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New Mexico Proposes Regulations Addressing Gross Receipts Tax Treatment of Digital Advertising Services

by Eric D. Carstens, Stephen P. Kranz, Michael J. Hilkin, Mark Nebergall and Jonathan C. Hague | Aug 11, 2022 | Allocation/Apportionment, Constitutional Issues, Local Tax, Nationwide Importance, New Mexico, Sales Tax, Tax Base, Transaction Taxes

On August 9, 2022, the New Mexico Taxation and Revenue Department published proposed regulations addressing the gross receipts tax (New Mexico’s version of a sales tax) treatment of digital advertising services. The Department states the proposed regulations do not reflect a change in policy but instead ensure the rules are consistent for all advertising platforms.

While the proposed regulations provide some clarity regarding the taxation of digital advertising services under preexisting rules, they introduce several inconsistencies and other gaps, particularly with respect to the finer details of the sourcing provisions. For example, we believe the proposed regulations leave ambiguity regarding whether gross receipts from the provision of digital advertising services should be sourced to:

The purchaser’s address
The server’s location
The viewer’s location

Separately, the proposed regulations would allow a deduction for gross receipts from national or regional advertising. However, the deduction is not allowed if the purchaser is incorporated in or has its principal place of business in New Mexico. While this significantly narrows the base for the tax, it injects complexity by requiring that the seller know the state in which its purchaser is incorporated or has its principal place of business, information not likely available in the context of internet-based advertising platforms.

Collectively, these inconsistencies and lack of clarity could lead to future compliance issues, which we hope will be mitigated as part of the Department’s regulatory approval process.

The Department scheduled a public hearing on the proposed rules for September 8, 2022, at 10:00 am MDT, which also is the due date for submission of written comments. The proposed regulations would be effective upon publication in the New Mexico Register, which could happen as soon as October 11, 2022 (or thereabout).

Please contact the McDermott Will & Emery State & Local Tax team if you have any questions about the potential impact of these proposed regulations on your company. In the meantime, we will be monitoring the regulation approval process and participating in next month’s public hearing.

CDTFA Proposes Significant Revisions to Chapters 4 and 13 of the Sales Tax Audit Manual

by Charles Moll, III, Troy M. Van Dongen, Marcy Jo Mandel and Elle Kaiser | Feb 10, 2022 | Audits, California, Local Tax, Nationwide Importance, Sales Tax

On February 2, 2022, the California Department of Tax and Fee Administration (CDTFA) held an interested parties meeting (IPM) to discuss proposed amendments to sales tax audit manual (AM) Chapter 13, “Statistical Sampling,” and Chapter 4, “General Audit.”

Prior to the IPM, the CDTFA released a lengthy discussion paper outlining the extensive proposed changes to the AM, which includes:

1. Removing the three error rule. The current text of AM 1308.05 explains that when a sample produces only one or two errors, the auditor must evaluate whether these errors are representative or whether it is possible they indicate problems in certain areas that could be examined separately. Under the proposed amendment, the same evaluation standards would still be in place without the minimum error requirement. According to the CDTFA, the proposed removal of the three error rule is because of the fact that “the number of errors identified in a sample does not give any indication whether the sample is representative or not…If the combined evaluation evaluates within Department [CDTFA] standards, it is justified to project the results even if one or two errors are found.”

2. Requiring 300 minimum sample items per stratum unless the auditor obtained approval from CAS to select fewer than 300. Currently, the “minimum sample size of at least 300 items of interest is to be used in all tests, except where the auditor can support a smaller sample size and it evaluates well.” (AM 1303.05) Under the new subsection titled “Materiality,” a minimum of 300 sample items per test stratum is recommended. Computer Audit Specialist (CAS) approval is required for selecting less than 300 sample items per test stratum.

3. Refunding Populations: A minimum of 100 sample items per stratum is required. In the section addressing sampling refund populations (AM 1305.10), the proposed amendment would permit auditors to select as few as 100 sample items per test stratum without CAS approval, provided the expected error rate is sufficiently high (greater than 20%). No such rule exists under the current text of Chapter 13.

4. Contacting CAS when the prior audit had 300 hours charged to it is now mandatory. In contrast, under the current rule, it is mandatory that CAS be contacted when the prior audit expended 400 or more hours or if CAS was involved in the prior audit.

