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BREAKING NEWS: New York Considers 5% Gross Receipts Tax on Almost Every Corporation

On January 21, A. 9112 was introduced in the New York Assembly. An identical Senate companion bill, S. 6102, has been referred to the Senate Budget & Revenues Committee after being introduced in May 2019. The bills would impose an additional 5% tax on the gross income of “every corporation which derives income from the data individuals of this state share with such corporations.” The bills do not provide further detail or limitation on the scope of the proposed new imposition language.

The bills would also establish a six-member Data Fund Board, to invest the tax revenue collected and distribute net earnings “to each taxpayer of the state” in a manner determined by the Board. If enacted without amendment, the bills would take effect 180 days after being signed into law.

As written, the proposed New York tax would unconstitutionally apply to all income worldwide earned by a company deriving income from data from New Yorkers. A state tax on a multistate business must “be fairly apportioned to reflect the business conducted in the State.”

The tax as written is so broad it would apply to essentially every business. Every business collects data and uses it to market or complete a sale, and any corporation with data-derived income from New York customers would be subject to the new tax on their total revenue. “Data” is a broad term. If a company collects zip codes or phone numbers at checkout, asks for email address to join a mailing list, counts customers coming in or out of the store, collects website click or open data, or asks for information from customers, such as their size or shipping address, before making a sale, it apparently would be subject to this tax. For many such businesses, a gross receipts tax at a 5% rate would wipe out all profits, equivalent to an over 100% corporate income tax. At that point, a tax for engaging in data collection might become so punitive it violates the Due Process Clause. Another obvious due process problem is that the lack of definitions and the broad sweep of this proposal could invalidate it on void for vagueness grounds.

Any meaningful attempts to address these constitutional issues, such as by specifically applying the tax only on big tech companies, would add new problems under the Permanent Internet Tax Freedom Act (PITFA). A tax on digital use of data while the non-digital use of data is not similarly taxed would run afoul of PITFA’s ban on tax discrimination against electronic commerce.

First Maryland, then Nebraska, now New York. The repeated introduction of targeted taxes on digital companies early in 2020 seems to be the start of an alarming trend of legally suspect tax proposals that we are keeping a close eye on.




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New Trend Developing? Another Digital Advertising Tax Proposal

On January 14, LB 989 was introduced in the Nebraska Legislature, which would impose sales and use tax on “the retail sale of digital advertisements.” The bill defines “digital advertisement” as “an advertising message delivered over the Internet that markets or promotes a particular good, service, or political candidate or message” (see pages 5-6 of the bill). The definition is a sweeping one, but the exact scope is unclear as the terms used are not further defined. It is also unclear how a taxable digital advertising transaction would be sourced if the proposed legislation is enacted.

The digital advertising tax proposed in the bill would have an effective date of October 1, 2020. Nebraska’s state sales tax rate is 5.5%, with local sales taxes up to an additional 2%.

Similar to Maryland’s SB 2 proposal, because Nebraska would tax digital advertising but not tax non-digital advertising, the proposed tax raises a series of legal concerns (above and beyond the obvious policy concerns).  For example, the tax would be a “discriminatory tax” prohibited by the Permanent Internet Tax Freedom Act (PITFA). The proposal also raises serious First Amendment (singling out digital commercial speech for tax) and Equal Protection (lack of rational basis for tax only on digital advertising) issues.

Practice Note: If enacted, LB 989 would create an uncharted and sweeping tax on digital platforms and advertisers. While this bill will have an uphill battle in 2020 (for example, Nebraska has a short, 60-day legislative session this year and Nebraska has a filibuster rule) the repeated introduction of digital advertising tax bills early in 2020 state legislative sessions may be the start of an alarming trend of legally suspect tax proposals that we are keeping a close eye on.  Businesses impacted by the Maryland and Nebraska digital advertising tax proposals are encouraged to contact the authors to discuss these legislative developments further.




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BREAKING NEWS: Maryland Proposes (French) Tax on Advertising – Digital Platforms and Advertisers Beware!

On January 8, SB 2 was introduced to establish a new digital advertising gross revenue tax of up to 10% on “annual gross revenues of a person derived from digital advertising services in the state.” This uncharted new tax would make Maryland the first state or locality in the United States to impose a targeted tax on the gross revenue of digital advertising services.

