On April 22, 2021, the Connecticut General Assembly’s Joint Committee on Finance Revenue and Bonding (“Joint Committee”) approved a revised revenue bill (HB6443) to implement the Connecticut state budget.  We have learned that the revised bill includes: (1) a new digital advertising services tax; and (2) a new wage compensation tax, whereby, at an employee’s or independent contractor’s election, an employer would be required to pay a tax equal to 5% of the electing employee’s wages or electing independent contractor’s payments.  As reported in a prior legal alert, both of these tax proposals were included in a bill introduced by the Joint Committee on April 14.  But as of publication, it is not clear whether there have been any revisions to the previously proposed statutory language.

Connecticut budget legislation (including the revenue bill) is expected to be finalized by the end of June.  In the interim, negotiations between leadership of both houses of the General Assembly, along with the Governor’s office, may lead to any number of changes to the revenue bill—including to the digital advertising services and wage tax proposals.

The Virginia Tax Commissioner issued a determination addressing use tax on the purchase of a software. Virginia statute provides an exemption for services not involving the exchange of tangible personal property, which provide access to or use of the internet and any other related electronic communication services including software, data, content and other information services delivered electronically via the internet. The Commissioner cited to a prior determination where it reasoned that to support this exemption, the sales invoice or contract must expressly certify the electronic delivery of the software and that no tangible medium for the software has been furnished to the customer. While the taxpayer provided correspondence from the vendor stating that the software was delivered electronically, the Commissioner found that this fact alone was not sufficient evidence that electronic delivery was the only method available. The invoice provided by the taxpayer did not substantiate electronic delivery and the taxpayer did not submit other proof of electronic delivery such as a delivery confirmation email. Based on the failure to provide sufficient documentation to meet its burden, the Commissioner determined that the transaction was taxable.

The New York State Department of Taxation and Finance released an advisory opinion finding the Petitioner’s fee paid for IT support services was not subject to sales and use tax because the only taxable component of the services was delivered to the Petitioner outside of New York.  The Petitioner hired a New York-based company to provide it with managed IT services.  The Department examined the different components of these services to determine the taxability of each.  It determined that the hardware and software support services, as well as the data back-up services provided, were non-taxable.  However, the Department found the management of security of Petitioner’s IT assets and data were a taxable protective service.  But, because the computer assets and data being protected were outside the state, they were not subject to New York sales and use tax in this instance.  Finally, the Department noted that although taxability of an “integrated service,” like the managed IT services provided here, is usually determined based on the service’s primary function, such determination was unnecessary here because the only taxable component of the services was delivered to Petitioner outside the state.

This year, Partner Nikki Dobay launched a new column for Tax Notes entitled “SALT Policy Picks,” which provides Nikki’s reflections on state and local tax policy and legislative updates.

In one of her initial columns, Nikki argues that now is not the time for states to consider sales tax base expansion, discussing specifically that base expansion is not “modernization,” as well as the political challenges with such proposals.

For a further dive into this topic, listen to Nikki discuss the issue of sales tax base expansion with Doug Lindholm, president and executive director of the Council On State Taxation (COST), in a recent episode of the SALT Shaker Podcast policy series.

If you’re interested in speaking with Nikki about state and local tax policy and Eversheds Sutherland’s work in this area, or if you have a particular policy topic to suggest for the podcast, email SALTonline@eversheds-sutherland.com.

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: What southern state’s legislature is considering a proposal to double the state’s corporate income 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.

Answers will be posted on Saturdays in our SALT Weekly Digest. Be sure to check back then!

“New Yorkers love to believe that we’re number one in everything. We’re certainly number one in something now, and that’s personal income tax rates.”

Ken Pokalsky, Vice President of The Business Council of New York State, and Michael Hilkin, Counsel in the New York office of Eversheds Sutherland, join Partner Nikki Dobay on this episode of the SALT Shaker Podcast policy series. Together, they discuss the newly passed New York State budget, which includes some significant changes for individual and corporate taxpayers, New York’s unemployment trust fund deficit and the prospect of the Department of Finance finalizing regulations that remain in draft form but are related to the 2015 reform of New York’s corporate franchise tax. 

The Eversheds Sutherland State and Local Tax team has been engaged in state tax policy work for years, tracking tax legislation, helping clients gauge the impact of various proposals, drafting talking points and rewriting legislation. This series, which is focused on state and local tax policy issues, is hosted by Partner Nikki Dobay, who has an extensive background in tax policy.

Questions or comments? Email SALTonline@eversheds-sutherland.com.










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On April 16, 2021, Governor Laura Kelly vetoed S.B. 50, which would require sales and use tax collection by marketplace facilitators and would set a remote seller tax collection threshold. Marketplace facilitators would be required to collect and remit these taxes if, during the current or immediately preceding calendar year: (1) the marketplace facilitator made taxable sales in Kansas exceeding $100,000; or (2) made or facilitated taxable sales, on its own behalf or on behalf of marketplace sellers, for delivery into Kansas in an amount exceeding $100,000. The bill would implement tax changes in addition to the marketplace facilitator and economic nexus rules, and the Governor’s message regarding the veto mentioned concerns over economic development and a self-inflicted budget crisis. The Kansas legislature can override the governor’s veto with a two-thirds majority vote but when the Kansas House passed S.B. 50, it was three votes short of a two-thirds majority.

