TWIST - July 13, 2020

Welcome to TWIST for the week of July 13, 2020.  This is Sarah McGahan from KPMG’s Washington National Tax state and local tax practice.

Today we are covering a number of developments that span a wide variety of tax types.

In corporate income tax news, the California Franchise Tax Board (FTB) is holding an Interested Parties Meeting (IPM) on the next round of amendments to Cal. Code Regs. § 25136-2, the regulation that sets forth market-based sourcing rules for sales other than sales of tangible personal property.  This will be the fifth IPM for this second round of amendments to the regulation. The meeting will be held telephonically on July 21, 2020 at 10 am pacific time.

Also out of California, but addressing realty transfer tax, an appeals court recently held that a transaction involving a sale of a building that included a lease was not subject to San Francisco’s documentary transfer tax a second time. The taxpayer paid the San Francisco transfer tax after recording the original 45-year lease. After the taxpayer sold the building, including the lease, which had a remaining term of 35 years, the question arose as to whether the transaction constituted “realty sold” so that the lease was subject to reality transfer tax a second time. The appellate court agreed with the trial court, and held that, other than substituting the new building owner as the lessor, there was no transfer of the lessee’s interests under the original lease and no transfer tax was due on the transaction.

In local tax news, this November City of San Francisco voters may be asked to decide on changes to the City’s tax structure. Mayor London Breed and the San Francisco Board of Supervisors are considering ballot measures that would restructure the City’s gross receipts tax regime. One of the proposed changes is to repeal the payroll component of the tax and replace it with an increase in gross receipts tax rates for most types of businesses. Another proposed change would “unlock” approximately $300 million in funds that businesses have already paid for the Homelessness Gross Receipts Tax and the Commercial Rents Tax for Childcare that have been tied up while litigation over the validity of those measures is ongoing. The proposed ballot measures also include several policies to alleviate financial pressure on small businesses and businesses that are struggling financially to operate in San Francisco. Finally, the Mayor is also considering putting general tax increases before the voters.

Further up the coast, the Seattle City Council recently approved the JumpStart Seattle revenue plan, which beginning January 1, 2021 adopts a new payroll expense tax imposed on persons doing business in Seattle that have over $7 million in payroll expense paid to employees primarily assigned to Seattle. The rate of tax depends on the business’ total payroll expense and the individual employee’s annual compensation and rates range from 0.7 percent to 2.4 percent.

In sales and use tax news, an Illinois appellate court held that a taxpayer/retailer was not considered a “construction contractor” when it sold and installed certain built-in appliances and was therefore required to collect sales tax on the appliance sales. To be considered a construction contractor, the taxpayer had to establish that the tangible personal property it sold “had no value to the customers except as a result of services the taxpayer rendered.” In the court’s view, the appliances had substantial value even without the installation services, which was evident by the fact that customers could opt out of the installation.

Finally, there were a number of recent bills signed into law that makes sales and use tax law changes. In Mississippi, House Bill 379, which imposes tax collection responsibilities on marketplace facilitators became effective July 1, 2020. In Tennessee, Senate Bill 2932 lowers the economic nexus threshold to $100,000 for dealers and marketplace facilitators. North Carolina House Bill 1079 provides statutory clarification that tax is not imposed on “sales of a digital audio work or digital audiovisual work that consists of nontaxable service content when the electronic transfer of the digital audio work or digital audiovisual work occurs contemporaneously with the provision of the nontaxable service in real time.”

In Rhode Island, two bills were enacted that expand the imposition of sales tax on specified digital products. Specifically, the bills provide that tax is due on the right to use specified digital products on a permanent or less than permanent basis and regardless of whether the purchaser is required to make continued payments for the right.

Thank you for listening and stay well.