The District of Columbia occupies a unique position among subnational jurisdictions in the United States given its status as a nonstate, federal enclave. The District’s status allows it to impose individual income tax on only residents under the district clause of the US Constitution, the Home Rule Act of 1973, and implementing statutes that are subject to general congressional oversight. Unlike states, which may tax source income of nonresidents, the District cannot tax nonresident income, including wages earned in the District. This limitation affects the District’s tax structure in a few ways, including the imposition of the District’s entity-level tax on unincorporated businesses.

Because of the ambiguities in the District’s definition of statutory resident, the Office of Tax and Revenue’s interpretation has created concern among individuals who have connections to the District and their employers.

In this installment of A Pinch of SALT in Tax Notes State, Eversheds Sutherland attorneys Charlie Kearns and Charles Capouet describe the District of Columbia’s statutory residency law, its associated risks, and what individuals can do to mitigate those risks.

Read the full article here.

The North Dakota Tax Commissioner updated its website to explain North Dakota’s Wayfair small seller exception to collecting and remitting state and local sales tax on sales made into the state. Consistent with North Dakota statutes, the website states that, for remote sellers with no physical presence in the state, the exception for small sellers “requires sales tax collection by remote sellers ONLY IF their taxable sales into the state exceed $100,000 in the current or previous calendar year.” See also N.D. Cent. Code §§ 57-39.2-02.2, 57-40.2-02.3. Once taxable sales exceed $100,000, a remote seller must obtain a permit and begin collecting tax on sales delivered during the following calendar year or beginning 60 days after the threshold is met, whichever is earlier.

In this episode of the SALT Shaker Podcast policy series, Eversheds Sutherland Partner and host Nikki Dobay is rejoined by Morgan Scarboro, Senior Director of Tax Policy at MultiState Associates for a year-end review of the state and local tax policy space.

Morgan and Nikki discuss what happened at the state level during the legislative sessions and the outcome and potential impact of the recent election. Additionally, Morgan and Nikki provide insight regarding what to expect with state revenues and SALT policy in 2023.

Nikki’s surprise nontax question deals with seasonal desserts – what is your favorite pie for the holidays?

Note: you can access the map of state government trifecta status that Morgan mentions during this episode here, as well as a map of red wave projections vs. post-election results here.

The Eversheds Sutherland SALT 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 SALT policy issues, is hosted by Partner Nikki Dobay, who has an extensive background in tax policy.

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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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 exempted hospital and provider clinics from the state’s tax on advanced computing businesses?

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 Shaker Weekly Digest. Be sure to check back then!

On November 4, 2022, the Washington Department of Revenue adopted WAC 458-20-290, a regulation explaining the state’s workforce education investment surcharge on select advanced computing businesses. The regulation defines a select advanced computing business as “a person who is a member of an affiliated group with at least one member of the affiliated group engaging in the business of advanced computing, and the affiliated group had worldwide gross revenue of more than $25,000,000,000 during the immediately preceding calendar year.” Such businesses must report and pay the 1.22 percent surcharge on a quarterly basis, with the report due on the last day of the month following the end of the quarter.

The surcharge does not apply to hospitals and provider clinics and their affiliated organizations, or a business primarily engaged as a(n):

  • Financial institution;
  • Owner (or lessor) and operator of transmission facilities and infrastructure for the transmission of voice, data, text, sound, and video using wired telecommunications networks; or
  • Commercial mobile service provider.

Notably, the regulation imposes a requirement on businesses believed to be engaging in advanced computing, or affiliated with such a business, to disclose whether they are a member of an affiliated group and, if so, to identify all other members of the affiliated group. The regulation also imposes a 50 percent evasion penalty for those members of an affiliated group that intentionally fail to comply with the surcharge.

WAC 458-20-290 effective November 28, 2022.

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 is the only state to designate its highest court as the “Court of Appeals?”

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 Shaker Weekly Digest. Be sure to check back then!

