In this episode of the SALT Shaker Podcast policy series, Eversheds Sutherland attorneys Nikki Dobay and Cat Baron provide an overview of a project they have been working on for some time – a universal, multistate Power of Attorney (POA). Cat and Nikki have been working with various interested parties on the business side and are collaborating with the Multistate Tax Commission (MTC) on this project. This is the first episode of a two-part series that covers this issue.

In this episode, Cat and Nikki speak to their experiences and frustrations with states’ POA forms and discuss how the current draft form was developed, highlighting various aspects of the form. A current draft of the form and other materials can be reviewed at the MTC’s website here.

Cat and Nikki wrap up the episode with Cat’s choice of a non-tax question – what’s your favorite thing about the state of Texas, or what’s your favorite fall drink?

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. Partner Nikki Dobay, who has an extensive background in tax policy, hosts this series, which is focused on state and local tax policy issues.

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

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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: Eversheds Sutherland Associates Chelsea Marmor and Jeremy Gove recently began a new podcast series highlighting tax regimes in all 50 states (plus DC). Which state did they start with?

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 October 11, 2022, the Florida District Court of Appeals, First District held oral arguments on State Farm Mutual Automobile Insurance Company v. Florida Department of Revenue, a case relating to the “add back” to Florida taxable income of interest earned on state and local bonds, for purposes of calculating Florida corporate income tax. The case specifically relates to whether Florida statutes require property-casualty insurance companies such as the taxpayer in State Farm to “add back” all tax-exempt interest that is deducted from federal taxable income under IRC section 832(c)(7) without any adjustment to account for the inclusion of 15% of such interest in federal taxable income under IRC section 832(b)(5)(B).

Read the full Legal Alert here.

The increase in people who work remotely means some financial planners may need to reassess clients’ income sources to avoid a tax surprise.

In his article for Journal of Financial Planning, Eversheds Sutherland Senior Counsel Eric Coffill examines key issues related to the state income taxation of nonresident equity-based compensation and how to avoid potential pitfalls.

Read the full article here.

On October 13, Eversheds Sutherland Partners Michele Borens and Maria Todorova will present a tax session during ETA’s inaugural Payments Compliance Conference, an event designed for payments, legal, regulatory and compliance professionals. The program will unpack the latest regulatory orders, enforcement actions, and court rulings.

Michele and Maria’s tax session will cover what payments companies should think about when considering changes to sales tax laws, not only for their customers, but for themselves as well.

Click here for more information and to register.

On September 26, 2022, the Ohio Court of Common Pleas in Morsy v. Dumas, held that Cleveland’s municipal income tax on remote workers was unconstitutional on an “as applied” basis. The taxpayer lived in Pennsylvania and was employed by a company located in Cleveland, Ohio.

Prior to the COVID-19 pandemic, Morsy would stay in Cleveland Monday through Friday returning home for the weekend. In response to the pandemic, however, the Governor of Ohio declared a state of emergency and a stay-at-home order was issued. The Ohio legislature also passed a law that required Morsy’s employer to treat days Morsy worked from home due to the pandemic as days worked at the employer’s place of business in Cleveland. As a result, Morsy’s employer continued to withhold municipal income tax from her wages even though Morsy was not physically located in Cleveland when performing her duties. Claiming that the deemed-work-from-Cleveland rule was unconstitutional, Morsy sought a refund of her withheld income tax.

The City of Cleveland argued that Morsy’s physical presence in the City prior to the pandemic satisfied any due process jurisdictional concerns, and that “the ability to continue performing her job duties through a virtual network connection with her employer, located in Cleveland, created a substantial nexus” thereby satisfying the constitutional requirements for taxing remote workers.

Morsy countered that physical presence in the early part of 2020 did not give rise to ongoing personal jurisdiction for the entire year when she was not otherwise physically present. Citing case law that explained physical presence is necessary to a municipality’s income tax jurisdiction, the taxpayer argued that there was no case law authorizing tax jurisdiction over an employee on the basis of a virtual connection with the employer’s place of business.

The Court of Common Pleas agreed with Morsy. The court explained that “[t]raditional due process is a minimal requirement for acquiring jurisdiction to impose an income tax on an individual.” Observing that “an employee enjoys the protections, opportunities and benefits” of a taxing authority when the employee is physically present, the court concluded that “[t]he ability of an employee to communicate virtually with her office and to perform her job duties from home does not create the fiscal relation required by the case law.” As a result, the court held that the law requiring Morsy’s work from home days be treated as work from Cleveland days was unconstitutional in the case at bar.

