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.

On New Year’s Eve 2021, New York’s Governor Hochul vetoed Senate Bill S. 4730, delivering a win to taxpayers. The bill as passed by the New York Legislature earlier this year proposed to expand New York’s already overreaching False Claims Act (FCA).

Most states have a false claims act that is modeled after the federal False Claims Act, which includes a bar against tax claims. But since it was amended in 2010, New York’s FCA has allowed private citizens to bring certain tax claims pursuant to the FCA. According to the sponsor of S.4370, the intent of bill was to expand New York’s FCA by permitting claims under the FCA against “wealthy individuals and corporations that knowingly and illegally fail to file New York tax returns.”

In a letter to the Governor’s Office, a coalition of organizations pointed out that the actual language of S. 4730 would have a broader impact on the FCA, allowing “routine types of audit issues to be overtaken by third party or Attorney General enforcement measures.” In her veto message, the Governor agreed with the coalition’s concerns, stating that “the language in [S. 4370] . . . would implicate more tax filing controversies . . . than just non-filers.” According to the Governor, such an expansion would be “incongruent with the way other states and the federal government pursue False Claims Act violations, and could have the effect of incentivizing private parties to bring unjustified claims under the law.”

While the Governor recognized there are “administrative and criminal remedies in the law currently that address” non-filers, she added that she remains “fully supportive” of legislative efforts to ensure that non-filers may be subject to FCA claims. Therefore, new legislation that proposes to amend the FCA to cover non-filers may be introduced in the current legislative session.

2021 will be remembered for many reasons: the continuation of the pandemic, the commercialization of space travel, and the rise of meme stocks among others. 2021 also will be remembered for the frenetic pace of state tax developments. The Eversheds Sutherland SALT team was kept busy tracking and summarizing state and local tax developments – more than 360 were posted to this site (note, that if you would like to receive our posts by email, please register here.)

The following selected developments exemplify interesting 2021 SALT trends. Please follow our writing in 2022 – it promises to be another interesting – and volatile – year.

Tax Jurisdiction: Nexus and Public Law 86-272

Three years after the U.S. Supreme Court’s decision in Wayfair, state and local tax nexus remains an area of significant controversy.  Pre-Wayfair cases (yes, they still are lingering), the application of the post-Wayfair repudiation of the physical presence nexus rule, special pandemic nexus rules, and controversies surrounding the application of federal Public Law 86-272 continue to plague taxpayers and tax administrators.

Sales Tax Marketplace Collection

Along with Wayfair’s sales tax nexus re-write, the adoption of marketplace collection laws – by every sales tax state – has led to substantial changes to tax collection.  These new laws require substantial adjustments by states and taxpayers, some of which were unanticipated.  We expect substantial administrative guidance in 2022.

Corporate Income Tax Apportionment Battles Continue

The amount of controversies associated with formulary apportionment of state corporate income could lead one to wonder whether it is “broken.”  Relying heavily (or solely) on a sales factor and newly enacted market-based sourcing regimes will lead to additional controversies in 2022.

Personal Income Tax: Residency, Domicile, Withholding and PTE Tax

Remote worker issues are not new – they have challenged state personal income tax systems for years.  The pandemic has stressed these systems even more, as evidenced by New Hampshire’s attempt to invalidate Massachusetts taxation of out-of-state residents and the multitude of remote workers.  The federal limitation on the deductibility of state and local taxes (also known as the “SALT cap”), has led to the enactment of pass-through entity (PTE) taxes – that are – wait for it – inconsistently implemented by the states.

Franchise Fee Battles Pits Localities versus Streamers

Franchise fees, which are usually 5% of video revenues, are often imposed on cable television providers.  “Over the top” streamers – those companies that do not directly own the infrastructure used to deliver their video services – have become the target of lawsuits alleging that they are subject to franchise fees.  Given the interest of contingency audit firms and law firms, these cases likely will continue into 2022 and beyond.

The Rise of the Multistate Tax Commission 

The Multistate Tax Commission (MTC) – an organization that represents states’ interests in imposing state and local taxes – has been active.  The MTC has been taking on significant projects associated with transfer pricing (see separate discussion below), sales taxation of digital goods, and partner/partnership issues.  Significantly, California’s reemergence as a MTC member not only bolsters the MTC’s finances, but also adds credibility to the organization’s efforts.

The States’ Bright Shiny Object: Digital Taxes

2021 will be remembered for Maryland’s unfortunate and controversial adoption of a digital advertising tax.  Effective January 1, 2022, the Maryland tax is plagued with lawsuits, condemnation by the business community and copy-cat efforts by other states (which fortunately have been unsuccessful.) We’ll closely watch the 2022 legislative efforts to consider digital taxes and hope that state legislatures will follow the federal government’s rejection of them.

New Economy Transactions

Unlike Maryland’s wrong-headed digital advertising tax, several states have been issuing guidance as to how their generally-imposed sales taxes apply (or not) to high-technology transactions such as software as a service (SaaS).  There will be more activity in 2022 as taxpayers seek certainty as to the taxability of what they are selling.

Transfer Pricing

State tax administrators continue to pursue transfer pricing challenges associated with intercompany transactions.  We covered several transfer pricing developments, including renewed activity by the MTC to organize state efforts.