New York is considering expanding its False Claims Act to “knowingly or illegally failing to file” a tax return.
Not only should the legislature reject the proposed legislation, New York should roll back its FCA so it does not apply to taxes.
In this installment of “A Pinch of SALT” in Tax Notes State, Eversheds Sutherland attorneys Jeff Friedman and Cyavash Ahmadi examine why New York’s application of the FCA to tax matters should be eliminated.
Read the full article here.
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 state’s supreme court recently affirmed a lower court’s determination that a taxpayer was liable for accommodations sales tax on its resort service fees?
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 Washington Department of Revenue’s Administrative Review and Hearings Division recently ruled that a company’s account access services provided to credit unions constituted digital automated services subject to sales tax.
The taxpayer provided an online banking platform and an automated phone system to member credit unions, which in turn provided those services to their individual credit union customers. The platform allowed individual customers to access their account and conduct various transactions such as pay bills, transfer money, accessing electronic statements, reviewing account data. The platform does so by retrieving data from several databases hosted and managed by the taxpayer. The automated phone system allows individual customers to make inquiries, access account information, and activate credit cards, and reroutes customers to the appropriate customer service agent.
Washington’s sales tax applies to digital automated services which include “any service transferred electronically that uses one or more software applications” and include services provided exclusively in connection with the digital automated services as well as “elements similar to standalone digital goods.” RCW 82.04.192(3)(a); Rule 15503(203)(a). Data processing services are excluded from digital automated services.
The company contended that the platform was not a digital automated service because it offered services that were included in the definition of nontaxable data processing services. The hearing officer disagreed with the taxpayer and concluded that the taxpayer was not selling any of the enumerated excluded services or otherwise charging its member credit card unions for specific excluded services; rather these services were component parts of a larger, integrated service, which constitute a retail sale of digital automated services.
Similarly, the taxpayer argued that the phone system’s core function was an exempt data processing service. Rejecting the taxpayer’s argument, the hearing officer concluded that the phone system goes beyond mere extrapolation or reformatting of data, and instead involves the use of voice recognition software, software to manage variety of requests and calls, and software to store information generated during the call.
The taxpayer also argued that the taxation of its services violated the Internet Tax Freedom Act (“ITFA”)’s bar on “multiple or discriminatory taxes on electronic commerce.” The hearing officer concluded that the taxpayer did not establish that imposing sales tax on digital automated services violates the ITFA.
On May 20, 2022, the Kansas Supreme Court ruled that a taxpayer had met his burden of demonstrating that he had changed his domicile from Kansas to Florida. If he were deemed a resident of Kansas, he would have owed over $42 million of back taxes, interest, and penalties, in part from the sale of his restaurant business.
The taxpayer considered Kansas his domicile until 2005, when he decided to retire to Florida. However, he maintained a home in Kansas with a full-time housekeeper. Under the relevant Kansas statutes, one asserting a change of domicile must show (1) a physical presence in a location other than Kansas and (2) an intention to remain in that location, either permanently or indefinitely. The plaintiff met his burden by demonstrating that he registered a vehicle in Florida, obtained a driver’s license, registered to vote, purchased a home, and other evidence that he considered Florida his permanent home.
The State argued that a spousal presumption applied and the taxpayer should be presumed to have the same domicile as his wife, i.e. Kansas. Although the taxpayer’s wife had moved with him to Florida, for the years at issue, she held herself out as a Kansas resident in order to maintain her law license and for other business purposes. However, the court noted that the relevant regulation is ambiguous and, instead, the presumption was likely overcome. The regulation states “the domicile of a person who is married shall be the same as the person’s spouse unless there is affirmative evidence to the contrary, the husband and wife are legally separated, or the marriage has been dissolved.” The court noted that this regulation is ambiguous “as to which spouse may control the other.” Thus, in the court’s view, “if one were to rely on [the husband’s] residency, rather than [his wife’s] in applying the presumption, then one could presume [his wife] was also a Florida resident.” Alternatively, the court held that he had rebutted this presumption with affirmative contrary evidence showing that his wife spent most of her time with him in Florida and also satisfied the criteria for a non-resident.
Bicknell v. Kansas Department of Revenue, No. 120 (Kan. May 20, 2022).
