INSIDE SALT
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
INSIDE SALT
In-Depth Coverage of Issues Surrounding State and Local Tax
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New York State Department Intends to Finalize Corporate Tax Regulations This Fall

by , and | May 2, 2022 | , , , ,

Almost seven years after it started releasing draft regulations concerning sweeping corporate tax reforms that went into effect back in 2015, the New York State Department of Taxation and Finance (Department) has issued guidance, stating that “the Department intends to begin the State Administrative Procedure Act (SAPA) process to formally propose and adopt” its draft corporate tax regulations this fall.

The Department has released many versions of “draft” regulations addressing corporate tax reform since September 2015. However, these draft regulations have been introduced outside of the SAPA process because the Department intended to formally propose and adopt all draft regulations at the same time. In the meantime, the Department warned taxpayers that so long as the regulations remain in draft form, they are not “final and should not be relied upon.”

Now, the Department has given its first public signal that it is prepared to formally adopt the draft regulations later this year. On April 29, 2022, the Department released “final drafts” of regulations that address a variety of topics, including nexus and net operating losses, and indicated that it will release final draft regulations addressing “apportionment, including rules for digital products/services and services and other business receipts” this summer.

Notably, the draft regulations released on April 29 include new provisions, “largely modeled after the [Multistate Tax Commission (MTC)] model statute . . . to address PL 86-272 and activities conducted via the internet.” Like the MTC model statute, the new draft regulations take a broad view of internet activities that would cause a company to lose PL 86-272 protection. In one example, the draft regulations state that providing customer assistance “either by email or electronic ‘chat’ that customers initiate by clicking on an icon on the corporation’s website” would exceed the scope of protections provided under PL 86-272.

As it intends to formally propose the draft regulations this fall, the Department is “strongly” encouraging “timely feedback” on all final draft regulations. With respect to the final draft regulations released on April 29, the Department is asking for comments by June 30, 2022.



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Maryland Comptroller Adopts Digital Advertising Gross Revenues Tax Regulations

by , and | Dec 3, 2021 | , , , ,

On December 3, 2021, the Maryland Comptroller published notice of its adoption of the digital advertising gross revenues tax regulations (which was originally proposed on October 8, 2021). Per the Maryland Administrative Procedure Act, the final adopted regulations will go into effect in 10 calendar days, or December 13, 2021. (See Md. Code Ann., State Gov’t § 10-117(a)(1).)

The final regulations were adopted almost entirely as proposed, with just two minor changes that the Attorney General (AG) of Maryland certified as non-substantive. Specifically, the changes to the October 8 proposed regulations concern the information that may be used to determine the location of a device and are described by the AG as follows:

  • Regulation .02(C): The Comptroller is clarifying language regarding the allowable sources of information a taxpayer may use to determine the location of a device. Specifically, this final action amendment changes “both technical information and the terms of the underlying contract” to “both technical information and nontechnical information included in the contract.”
  • Regulation .02(C)(2): The Comptroller is amending the non-exhaustive list of technical information to include “industry standard metrics.”

Practice Note: While “industry standard metrics” is a nice addition to the list of sources that may be used to determine the location of devices for sourcing purposes, significant and fundamental questions and concerns submitted as part of the comments were not addressed by the Comptroller in adopting the final digital ad tax regulations. The tax is subject to multiple lawsuits (both state and federal court) and pending a court order to the contrary is scheduled to take effect beginning January 1, 2022, with the first filing obligation for large taxpayers in April 2022. Taxpayers grappling with how to comply with this new tax are encouraged to contact the authors.



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Massachusetts Supreme Judicial Court Approves Sales Tax Apportionment for Software

by , , and | May 25, 2021 | , , , , ,

On May 21, 2021, the Massachusetts Supreme Judicial Court issued a decision affirming the Massachusetts Tax Appeal Board’s decision in favor of Microsoft and Oracle, ruling that the companies may apportion sales tax to other states on software purchased by a Massachusetts company from which the software was accessed and seek a tax refund.

