TWIST - May 4, 2020

Welcome to TWIST for the week of May 4. This is Sarah McGahan from KPMG’s Washington National Tax state and local tax practice.

We have two interesting sales and use tax cases to cover today. In the first case, an Illinois appeals court addressed whether a taxpayer was entitled to a temporary storage use tax exemption when newly purchased solvent was stored in Illinois before being used at out-of-state client locations. The Department of Revenue argued that the temporary storage exemption did not apply because the solvent, once used, was returned to Illinois and cleaned. After that, it was mixed with new solvent and used again at client locations.  The taxpayer argued that when the solvent was returned to Illinois in used form, it was a new product and therefore the return should not disqualify it from being entitled to the temporary storage use tax exemption. The court, rejecting the taxpayer’s new product argument,  concluded that the taxpayer could not claim temporary storage for the new solvent because property that leaves the state and then returns to the state for further storage is not “temporarily stored” in the state.

In South Carolina, an appeals court addressed whether a bookseller’s membership fees that entitled customers to discounts and free shipping were subject to sales and use tax. The bookseller argued that because sales of memberships were not sales of tangible personal property, the fees were not “gross proceeds of sales” subject to sales tax. The court disagreed. In its view, the membership fee was a direct result of the sale of tangible personal property because the taxpayer would not be able to sell memberships but for its sale of tangible personal property. As such, the court concluded that the membership fees were subject to sales and use tax.

Bills were recently introduced in the NY Assembly and Senate that would impose sales and use tax on digital advertising services, unless such services were purchased for resale.  The bills define “digital advertising services” 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 which markets or promotes a particular good, service, or political candidate or message.”  At this point, neither bill has advanced.

The beginning of May marks about six weeks since many states and cities began enforcing stay at home orders due to COVID-19. During this time, many states and localities have issued guidance on extensions of time to file returns for various types of taxes. The issuance of guidance has slowed a bit, likely due to the fact that the 4/15 income tax filing and payment deadlines have come and gone.  However, some states have continued to refine their guidance in this area. In addition, certain states have also issued guidance on other tax types, or other deadlines. For example, in California, Controller Betty Yee postponed the due date for unclaimed property holders to submit their reports and remittances for properties reported on 2019 Notice Reports from June 1, 2020, to August 15, 2020.

This past week, the Hawaii Department of Taxation issued Tax Information Release No. 2020-02 in which the Department confirmed that CARES Act Economic impact payments and loan proceeds from Paycheck Protection Program (PPP) loans are not subject to Hawaii Income Tax. However, the Department noted that when the PPP loans are forgiven, the cancellation of indebtedness income will not be excluded from income for Hawaii income tax purposes absent state legislation.

Finally, state revenue collections and budget situations in light of COVID-19 are starting to become a bit clearer, as states and economic forecasters gain more data. Two organizations- the Federation of Tax Administrators and the Center on Budget and Policy Priorities - recently issued reports summarizing the states’ fiscal condition. Thank you for listening and stay well.

To read about recent state and local tax guidance on extensions in response to COVID-19, please click here and bookmark KPMG TaxNewsFlash-United States to stay current as more guidance is regularly released.