5. Replacing Credit Methods 1, 2 and 3 with one recommended approach to handling credits in a statistical sample. The subsection (AM 1303.25) currently lists three types of credit methods that can be used for a statistical sample. The CDTFA now only recommends one credit method for use in a stratified statistical sample, which is referred to as “Method 1” in the current AM text. When auditors review electronic data, attempts should be made to match credit invoices to original invoices (including partially) if it is certain that the credit invoices are related to the original invoice. For all credit memos that are not matched to original invoices, those credits will be removed from [...]

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Massachusetts Supreme Judicial Court Approves Sales Tax Apportionment for Software

by Stephen P. Kranz, Richard C. Call, Mark Nebergall and Jonathan C. Hague | May 25, 2021 | Allocation/Appointment, Constitutional Issues, Local Tax, Massachusetts, Nationwide Importance, Sales Tax

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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Texas Governor Signs Bill Exempting Medical Billing Services from Sales Tax

by Richard C. Call and Jonathan C. Hague | May 4, 2021 | Insurance Tax, Sales Tax, Texas

Texas Governor Greg Abbott has signed HB 1445 into law, making “medical or dental billing services” exempt from sales tax. Under the statute, a “medical or dental billing service” is defined as “assigning codes for the preparation of a medical or dental claim, verifying medical or dental insurance eligibility, preparing a medical or dental claim form for filing, and filing a medical or dental claim.” Beginning in 2002, the Texas Comptroller’s office took the position for sales tax purposes that “medical billing services” were not taxable data processing services. In November 2019, the Comptroller published a notice stating that it was going to treat “medical billing services” as taxable “insurance services.” Implementation of that notice was delayed multiple times, most recently through October 2021. The Comptroller’s office may now take the position that the legislative definition of “medical or dental billing services” is narrower than the definition the Comptroller has applied in its recent guidance and assert that some items are still subject to tax effective October 2021. Companies should consider whether their medical billing services fall within the legislative definition of “medical or dental billing services.”

You’re Invited: COST, Bloomberg Tax and McDermott Will & Emery to Host Post-Oral Argument Roundtable Discussion

by McDermott Will & Emery | Mar 13, 2018 | Constitutional Issues, Nationwide Importance, Nexus, Sales Tax, South Dakota, Transaction Taxes

On Tuesday, April 17, 2018, at 10:00 am (EST) the United States Supreme Court will hear oral arguments in South Dakota v. Wayfair, Inc., a state tax case poised to reconsider the dormant Commerce Clause physical presence standard upheld by the Court on stare decisis grounds in the historic mail-order case Quill Corp. v. North Dakota (U.S. 1992), which was litigated by McDermott Will & Emery. The Court is expected to consider whether a 2016 South Dakota law imposing sales and use tax collection obligations on online retailers–and other sellers–with no physical presence in the state is permissible given, among other things, the advances in technology and e-commerce since Quill was decided.

For those that would like to attend the South Dakota v. Wayfair, Inc. oral argument as a member of the public (as opposed to as a member of the US Supreme Court Bar), the Supreme Court Police give out 100–150 numbered tickets between 7:00 am–7:30 am. The doors to the building open at 8:00 am. Once inside, the line re-forms in the hallway by the Gallery steps and at 9:00 am, the public is allowed upstairs to the Gallery. The argument will begin at 10:00 am. Given the popularity of this case, it is anticipated that only around 50 seats will be available to the general public for this argument—so plan to arrive early to ensure you have the best chance to make it in!

After the oral argument concludes, we invite you to join COST, Bloomberg Tax, McDermott Will & Emery, and lawyers involved in many respects of the litigation for a moderated roundtable discussion at the DC office of McDermott Will & Emery, which is just minutes away from the Supreme Court. The roundtable discussion will begin at 12:00 pm (EST) and explore the issues before the Court and opinions regarding the many possible outcomes from the case.

We expect a full house and space will be limited, so please register your interest now so that we can plan to accommodate as many as possible. This case promises to revolutionize the world of SALT, no matter the outcome.