The case involved a claim by vendors for abatement of sales tax collected on software delivered to a location in Massachusetts but accessible from multiple states. The Massachusetts Department of Revenue (DOR) claimed that the statute gave it the sole right to decide whether the sales price of the software could be apportioned and, if so, the methods the buyer and seller had to use to claim apportionment. Under rules promulgated by the DOR, there are three methods to choose from, such as the purchaser giving the seller an exemption certificate claiming the software would be used in multiple states, none of which the purchaser used. The DOR argued that if a taxpayer did not use one of the methods specified in the rule, no apportionment was permitted. The vendors sought abatement of the tax on the portion of the sales price that could have been apportioned to other states had one of the methods specified under the rule been used. The DOR claimed the abatement procedure was not a permissible method of claiming apportionment.

The court held: (1) the statute gave the purchaser the right of apportionment and it was not up to the DOR to decide whether apportionment was permitted; (2) the abatement procedure is an available method for claiming the apportionment; and (3) the taxpayer was not limited to the procedures specified in the rule for claiming sales price apportionment.

The court’s decision was based in part on separation of powers: “Under the commissioner’s reading of [the statute], the Legislature has delegated to the commissioner the ultimate authority to decide whether to allow apportionment of sales tax on software sold in the Commonwealth and transferred for use outside the Commonwealth.” The court found such a determination represented “a fundamental policy decision that cannot be delegated.”

The Massachusetts rules reviewed by the court have their genesis in amendments to the Streamlined Sales and Use Tax Agreement (SSUTA) (that never became effective) providing special sourcing rules for, among other things, computer software concurrently available for use in more than one location. Even though Massachusetts is not a member of the SSUTA, officials from the DOR participate in the Streamlined process and apparently brought those amendments home with them and had them promulgated into the Commonwealth’s sales tax rules.

Practice Notes: This case addresses one of the issues with taxing business models in the digital space. This important decision makes clear, at least in Massachusetts, that taxpayers have post-sale opportunities to reduce sales tax liability on sales/purchases of software accessible from other states where tax on the full sales price initially was collected and remitted by the seller.

Taxpayers may have refund opportunities related to this [...]

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Indiana Tax Court Upholds Pharmacy Benefit Management Costs of Performance Approach

by and | May 21, 2021 | , , , ,

The Indiana Tax Court held that a “pharmacy benefit management company” sold services as opposed to tangible personal property for tax years 2011 through 2013. The company’s receipts were properly sourced as revenue from services under the income producing activity/costs of performance rule, which in this case meant that all receipts were sourced outside of Indiana.

The Indiana Department of Revenue (Department) argued that the pharmacy benefit management company’s “receipts from its sale of prescription drugs should have been sourced to Indiana as required for sales of tangible personal property under Indiana Code” because the company’s “primary ‘revenue stream’ was attributable to buying, selling, and delivering prescription drugs in transactions which occurred within [Indiana].”

The court disagreed with the Department, finding “[the pharmacy benefit management company’s] income was derived from providing pharmacy benefit management services and not from selling prescription drugs during the years at issue.” The court looked to the company’s Securities and Exchange Commission (SEC) Form 10-K filing, observing “[n]one of the emphasized words [in the Form] describe a sale of goods, but instead, describe services. Indeed, nowhere in the designated portion of [the company’s] Form 10-K does the text state that the [company’s] revenue is from the sale of prescription drugs, focusing on facilitating delivery as its discrete service, not as a function of selling a good” (emphasis in the original). On May 1, 2019, Indiana switched from its historical cost of performance sourcing methodology to a market-based sourcing for services, retroactive to January 1, 2019.



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Maryland Digital Advertising Services Tax—Implementation Delay Likely

by , and | Mar 2, 2021 | , , ,

On the morning of Friday, February 26, 2021, the Maryland Senate Budget and Taxation Committee added a new item to its agenda for the hearing later that morning. The new item was proposed amendments to Senate Bill 787, a bill that would amend the Maryland Digital Advertising Tax by excluding broadcasters and news media and preventing service providers from directly passing the tax through to customers. One of the amendments would change the tax years to which the tax applies from tax years beginning after December 31, 2020, to tax years beginning after December 31, 2021. The amendment passed on a voice vote.

The amendment was sponsored by the bill’s author, Senate President Bill Ferguson. Senator Ferguson was also the chief proponent of the Digital Advertising Services Tax. A companion bill, House Bill 1200, sponsored by House Majority Leader Eric Luedtke, came up for a hearing in the House Ways and Means Committee later that day, but only testimony from supporters of the two carve-outs was received. No amendments were offered, and no votes were taken.

