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State and Local Tax Update Q1 2021

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Rödl & Partner Tax Matters Volume 2021-3, published March 17, 2021

Sales Tax on Digital Advertising Now Reality in Maryland

Several states have pending legislation that will apply an entirely new gross receipts tax on digital advertising aimed at customers in the state. All eyes are on Maryland as that state was the first to pass bills in both the state House and Senate, only to see the bill vetoed by the Governor in 2020.  On Friday, February 12th, the Maryland Senate garnered the 60% of votes needed to override the Governor’s veto, which had already been overridden by the House.
 
The new law creates an entirely new gross receipts tax on digital advertising services.  These services include display ads, search engine ads, and ads embedded into software.  The law takes effect in 30 days, meaning the first estimated tax payment would be due on April 15th.
 
Aimed primarily at “Big Tech”, the tax applies to businesses with digital advertising from sources “in the state” above $100 million.  The rate of tax progresses from 2.5% to 7.5%, but rather than the rate of tax being determined on the amount of tax base, the rate is determined based on worldwide gross revenues.
 
​Between $100 million and $1 billion in worldwide gross revenues
​ 2.5%
​Between $1 billion and $5 billion in worldwide gross revenues
​5.0%
​Between $5 billion and $15 billion in worldwide gross revenue 
​7.5%
​Over $15 billion in worldwide gross revenue        
​10.0%

Although the base amount to which the rate applies is digital advertising services “in the state”, how this amount will be determined is not clear.  The bill states the amount is determined based on a fraction, of which the numerator is “the annual gross revenues of a person derived from digital advertising services in the state” and the denominator being the annual gross revenues derived from digital advertising services within the U.S.  Considering that the base amount previously defined is “the annual gross revenues of a person derived from digital advertising services in the state”, it is not clear why the fraction is needed and the total amount this fraction is to be multiplied by.  Authority is provided to the Comptroller to determine the state from which revenues are derived.
 
Businesses with $1 million or more are required to file returns on or before April 15th of each year, setting up April 15, 2022 for the first return for this tax.  Estimated tax payments are due each quarter of the year, giving businesses with digital advertising receipts a short time to determine how much of these revenues are “in the state” of Maryland.
 
Legal challenges to the bill are expected, but with D.C., Nebraska, New York and South Dakota all with digital advertising bills waiting for votes, the Maryland law may begin the avalanche of the search for new dollars from budget-stretched states.
 
In addition to this new gross receipts tax, Maryland will also apply sales tax to “digital products” effective March 14, 2021.
 
Note that additional states are considering taxes on digital goods.  We are closely monitoring bills or proposals in the following states:
 
  • District of Columbia:  Proposed 3% sales tax on the sale of advertising services, both digital and non-digital, including the sale of personal information.
  • Connecticut:  Gross revenue tax on certain digital advertising
  • Indiana:  Surcharge tax on social media providers
  • Nebraska:  Sales tax extended to digital advertisements
  • New York:  Similar gross receipts tax as Maryland, an expansion of sales tax to digital advertising, and a new gross receipts tax on the sale of personal data
  • Oregon:  Gross receipts tax on selling personal information
  • South Dakota:  Sales tax extended to advertising services
  • Washington:  B&O (gross receipts) tax would be extended to include sale of personal data
  • West Virginia:  Gross receipts tax on the sale of personal data
 
City of Chicago Enacts Economic Nexus Provisions effective July 1, 2021

The City of Chicago released an informational bulletin announcing it will impose economic nexus provisions providing it with the power to impose certain city taxes.  Under Illinois state rules, the state can preempt a local jurisdiction’s authority to impose local taxes, and the city’s bulletin comments that the state has not done so regarding Chicago’s taxes.
 
The bulletin relies on a 1975 Illinois Supreme Court case (Mulligan v. Dunne) in which the Court ruled that a local jurisdiction can require an Illinois seller that does business within the local jurisdiction to collect the local taxes.  The Court did not address out-of-state-sellers, however.  The city’s position stated in the bulletin is that because the state of Illinois has enacted economic nexus provisions for state taxes, no limitations exist on a local jurisdiction’s ability to determine if an out-of-state seller can collect a city’s tax. 
 