Massachusetts DOR Sending Letters to Sellers Regarding July 1 Effective Date of Economic Nexus Directive

by Arthur R. Rosen and Richard C. Call | Jun 28, 2017 | Constitutional Issues, Massachusetts, Nexus, Procedure, Sales Tax, Transaction Taxes

Recently, the Massachusetts Department of Revenue (Department) sent letters to several companies regarding Directive 17-1. The Directive announces a “rule” requiring remote internet sellers to register for and begin collecting Massachusetts sales and use tax (sales tax) by July 1, 2017, if they had more than $500,000 in Massachusetts sales during the preceding year. The legal premise behind the rule is that the Department believes sellers with more than $500,000 in annual Massachusetts sales must have more than a de minimis physical presence so that requiring sales tax collection would not be prohibited by Quill Corp v. North Dakota, 504 US 298 (1992). The Directive’s examples of such physical presence include the presence of cookies on purchasers’ computers, use of third-party carriers to make white-glove deliveries and the use of online marketplaces to sell products. The Directive also states that sellers who fail to collect tax beginning July 1, 2017 will be subject to interest and penalties (plus, of course, any uncollected taxes).

We think the Directive is contrary to law on three main grounds. First, we believe that the items that the Department asserts create physical presence are insufficient to establish more than a de minimis physical presence. For example, the presence of cookies on computers in a state appears to be less of a physical presence than the floppy disks the seller in Quill sent into North Dakota (which were used by its customers to place orders) that the United States Supreme Court viewed as de minimis. Second, the Directive violates the state administrative procedures act because it constitutes an administrative rule that was not validly adopted. Third, the Directive’s rule violates the Internet Tax Freedom Act, a federal statute, because the rule discriminates against internet sellers.

By its own terms, the Directive applies only prospectively. The Directive does not assert a blanket rule that internet sellers are liable for sales tax for periods prior to July 1, 2017, if they met a certain sales threshold. The risks from non-collection for such periods are dependent on a company’s specific facts. The letters advise sellers that they may be eligible for voluntary disclosure for such prior periods.

Companies have two general options: (1) register and begin collecting or (2) not register or collect. Litigation has been brought on behalf of a number of sellers to challenge the Directive on the grounds identified above. One important aspect of that litigation is the request for an injunction barring the enforcement of the Directive pending a court decision; an injunction would likely prompt many sellers to take a “wait and see” approach. Ultimately, sellers must make a business decision based on their own facts and business circumstances.

Illinois Appellate Court Delivers Another Blow to Relator in False Claims Act Litigation

by Catherine A. Battin and Mary Kay McCalla Martire | Oct 19, 2016 | False Claims Act, Illinois, Sales Tax

On Monday, October 17, the Illinois Appellate Court issued another taxpayer-friendly opinion in an Illinois False Claims Act case alleging a failure to collect and remit sales tax on internet and catalog sales to customers in Illinois (People ex. rel. Beeler, Schad & Diamond, P.C. v. Relax the Back Corp., 2016 IL App. (1st) 151580)). The opinion, partially overturned a Circuit Court trial verdict in favor of the Relator, Beeler, Schad & Diamond, PC (currently named Stephen B. Diamond, PC).

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D.C. Proposes Law to Allow Indefinite Suspension of Limitation Period for Assessment and Collection

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | May 6, 2015 | Audits, District of Columbia, Income Tax, Procedure, Sales Tax, Transaction Taxes

The Fiscal Year 2016 Budget Support Act of 2015 (BSA), introduced by the Washington, D.C. Council at the request of Mayor Muriel Bowser on April 2, 2015, contains a subtitle (see Title VII, Subtitle G, page 66-67) that would give the Office and Tax and Revenue (OTR) complete discretion to indefinitely suspend the period of limitation on assessment and collection of all D.C. taxes—other than real property taxes, which contain a separate set of rules and procedures. The change to the statute of limitation provision would eliminate a fundamental taxpayer protection that exists today in all states. Those concerned should reach out to members of the D.C. Council to discourage adoption of this subtitle of the BSA.

Current Law

Under current law, the amount of tax imposed must be assessed (in other words, a final assessment must be issued) within three (3) years of the taxpayer’s return being filed. See D.C. Code § 47-4301(a). Practically speaking, this requires the mayor to issue a notice of proposed assessment no later than two (2) years and 11 months after the return is filed—to allow the taxpayer the requisite 30 days to file a protest with the Office of Administrative Hearings (OAH). See D.C. Code § 47-4312(a). As the law reads today, the running of the period of limitation is suspended between the filing of a protest and the issuance of a final order by OAH, plus an additional 60 days thereafter. See D.C. Code § 47-4303. The District has 10 years after the final assessment to levy or begin a court proceeding for collections. See D.C. Code § 47-4302(a).