Because the amendment delaying the implementation of the Digital Advertising Services Tax is coming from the Senate’s president, we believe its passage a near certainty. This amendment, if passed, would not delay the effective date of the tax, it would only change the tax year to which it first applies from 2021 to 2022.



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Maryland Sued over Digital Advertising “Tax”

by and | Feb 18, 2021 | , , , , , ,

Today, McDermott Will & Emery filed suit in Maryland federal court on behalf of a number of leading trade associations against Maryland Comptroller Peter Franchot, challenging the state’s recently enacted 10% gross receipts “tax” applicable to digital advertising revenue. The plaintiffs in the suit are the US Chamber of Commerce, the Internet Association, NetChoice and the Computer and Communications Industry Association. The suit asks that the court invalidate Maryland’s punitive imposition as violating several provisions of the US Constitution and the Internet Tax Freedom Act.

A file-stamped copy of the complaint is available below:



The complaint alleges that Maryland’s focus on internet advertising services (the tax does not apply to traditional advertising) discriminates against the internet, violating the Internet Tax Freedom Act. Next, because Maryland’s new law burdens and penalizes conduct occurring outside Maryland, it violates the Commerce and Due Process Clauses of the US Constitution. The complaint alleges that the characteristics of the imposition and the circumstances surrounding its enactment demonstrate a clear purpose and intent to punish out-of-state digital advertising companies for their extraterritorial activities.

The case is Civil No. 21-cv-410 (D. Md., filed February 18, 2021). Michael B. Kimberly, Paul W. Hughes, Stephen P. Kranz and Sarah P. Hogarth of McDermott, Will & Emery’s Washington, DC, office represent the plaintiffs.

Practice Note: The filing of this suit sends a signal to other states, like New York, Connecticut and Montana, where similar proposals are under consideration. Policymakers in those other states should recognize that following Maryland’s lead will only lead to the courthouse.



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Maryland Enacts First Digital Advertising Services Gross Receipts Tax: Now What?

by , and | Feb 12, 2021 | , , , , , , , , ,

General Assembly Veto Override

On February 12, 2021, the Maryland General Assembly overrode Governor Larry Hogan’s veto of HB 732 (2020) (the Act), a bill enacting a first-of-its-kind digital advertising services tax on the annual gross receipts from the provision of digital advertising services in Maryland. The tax only applies to companies having annual gross revenues (without deduction of any expenses) from all sources of $100 million or more. The rate of the tax varies, depending on the level of global annual gross revenues, from 2.5% (for companies with $1 billion or less in global annual gross revenues) to 10% (for companies with more than $15 billion in global annual gross revenue). The rate applies to gross revenues from the performance of digital advertising services in Maryland. For instance, a company subject to the 10% rate having $100 million of revenue attributable to the performance of digital advertising services in Maryland would owe an annual tax of $10 million that will be reported and paid on a quarterly basis throughout the year.



Effective Date

Even though the legislation says the tax is effective July 1, 2020, under the Maryland Constitution, vetoed legislation becomes effective the later of the effective date in the bill or 30 days after the veto is overridden. Based on today’s veto override, the bill should become effective on or about March 14, 2021. However, because the legislation is “applicable to all taxable years beginning after December 31, 2020,” the digital advertising services tax will be retroactive to the beginning of this year.

Looming Compliance Deadlines

The digital advertising services tax applies on an annual basis with a return due on or before April 15 of the following year. However, the tax also requires quarterly filing and payment for certain taxpayers. On or before April 15 of the current year, persons subject to the tax are required to file a declaration of estimated tax showing how much Maryland digital advertising services tax they expect they will owe for the calendar year. As part of the declaration and quarterly with returns filed thereafter, the Act requires that they pay at least 25% of the estimated annual tax shown on the declaration. There is a penalty of up to 25% of the amount of any underestimate of the tax. The Act also creates a fine of up to $5,000 and criminal penalties of up to five years’ imprisonment for willfully failing to file the annual return.

Filing and Guidance TBD

At the time of writing, the Maryland Office of the Comptroller has not published any of the forms necessary for making the declaration of estimated tax or the return due on April 15 of the current year. The comptroller’s office also has not adopted regulations as required by the Act, providing guidance on when advertising revenue is derived in Maryland, likely a daunting and complicated task since this is a novel question that other states have not addressed. Many aspects of the Act are vague at best [...]

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