Under the safe harbor provision, an out-of-state entity that received less than $100,000 in revenue from Chicago customers during the most recent four quarters are not required to collect the city’s amusement tax and personal property lease taxes.  The amusement tax is applied broadly and includes amusements delivered electronically, such as video streaming, audio streaming and on-line games.  The personal property lease tax includes “nonpossessory computer leases”, which the city defines as including software downloaded electronically or accessed remotely in the cloud or through a server located outside the city of Chicago.
 
The safe harbor amounts only applies to entities that have no other “significant” contact with Chicago.  Once an out-of-state business meets the safe harbor amount, it must register within 60 days and begin collecting taxes within 90 days.  Once collecting, the business must continue collecting Chicago taxes for at least 12 months.  The safe harbor provision is effective July 1, 2021.   
 
The bulletin also states that if the safe harbor does not apply to the business, the city can determine economic nexus based on the facts and circumstances of the entity’s activities, including if the business has agreements with Chicago customers, employee, or agent’s activities within the city, and even advertising directed at Chicago customers.  Rather than solely the safe harbor amounts, the city will look at all facts that indicate a business is purposefully availing itself of the privilege of carrying on business within the city of Chicago.
Bulletin
  

New York Releases Sales Tax Opinions on Certain Digital Services

In two recent advisory opinions, New York concluded that certain digital services are not subject to the state’s sales tax.
 
In TSB-A-20(30)S, the state responded to a taxpayer that provides emailing services to customers.  In one  pay-by-volume service, the taxpayer provides customers with the ability to send large volumes of email through the taxpayer’s infrastructure.  In another service, customers can utilize certain credentials from the taxpayer’s services and embed these into the customer’s website, allowing them the ability to define what emails for forgotten passwords and other communications will look like when received by the end user.  In a third service, taxpayer’s customers can sign up for a free API site with the taxpayer so that customers can communicate with taxpayer’s technology without having to go to the website.  Utilizing the API requires a download of a “wrapper” software to the customer.  In the fourth service, customers use “plug-in” software that allows taxpayer’s technology to be used by customers with non-typical content management systems, such as Wordpress.  Each of these services are provided to customers under a service agreement, and each service allows customers to view underlying statistical data about results of the service (clicks, open rates, etc).  In its analysis, the state determined that the “wrapper” service is downloaded prewritten software, but since the software is provided for free to use the email service, the primary function is the email service itself and is not subject to tax.  Additionally, the statistical reports provided to customers is an “information service” under NY tax law, but since the information is personal and individual in nature, it is not subject to sales tax as long as it is not substantially incorporated into reports furnished to other persons.  In conclusion, none of the services provided were subject to NY sales tax.
 
In TSB-A-20(33)S, New York determined that sales from online courses of precorded lectures are not subject to sales tax, in addition to paid course certificates which include a streaming video.  The taxpayer’s products can be accessed through an online service and also downloaded to computers, phones, tablets and other electronic devices. 
 
 https://www.tax.ny.gov/pdf/advisory_opinions/sales/a20_30s.pdf 
https://www.tax.ny.gov/pdf/advisory_opinions/sales/a20_33s.pdf
 

City of Portland Guidance on New Housing Services Income Tax

In Portland, voters approved a ballot measure imposing a new 1% business profits tax on businesses with gross receipts over $5 million and married individuals with income of more than $200,000 (over $125,000 for single filers).  The tax is imposed on both residents and non-resident income earned from sources from within the Portland metro area (Washington, Clackamas and Multnomah counties).  The tax is effective January 1, 2021 and revenues provide funding for housing assistance and wraparound services. 