On April 14, 2021, the Connecticut General Assembly’s Joint Committee on Finance Revenue and Bonding introduced SB1106. The bill would establish the “Connecticut Equitable Investment Fund,” which would be funded by, among other things: (1) a new digital advertising services tax; and (2) a new wage compensation tax, whereby, at an employee’s or independent contractor’s election, an employer would be required to pay a tax equal to 5% of the electing employee’s wages or electing independent contractor’s payments.

Read full Legal Alert here.

The Illinois Tax Tribunal issued an order denying PepsiCo Inc. and Affiliates’ (“PepsiCo”) motion for summary judgment and found that PepsiCo’s subsidiary, Frito-Lay North America, Inc. (“FLNA”), was not an excluded 80/20 company and must be include in the PepsiCo Illinois unitary group corporate income tax return.[1] As originally filed, PepsiCo excluded FNLA from its returns for 2011-2013 based on the state’s 80/20 rules. The Department issued audit adjustments that denied this treatment, included Frito-Lay in the unitary return, and included approximately $2.5B of additional income in the return for each year.

Illinois adopts the water’s edge combined apportionment method and allows exclusion of unitary members if the taxpayer can demonstrate that 80% of the business of such member fall outside the United States. Illinois determines whether 80% of the business is outside the US based on the worldwide property and payroll factors of the member. The member shall be excluded if the average of its worldwide payroll and property factors is 80% or more outside the US.[2] While PepsiCo argued that the 80/20 determination is a straightforward mechanical calculation, the Tribunal reasoned that the Department may analyze the underlying facts that go into the calculation. In calculating the 80/20 property factor, PepsiCo included the payroll costs reported by PepsiCo Global Mobility, LLC (PGM), a disregarded single member limited liability company owned by FLNA, as compensation paid to expatriate employees. PepsiCo argued that the expatriate employees who were transferred to related foreign host companies through secondment agreements should be considered employees of  FLNA through PGM.

The court determined that as part of its global reorganization, PepsiCo created PGM in 2011 to reduce its overall tax liability. PGM had no assets, no capitalization, no management or supervisory employees, and no offices. When PepsiCo created PGM, it swapped PGM’s name on the expatriates’ secondment documents. The Tribunal determined that PGM was nothing but a “shell corporation” and that “it must be disregarded for having no economic substance or valid business purpose.” The Department also argued that the expatriates should not be considered the employees of PGM. The Tribunal considered common law factors in determining whether the expatriates were employees of PGM including that PGM did not provide work tools to expatriates, PGM had no investment in foreign work facilities, had no ability to assign projects to expatriates, had no ability to dictate the timing and length of work assignments, and that PGM did not pay the expatriates because the foreign host companies reimbursed PGM. The Tribunal determined that PepsiCo failed in its burden to show that PGM was the true employer of the expatriates and thus PGM’s tax regarded owner, FLNA, was not he true employer of the expatriates. This changed the payroll apportionment calculation of FLNA for the 80/20 test. As a result, the Tribunal concluded that FLNA could not be considered an 80/20 company and must be considered a company conducting business within the United States and included in the PepsiCo Illinois unitary combined corporate income tax return.

Eversheds Sutherland observation: Many states employ an 80/20 test that can result in the exclusion of domestic entities from the return or the inclusion of foreign entities into the return. Many of these states determine exclusion or inclusion based on the member’s property and payroll ratios. For example, if the ratio of US property and payroll to worldwide property and payroll falls below 20% for a domestic entity, that entity will be removed from the unitary combined group. While the 80/20 test is a mechanical calculation, the calculation of the property and payroll ratio for purposes of the 80/20 test is subject to audit and adjustment just as apportionment factors are. Based on a company’s business operations and structure it may have a domestic entity with sufficient amounts of foreign property and payroll to meet the 80/20 test and exclusion from the combined return. However, taxpayers should ensure that they have the proper information and documentation to substantiate the determination of foreign property and payroll amounts for those entities excluded under the 80/20 rules.

[1] Pepsico Inc. and Affiliates v. Illinois Department of Revenue, Ill. Tax. Trib., 16 TT 82; 17 TT 16 (2021)

[2] 35 ILCS 5/1501(a)(27); 86 Ill. Adm. Code 100.9700(c)

In this episode of the SALT Shaker Podcast, Eversheds Sutherland attorneys Nikki Dobay and Chris Lee discuss a recent Oregon Tax Court decision addressing whether Subpart F income and dividend income included in the Oregon income base should also be included in the Oregon apportionment sales factor. They also discuss how this decision may impact the apportionment treatment of Section 965 deemed repatriation income and GILTI.

For a link to the case discussed in the episode, click here.

Questions or comments? Email SALTonline@eversheds-sutherland.com.










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