The Virginia Tax Commissioner ruled that purchases of software and software maintenance were subject to use tax, where the taxpayer was unable to prove that the software was delivered electronically and exempt. Although the taxpayer presented correspondence with two vendors that referenced the software and maintenance being only delivered electronically, the taxpayer could not provide the necessary contracts, sales invoices, or sales agreements with the required certification that delivery took place electronically and that “no tangible medium for that software has been furnished to the customer.”

On February 7, 2022, the Ohio Court of Appeals upheld the constitutionality of a statute providing that, during the duration of a stay-at-home order issued by the Governor related to the COVID-19 pandemic, and for thirty days after its end, any day on which an employee works from home because of the order shall be deemed to be a day working at the employee’s principal place of work. A resident of Blue Ash, Ohio, who had an office located in Cincinnati, but who worked primarily from home during the duration of the stay-at-home order, challenged the statute on the grounds that the Due Process Clause prohibited Cincinnati from imposing its municipal income tax on the resident’s wages for the days worked from home.  The Court disagreed, and held that cities may act extraterritorially where permitted by state law. The Court dismissed the taxpayer’s due process concerns, noting that because the statute was passed by Ohio’s legislature, and the taxpayer is a citizen of Ohio, the taxpayer received all the due process necessary under the law. The Court further determined that there was a rational relationship between the statute and its purpose, which was an emergency measure designed to preserve the status quo of the tax code during a public-health crisis.

Schaad v. Alder, 2022-Ohio-340 (Ohio Ct. App. 2022)

Eversheds Sutherland is a proud sponsor of the Tax Executives Institute (TEI) 72nd Midyear Conference on March 20-23, 2022. The conference is held as a fully hybrid event this year, with the in person option at the Grand Hyatt Hotel in Washington, DC.

Eversheds Sutherland SALT team members Michele Borens, Jeffrey Friedman and Liz Cha will present, and the details of their presentations are below.

Monday, March 21
2:15 p.m. – 3:15 p.m.
The Locals are Here to Stay: An Update on Local Taxes and Fees Expansion and Litigation
Speaker: Liz Cha

Tuesday, March 22
9:45 a.m. – 10:45 a.m.
All Things Digital – The Global Taxation of Digital Goods and Services
Speaker: Jeff Friedman

Wednesday, March 23
8:30 a.m. – 9:30 a.m.
Implementing the New Rules: Compliance Issues with On-Demand Services and Marketplaces
Speakers: Michele Borens 

The Colorado Court of Appeals held that sales tax bad debt credits may not be claimed by a financial company that issued private label credit cards. As a private label retail credit card issuer, Capital One financed purchases made by its cardholders. Under the terms of its agreements with retailers, Capital One financed purchases made with the retailers, including any sales tax. Colorado provides a bad debt credit to taxpayers for sales tax previously paid on defaulted financing transactions.  Capital One argued that it was a taxpayer for Colorado sales tax purposes because the definition of “taxpayer” includes “any group or combination” of persons “acting as a unit.” The Court held that Capital One and the retailers did not constitute a group or unit and therefore they are two distinct legal entities. Because the retailers were obligated to pay the sales tax to the Department, only the retailers were entitled to the credit (or refund).

Capital One, N.A., v. Colo. Dep’t Rev., 2022COA16 (Colo. Ct. App. Feb, 10, 2022).

“Crossover Day” in the Georgia legislature was Tuesday, March 15th—the 28th legislative day of 40 total legislative days – the day by which all bills must have passed one legislative chamber in order to cross over and be considered by the other chamber. Bills that have not passed one chamber prior to crossover are generally dead for the year, although there are still opportunities for tax provisions to be added to other tax bills that have crossed over. Georgia’s Constitution requires that all revenue related bills originate in the House, so the vast majority of bills still alive for the year now go over to the Senate. Sine Die, or the 40th and final legislative day, this year will be April 4, 2022.

Read the full Legal Alert here.

In this episode of the SALT Shaker Podcast, host and Eversheds Sutherland Associate Jeremy Gove discusses the ins and outs of California residency with Partner Tim Gustafson. They outline the various tests used in determining residency for California income tax purposes and identify common pitfalls for individuals who are considering a move out of the state. They also discuss recent legislative and initiative personal income tax proposals that have prompted many current residents to contemplate their California residency status.

They conclude with Jeremy’s classic question – overrated/underrated? March means one thing – morning to night college basketball, so naturally they rate March Madness.

Questions or comments? Email SALTonline@eversheds-sutherland.com. You can also subscribe to receive our regular updates hosted on the SALT Shaker blog.

If you have questions about income tax and residency from a California perspective, please feel free to reach out to Eversheds Sutherland attorneys Tim Gustafson or Eric Coffill.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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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: Which state recently ruled that a law firm’s purchases of loan packages for lending institution clients was the taxable purchase of data processing service?

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 North Carolina Department of Revenue issued a private letter ruling finding that a business-to-business online platform where businesses list inventory for sale for other businesses to order and pay was a marketplace facilitator responsible for collecting and remitting tax on sales that took place over its platform. The platform was not open to the general public and customers needed log-in credentials to be able to buy and sell inventory. The customer had two payment options: (i) utilizing a pre-existing credit line established with the seller; or (ii) accepting credit card payments where the customer interacts directly with the platform’s designated credit card processor through a “pop-up window.” Although the ruling contains little analysis, the Department concluded that the taxpayer met the definition of a marketplace facilitator: it lists and makes sales of a marketplace seller’s items and makes payment processing available.

