On October 6, 2022, the Supreme Court of Mississippi held that digital images are not subject to sales tax as tangible personal property or specified digital products. The taxpayer was a digital wedding photographer that sold wedding photography services to customers and then transferred the digital images to the customers via DVDs or flash drives. Following an audit and sales tax assessment, the Supreme Court of Mississippi held that the sales of wedding photography packages – including digital images – were not subject to sales tax. First, the court held that digital images were not “tangible personal property” by nature of being transferred by DVD or flash drive, as opposed to an electronic means of transfer. Rather, this approach “literally places form over substance” and is “an arbitrary distinction.” Instead, the court observed that the tangible drive or disk is “incidental to the nontaxable photography service being provided.”  Second, the digital images were not taxable as “specified digital products” because the term does not include “still digital images.” Finally, photography services are not enumerated as taxable.

Mississippi Dep’t of Revenue v. EKB, Inc., Dkt. No. 2021-SA-00441-SCT (Miss. Oct. 6, 2022).

The Iowa Department of Revenue proposed amendments to its sales and use tax regulations regarding digital-based services implementing 2018 legislation imposing sales tax on a variety of new, digital-based services. The Department essentially adopted its prior non-binding guidance regarding which services are taxable, including storage of tangible or electronic files, information services, video game services and tournaments, software as a service, storage of electronic files, webinars, and services relating to installing, maintaining, servicing, repairing, operating, upgrading, or enhancing certain digital products or software sold as tangible personal property. The public comment period is open through October 25, 2022.

Next week, Eversheds Sutherland is pleased to sponsor the Tax Executives Institute (TEI) 77th Annual Conference in Scottsdale, AZ from October 23-26, 2022. Registration and event information can be found here.

Members of the Eversheds Sutherland SALT team will present on the following topics:

  • October 24 − Around the States – Everything You Need to Know About the Top State and Local Tax Issues – Maria Todorova 
  • October 25 − NOLS: The Most Valuable State Tax Assets You Only Think You Have – Charlie Kearns
  • October 26 − A Tax Family Feud: An Interactive Discussion of Tax Department Challenges and Opportunities − Jeff Friedman 

In addition, Eversheds Sutherland is supporting the Council on State Taxation (COST) 53rd Annual Meeting from October 24-27, 2022 in Orlando, FL. Registration and event information can be found here.

Eversheds Sutherland SALT Partners are presenting on several topics, including:

  • October 26 − Locally Administered Sales and Accommodation Taxes: Compliance Burdens and Constitutional Concerns – Nikki Dobay
  • October 26 – The Next Chapter in Transfer Pricing – Michele Borens
  • October 27 – The Limits of Administrative Deference – Jonathan Feldman

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

 

The Maryland Court of Special Appeals affirmed the tax court’s decision that a Macy’s captive insurance company is exempt from Maryland corporate income taxes on interest payments received from a Macy’s affiliate. Maryland imposes a premium receipts tax on unauthorized insurance companies, which includes the taxpayer captive insurer in this case. The taxpayer captive insurer paid no premium receipts tax to Maryland for the years at issue. However, the Maryland law says: “the premium receipts tax under this section is instead of all other State taxes.” The Court of Specials Appeals found this language to be unambiguous—a company subject to the premium receipts tax is exempt from all other taxes, without other conditions. The court noted that while exempting taxpayers who do not pay any premium receipts tax from other taxes may not have been the legislative intent, the court said it was bound by the plain language of the statute.

Comptroller of the Treasury v. Leadville Ins. Co., No. 563, 2022 Md. App. LEXIS 64 (unpublished Ct. of Special App. Aug. 29, 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: In what recent case did the Ohio Court of Common Pleas hold the City of Cleveland’s municipal income tax on remote workers unconstitutional on an “as applied” basis?

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 September 29, 2022, the New York State Division of Tax Appeals determined that services involving the creation of customer engagement reports based on email tracking and email template usage data are nontaxable information services—particularly when use of software is only incidental to the performance of such services. The taxpayer sold “customer engagement services” to sales organizations or sales teams. A sales team could use software provided by the taxpayer to embed software in template emails that were then sent to the sales team’s prospective clients. The embedded software would transmit client engagement data back to the taxpayer to report how clients engaged with the template email. The taxpayer would analyze the data and issue a report to the sales team regarding the effectiveness of their template or sales campaign. The taxpayer sold different packages of these services, some that allowed for sharing of the template emails and reports across teams and others that permitted the integration of the information provided by the reports into customer engagement platforms.