The bill defines “in the state” as appearing on the user’s device located in the state (determined based on either the user’s IP address or reasonable knowledge). “Digital advertising services” is defined as “advertisement services on a digital interface, including advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services.” The definition uses the word “includes” rather than “means,” enabling the definition to be read even more broadly. “Digital interface” is defined as “any type of software, including a website, part of a website, or application, that a user is able to access.”

The tax applies at a sliding scale:

  • 2.5% for person with global annual gross revenues of $100 million or more
  • 5% for person with global annual gross revenues of $1 billion or more
  • 7.5% for person with global annual gross revenues of $5 billion or more
  • 10% for person with global annual gross revenues of $15 billion or more

The bill would require quarterly estimated tax payments and an annual return and provides that willful failure to file a digital advertising gross revenues tax return is a misdemeanor subject to a $5,000 fine and 5 years’ imprisonment.

The bill is co-sponsored by Senator Thomas Miller (D), the outgoing Senate President, and Senator William Ferguson (D), the incoming Senate President. Maryland legislative leaders have been hinting at new taxes on the digital economy, digital downloads, and streaming subscriptions as they decide how to fund a proposed $825 million per year education spending increase. Governor Hogan (R) opposes the education spending increase as too expensive, amounting to a $6,000 per family tax increase, and in response Democrats last week ruled out raising income, sales, or property tax rates. We therefore may see additional digital taxation bills aside from this one.

Because Maryland would tax digital advertising but not tax non-digital advertising, the tax is a “discriminatory tax” prohibited by the Permanent Internet Tax Freedom Act (PITFA). The use of an arbitrary threshold of global annual gross revenues, while perhaps politically popular, serves to tax larger global advertising service providers at a higher tax rate than their domestic counterparts, in violation of the Commerce Clause of the US Constitution.

The proposal also raises serious First Amendment (singling out digital commercial speech for a punitive tax) and Equal Protection (lack of rational basis for punitive tax on digital advertising) issues. For example, the Maryland Court of Appeals has held that municipal taxes on advertising media were unconstitutional for singling out for taxation newspapers and radio and television stations entitled to first amendment immunities.  See City of Baltimore [...]

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Gross Receipts Taxes Face Policy and Legal Challenges

“Generally, the only places with gross receipts taxes today are U.S. states and developing countries.” –Professor Richard Pomp, University of Connecticut

As the economy shifts to a digital one, we are finding that states are turning toward unconventional revenue options. One trend we’re seeing is the surprising comeback of the gross receipts tax (GRT):

  • Oregon’s new Commercial Activity Tax (CAT) takes effect January 1, 2020. Oregon officials are currently writing rules to implement it. Portland, Oregon also adopted a 1% gross receipts tax, imposed only on big businesses, starting January 1, 2019.
  • San Francisco voters imposed an additional gross receipts tax on businesses with receipts of more than $50 million beginning January 1, 2019. This is on top of the gross receipts tax that was phased in from 2014 to 2018 to replace the city’s payroll tax.
  • Nevada’s Commerce Tax took effect July 1, 2015, imposing differing tax rates on 26 categories of business with over $4 million in receipts. Part of the revenue was to reduce the state’s MBT payroll tax, but legislators suspended those reductions this year; it’s now in court.
  • Serious proposals to adopt a statewide gross receipts tax keep coming, with the last three years including Louisiana, Missouri, Oklahoma, West Virginia and Wyoming. A San Jose, California gross receipts tax proposal was approved to gather petition signatures in 2016 but eventually morphed into a business license tax overhaul.

(more…)




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Wisconsin Enacts Discriminatory Exit Charge for Businesses Moving out of State

On June 24, 2019, Wisconsin Governor Tony Evers (D), signed into law AB 10, entitled “2019 Wisconsin Act 7.” This Act either bars a deduction for, or requires that amounts deducted be added back to, Wisconsin taxable income “for moving expenses” deducted on federal income tax returns if the expenses are associated with a move of a business either out of the state or out of the country. This requirement would not apply to expenses incurred by a taxpayer in moving a business to a different location within the state of Wisconsin. The provisions apply regardless of the form of ownership of a business, either as a sole proprietorship, a corporation, or a pass through entity such as a partnership, limited liability corporation or subchapter S corporation.  (more…)




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Tennessee Joins Other States in Excluding GILTI and 965 Income from the Tax Base

On May 8, Governor Bill Lee (R) signed SB 558, which provides for the exclusion of 95% of Global Intangible Low-Taxed Income (GILTI) and foreign earnings deemed repatriated under IRC section 965 (965 Income) from the tax base for tax years beginning on or after January 1, 2018. By enacting this bill, Tennessee joins about 20 other states that explicitly exclude at least 95% of GILTI from the tax base and joins about 25 other states that explicitly exclude at least 95% of 965 Income from the tax base.