Morsy v. Dumas

The California Supreme Court recently held that the City of Oakland’s waste management franchise fees may constitute illegal taxes that fail to meet the state’s constitutional voter approval requirements. Accordingly, the state supreme court upheld the reversal of a trial court decision sustaining the city’s demurrer.

The plaintiffs challenging the fees are owners of multifamily properties that pay their tenants’ waste collection bills and had the franchise fees passed onto them by two waste management companies. The plaintiffs allege that the fees constitute illegal taxes because they were not approved by voters pursuant to Cal Const, Art. XIIIC. That provision requires voters to approve local “taxes,” which the constitution defines as “any levy, charge, or exaction of any kind imposed by a local government.” Art. XIIIC, § 1(e). This general definition, however, is qualified by seven specific exemptions, the first of which exempts a “charge imposed for a specific benefit conferred or privilege … which does not exceed the reasonable costs to the local government of conferring the benefit.” See id. Art. XIIIC § 1(e)(1). According to the plaintiffs, the waste franchise fees were “taxes” subject to voter approval because the fees did not bear a reasonable relationship to the value received from the government and the fees are not based on the value of the franchises conveyed.

The supreme court held that plaintiffs demonstrated that the fees fall under the state constitution’s broad definition of a “tax” because they are a “levy, charge or extraction” and were imposed by a local government. The court further held that plaintiffs had also demonstrated that the exemption in Art. XIIIC, § 1(e)(4) did not apply because the fees were not for the purchase or use of local government property.  Finally, the court held that plaintiffs had alleged sufficient facts to show that the exemption in Art. XIIIC, § 1(e)(1) did not apply because the fees exceeded the reasonable costs to the local government of conferring a benefit or granting of a privilege.

Zolly et al. v. City of Oakland,  Dkt. No. S262634 (Cal. Aug. 11, 2022)

In this episode of the SALT Shaker Podcast, Eversheds Sutherland Associate Jeremy Gove welcomes back Associate Chelsea Marmor to begin a new (optimistic) series highlighting all 50 states (and DC) by breaking down each tax system and its nuances.

To kick off his series, Chelsea joins him for a breakdown of the tax regime of New York.

Jeremy’s overrated/underrated question is very seasonal and appropriate: how do you feel about pumpkin spice?

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: What highly-watched credit-related development was recently covered during the Texas Comptroller’s recent annual briefing?

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 Texas Comptroller of Public Accounts held its annual briefing in Austin on September 29 and provided taxpayers with updates regarding audits, staffing, pending legislation and related topics. The meeting – which was the first in-person briefing since the beginning of the pandemic – highlighted several taxpayer-friendly audit changes and efficiencies being driven by the Comptroller’s ongoing staffing challenges.

Seeing green: Texas’ robust economic outlook

Once again, Texas blew past its projected revenues this past year, according to the Comptroller’s Chief Revenue Estimator, Brad Reynolds. Texas’ rosy revenue numbers were largely driven by strong sales tax collections. Reynolds noted that business-to-business sales such as building materials bore more inflation than what consumers typically experience. Comptroller Glenn Hegar also predicted that Texas will continue to outperform other states in the country in the year to come.

Staffing issues spur audit efficiencies

Comptroller Hegar noted that he hopes some of Texas’ increased tax revenue finds its way back to his agency in the form of funds for increased salaries and general staffing. Hegar also noted that the Comptroller’s office experienced significant turnover and retirements during the pandemic, leaving many job vacancies open. The Comptroller’s Director of Audit, Emma Fuentes, stated that her division started the year with only about 450 of 623 auditor positions filled. Personnel shortages were also noted by other divisions that presented at the Comptroller’s annual briefing.

Audit Director Fuentes said that her division is addressing its staffing issues by increasing the number of hiring cycles per year and finding efficiencies that will allow its auditors to serve more taxpayers, such as:

  • Managed Audits: The Comptroller expanded the managed audit program to include taxpayers that have not previously undergone an audit. This program frees up auditor time because taxpayers agree to do the backfill work in return for interest and penalty waivers.
  • Onsite audit kickoffs: Auditors are encouraged to request in-person meetings with taxpayers to kickoff audits. This prevents extended back-and-forth correspondence during the audit initiation phase by allowing the auditor to immediately address questions with the taxpayer.
  • Bringing audits current: Audit Director Fuentes estimates that at least 1,300 work hours have been saved by bringing some of the Comptroller’s largest audits current to the most recent available tax year.
  • Streaming franchise tax refunds: When processing a franchise tax refund, the Comptroller will no longer initiate audits for affiliated companies that are disregarded entities without nexus in Texas. Comptroller will request an affiliate schedule and Texas nexus questionnaire for these entities instead.
  • Informal review: Audit will also informally process taxpayer questions and requests for reconsideration of audit determinations rather than forcing taxpayers to go through a formal determination process.