The U.S. Court of Appeals for the Ninth Circuit held that the City of Reno was not entitled to file a lawsuit against streaming video providers for franchise fee payments. Reno sought damages for the streaming services providers’ alleged failure to collect franchise fees under Nevada’s Video Service Law. The court held that the law does not create a private right of action for cities to sue for unpaid franchise fees. Reno therefore failed to state a claim against the streaming service providers. Additionally, Reno failed to state a claim under the federal Declaratory Judgment Act because it sought affirmative relief and lacked a cause of action under a separate statute. Because Reno lacked a cause of action, the court declined to address the substantive question of whether the streaming video providers met the definition of a “video service provider” under the law.

City of Reno v. Netflix, Inc. et al., No. 21-16560 (9th Cir. Oct. 28, 2022)

From November 14 through 17, the Multistate Tax Commission (MTC) held its annual Fall Meetings in Little Rock, Arkansas. The MTC’s Uniformity, Executive, Strategic Planning, Audit, Litigation, and Nexus Committees met during the week. The Uniformity Committee meeting included the following topics:

  • Digital products
  • Apportionment
  • Multistate Power of Attorney
  • Marketplace updates

Read the full Legal Alert here.

On August 31, 2022, the California Office of Tax Appeals (“OTA”), in the Matter of the Appeal of B. Housman and B. Pena, held that an Australian software company holder, Housman, and his wife are California residents and Housman is entitled to a stepped-up basis as a result of a valid check-the-box election to be classified as a partnership for federal and California income tax purposes.

Housman, an Australian citizen, formed an entity in Australia in 2000. In 2008, Housman and his wife moved to San Francisco, intending to stay for an indeterminate period of time. In 2009, Adobe Systems purchased Housman’s software-as-a-service company, a subsidiary of the entity, for $22.5 million. The California Franchise Tax Board (FTB) and the couple disagreed on how much tax was owed as a result of the sale.

The OTA denied the couple’s argument that they were entitled to a $4.7 million refund as they were California residents at the time the company was sold. The OTA found that, although the couple continued to own a house in Australia after moving to San Francisco in 2008 and contended that their presence in California was intended to be temporary, the couple remained in California for a relatively long or indefinite period of time and had significant connections in California which was not temporary or transitory in nature.

The OTA, however, did agree with Housman that he was entitled to a stepped-up basis from 2008 to offset the $1.4 million in capital gains resulting from the sale of the company to Adobe in 2009. The OTA determined that the company in question made a valid check-the-box election to be classified as a partnership for federal and state tax purposes that took effect on April 1, 2008. The OTA rejected the FTB’s argument that the partnership election did not qualify Housman for the stepped-up basis because the entity did not operate in the United States, stating that “the regulation does not address whether the entity itself is relevant, but whether the classification of the entity is relevant.” (emphasis added) The OTA further found that the appraisal, from which the basis was determined, is reasonable and consistent with revenue rulings.

As such, the OTA found that Housman is entitled to a stepped-up basis as result of a valid check-the-box and any additional penalties and interest were waived.

In re Housman, Cal. Office of Tax App., No. 18010200, 8/31/22

The California Office of Tax Appeals held that a taxpayer was a California resident and domiciliary when he redeemed shares of his Tennessee-based employer in 2012. Accordingly, the taxpayer was assessed additional state income tax on the value of the redeemed shares.

In 2008, the taxpayer moved from California to Tennessee and purchased a home. From 2008 – 2011, the taxpayer was domiciled in Tennessee and was involved in a Tennessee based business. In 2012, the taxpayer became engaged to a California resident, purchased a home in California to remodel, sold his Tennessee home, and paid a portion of his fiancé’s rent. The taxpayer argued that he was Tennessee resident during all of 2012 and only temporarily in California to visit his fiancé and remodel the California property. The OTA however found that the taxpayer’s strongest ties were to California at the time of the sale of the Tennessee business, based on a number of factors, such as the taxpayer maintained a permanent home in California, his fiancé was located in California and had no intention of moving, and the taxpayer spent more time in California than Tennessee. Additionally, the taxpayer did not file a Tennessee tax return during 2012 to report certain investment income subject to tax in Tennessee.

In the Matter of the Appeal of Beckwith, 2022-OTA-332P (Cal. Office of Tax Appeals 2022).