The Metro recently released a FAQs document providing additional guidance.  Starting April 1, 2021, taxpayers and employers will be able to register and remit both withholding and quarterly estimated taxes to the City of Portland, which is administering the tax on behalf of the Metro.  The first annual tax returns are due April 15, 2022.  The FAQs confirm that these filings are separate from the Multnomah County business income tax and the new personal income tax on high wage earners. 


Virginia Determines that Software Sales are Tangible Personal Property for Apportionment Purposes

In a recent ruling, the Virginia Department of Revenue determined that an out-of-state software company selling electronically-delivered software to customers in Virginia should treat the sale of software as tangible personal property for purposes of calculating the sales factor in apportioning income.

In calculating taxable income to Virginia, the state begins with federal taxable income, requires certain adjustments, then apportions total net income to Virginia based on a sales factor.  The sales factor is the sales sourced to Virginia divided by sales everywhere.

In determining sales sourced to Virginia, the sale of tangible personal property is sourced using “market-based sourcing” – where the customer received the property.  Sales of intangibles or services are sourced based on “cost of performance” – where the taxpayer incurred the greater proportion of costs to deliver the intangible or service. 

For the sale of software in calculating the sales factor, the Department ruled that software should be classified as tangible personal property and sales to Virginia customers are sourced to Virginia in calculating the sales factor.

CT Bulletin on new nexus law – only impacts year 2020; basically says that if CT resident was WFH due to pandemic, this fact alone would not be determinative in whether an employer has nexus for CT purposes.


City of Evanston “Amusement Tax” Applied on Streaming Digital Products

Similar to the City of Chicago, the City of Evanston imposes a 5% gross receipts tax on “amusement”.  Traditionally, this tax applied to admissions of amusement and recreational events within the City of Evanston.  City Ordinance 55-O-20 has amend  City Code 3-2-17 to apply “amusement tax” to include video streaming, audio streaming and online games delivered within the City.  For purposes of determining which charges are subject to the tax, the law refers to the rules set forth in Illinois Mobile Telecommunications Sourcing Conformity Act, 35 ILCS 638, as amended.  This includes adding the following to the tax:

  • Any paid television programming, whether transmitted by wires, cable, fiber optics, laser, microwave, radio, satellite or similar means;
  • Any video streaming, audio streamlining or online games delivered electronically to mobile devices.
The tax is collected from the “patron” of the amusement to the owner for remittance to the City.


New Hampshire

New Hampshire released guidance on moving to market-based sourcing for corporate income tax purposes effective January 1, 2021.  Previously, NH used cost-of-performance for apportioning sales of service revenue.  The guidance clarifies that if a customer receives a service in New Hampshire, the sale is sourced to New Hampshire, regardless of where the cost of performing the service is incurred.
 

Alabama

Comprehensive tax legislation was signed into law on February 12, 2021.  Highlights of the legislation include:
  • Credits, stimulus payments, disaster relief payments, and other federal relief to taxpayers resulting from COVID is not subject to Alabama individual and corporate income tax.  This includes PPP loan forgiveness, and expenses paid with forgiven loans are deductible for Alabama purposes to the same extent as federal.
  • Some federal tax reform components were addressed:
  • §951A income is excluded for AL purposes to the extent the income was included in federal taxable income; expenses deducted for federal purposes attributable to this income must be added back for AL purposes;
  • §250 deduction is allowed only to the extent the same income was included in Alabama taxable income;
  • New deduction available for contributions by Alabama or political subdivision that is included in federal taxable under §118(b)(2) (effective for contributions made after December 23, 2017);
  • GILTI exclusion applies for tax years beginning after December 31, 2017.
  • §163(j):  New Ala. Code §40-18-39.1 is effective for tax years beginning on or after January 1, 2021. 
    • If a taxpayer’s federal or federal consolidated return does not have a §163(j) limitation, the taxpayer will not be subject to an AL limitation, even if they are not filing in the same manner (separate or consolidated) for AL purposes.
    • If a taxpayer’s business interest deduction is limited for federal purposes, the taxpayer shall compute the Alabama business expense deduction on a separate entity or consolidated group basis in the same way the taxpayer is filing its AL business tax return (ie, if consolidated for federal but separate for AL and federal interest was limited at federal consolidated level, compute AL limited amount on separate company basis).
    • The gross receipts test under federal §163(j)(3) applies to each separate AL filer or the consolidated AL group if a consolidated return is filed in AL.
    • For purposes of a related-party interest addback, the §163(j) limitation applies before the application of the related party interest addback.
    • Also in regard to the related party interest addback, any AL interest expense limitation deduction and interest expense carryforward are allocated on a pro-rata basis to the interest income recipients.  In a year in which carried forward interest expense is deducted on the federal return and is also subject to AL’s related party interest addback rules, the taxpayer will apply the add back to the amount of the interest expense carried forward in addition to the current year amounts.
    • Nonbusiness interest expense is assigned to nonbusiness income and is only allowed to reduce nonbusiness income.
  • Single-sales apportionment factor readopted beginning on or after January 1, 2021.
  • Throwback rule for sales factor calculation is repealed beginning in 2021.
  • A pass-through entity regime can be elected by taxpayers effective for tax years beginning on or after January 1, 2021.  This is a separate bill (HB 170) which states that “no refunds shall be granted or paid for tax years ending before January 1, 2020 related to provisions of this Act”.