The Tennessee Department of Revenue ruled recently that an information technology company’s platform product was subject to Tennessee sales and use tax. The platform was used to support a decision-making process.

The platform was hosted on Taxpayer or third-party servers, and users accessed the platform from their employer’s electronic software system. The platform was highly integrated into employers’ systems. After integration, a separate tab for users to click for access to the platform would appear, or certain triggers in an employer’s software system would produce a pop-up directing the user to use the platform. In some cases, the platform’s use was mandatory.

Although some user input was required, both the platform and customer’s computer systems exchanged information with each other, presumably automating the information transfer process. After the platform received the necessary information, it produced a decision tree that users would follow as additional information is entered. Ultimately, the platform suggests an outcome based on the information users provide.

The taxpayer charged customers three different fees in connection with the product: Platform Fees, Implementation Fees, and Content Fees. All three fees are part of a single contract, itemized within the same, and separately stated on invoices.

The Platform Fee was paid to license the platform’s technology and required configuration, content integration, and hosting, customer support, and connectivity maintenance. The Implementation Fee was paid for resources necessary to assure seamless implementation, employee onboarding, on-site user training, and the strategies to drive customer success.  Onboarding was necessary for the platform’s function, and generally involved configuring the platform so that information with a customer’s computer system could be exchanged. The Content Fee was charged for access to the platform’s proprietary content and was based on the amount and type of content made available to the customer. Only the Implementation Fee and Content Fee were at issue.

The Department concluded that both were taxable. The Department explained that retail sales of tangible personal property and computer software are subject to sales tax, including the “use of computer software,” which includes the access and use of computer software in Tennessee.

The Department observed that whether the Fees were taxable turned on the outcome of the “true object” test, since the transaction involved the sale of a combination of items or services.

The Department then determined that the true object of the transaction was for access to the platform. The Department did not explain its basis for concluding, and the taxpayer did not dispute, that the Platform Fees were subject to sales tax as charges for access and use of computer software. Finding the Implementation Fee and Content Fee were necessary to complete the sale or essential and integral to the sale, they too were taxable. The Department reasoned that the platform would not operate properly without onboarding (for which Implementation Fees were charged). And, because the taxpayer’s proprietary content could not be purchased without the platform, the Department had no difficulty concluding they were also taxable.  The Content Fees were charges for tools and information essential and integral to the platform’s operation.

Concluding, the Department wrote, “The sale and access to and use of the Platform (computer software) is subject to Tennessee sales and use tax. The Taxpayer’s Implementation Fees and the Content Fees are in turn subject to the Tennessee sales and use tax because the services covered by the fees are necessary to complete the sale and/or an essential and integral part of the taxable sale of the [p]latform.”

Tennessee Dep’t. of Revenue, Letter Ruling 21-10 (Oct. 21, 2021)

The California Office of Tax Appeals (OTA) recently sustained the Franchise Tax Board’s (FTB) income tax treatment of an IRC 338(h)(10) election. In return for all the outstanding stock in the target S-Corporation taxpayer, third-party buyers paid an initial (fixed) purchase price and agreed to make deferred contingent earnout payments totaling up to $50 million if the taxpayer’s earnings exceeded certain thresholds during the three years immediately following the transaction. The earnout payments ultimately totaled more than $33 million.

The OTA made three determinations regarding the transaction:

  1. The unreported installment gain should be accelerated for inclusion in the taxpayer’s taxable income for the final short tax year. While a taxpayer generally recognizes gain in the year received under the installment method, California law provides an exception which includes such installment income in the measure of tax for the last year the taxpayer is subject to California tax. Acceleration was warranted even though the taxpayer continued California business operations as a C corporation. This is because when an IRC 338(h)(10) election is made, the corporation is treated as if it sold its assets, liquidated, and ceased to exist, and thus the subsequent C-Corporation was a different entity.
  2. The income from the deemed asset sale relating to intangibles such as goodwill and going concern value constitutes business income because these assets were integral to the taxpayer’s regular trade or business operations and thus satisfied the “functional” test for business income.
  3. Gross receipts from the deemed asset sale should be excluded from the taxpayer’s sales factor pursuant to Regulation section 25137(c)(1)(A) as receipts arising from a substantial and occasional sale. As a result, the taxpayer was required to exclude the fixed portion of the sale amount from the sales factor numerator and denominator. This increased the taxpayer’s California sales factor apportionment percentage and California taxable income, resulting in a tax liability.

Finally, the OTA determined that the taxpayer was not entitled to alternative apportionment. The taxpayer argued that excluding the gross receipts from the sales factor while including the corresponding net gain in its apportionable tax base was distortive and did not fairly reflect the extent of the taxpayer’s California business activity during the period that the value of the intangible assets were generated. The OTA evaluated the distortion arguments under both the qualitative and quantitative approaches, as well as for reasonableness.  The OTA held that it was not necessary to include the gross receipts from the sale of goodwill in the apportionment factor for the year at issue to represent the gradual effects of the buildup of the goodwill’s value over several years as such value was already represented within the regular sale of inventory. The OTA also held that the deemed sale of assets was substantial and occasional and it would be distortive to treat the proceeds from this transaction the same as proceeds from the taxpayer’s regular business operations.

In the Matter of Amarr Company, Case No. 20046125 & 20046127, (Cal. Office of Tax Appeals Dec. 9, 2021, published Feb. 7, 2022) (pending precedential).