The New York Division of Tax Appeals determined that a multilevel marketing company’s provision of access to its web-based software that contains confidential and proprietary information and reports for use in developing business was neither the taxable sale of prewritten computer software, nor the sale of a taxable information service. The company, a multilevel marketing company, sells health and beauty products directly to end customers via e-commerce through its distributors and independent sales agents. The distributors paid a subscription fee to have access to a web-based software service that provided various personalized commission and transaction reports, reports regarding how their downline sellers were performing, as well as additional information, including access to a mobile application. The Department of Taxation and Finance assessed sales tax against the company, asserting that receipts from subscriptions to the web-based software was the taxable sale of prewritten computer software and that the furnishing of the information reports constituted the sale of a taxable information service. The ALJ applied the primary function analysis in concluding that the primary function of the subscription was the generation of confidential financial reports rather than the taxable sale of prewritten computer software. The ALJ also determined that the subscription sales were not the sale of a taxable information service because the confidential information provided in the reports was personal or individual in nature which would not be substantially incorporated in reports furnished to others, and thus qualified for the exclusion from tax on information services.

Happy New Year from the SALT Shaker Podcast!

In the first episode of the 2022 SALT Shaker Podcast focused on policy issues, host and Eversheds Sutherland Partner Nikki Dobay welcomes Lucy Dadayan, senior research associate with the Urban-Brookings Tax Policy Center at the Urban Institute, where she is leading the State Tax and Economic Review project. Lucy is an expert on state government revenues.

And, during their discussion, they discuss where state tax revenues were before the pandemic, what happened during the pandemic, and where the states are coming into 2022.

Then, they wrap up with Nikki’s surprise non-tax question – what’s your New Year’s Eve ritual?

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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The Indiana Department of Revenue issued a protest ruling that an auto parts manufacturer was entitled to a refund on certain software service purchases for the 2017, 2018, and 2019 years. The taxpayer licensed software through a remote platform into which taxpayer loaded its own data for education services, cloud services, and manufacturing support services. For 2019, the ruling quickly concluded that the service at issue was a “software as a service” and exempt from sales tax because effective in 2019, Indiana expressly exempted “software as a service.” For 2017 and 2018, the Department examined whether the taxpayer acquired a possessory interest in the software.” The ruling cited Indiana Bulletin #8, which lists the factors for determining whether a possessory interest is acquired. Here, the taxpayer’s software agreement “ticks all the boxes” to indicate that the software services provider retained sole and exclusive ownership, and the taxpayer did not have “constructive possession” of the software. Therefore, Indiana sales tax was not due on the software service agreement for any of the years at issue.

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 rejected a False Claims Act expansion?

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 January 10, California Governor Gavin Newsom issued his proposed budget for the upcoming fiscal year. Of interest to business taxpayers, the proposal would allow taxpayers to again fully utilize business tax credits, like the R&D credit, and net operating loss deductions in 2022. For tax years 2020 to 2022, AB 85 (enacted in 2020), limited the amount of business tax credits that can be claimed annually to $5 million and suspended use of net operating loss deductions for business taxpayers with income of $1 million or more (see our previous coverage on AB 85 here and here).

The proposed budget also includes two new tax credits for businesses investing in activities to mitigate climate change and those developing green energy technologies. Overall, the budget proposes $286.4 billion in spending, a 9.1% increase from the budget for the current fiscal year. This proposed budget will be revised in May, then the Legislature must approve the budget and send a budget bill to the Governor by June 15.

On January 5, members of the California Assembly introduced Assembly Constitutional Amendment (ACA) 11. The bill would impose both a new excise tax and a new payroll tax, and increase personal income tax rates to fund universal single-payer health care coverage and a health care cost control system for state residents. These new taxes are estimated to raise nearly $163 billion in revenue per year, and would constitute one of the biggest tax increases in the state’s history.

The bill’s excise tax would impose a 2.3% rate on gross income above $2 million of all qualified businesses in California. The payroll tax would be imposed on employers with 50 or more employees at 1.25% of employee wages and on employees earning more than $49,900 annually at 1% of wages. Finally, the bill would increase personal income tax on income exceeding $149,509, at specified rates, up to a new 15.8% rate for income above $2,484,121 (under current law the top rate is 13.3%).