Tax-Filing Deadlines Postponed Due to Winter Storms, COVID or Legislative Changes:

​OK
​June 15, 2021
​1st Qtr 2021 ES taxes for individuals, corporations and partnerships; tax return deadlines are the same; however taxpayers with an OK franchise tax liability due and payable on or before July 1, 2021 is granted a waiver of penalties and interest for returns filed by Aug 1, 2021 if payment is received by September 1, 2021.
​NJ
​May 17, 2021
​Returns with original due dates between 11/15/2021 – 4/15/2021 are granted an automatic extension to May 15, 2021 (resulting from NJ law change).
​MD
​July 15, 2021
​Individuals, pass-through entities, fiduciary and corporate tax returns, including 1st & 2nd quarter payments, are automatically extended to July 15th to provide time for the state to update software resulting from the state’s RELIEF Act passed in February and the new federal COVID-relief bill.

The following states have announced extensions to June 15th for taxpayers impacted by the TX winter storms:
 
​AL
​CO
​FL

​ID
​IN
​KY
​LA
​(only for taxpayers impacted by Hurricane Zeta only)
​NM

​TX
​plus separate announcement for franchise tax
           
Note that each state may have different procedures/taxes/payments that are extended.  You will need to confirm in each state what is needed and if the tax type you are looking to extend is included in the state’s guidance.
 

Pennsylvania Sales Tax Amnesty for Taxpayers with Inventory in the State

Taxpayers with inventory located in Pennsylvania that have not been collecting and remitting sales taxes in the state have a limited amnesty period to register with PA.  Most relevant to businesses utilizing Amazon’s FBA (Fulfillment by Amazon) program, PA is allowing businesses to register and pay all taxes due to the state beginning January 1, 2019 to December 31, 2020 without penalty.  This program ends May 9, 2021.

This publication contains general information and is not intended to be comprehensive or to provide legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Consult your advisor.

We have made reasonable efforts to ensure the accuracy of the information contained in this publication, however this cannot be guaranteed. Neither Rödl Langford de Kock LP nor any of its subsidiaries nor any affiliate thereof or other related entity shall have any liability to any person or entity which relies on the information contained in this publication, including incidental or consequential damages arising from errors or omissions. Any such reliance is solely at user's risk.

Any tax and/or accounting advice contained herein is based on our understanding of the facts, assumptions we have been asked to make, and on the tax laws and/or accounting principles in effect as of the date of this advice. No assurance is given that the conclusions would be the same if the facts or assumptions change, or are not as we understand them, or that the tax laws and/or accounting principles will not change subsequent to the issuance of these conclusions. In addition, we do not undertake any continuing obligation to advise on future changes in the tax laws and/or accounting principles, or of the impact on the conclusions herein.

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