The sales taxation of software has long been controversial. When sales of software became commonplace in the 1970s and 1980s, it was largely available and commercially distributed on a tangible medium. Today, software is provided in ways that do not constitute the transfer of title or possession of tangible personal property, such as the Software-as-a-service (SaaS) distribution model.

While only a few states explicitly tax SaaS or digital automated services as enumerated services, tax administrators may still attempt to tax them.

In this installment of A Pinch of SALT in Tax Notes State, Eversheds Sutherland attorneys Michele Borens, Cyavash Ahmadi, and Meriem El-Khattabi explore recent administrative actions and judicial, tax tribunal, and legislative responses to the evolving provision of software. 

Read the full article here.

The Maine Supreme Judicial Court held that a prescription drug company’s income should be apportioned based on the location where its prescription drugs are received, rather than the headquarters locations of the health plans or employers paying for the drugs.

The drug company sought income tax apportionment based on a “market client basis,” arguing that its services were primarily received by its clients such as health insurers and employers. The court held that the clients’ “members” or insureds were the primary recipients of the drug company’s services, and therefore the company’s income must be apportioned on a “market member basis” to the location where the members received their prescription drugs. “Market client basis” sourcing was not appropriate because the company’s client agreements and its 10-k filings established that although the company contracted with health plans and employers, the ultimate recipients of its services were the individuals receiving the drugs and covered health services.

Express Scripts Inc. v. State Tax Assessor, No. BCD-22-331, (Me. Nov. 7, 2023).

A North Carolina Administrative Law Judge held that the Department of Revenue did not have the authority to adjust the taxpayer’s net income because the Department failed to timely issue a statutorily required written statement.

The Department believed the taxpayer had not accurately reported income properly attributable to North Carolina due to intercompany transactions that either lacked economic substance or were not at fair market value and issued a proposed assessment pursuant to N.C. Gen. Stat. § 105-130.5A(k). Although the Department is generally permitted to make such adjustments to a taxpayer’s net income, certain statutory requirements must be met. One such requirement is that the Department “shall” provide the taxpayer a written statement within 90 days of issuing the proposed assessment, detailing the support for the Department’s findings and its proposed method for computation of net income. 

Here, it took the Department nearly five years after issuance of the notice of proposed assessment to provide the required written statement. The ALJ analyzed the language within the 90-day deadline, ruling that the use of the word “shall” in reference to providing the written statement and the imposition of a deadline following the phrase “no later than” indicated the requirement was mandatory, not directory. Because the Department did not comply with a mandatory requirement, the Department lacked authority to adjust the taxpayer’s income under this code section.

Ingram Micro, Inc. v. N.C. Dep’t of Revenue, 22 REV 04478 (N.C. Office Admin. Hearings Oct. 27, 2023).

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 Ohio Board of Tax Appeals recently held that receipts from healthcare services should be sourced where the patient is located, for purposes of which state level 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 posted on Saturday in our SALT Shaker Weekly Digest. Be sure to check back then!

The Multistate Tax Commission (MTC)’s 2023 Fall Committee Meetings are off to an exciting start, considering the announcement that Philadelphia will be joining the MTC’s Joint Audit Program. The District of Columbia and Philadelphia are the Program’s only non-state members.

The MTC’s Joint Audit Program provides audit services to the participating taxing authorities. The Program’s audit staff performs audits and provides proposed findings—often assessments—to jurisdictions that participate in each audit. Over the last 5 years, the MTC’s Joint Audit Program has completed the equivalent of 1,647 audits.

Read the full Legal Alert here.

Eversheds Sutherland is a proud sponsor of the 2023 New England State and Local Tax Forum, which provides an annual update on significant state and local tax developments from across the nation with a particular focus on New England.

On Thursday, SALT Partner Liz Cha will discuss the future of cost of performance sourcing, discussing cases in which the taxing authorities have been successful and cases in which the courts have pushed back, as well as what the current landscape looks like after the latest wave of litigation and where we may be headed next.

View and learn more about past and upcoming events and presentations for the SALT team.

In this article originally published by CalCPA in the September issue of California CPA, Eversheds Sutherland Senior Counsel Eric Coffill provides some considerations in deciding whether to grant or deny an auditor’s request for a statute waiver in a pending audit, a common issue arising in FTB audits.

Read the full article here.

Please join us for the NYU School of Professional Studies’ 42nd Institute on State and Local Taxation. This important conference, scheduled for December 11-12, 2023 in New York City, will provide insightful updates, practical advice, and in-depth analysis of the latest developments and current issues in state and local taxation. Check out this year’s exciting agenda here.

Sessions include:

  • Overview and Preview of Federal Constitutional Issues – A spirited review of the most significant constitutional cases
  • Rest Insured: The Pros and Cons of Insuring State Tax Positions and Controversies – What exactly is tax insurance, and what are the considerations to obtaining a policy? Considerations may vary between the insured (taxpayer) and the insurer. Hear about how insurance companies assess the insured’s return position/transaction/litigation position
  • Big Gain Hunting – A discussion of recent decisions confronting the issues that arise from transactions that produce big gains (and losses)
  • And more!

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

Register now!

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 Department of Revenue recently found that a resident partnership was liable for additional composite tax on guaranteed payments made to nonresident partners?

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 posted on Saturday in our SALT Shaker Weekly Digest. Be sure to check back then!

On November 7, SALT Partner Todd Betor will present about current uses and trends of tax liability insurance for members of the Atlanta Tax Forum.

In addition, on November 10, Todd and fellow SALT Partner Ted Friedman will present during the 2023 Bank & Capital Markets Tax Institute, which provides a current state of the industry for bank tax professionals. Todd and Ted’s session will cover recent SALT developments, including judicial decisions, administrative guidance, legislative changes, and other matters relevant to the banking and capital markets industry. In addition, the panel will focus on corporate income tax, but will also cover recent sales/use and other state and local tax issues.

View and learn more about past and upcoming events and presentations.