On July 1, 2022, the Maryland Comptroller of the Treasury revised its Business Tax Tip #29, to acknowledge the exclusion of certain business purchases of digital products. In addition, the revised guidance clarifies the taxability of data processing, information, web hosting, and digital advertising services. This is the Comptroller’s third set of revisions to Business Tax Tip #29 since Maryland began taxing digital products on March 14, 2021.
Newly Enacted Modifications to Maryland’s Newly Enacted Taxation of Digital Products
Effective July 1, 2022, S.B. 723 and H.B. 791 exclude from the definition of a sales taxable “digital product”:
These two categories of nontaxable business purchases include purchases of: (i) certain digital content (such as images, artwork, video, or music) that a business uses in its advertising; and (ii) enterprise resource planning (ERP) software.
While not defined by the new law, the Comptroller explains in Business Tax Tip #29 that an “enterprise computer system” includes the following:
Thus, even if prewritten computer software is purchased for commercial purposes, it will be taxable if it cannot be used by multiple users and does not operate with other software or computers. For example, tax preparation software used by a sole proprietorship in its business is not excluded enterprise software because it is not purchased or licensed “for simultaneous use on multiple computers.” The Comptroller warns that a vendor and buyer should retain documentation to support the nontaxable transaction. Importantly, the sale of software or software-as-a-service to an individual for non-commercial use remains subject to Maryland sales and use tax, unless another exclusion or exemption applies.
The General Assembly intended for the amendments to be clarifying in nature, as reflected in the Department of Legislative Services’ Fiscal and Policy Notes to S.B. 723 and H.B. 791: “the amount of revenue decrease [from the amendments] is not expected to be significant.”[2] Further, citing a prior version of Business Tax Tip #29, the Department of Legislative Services also explains in those Notes that, “information published on the Comptroller’s website indicates that many, if not all, of these transactions [described in the amendments] are exempt from the sales and use tax under current law.”[3]
Eversheds Sutherland Observation: In addition to these amendments to Maryland’s digital products taxation, there are other exclusions or exemptions to consider. First, even if computer software does not qualify as nontaxable “enterprise software,” it may still be exempt under Md. Code Ann., Tax-Gen. § 11-219(b) as customized, configured, or modified software.[4] Second, Maryland excludes or exempts certain digital products “inputs” where the seller does not hold an intellectual property interest. Specifically, the tax on digital products does not apply to: (i) sales to “non-end users,” i.e., any person that “receives a digital code or digital product for further commercial broadcast, rebroadcast, transmission, retransmission, licensing, relicensing, distribution, redistribution, or exhibition of the digital product,” and (ii) sales to buyers that will resell a digital product, transfer a digital product as part of digital service, or incorporate a digital product into a physical product or another digital product for resale.[5]
Additional Items
The Comptroller also indicates in the revised Business Tax Tip #29 that a variety of other services are not subject to Maryland sales and use tax, whether sold to a taxpayer for personal or business use:
To qualify as a data or information processing service, the vendor must be contractually obligated to sort and process data into a unique report for a particular customer at the customer’s request. In contrast, the sale of a customer list, mailing list, or medical report that is static and not customized to a specific buyer is subject to sales and use tax if delivered or obtained electronically.
By statute, the General Assembly imposed sales and use tax on the sale of chat room discussions, weblogs, and similar products as “digital products.” Related to those items, the Comptroller added the following explanatory examples in its latest guidance:
Non-Taxable Digital Advertising Services
In addition to explaining whether a variety of services are subject to sales and use tax, the Comptroller concludes that several digital advertising services are not “digital products” and, therefore, not to subject to Maryland sales and use tax. The following digital advertising services are not subject to sales and use tax, but – per the Comptroller – “may be subject to other Maryland taxes”:
Eversheds Sutherland Observation: The list of non-taxable digital advertising services in Business Tax Tip #29 closely reflects the enumerated services subject to Maryland’s separately imposed digital advertising tax, which is being challenged in state and federal courts.
The Eversheds Sutherland SALT Team will continue to monitor Maryland’s sales and use tax on digital products, as well as any further revisions to Business Tax Tip #29.
