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 held that payroll, property and sales that generated deductible agricultural cooperative income must be included in the taxpayer’s corresponding payroll, property and sales apportionment factors?

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 September 19, 2023, the D.C. Tax Revision Commission met for the second time to discuss proposals for changes to the D.C. tax scheme. Among the multiple topics reviewed, the Commission’s members discussed whether to create a business activity tax, which would primarily target entities that do not pay the District’s net income taxes on business entities – Corporation Franchise Tax or Unincorporated Business Franchise Tax. However, reception among the members on this proposal was mixed. The Commission also discussed a broad range of proposals, covering a range of tax types.

Business Activity Tax

For background, the District’s status as a federal enclave and not a state (while “functioning” as a state, county, and municipality for tax purposes) is unique among U.S. jurisdictions.  Pursuant to the Home Rule Act[1] and ultimate oversight by Congress, the District cannot impose tax on the personal income of non-residents. Because the District cannot tax the income of non-residents, it imposes the Unincorporated Business Franchise Tax to tax the entities of which they are owners, such as partnerships. However, the Unincorporated Business Franchise Tax does not apply to the income of professional partnerships.

To address what it views as those inequities, the Commission now proposes creating a Business Activity Tax. The tax would apply at a 0.5% or 1.0% rate on the formula of Gross Receipts – [Cost of Goods Sold + Capital Purchases]. The Commission also considered the Business Activity Tax liability being a nonrefundable credit against the Corporation Franchise Tax or the Unincorporated Business Franchise Tax. In its proposal paper, the Commission specifically identifies law partnerships as being subject to new tax liabilities, along with, potentially, nonprofit entities. 

The Commission’s members were not convinced by the business activity tax proposal. There were concerns about the tax applying to businesses that failed to make a profit and, also, providing a disincentive to start-ups considering locating in the District. The Commission’s members did not entirely rule out the tax, though, because of its potential as a revenue-raiser.

Other Proposals

The Commission brainstormed a number of other policy ideas affecting income taxes, taxation of partnerships, property taxes, and administrative issues, including:

  • Joyce to Finnigan. The District currently uses the Joyce method of combined reporting.  In other words, District combined reports may include only entities that separately have nexus with the District. The Commission’s members broadly supported switching to the Finnigan method of combined reporting, which would treat the entire combined group as includible in the combined return, unless otherwise excluded.
  • Pass-Through Entity Tax. Unlike many other states, the District does not currently have a SALT cap workaround option for individuals to bypass the federal cap on deductions for state taxes paid. The federal cap does not apply for taxes paid by businesses because they qualify instead as deductible business expenses. By allowing unincorporated pass-through entities that are not subject to the unincorporated business franchise tax (such as law and accounting partnerships) to pay entity-level tax and giving their owners an equivalent tax break at the individual level, the owners can reduce their federal income tax liabilities. This change would be optional for District taxpayers. The members of the Commission also supported this proposal.
  • Finally, the Commission’s members also discussed: (1) switching from I.R.C. rolling conformity to static conformity; (2) whether to increase the franchise tax filing thresholds and minimum tax amounts; (3) repealing, or increasing the threshold for, personal property tax; and (4) eliminating or limiting the District’s bar on issuing clean hands certificates for taxpayers with outstanding tax liabilities.

Future meetings and next steps

The Commission currently has scheduled four more proposal review sessions – September 26th, October 10th, October 20th, and October 24th. At the next meeting, the Commission expects to discuss whether to levy a per-employee service fee on employers and create an “extreme” wealth tax.

[1] D.C. Code Ann. § 1-206.02(a)(5).

On Wednesday, September 20, Eversheds Sutherland Partners Michele Borens, Jeff Friedman, Ted Friedman and Maria Todorova will provide various SALT updates to TEI’s Seattle Chapter.

Sessions and speakers include:

  • Jeff Friedman – WA DOR update
  • Michele Borens, Maria Todorova – Sales Tax Is Cooler
  • Jeff Friedman, Ted Friedman – No, Income Tax Is Cooler
  • Michele Borens, Jeff Friedman, Ted Friedman, Maria Todorova – Why SALT isn’t Kosher?

On September 13, 2023, the D.C. Tax Revision Commission met and evaluated over a dozen tax proposals. Most concerning, the Commission discussed the possibility of implementing a digital advertising tax or a data mining tax.

D.C. Tax Revision Commission

The Council of the District of Columbia established the Commission to comprehensively review the District’s tax code. The Commission’s mandate is to make tax policy recommendations on:

  1. Providing for fairness and equity in the apportionment of taxes and promoting progressivity;
  2. Broadening the tax base;
  3. Making the District’s tax policy more competitive with surrounding jurisdictions;
  4. Encouraging business growth and job creation; and
  5. Modernizing, simplifying, and increasing transparency in the District’s tax code.[1]

By the end of 2023, the Commission is set to submit its slate of recommendations to the Council, along with specific steps for implementing the recommendations, such as draft legislation and regulations.

