather than apportion) the interest expense which resulted in a refund. The Arkansas Department of Finance and Administration (DFA) rejected the refund claim on the basis that the interest expense is properly classified as an apportionable expense. 

    The Supreme Court agreed with the taxpayer that the expense is properly allocable to Arkansas because the spinoff was an extraordinary, nonrecurring event. The court distinguished the spinoff debt from the taxpayer’s other borrowing. Interestingly, the court also rejected the DFA’s fairness argument – that it would be unfair to allow the taxpayer to allocate the deduction to Arkansas because the taxpayer apportioned the interest deduction on other states’ tax returns. The court concluded that “[i]t is not the role of this court to adjust Arkansas tax returns based on unfairness to Tennessee, Mississippi, or other states.” 

    Hudson v. Murphy Oil USA, Inc., 2024 Ark. 179.

    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: On November 5, 61% of voters in Charleston County, SC rejected a proposal to increase what tax?

    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. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!

    On November 20, 2024, the Pennsylvania Supreme Court concluded that its decision to invalidate a limitation (or “cap”) on net operating loss (NOL) carryforwards should be applied prospectively only.

    The issue of whether to provide retroactive relief to taxpayers injured by the NOL cap arose based on two of its prior decisions:

    • In Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, 171 A.3d 682 (Pa. 2017), the Court struck down the NOL cap as violating the Uniformity Clause of the Pennsylvania Constitution.
    • In General Motors Corp. v. Commonwealth, 265 A.3d 353 (Pa. 2021), the Court had held that Nextel applied retroactively. That decision is now reversed.

    The Court applied the three-factor Chevron test developed by the United States Supreme Court, see Chevron Oil Co. v. Huson, 404 U.S. 97 (1971). Under the Chevron test, when considering whether to apply a decision retroactively, courts must consider: (1) whether the decision in question established a new principle of law; (2) whether retroactive application of the decision would forward the operation of the decision; and (3) whether the relevant equities favor prospective application. Because the Court found that each of the three factors supported the prospective-only application of Nextel, the Court determined that the General Motors Court erred in applying Nextel retrospectively.

    Alcatel-Lucent USA Inc. v. Commonwealth of Pennsylvania, No. 8 MAP 2023.

    Members of our SALT team are pleased to join the NYU School of Professional Studies’ 43rd Institute on State and Local Taxation, held December 16-17, 2024 in New York City. The Institute will provide insightful updates, practical advice, and in-depth analysis of the latest developments and current issues in state and local taxation. The full agenda can be found here.

    Sessions featuring members of our team include:

    • Transfer Pricing – Should Form Control? – Maria Todorova
      • In this session, panelists will review the nuts and bolts regarding intercompany transactions and state transfer pricing audits and discuss the key issues and updates.
    • Overview and Preview of Federal Constitutional Issues – Jeff Friedman
      • In this session, panelists will provide a spirited preview of the most significant constitutional cases in state taxation over the past year as well as a preview of important cases to watch in the coming year.
    • TaxTok – The Timely New Name for “What’s Happening Everywhere Today” – Jeremy Gove
      • Like its social media kin, TaxTok is a platform for sharing and discovering short topics. In this session, expert “influencers” will provide a rundown of what you need to know about SALT developments affecting taxpayers.

    Eversheds Sutherland is a proud sponsor of the Institute on State and Local Taxation. We hope to see you there!

    On November 18, 2024, the New York Tax Appeals Tribunal (TAT) determined that Sunoco, Inc. (R&M) Combined Affiliates (Sunoco) was not entitled to include receipts from buy/sell agreements in its New York receipts factor because they were derived from inventory exchanges, not bona fide sales for monetary consideration.

    Sunoco refined and marketed oil, and entered into buy/sell transactions to alleviate costs associated with the transportation of oil to a customer’s location. Between 2007 and 2010, Sunoco included the sell side of these transactions in the denominator of its New York receipts factor on the basis that it constituted sales of tangible personal property to third parties for a price and, therefore, bona fide sales for purposes of calculating the company’s business allocation percentage (BAP). The New York Division of Taxation disagreed at audit.

    On appeal, the TAT determined that the buy/sell transactions constituted exchanges of inventory, followed by a sale to an end customer.  The TAT stated that the transactions were not sales for purposes of Sunoco’s BAP calculation, “as they lacked independent economic substance separate from the end customer sale” and that Sunoco “would not have agreed to sell oil in a buy/sell transaction unless oil was to be acquired in return.”  Further, the TAT held that net-out agreements demonstrated the buy/sell transactions were actually inventory exchanges and not bona fide sales for monetary consideration. Accordingly, the TAT denied the refund.

    In re Sunoco, Inc. (R&M) Combined Affiliates, No. 829399 (N.Y. Tax App. Trib., Nov. 18, 2024).

    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: For tax years beginning after December 31, 2025, corporate franchise taxpayers that are part of a combined group in which jurisdiction will transition to the Finnigan method of apportionment?

    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. This week’s answer will be included in our SALT Shaker Weekly Digest, distributed on Saturday. Be sure to check back then!