The Division of Taxation of the New York Department of Taxation and Finance (Department) argued that the taxpayer’s services were subject to sales tax because they constituted the sale of a license to use software. The Department also argued that the taxpayer sold services that were bundled, and the prewritten software element of the bundle was not incidental, thereby subjecting the entire bundle to sales tax. The taxpayer contended that it was selling nontaxable information and data storage services, that any sale of prewritten software was incidental in the transaction, and that it did not receive payments for the license to use such software.

The Division of Tax Appeals determined that: (1) under New York Law, when a service is bundled, the primary function test should be used to determine whether the services are taxable; (2) the primary function of the taxpayer’s services lay in its provision of information reports; (3) although each level of service sold by the taxpayer increased the range of services provided to its customers, the primary purpose of the services remained the same and use of prewritten software by the taxpayer’s customers was incidental to this purpose; and (4) the services provided by the taxpayer to its customers were personal or individual in nature, since the taxpayer’s reports did not comingle data from various customers.  As a result, the Division of Tax Appeals found that the entire bundle of services was nontaxable.

In the Matter of the Petition of Yesware Inc., DTA No. 829638, (N.Y. Div. Tax. App. Sept. 29, 2022); In the Matter of the Petition of Matthew Bellows, DTA No. 829639 N.Y. Div. Tax. App. Sept. 29, 2022); In the Matter of the Petition of P. Cashman Andrus, DTA No. 829640 N.Y. Div. Tax. App. Sept. 29, 2022).

In an opinion published on September 9, 2022, the Circuit Court of the City of Richmond held that a telecommunications equipment company was entitled to a sales tax refund on its sales of software, equipment, and related services sold to a telecommunications company.

Under Virginia law, software delivered electronically via the Internet is exempt from sales tax. The Commissioner argued that the software was not exempt because there was no invoice, contract, or other sales agreement certifying the delivery method “lack[ed] merit.” However, the court rejected this argument, concluding that there was no such requirement under the statute’s plain language.

The court further found that the taxpayer’s sales of equipment were exempt. Virginia law provides for two categories of exempt equipment: (i) broadcasting equipment and parts and accessories thereto, and (ii) amplification, transmission, and distribution equipment when used by certain entities. Among the qualifying entities are concerns that are under the regulation and supervision of the Federal Communications Commission. The court concluded that the equipment was broadcasting equipment and the purchaser was a concern regulated and supervised by the FCC. The equipment was also amplification equipment used by an open video system.  The court rejected the Commissioner’s argument that the purchaser had to be a retail internet service provider in order for the sales to qualify as exempt.  Rather, the Commissioner had “read[ ] words into the statute” and added limitations the legislature did not enact. Finally, the court noted that the Commissioner’s position was also wrong as a matter of fact—the purchaser was a retail ISP under another entity’s brand.

Alcatel-Lucent USA Inc. v. Virginia Department of Taxation, Case No. CL 20-3591 (Va. Cir. Ct. Richmond published Sept. 9, 2022).

Eversheds Sutherland is a proud gold sponsor of the 29th Annual Paul J. Hartman State & Local Tax Forum, which will be held this week from October 19-21 in Nashville, TN. Registration and event information can be found here.

Members of the Eversheds Sutherland SALT team will present on the following topics:

  • October 19 – Sales Tax Audit Best Practices in the Digital Age – Chelsea Marmor
  • October 20 – Extreme Apportionment – Bad facts make bad factors – Jeff Friedman

The Taxation of Remote and Internet-Based Computer Software Products and Services Study Committee (the “Committee”) was empaneled by the Mississippi Legislature to examine and develop recommendations regarding the taxation of remote and internet-based computer software products and services following the Mississippi Department of Revenue’s (“DOR”) proposal in September 2021 to update its regulations. The proposed regulations would have significantly expanded the tax base to reach software, software as a service, platforms as a service, infrastructure as a service, and “cloud computing.” Appearing to question the DOR’s proposal, the Legislature instructed the Committee to make “recommendations for which of such products and services should be taxable and the manner in which the products and services should be taxed.” On October 1, 2022, the Committee issued a report recommending the exclusion from the sales and use tax of: (1) “all sales of software to business consumers and used as a business input,” and (2) “all software-related services to business consumers and used as a business input.” The Committee adopted no specific recommendation as to sales of software and related services to non-business consumers.

Read the full report here.