The Commission previously released reports in 1998[2] and 2014.[3] Each Commission’s report made recommendations for changes to the District’s tax system. For example, in 1998, the Commission recommended a 1.5% business activities tax and “taxing sales of tangible products to District residents the same regardless of whether they are sold remotely or by District-based businesses.” In 2014, the Commission recommended reducing the District’s business franchise tax rate from 9.975% to 8.25%.

D.C. Tax Revision Commission proposals

Throughout 2023, the Commission has met with various tax and fiscal policy experts, as well as community and industry representatives. It has prepared a series of proposals to review and potentially suggest to the Council. On September 13, 2023, the Commission met for the first time to discuss these various proposals. In advance, the Commission released the list of proposals that they would review. 

The first proposal on the list was “Strengthen and clarify taxation of digital ads and services.” The Commission released a proposal paper, elaborating on the topic. The proposal paper specifically listed as options: (1) a digital advertising tax act similar to Maryland’s enactment; and (2) a tax on “the extraction of consumer data by tech platforms in much the same way that states tax the extraction of valuable commodities like fossil fuels or precious metals.” The second option would be a “per-consumer excise tax that accounts for each user whose data is being mined.” 

The sordid history of state digital advertising taxes

Maryland became the first – and only – state in the United States to impose a tax on gross receipts from digital advertising services in 2022. The tax is imposed on gross revenues derived from digital advertising services in Maryland at graduated rates, from a minimum rate of 2.5% to a maximum rate of 10% of such revenues. The Maryland digital advertising generated immediate controversy, with taxpayers challenging the tax in state[4] and federal courts on federal statutory and constitutional grounds.[5] While those challenges have yet to result in a final nonappealable decision on the legality of the Maryland tax, we expect the Maryland Supreme Court to eventually reach the merits and, hopefully, find the tax to be unconstitutional. And while several other states have considered Maryland-style digital advertising tax legislation, those proposals ultimately have been rejected.

With the history of Maryland’s digital advertising tax in mind, the Commission’s proposal paper acknowledged that any potential D.C. tax similar to Maryland’s tax would likely face similar legal challenges. But the paper noted that it may be able to “minimize challenges by, for example, imposing a tax on all advertising (as opposed to just digital advertising). There could then be less risk that the tax would violate the federal Internet Tax Freedom Act.” But imposing a broad advertising tax could prove difficult for the Council based on recent experience. In 2020, the Council considered expanding its sales tax base to include sales of advertising services and personal information, as part of its Fiscal Year 2021 Budget Support Act of 2020. Ultimately, the D.C. Council opted not to pursue expanding its sales tax base to these sales due to the adverse impact on local media and press, on top of the likely litigation that would follow if a targeted tax on digital advertising were adopted.[6]

The Commission meeting on September 13th

At the meeting, the Commission discussed the first batch of proposals but without formally voting on them, which will happen in a later meeting. Rather, the meeting was intended to advance discussion in preparation for later formal voting. 

The Commission’s members were generally interested in pursuing a digital advertising tax or a data mining tax. The members saw these taxes as being worth consideration because of the potentially large amount of revenue they could generate. One member supported the taxes because he saw them as an expansion of the tax base to match changing technology, rather than a tax rate increase.

However, there was hesitancy among the Commission’s members because of the ongoing Maryland litigation and potential tax implementation difficulties. The Commission’s members noted that the process to pass and implement these taxes could be long, especially as they were interested in whether the Maryland tax would survive legal scrutiny.

The Commission also considered a variety of other proposals. For example, the Commission’s members reacted negatively to increasing the general sales tax rate from 6 percent to 7 percent due to regressivity concerns. However, they were supportive of eliminating the motor vehicle excise tax exemption for electric vehicles.

Future meetings and next steps

The Commission currently has scheduled five additional proposal review sessions—September 19th, September 26th, October 10th, October 20th, and October 24th. These sessions will shape which recommendations the Commission will make to the D.C. Council. Of particular interest for the September 19th meeting, the Commission likely will discuss a business activity tax proposal, which may resemble the Texas franchise (margin) tax and the Oregon corporate activity tax. Eversheds Sutherland will continue to follow these review sessions that will color the next decade of District taxation. 

[1] D.C. Code Ann. § 47-462.

[2] See Summary Report to the Mayor and Council of the District of Columbia, June 1998, D.C. Tax Revision Commission (June 1998), available at https://cfo.dc.gov/sites/default/files/dc/sites/ocfo/publication/attachments/ocfo_part_i_summary_report.pdf.

[3] Final Report, D.C. Tax Revision Commission (May 2014), available at https://cfo.dc.gov/sites/default/files/dc/sites/ocfo/publication/attachments/DC%20Tax%20Revision%20050114.pdf.

