On May 8, 2024, the California Senate’s Revenue and Taxation Committee held a hearing on S.B. 1327, which would impose a 7.5% tax on data extraction transactions in California. The committee passed the bill by 4 votes to 1. 

Peter Blocker, Vice President of Policy at CalTax, testified in opposition to the bill. He indicated that it would raise operating costs for small businesses, increase costs for consumers, and be subject to legal challenges, including for violations of the Commerce Clause to the United States Constitution and the Internet Tax Freedom Act. He was the only witness to testify regarding the tax. The two witnesses who testified in support of the bill instead focused on issues related to local news.

Multiple committee members voted in favor of the bill despite expressing misgivings, including the impact on California’s budget deficit, the outcome of the ongoing litigation regarding Maryland’s digital advertising tax, and whether the tax credits to local newsrooms would be properly implemented.

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: The California Court of Appeal recently held that the purchase of “discounted” cell phones bundled together with wireless services were subject to payment of which tax on the cell phone’s full price?

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 May 6, 2024, the San Francisco Controller and Treasurer released their proposed final tax reform ordinance language. To become effective, San Francisco voters will have to pass a measure on the November 5, 2024 ballot by a 50% vote. The changes would apply to tax years 2025 forward.

Read the full Legal Alert here.

On May 7, SALT Partner Todd Betor will present Mistakes Were Made: Considerations for Addressing Errors in Tax Filings for the 63rd Annual TEI Upstate New York Tax Conference in Buffalo.

In addition, Eversheds Sutherland is a sponsor of the STARTUP conference in Columbus, OH on May 7-8. Partner Maria Todorova will present Judicial Updates on May 7.

Finally, Eversheds Sutherland will help present TEI Denver’s state and local tax seminar on May 8. Speakers and topics include:

  • Jeff Friedman, Ted Friedman – State Tax Bronco Rodeo
  • Ted Friedman, Tim Gustafson and Chelsea Marmor – Empire State vs Golden State – What it means for your business
  • Jeff Friedman, Cyavash Ahmadi – What’s in Store: Recent Marketplace Developments
  • Tim Gustafson, Jeremy Gove – Transfer Pricing and Intercompany Transactions
  • Ted Friedman, Chelsea Marmor and Cyavash Ahmadi – Sales Tax Is Cooler
  • Jeff Friedman, Tim Gustafson and Jeremy Gove – No, Income Tax Is Cooler

On May 1, 2024, California Senator Steve Glazer, Chair of the Senate Revenue and Taxation Committee, unveiled another proposal to tax digital advertising. This time, Senator Glazer proposes to amend California Senate Bill 1327 to impose a 7.25% tax on “data extraction transactions in the state.”[1] This “data extraction transactions tax” (referred to as the “DETT”) would feel like a root canal as it would suffer from the same legal infirmities as Maryland’s controversial Digital Advertising Gross Receipts Tax.

So, what’s a data extraction?

“Data extraction transactions” means a transaction where a person:

  1. “sells user information or access to users to advertisers,” and
  2. “engages in a barter by providing services to a user in full or partial exchange for the ability to display advertisements to the user or collect data about the user.”

We know this is a re-branded digital advertising tax because the DETT proposal provides that digital advertising is per se taxable:

“Gross receipts shall be deemed to be derived from data extraction transactions if they derive from the sales of advertising services on a digital interface, including, but not limited to advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services that use personal information about the people to whom the ads are being served” (emphasis added).

Only the big guys pay the tax

The proposed DETT would apply to persons with at least $2.5 billion of gross receipts from data extractions transactions in California. During his press conference announcing the DETT, Senator Glazer said the high threshold was intended to limit the tax to only the largest companies engaging in data extraction transactions.

Apportionment and sourcing

Much like Maryland’s Digital Advertising Gross Receipts Tax, the DETT apportionment formula is the ratio of annual gross receipts from data extraction transactions (otherwise known as digital advertising) in California to annual gross receipts from data extraction transactions in the U.S. Gross receipts from data extraction transactions are sourced to California, i.e., assigned to the numerator of the formula, based on location of the user. For purposes of computing the numerator and denominator of the apportionment formula (but not the $2.5 billion threshold), “annual gross receipts in this state” includes the gross receipts of all members that are part of the same unitary group if multiple members of the group engage in data extraction transactions.