Proposed Changes

The BSA would extend the limitation period for assessment and collection, as follows:

The BSA would add a new provision to statutorily require the chief financial officer (CFO, the executive branch official overseeing the OTR) to send a notice of proposed audit changes at least 30 days before the notice of proposed assessment is sent; and
The BSA would toll the running of the statute of limitation on assessment and collection during the period after the CFO/OTR issues the aforementioned notice of proposed audit changes until the issuance of a final assessment or order by OAH.

The BSA does not indicate an applicable date for these changes. As a result, the provision likely would be applicable to any open tax period, effectively making the change retroactive to returns already filed.

Effect

By changing the law to toll the statute of limitation for the period after OTR issues a notice of proposed audit changes, the BSA would allow OTR to unilaterally control whether the three-year statute of limitation is running. The current statute requires that OTR issue its notice of proposed assessment before the expiration of the three-year statute—and gives taxpayers the ability to protest such notices before the OAH. By tolling the statute upon issuance of a notice of proposed audit changes, which is not subject to review by OAH, the BSA would strip taxpayers of the [...]

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Maryland Offers Attractive Amnesty Program – Even for Taxpayers Under Audit!

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Apr 23, 2015 | Income Tax, Interest and Penalties, Local Tax, Maryland, Sales Tax, Transaction Taxes

Starting September 1, 2015, the Comptroller of Maryland (Comptroller) will offer qualifying taxpayers that failed to file or pay certain taxes an opportunity to remit tax under very attractive penalty and interest terms. The 2015 Tax Amnesty Program (Program) is the first offered in Maryland since 2009, when the state raised nearly $30 million, not including approximately $20 million collected the following year under approved payment plans. The amnesty program offered before that (in 2001) brought in $39.4 million. Consistent with the Maryland amnesty programs offered in the past, the Program will apply to the state and local individual income tax, corporate income tax, withholding taxes, sales and use taxes, and admissions and amusement taxes.

The Program was made law by Governor Larry Hogan when he signed Senate Bill 763, available here, after two months of deliberation in the legislature. While the Program is scheduled to run through October 30, 2015, the Comptroller has a history of informally extending these programs beyond their codified period. For companies that are nervous about potential assessments following the Gore and ConAgra decisions, the amnesty offers an opportunity that should be evaluated.

Perks

The Program’s main benefits include:

Waiver of 50 percent of the interest;
Waiver of all civil penalties (except previously assessed fraud penalties); and
A bar on all criminal prosecutions arising from filing the delinquent return unless the charge is already pending or under investigation by a state prosecutor.

Qualification

The Program is open to almost all businesses, even if under audit or in litigation. The statute provides for only two classifications of taxpayers that do not qualify:

Taxpayers granted amnesty under a Maryland Amnesty Program held between 1999-2014; and
Taxpayers eligible for the 2004 post-SYL settlement period relating to Delaware Holding Companies.

Because the Program’s enacting statute does not prohibit participants from being under audit, or even those engaged in litigation with the Comptroller, even taxpayers with known issues and controversy may find the amnesty an attractive vehicle to reach resolution of a controversy with the state.

Practice Note

Because the range of taxpayers eligible for the Program is so broad, we encourage all businesses to evaluate whether participation will benefit them. Given that past Maryland amnesty programs excluded taxpayers over a certain size (based on employee count), large companies who were not able to resolve uncertain exposure in the state should evaluate this new offering. If your business is currently under audit (or concerned about any tax obligations from previous years), please contact the authors to evaluate whether the Program is right for you.

Inside the New York Budget Bill: Proposed Sales Tax Amendments

by Emily Townsend | Mar 25, 2015 | New York, Sales Tax, Transaction Taxes

Governor Andrew Cuomo’s 2015-2016 New York State Executive Budget Bill (Budget Bill) contains several important revenue measures, including, but not limited to, technical corrections to the 2014 overhaul of New York State’s Corporate Franchise Tax, conformity of the New York City General Corporation Tax to the revised New York State Corporate Franchise Tax, and several significant changes to New York’s sales and use tax statutes. This article will address the Budget Bill’s proposed sales and use tax changes. Several of these changes, while touted by Governor Cuomo as “closing certain sales and use tax avoidance strategies” are much broader and, if enacted, will have a significant impact on the sales and use tax liabilities resulting from routine corporate and partnership formations and reorganizations.

Read the full article.

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