[4] The Maryland digital advertising tax was challenged in the Circuit Court of Anne Arundel County, with the plaintiffs seeking a declaratory judgment that the tax is unconstitutional and unlawful.  On October 17, 2022, the circuit court granted the plaintiffs’ motion for summary judgment and issued a final declaratory judgment, finding that the tax was unconstitutional and invalid because it violated the Internet Tax Freedom Act (which bars state and localities from imposing taxes that discriminate against electronic commerce), the Commerce Clause of the U.S. Constitution, and the First Amendment to the U.S. Constitution. Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia, LLC, et al. v. Comptroller of the Treasury of Maryland, Case No. C-02-cv-21-000509 (Md. Cir. Ct. final declaratory judgment issued Nov. 17, 2022).While the Maryland Supreme Court later concluded that the circuit court lacked jurisdiction to enter the declaratory judgment, the supreme court did not address the tax’s legality. Comptroller of Maryland v. Comcast of California/Maryland/Pennsylvania/Virginia/West Virginia, LLC, et al., 484 Md. 222 (2023). As it stands, only one court has review the legality of Maryland’s digital advertising tax. That court found it to be unconstitutional under multiple theories.

[5] The Chamber of Commerce of the United States is also pursuing a challenge to the Maryland digital advertising tax at federal court. However, the United States District Court for the District of Maryland concluded that the Tax Injunction Act precluded the Chamber’s substantive challenges to the tax. While the court initially allowed the lawsuit to proceed against the tax’s pass-through prohibition, the court later also dismissed that challenge as moot because of the Circuit Court of Anne Arundel’s declaration that the tax violated the U.S. Constitution. The Chamber is currently challenging these decisions before the United States Court of Appeals for the Fourth Circuit. Oral argument is set for September 20, 2023. Chamber of Commerce of the United States v. Lierman, No. 22-2275 (4th Cir. notice of appeal filed Dec. 13, 2022).

[6] The sales tax on advertising services would have applied to “the planning, creating, placing, or display of advertising in newspapers, magazines, billboards, broadcasting, and other media, including, without limitation, the providing of concept, writing, graphic design, mechanical art, photography, and production supervision.” The tax would have encompassed both physical and digital advertising. The proposed sales tax on sales of personal information would have applied to “information or data that is derived from a person that identifies, relates to, describes, or is capable of being associated with, a particular person” and included a person’s browser habits and consumer preferences.

This episode of the SALT Shaker Podcast welcomes a new voice into the mix, Eversheds Sutherland Associate Laurin McDonald. Laurin joins host and Associate Jeremy Gove to describe 80/20 rules used by states in the context of water’s-edge combined reporting, the subject of an article she co-authored in Tax Notes State.

In addition to discussing the 80/20 rules, Jeremy and Laurin cover variations on the rules, compliance issues and recent cases that exemplify controversies that can arise from application of 80/20 rules.

They wrap with an underrated/overrated question – how do you feel about concert encores?

Questions or comments? Email SALTonline@eversheds-sutherland.com. You can also subscribe to receive our regular updates hosted on the SALT Shaker blog.

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The back to school buzz has begun! Time to hit the books and open a new chapter with plenty of learning and growth.

To commemorate the start of the 2023 school year, we’ve collected photos from members of our Eversheds Sutherland SALT team for your enjoyment! We wish all these bright minds a wonderful academic year!

1: Partner Charlie Kearns’ daughter Ella (1st grade)

2: Paralegal specialist Jaime Lane’s daughter Cassidy (6th grade) and son Cooper (8th grade)

3: Legal secretary Janet Curry’s granddaughter Raegan (pre-K)

4: Associate John Ormonde’s daughter Betsy (pre-K)

5: Partner Jonathan Feldman’s daughter Anna (8th grade) and son Micah (5th grade)

6: Partner Tim Gustafson’s son Luke (4th grade) and daughter Cate (8th grade)

7, 8: Legal secretary Melissa Bragg’s daughters Madelyn (4th grade) and Emma (10th grade)

9, 10: Partner Maria Todorova’s daughter Addison (7th grade) and son Nicholas (5th grade)

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: A tax court in which state found that a used car dealership was properly denied $1 million in sales tax deductions due to a failure to properly maintain records?

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!

There has been an alarming expansion of local taxes. In some localities, this includes new local taxes imposed on businesses. In other localities, this includes aggressive interpretations of existing local ordinances by local tax agencies.

In this installment of A Pinch of SALT in Tax Notes State, Eversheds Sutherland attorneys Michele Borens, John Ormonde and David Patterson examine a relatively old local tax — San Francisco’s gross receipts tax.

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 southwestern state city council recently voted to put a measure on the November ballot asking residents to approve a 3% excise tax on any residential property purchase price in excess of $1 million?

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 most purrfect pals, Lady and Monkey, are September’s SALT Pet(s) of the Month! Belonging to Mitch Trager, Senior Tax Manager at Forvis, these sisters make a pawsome duo, especially when teaming up to steal a spot on vacated chairs or in purrsuit of milk and butter, their favorite treats.

Named by Mitch’s oldest son, the two cats are the perfect additions to the Trager family.

Welcome to the SALT Pet of the Month family, Lady and Monkey!