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.

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)