Exclusions

Finally, the DETT legislation contains three exclusions, which also add to its questionable legality. The DETT excludes “news media entities,” which are entities “primarily engaged in the business of newsgathering, reporting, or publishing or broadcasting articles or commentary about news, current events, or culture.” Just like Maryland’s Digital Advertising Gross Receipts Tax, this exemption creates First Amendment issues.  The DETT also excludes web hosting services and domain registration services from the definition of “data extraction transaction.”

Next steps

It is expected that Senate Bill 1327 will be heard in the Senate Revenue and Taxation Committee on May 8th, which would likely be the first of several hearings on the proposed DETT.

[1] The introductory caption and short title of the Senate Bill 1327 amendments characterize the DETT as a “Data Extraction Mitigation Fee,” yet the remaining substantive provisions characterize (and treat) the DETT as a “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: The Washington Court of Appeals held that a county document recording surcharge was constitutional because it was not a property tax, but was instead which type of 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!

AI can’t fix SALT! This week, SALT Partners Michele Borens and Jeff Friedman will present during TEI Region 9’s Annual Conference, held today through May 1. Michele and Jeff’s presentation will provide some relief for SALT professionals worried about being replaced by non-humans. They’ll discuss some of the craziness that accompanies state and local tax, including the inconsistent application of look-through apportionment, random application of forced combination/transfer pricing/business purpose, unpredictable sales and use tax characterizations of “tangible” personal property, and now-you-see-it/now-you-don’t tax exemptions.

In addition, SALT Partners Todd Betor, Jeff Friedman and Maria Todorova will each present during COST’s Spring Conference and Audit Sessions in Boston, held April 30 to May 3. You can still register to hear the latest on a variety of SALT topics, including states’ efforts to expand their reach on imposing taxes, navigating accounting challenges and combined reporting issues.

At the Spring CPE Event for the TEI Carolinas Chapter, SALT attorneys Jonathan Feldman and Laurin McDonald will present a SALT update on May 2. Jonathan and Laurin will provide a summary of important state tax cases and legislative developments.

Finally, our SALT team is excited to again support TeleStrategies’ Communications Taxation Conference, held in Tampa, FL from May 1-3, 2024. Liz Cha and Chelsea Marmor will provide an update on key litigation and controversies involving the taxation of telecommunications services, including the application of telecommunications taxes to hardware and software and more. Laurin McDonald and Alla Raykin will cover the complexities of gross receipts taxes, as well as new taxes and fees applicable to the communications industry.

Say hello to Agnes and Oscar, our April SALT Pets of the Month! This dynamic duo keeps Associate Madison Ball’s home full of fun!

Agnes is a 2-year-old Shih Tzu mix with special one-eyed vision. What she lacks in eyesight she makes up for in curiosity and affection! Agnes is happy to do pretty much anything – she just wants to be included. Surprisingly speedy, she always champions the race home against her parents.

Madison’s pet rabbit, Oscar, has managed to live well past his life expectancy. At least 15 years old, Oscar is a faithful companion, even if he has become a bit of a grouch in his old age. He enjoys his days rummaging under the bed while Agnes is running about the house. Oscar can be quite mischievous and is known to steal a piece of fruit if given the opportunity. Who can blame him? Fresh fruit is awesome!

Agnes and Oscar are a great pair of furry friends! Welcome to SALT Pet of the Month club.

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: Minnesota’s Senate Taxes Committee recently introduced legislation that would decrease which state tax rate by more than 1.5 percentage points?

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!

Most often, state and local tax litigation follows the escalation of an administrative controversy — resulting from the denial of a protest or refund claim, or other tax agency determination. While there are times when litigation is the only remaining option, the decision whether or not to proceed with litigating a tax case is often a strategic one. Of course, prevailing in a dispute following a trial is an obvious potential benefit of litigation, but it is far from the only one.

In this installment of A Pinch of SALT in Tax Notes State, Eversheds Sutherland attorneys Ted Friedman and Alla Raykin describe some of the advantages of litigating state and local tax matters, discuss opportunities and remedies available only through litigation, and highlight items to keep top of mind when pursuing litigation.

Read the full article here.