[1] Md. Code Ann., Tax-Gen. § 11-101(c-4)(3)(v) – (vi) (2022).
[2] Dep’t of Legis. Svcs., Fiscal and Policy Note – H.B. 791 Third Reader, Maryland Gen. Assembly 2022 Sess. (March 11, 2022) at 3; Dep’t of Legis. Svcs., Fiscal and Policy Note – S.B. 723 Third Reader, Maryland Gen. Assembly 2022 Sess. (March 19, 2022) at 3.
[3] Id.
[4] See Md. Code Ann., Tax-Gen. § 11-219(b) (“The sales and use tax does not apply to a sale of custom computer software, regardless of the method transferred or accessed, or a service relating to custom computer software that: (1) would otherwise be taxable under this title; (2) is to be used by a specific person; (3) (i) is created for that person; (ii) contains standard or proprietary routines requiring significant creative input to customize, configure, or modify the procedures and programs that are necessary to perform the functions required for the software to operate as intended; and (4) do not constitute a program, procedure, or documentation that is mass produced and sold to: (i) the general public; or (ii) persons engaged in a trade, profession, or industry, except as provided in item (3) of this subsection.”).
[5] See Business Tax Tip #29 at 28, citing Md. Code Ann., Tax-Gen. §§ 11-101(c-5), -(h)(3)(ii), -(n)(3)(ii).
In this episode of the SALT Shaker Podcast policy series, Eversheds Sutherland Partner and host Nikki Dobay welcomes Chris Wright, Senior Vice President of Advance SF. Before getting into the weeds on San Francisco’s tax landscape, they cover the background of Advance SF and its mission to address issues that impact the ability of businesses and individuals to prosper in the city.
Chris provides an overview of San Francisco tax system and how it has progressed over the last decade, including the substantial tax increases that took effect just before the pandemic. They also touch on how remote work during the pandemic has impacted the city’s revenues and end with a discussion of a proposed ballot initiative that would tax certain retailers delivering goods into the city. Chris details where in the process this initiative is and the potential implications of this initiative if it passes. You can find more detail on that initiative here.
You can also read Advance SF’s Middle Income Jobs Report here, which highlights how the city’s economic recovery is lagging far behind comparable cities.
They conclude with Nikki’s surprise nontax question for the week — if someone was visiting your city, what’s the one thing you recommend they must do during their stay?
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. This series, which is focused on state and local tax 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: In a recent SALT Shaker Podcast, Eversheds Sutherland Associates Jeremy Gove and Annie Rothschild discussed what recent decision out of the California Court of Appeal?
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 recently published a private letter ruling (issued on June 10, 2022) concluding that access to a cloud-based online platform used by healthcare students while attending courses at accredited universities and colleges was not subject to sales tax. The platform was accessed exclusively via the Internet, and the students did not download any software to access the platform. Professors using the platform assign students modules, which provide various virtual patient simulations. Upon completion of the module, the students receive scores based on their performance and the scores are transmitted to the assigning professor for a follow-up debrief. The Comptroller concluded that the program was not a taxable information service since it was educational and interactive and not merely the sale of information. The Comptroller found that that the program did contain elements of taxable data processing—such as compiling students’ responses and generating scores based on student performance. However, Tex. Tax Code § 151.0101(d) grants the Comptroller exclusive jurisdiction to interpret whether services are taxable and the Comptroller utilized that jurisdiction to conclude that the educational instruction and evaluation would not be considered a taxable data processing service.
The Washington Department of Revenue released a notice providing that effective June 9, 2022, qualifying businesses and tenants may apply for a sales and use tax exemption for purchases of server equipment and infrastructure for computer data centers located in urban areas pursuant to 2022 House Bill 1846. Eligible urban areas are those counties with population greater than 800,000, which includes King, Pierce, and Snohomish counties. Eligible computer data centers must have at least 20,000 square feet dedicated to working servers. In the first calendar year, the Department will review applications on a first-come first-served basis, and approve only six applications.
On July 14, Eversheds Sutherland attorneys Jeff Friedman, Ted Friedman, Liz Cha, Jeremy Gove and Chelsea Marmor will lead panels for COST’s Mid-Atlantic Regional State Tax Seminar.
Panel details and speakers include: