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.

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.