Despite this win for taxpayers, many may be wondering, “what about 965 Income included in 2017?” With respect to 2017, the Tennessee Department of Revenue issued guidance providing that 965 Income should not be included in the Tennessee tax base because such income was not reported on Line 28 of the Federal 1120 (the federal form changed for 2018 and 965 Income is included on Line 28 of the 2018 Form 1120). We understand that SB 558 has not impacted the department’s guidance in any way and that it remains the department’s position that 100% of 965 Income should be excluded from the tax base for 2017.

SB 558 does not address whether or how the 5% of GILTI and 965 Income that is taxed will be represented in the apportionment formula. Some states that have opted to tax 5% of GILTI and 965 Income consider the taxed amount to be a disallowed expense related to the GILTI and 965 Income that is excluded from the base. Tennessee does not frame its 5% tax as an expense disallowance so such taxed amounts should be represented in the apportionment formula. However, at least for now, there is no guidance from the legislature or Department of Revenue on this issue.




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An Uneven Playing Field: Judicial Deference to State Tax Administrator Interpretations

Judicial deference to state tax agencies puts taxpayers at a steep disadvantage and wastes time and resources on costly tax disputes. A united advocacy effort can help promote passage of state-level legislation that takes the tax administrator’s thumb off the scales of justice in administrative and judicial review of tax determinations.

Access the full article.

Learn more here about the Deference Coalition and how McDermott can help.




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Court Strikes Down New York Opioid Surcharge on Manufacturers and Distributers

On December 19, 2018, the US District Court for the Southern District of New York ruled in favor of McDermott’s client, the Healthcare Distribution Alliance (HDA), the trade association for pharmaceutical distributors. In Healthcare Distribution Alliance v. Zucker, the court granted summary judgment and enjoined enforcement of the New York Opioid Stewardship Act, which imposed a $600 million surcharge on manufacturers and distributors of opioid pharmaceutical products. The first $100 million installment was due on January 1, 2019. (more…)




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Illinois Department of Revenue Issues Post-Wayfair Guidance Implementing October 1 Economic Nexus Law

In June 2018, just before the US Supreme Court ruling in Wayfair, Illinois enacted an economic nexus standard modeled after South Dakota’s law (see our prior coverage). The new Illinois standard takes effect on October 1, 2018. On September 11, the Illinois Department of Revenue (Department) issued an emergency rule (Regulation 150.803), together with other guidance found on its website, intended to assist remote retailers with compliance with the new law.

The Regulation was effective immediately. Retailers should note the following key features of the Regulation. (more…)




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House Judiciary Committee to Consider Wayfair Decision Impact

The US House Committee on the Judiciary has scheduled a hearing for Tuesday, July 24 at 10:00 am EDT in 2141 Rayburn House Office Building. According to a press release circulated last night, the topic of the hearing will be “[e]xamining the Wayfair decision and its ramifications for consumers and small businesses.” According to comments made by House Judiciary Chairman Bob Goodlatte (R-VA) to Bloomberg Law, specific pending or former legislation will not be considered and instead the hearing will be informational and used to drive the committee’s next steps, if any.

The 8 witnesses that will be testifying at the hearing next week are listed below.

  1. Grover Norquist, Americans for Tax Reform President
  2. Chad White, Class-Tech-Cars, Inc. Owner
  3. Lary Sinewitz, BrandsMart Executive Vice President, on behalf of the National Retail Federation
  4. Bartlett Cleland, American Legislative Exchange Council General Counsel and Chief Strategy and Innovation Officer
  5. The Honorable Curt Bramble, National Conference of State Legislatures Past President
  6. Andrew Moylan, National Taxpayers Union Foundation Executive Vice President
  7. Joseph Crosby, MultiState Associates Incorporated Principal
  8. Andrew Pincus, Mayer Brown Partner

A live video feed of the hearing will be available here next Tuesday. The authors plan to attend the hearing in-person and will post a follow-up blog summarizing our thoughts shortly after the hearing concludes next Tuesday. Stay tuned!




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