ACA 11, however, faces numerous hurdles before being enacted. As a constitutional amendment, it must receive a two-thirds majority vote in both houses of the Legislature to be placed on the California ballot. If ACA 11 makes it to the ballot, then it must then be approved by a majority of California voters. And while the Governor would not have veto authority over the amendment, the companion legislation establishing a single-payer healthcare system would require his approval to be enacted.  Considering that California is already in a significant budget surplus and that many state legislators are up for reelection in November, ACA 11’s proposed massive tax increase has a very steep hill to climb in 2022.

On August 24, 2021 (released November 2021), the Virginia Department of Taxation (the Department) concluded that a provider of professional and information technology services was entitled to payroll apportionment of gross receipts for a local Business, Professional and Occupational License Tax (BPOL Tax) refund claim. Virginia localities may impose a BPOL Tax on the gross receipts attributed to the exercise of a privilege subject to licensure at a definite place of business within the jurisdiction. While the BPOL is administered by local officials, the Department is authorized to issue determinations on taxpayer appeals of BPOL assessments.

Receipts from services are sitused in the following order: (1) the definite place of business at which the service is performed; (2) the definite place of business from which the service is directed or controlled; and (3) when it is impossible or impractical to determine either of the above locations, by payroll apportionment between definite places of business.

The taxpayer first argued that it was entitled to payroll apportionment. The taxpayer used a cost tracking system to estimate its gross receipts attributable to the city. The system captured direct labor costs, subcontractor costs, and other direct costs, and then allocated gross receipts based on costs as they were assigned to various location codes. However, the taxpayer explained that this system was not reliable for situsing subcontractor costs because: (1) those costs were assigned in a variety of manners; (2) the taxpayer did not often know where the subcontractors performed their work; and (3) services under fixed price contracts were usually performed in multiple locations with several points of control for each contract. Although sharing the City’s concerns regarding how a business that is unable to track its contract costs could effectively manage its operations, the Department concluded that payroll apportionment was appropriate because the taxpayer’s “highly complex” business operations spanned multiple states and countries and involved a “great number of employees and contractors” to perform many of their contracts. Allocation of gross receipts to definite places of business under the first two statutory methods would be “very difficult in this case.”

The taxpayer next argued that it was entitled to claim a deduction for any receipts “attributable to business conducted in another state or foreign country in which the taxpayer … is liable for an income or other tax based upon income.”  The Department returned the case to the City “to determine to what extent, if at all, the Taxpayer was eligible to claim the out-of-state deduction under the process used when payroll apportionment is used to situs gross receipts.”

Va. Public Document Ruling No. 21-111, Va. Dep’t of Tax. (Aug. 24, 2021) (released Nov. 2021).

In General Motors Corporation v. Commonwealth, the Pennsylvania Supreme Court held that the state’s prior flat $2 million cap on a corporate taxpayer’s net operating loss (NOL) deduction violated the state constitution’s Uniformity Clause and, therefore, the state’s NOL deduction statute must be stricken in its entirety.1 Nevertheless, the Court determined that the required remedy under the Due Process Clause of the US Constitution was to allow the taxpayer to deduct the stricken NOL deduction.

Read the full Legal Alert 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: Who joined Eversheds Sutherland Partner Nikki Dobay on the SALT Shaker Podcast to discuss the top SALT policy issues of 2021?

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 Fifth Circuit Court of Appeal affirmed the trial court’s ruling that online travel companies (OTCs) did not owe local sales and occupancy taxes on the fees charged by the OTCs to their customers for facilitating the customers’ online reservations with hotels located in Jefferson Parish, Louisiana nor were responsible for remitting the taxes collected from customers and transmitted to the hotels. The court determined that the fees the OTCs received for facilitating the hotel bookings were not proceeds from taxable sales of services because the OTCs were not hotels and did not themselves furnish hotel rooms. Instead, the court found that the OTCs only facilitated customers’ hotel reservations at hotels that were ultimately responsible for remitting the applicable taxes. The court also concluded that the OTCs were not “dealers” responsible for remitting taxes to the Parish, as they simply collected the anticipated sales and occupancy taxes directly from the consumer and transmitted those taxes to the hotel. A “dealer” is the party legally responsible for remitting taxes, and the court determined that the OTCs’ collection of tax from the consumer and transmission to the hotel does not relieve the hotel of its collection and remittance obligation.