We’ll see you in court – Litigation update

Comptroller Tax Litigation Attorney, Bree Boyett, provided this year’s litigation update, covering several noteworthy cases such as:

  • Coppell v. Hegar: This is a dispute regarding the Comptroller’s amendments to Rule 3.334 concerning local tax, which provide that computer servers, IP addresses, websites, and software applications are not places of business of the seller. A trial date is pending.
  • Apple v. Hegar: This ongoing District Court case is about whether the Internet Tax Freedom Act (ITFA) preempts Texas from taxing the iCloud and iTunes Match services, or if these services are taxable as data processing.
  • Prison litigation: Several for-profit prison operators have filed suits concerning whether they are entitled to make sales tax-free purchases as government agents.
  • Texas Westmoreland Coal Co. v. Hegar: A lignite coal miner asserted that it could take the manufacturing exemption on lignite excavators. The issue in this case, which is pending before the Texas Supreme Court, is whether the statutory requires the inputs to the manufacturing process be tangible personal property for ultimate sale.

Focus on R&D Credits

One of the most highly-watched direct tax developments is the Comptroller’s recent back-to-back revisions of its R&D rules, which Indirect Tax Analyst Julio Mendoza-Quiroz covered during the meeting. In October 2021, the Comptroller released a comprehensive set of amendments regarding the state’s R&D credit.  These regulations, however, misstated the relevant IRC regulations and effectively prohibited the R&D credit for internal use software. After considerable taxpayer pushback, the Comptroller revised its regulations again in August 2022 to allow taxpayers to apply optional IRC regulations, thereby permitting the R&D credit for some forms of internal use software.

The Comptroller further addressed carryover issues related to the R&D credit. Under the prior R&D rule, a change in a combined group could result in the loss of the credit carryforward. The revised rule makes the tax attribute loss less likely to occur, except in situations where the relevant entity is terminated without a merger or acquisition.

Audit Director Fuentes also noted that the Comptroller currently has about 1,300 outstanding R&D audits and that the Comptroller has modified its approach to these audits. Prior to May, the audit team was directed to automatically reject R&D credits for four areas:

  • Engineering and design
  • Oil and gas
  • Services
  • Internal use software

Audit Director Fuentes noted that after reconsideration, the Comptroller will now review R&D credit claims involving internal use software and oil and gas issues. Auditors will, however, continue to initially reject R&D credits for services and engineering. The Comptroller is also reaching out to other state tax departments to determine if they have expertise to evaluate complicated R&D credit requests.

Additional updates from the direct and indirect tax teams

Other noteworthy direct tax changes included revisions to the apportionment rules to align with the outcome of recent litigation and pending oil and gas rule updates regarding marketing costs and the high-cost gas exemption.

During the indirect tax update, Analyst Mendoza-Quiroz said that the Comptroller is reviewing the various situations in which software may be subject to sales or use tax. The Comptroller is also reviewing situations whether SaaS providers may be able to purchase cloud-computing related services under the resale exemption, and whether some new e-learning platforms qualify for treatment as exempt instructional services if they also contain other types of information.

Data centers are another area of focus for the indirect tax team, which is reviewing issues such as:

  • Whether the existence of a right-of-way means that properties are no longer contiguous for tax purposes
  • How telework employees impact a data center’s job creation obligations
  • The availability of capital investment credits to successor owners, and the audit liability of prior data center owners

The indirect tax team is also reviewing rules related to local sales taxes, qualified hotel services and amusement services.

What’s next for Texas?

There is no such thing as a dull tax year in Texas, and this coming year is sure to present unique challenges for the Comptroller and taxpayers. The 88th Texas Legislature kicks off January 10, 2022, and it remains to be seen whether the Comptroller will obtain sufficient funding to address its staffing issues. Taxpayers will continue to navigate the Comptroller’s evolving rules and audit process, as well as litigate some highly interesting cases in court. Eversheds Sutherland’s tax team will keep monitoring Texas developments and provide insights on what Texas taxpayers can expect in the Lone Star State.