Governor Glenn Youngkin has issued his proposed Virginia 2024 – 2026 Budget Bill. The Budget Bill would make three notable changes to Virginia’s tax structure, all of which would take effect on January 1, 2025: (1) increase the sales and use tax rate; (2) expand the sales and use tax base to digital products; and (3) reduce the personal income tax rates. Virginia currently does not impose sales tax on downloaded or electronically accessed digital products and software.[1]

Sales and Use Tax Rate Increase. The Budget Bill would increase the state sales and use tax rates from 4.3% to 5.2%. This rate increase, plus the additional 1% sales and use tax imposed by local governments, would result a new total sales and use tax rate of 6.2%.

Sales and Use Tax Base Expansion. The Budget Bill would expand the sales and use tax base by: 

  • Including “digital personal property” in “tangible personal property,” with the former defined as “digital products delivered electronically, including software, digital audio and audiovisual products, reading materials, and other data or applications, that the purchaser owns or has the ability to continually access, whether by downloading, streaming, or otherwise accessing the content, without having to pay an additional subscription or usage fee to the seller after paying the initial purchase price”; and 
  • Expanding the base to enumerated “taxable service[s],” which include: “1. Software application services; 2. Computer-related services; 3. Website hosting and design; 4. Data storage; and 5. Streaming services.” However, the term does not include, “any service transaction where the purchaser or consumer of the service is a business, or any other service otherwise exempt [from sales and use tax].”

Eversheds Sutherland Observation: While details need to be worked out, the Budget Bill attempts to avoid taxation of digital business inputs in two ways. First, by characterizing “digital personal property” as “tangible personal property,” much of the existing Virginia sales and use tax law would apply to those transactions including, among other things, the resale exemption.[2] Second, the Budget Bill excludes business-to-business transactions involving “taxable services,” thereby avoiding tax pyramiding for Virginia businesses, including the commonwealth’s large data center market. 

Personal Income Tax Rate Reduction. The Budget Bill would also reduce the personal income tax rate by approximately 12% for all earning brackets for taxable years beginning on and after January 1, 2025. For example, the highest marginal rate would be reduced under the plan from 5.75% to 5.1%. 

The Eversheds Sutherland SALT team will continue to monitor the pending Virginia budget and update on any resulting tax changes.

[1] See Va. Code Ann. § 58.1-648(C), which excludes “digital products delivered electronically, such as software, downloaded music, ring tones, and reading materials” from the communications sales tax. This provision would be repealed as part of the Budget Bill proposals.  

[2] See, e.g., Va. Code Ann. § 58.1-602 (excluding from “retail sale” any “sale to any person for any purpose other than for resale in the form of tangible personal property or services [subject to sales and use tax]”; see also § 58.1-623 and V.A.C. 23 § 10-210-280 (relating to resale exemption certificates).

Good tax legislation. Bad tax legislation. Massive budget shortfall. A November general election around the corner. Curious agency guidance. And looming corporate tax appeal decisions. 2024 is shaping up to be a wild year for California tax.

Join Eversheds Sutherland attorneys Tim Gustafson and Eric Coffill on Thursday, January 25 for a discussion of what we’ve seen thus far on the California tax front and where the year may take us.

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 recently adopted final regulations to its business corporation franchise tax to implement reform that was enacted nearly a decade ago?

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!

2023 was a year of brisk activity in the state tax world. States remained focused on the digital economy, with numerous new tax proposals being offered in legislatures. Departments of Revenue were also busy issuing regulations and guidance—and in the case of New York’s corporate tax reform regulations, almost a decade in the making. State litigation dockets also continued to be active as they worked through heavy caseloads, issuing numerous income tax and sales tax decisions.

Throughout the year, the Eversheds Sutherland SALT team continued tracking and summarizing SALT developments – nearly 200 items were posted to this site. In addition, we continued discussing key cases and SALT trends through our SALT Shaker Podcast. (You can catch up on 2023 episodes here, and if you would like to receive all of our updates by email, please register here.)

The following selected developments exemplify interesting 2023 SALT trends. While the digital economy continued to take center stage from both a legislative and tax administration perspective, income tax disputes, and apportionment specifically, continue to remain a focal point of state tax controversies.

Digital Economy Tax Proposals

As with 2022, 2023 was yet again a busy legislative year with numerous jurisdictions discussing new ways to tax the digital economy, such as digital advertising taxes and social media taxes.

Digital Economy Sales Tax Decisions

It was not just the legislatures in 2023 focused on the digital economy, as several states issued decisions addressing the continually expanding digital environment in which we live.  We expect as many or even more of these type of decisions in 2024 as disputes work their way through litigation.

Regulations and Department Guidance

2023 was a busy year for Departments around the country as they promulgated and finalized long-awaited regulations, including the Texas Comptroller amending its sourcing regulations in light of the Texas Supreme Court’s 2022 decision in Sirius XM v. Hegar, and the New York Department of Taxation and Finance finally adopting regulations implementing the state’s 2015 corporate tax reform.

Income Tax and Apportionment

In 2023, income tax controversies continued to occupy a central role in state tax litigation around the country. Specifically, cases regarding apportionment, from cost of performance disputes to look through sourcing, highlighted litigation dockets. We do not anticipate this trend slowing down in 2024. 

Sales and Use Tax Cases

Sales and use tax cases continued to maintain its status as a leading focus of state tax disputes. 2023 also saw the role of class-action sales tax disputes and qui tam cases continue unabated.     

Constitutional Issues

In 2023, multiple jurisdictions issued decisions in favor of taxpayers on constitutional grounds, reinforcing the importance of raising constitutional claims during litigation.

On January 5, 2024, the DC Tax Revision Commission released its “Chairman’s Mark,” which lays out the Commission’s tentative proposals for changes to the District’s tax structure. The Commission released a package of 39 proposals. The total net package is estimated to be revenue neutral.

Read the full Legal Alert here.

We’re pleased to introduce Jackson, our first SALT Pet of the Month for 2024! Jackson is a spirited 3-year-old Bernedoodle, adored for his companionship by mom Betsy Weiler, Corporate Tax Lead at Zoom.

Jackson is named after Jackson Hole, Wyoming, in lieu of Betsy’s plans for a vacation home that were interrupted by the pandemic. While Betsy may have missed a home in the wilderness, she is never short on adventure with Jackson. The two have road tripped through Utah, Colorado, Wyoming, and Wisconsin, stopping along the way for skiing excursions and hikes.

When the young pup is not on an adventure, he enjoys a peanut butter-filled dog treat. Jackson is as determined to eat all the peanut butter as he is to finish a hike! It’s also the perfect treat to give him as it keeps him occupied for a long time!

In addition to his love of travel, playing fetch and peanut butter, he can’t help himself from trying to say hello to little ones in strollers. Jackson’s definitely gentle, but still a giant to them!

We are happy to have you, Jackson. Here’s to many more outings in the New Year!

On December 27, 2023, the New York Department of Taxation and Finance formally adopted long-awaited regulations implementing state corporate tax reforms that were enacted nearly a decade ago. Although the department solicited feedback from the public throughout the process that culminated in the rules’ formal adoption, there remain several rules that we are certain will cause irreconcilable disputes.

In addition to the reasonable disagreements taxpayers and the department will have over these regulations, the state’s legislative response to the Tax Cuts and Jobs Act is all but certain to lead to litigation.

Litigation at the state and city level generally follows the same process. In this article published by Law360, Eversheds Sutherland attorneys Jeff Friedman and Cyavash Ahmadi provide an overview of the litigation process and pose some questions worth thinking through before committing to New York tax litigation.

Read the full article here.

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 announced that beginning January 1, 2024, sales, use, and excise tax payments, with the exception of quarterly payments, constitute an agreed liability by the taxpayer?

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 December 27, 2023, the New York State Department of Taxation and Finance officially adopted the business corporation franchise tax regulations it submitted to the State Register on August 9, 2023 – marking the final step in the State Administrative Procedure Act process to implement regulations regarding the state’s corporate tax reform that was enacted nearly a decade ago. 

Read the full Legal Alert here.

The Tennessee Chancery Court for the Twentieth Judicial District held that software licenses are intangible property and thus the gross receipts from their sale are not subject to tax under Tennessee’s Business Tax Act.

The taxpayer is a software company engaged in the business of selling and licensing software used for various corporate and back office tasks.

The Department issued tax assessments for years 2014 through 2018, contending that the taxpayer owed business tax on the gross receipts from software licensing—which the Department classified as a service subject to the business tax. Conversely, the taxpayer argued that its sales were not sales of services, but instead sales of intangible property and thus not taxable under the Business Tax Act.

The court agreed with the taxpayer, relying on the holding in Commerce Union Bank v. Tidwell, where the Tennessee Supreme Court held that the sale of computer software is the sale of intangible property. After the Commerce Union decision, the state legislature amended the state sales tax statute such that the sale of software would be treated as the sale of tangible property and thus subject to sales tax. Nonetheless—as the court noted—the legislature chose not to make similar changes to the Business Tax Act.

Applying strict statutory interpretation, the court held that the Commerce Union decision was still binding with regard to the Business Tax Act, classifying software as intangible property under that taxing regime. The court therefore held that sales of software licenses did not meet the definition of “services” under the Act because they involved the sale of intangible property. As a result, gross receipts from such sales are not subject to tax under the Business Tax Act. 

SAP America Inc. v. Gerregano, No. 20-1249-II, Davidson Cty. Ch. Ct. (Aug. 9, 2023).