TWIST - This Week in State Tax

Welcome to TWIST for the week of November 1st, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.

The Louisiana Department of Revenue recently announced that eligible corporate taxpayers are invited to participate in a voluntary initiative designed to resolve intercompany transfer pricing issues. The purpose for the initiative is twofold. First, the Department wishes to create an efficient and expedited resolution for corporate tax audits when transfer pricing issues exist. Second, the hope is to provide certainty and uniformity to taxpayers on the resolution of transfer pricing issues for open audit periods and a defined period of future tax years. Participating taxpayers will receive an abatement of penalties associated with additional taxes due as a result of the managed audit, as well as an abatement of interest during the course of the managed audit. Requests for approval to participate in the program must be received by the Department on or before April 30, 2022.

In sales and use tax news, the Iowa Department of Revenue confirmed that web hosting services are not subject to Iowa sales and use tax. In Texas, the Comptroller issued a ruling addressing the taxability of various fees charged by a marketplace provider. The marketplace was a mobile app that allowed restaurant customers to order food. Participating restaurants were charged various fees for the taxpayer’s services. In the Comptroller’s view, certain service, subscription and credit card fees charged to the restaurants were taxable data processing services. Other fees that were charged to feature a restaurant more prominently on the app, or to attract customers by offering rewards points, were not taxable.

Finally, in an unpublished decision, the California Second District Court of Appeal held that a taxpayer had not exhausted all administrative remedies prior to bringing a judicial action for the refund of overpaid Los Angeles Business Tax. The Business Tax has a very short one-year statute of limitations and although it was determined that the taxpayer had overpaid its tax, it was unable to obtain a writ of mandate to compel the City to refund the tax, as the appropriate remedy was to file a refund claim within the statute of limitations period. 

Thank you for listening to TWIST and stay well.

California: Taxpayer Failed to Exhaust All Remedies Prior to Bringing Judicial Action for Local Tax Refund

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In an unpublished decision, the California Second District Court of Appeal recently held that a taxpayer had not exhausted all administrative remedies prior to bringing a judicial action for the refund of overpaid Los Angeles Business Tax. The taxpayer at issue provided advertising and media services nationally, including in the City of Los Angeles.  In the 2010 through 2013 tax years, the taxpayer mistakenly believed it was taxable under the City’s “Professions and Occupations” classification, which meant it was subject to the highest rate of tax.  After being audited and receiving an assessment related to situsing its receipts to Los Angeles, the taxpayer paid the assessment and then appealed. As part of the appeal, the taxpayer raised the argument that it was taxable under a different classification and requested a refund of $970,000. The City’s Board of Review (BOR) agreed and issued a final order requesting that the assessments imposed on the Taxpayer be revised. However, the City’s Office of Finance, upon reviewing the BOR order, determined the refund request was untimely.  The taxpayer then filed a writ of mandate with the court, requesting that the City be required to pay in accordance with the BOR’s ruling. The trial court ruled that the City had a duty to correct the incorrect tax assessment and ruled for the taxpayer.

Upon review, the Appeals Court reversed the trial court decision. Under California law, a writ of mandate may issue only when there is “not a plain, speedy, and adequate remedy in the ordinary course of law.”  The appellate court determined that the taxpayer had a remedy— it could request a refund of its overpaid taxes. The court further clarified that the BOR’s order that the amount of tax owed must be reassessed did not establish that the taxpayer was owed a refund. Rather, the BOR’s action merely demonstrated acceptance of the taxpayer’s misclassification argument which allowed the Office of Finance to then conduct its review—which ultimately led to the determination that the taxpayer’s refund request was untimely. As a result, and solely on this ground, the court reversed the lower court’s decision. The court did go on to note, however, that “most, if not all,” of the refund requests eventually filed by the taxpayer were untimely. A request for Los Angeles Business Tax refund must be brought “within one year of accrual.” In the court’s view, the date of accrual was the date on which the taxpayer overpaid the taxes based on the misclassification. Please contact Sarah McGahan with questions on Outfront Media, LLC v. City of Los Angeles.

Iowa: Web Hosting Not Taxable

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The Iowa Department of Revenue recently issued guidance on the taxability of web hosting. The new information has been added to the Department’s overall online guidance on the taxation of specified digital products, software as a service, and information services. Although the term “web hosting” is not defined under Iowa Code or existing rule, the Department noted that web hosting is generally understood to be an online service that allows users to publish their website files to the internet, thus making the website available for public access. In a previous Declaratory Order, the Iowa Director of Revenue determined that web-based storage is taxable because it is considered the enumerated service of “storage of tangible or electronic files, documents, or other records.” On the other hand, web hosting is focused on the publication of data and not its mere storage; therefore, the Department concludes that web hosting is not an enumerated service when it is provided in a traditional, stand-alone manner. Additional cloud-based services may include web hosting, but taxpayers should take note that Iowa imposes tax only on software as a service (SaaS). Other cloud-based services, such as infrastructure as a service (IaaS) are not subject to tax. Please contact Jill Nielsen with questions. 

Louisiana: Department Announces Voluntary Transfer Pricing Initiative

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The Louisiana Department of Revenue recently announced that eligible corporate taxpayers are invited to participate in a voluntary initiative designed to resolve intercompany transfer pricing issues.  The purpose of the “Louisiana Transfer Pricing Managed Audit Program” is twofold. First, the Department wishes to create an efficient and expedited resolution for corporate tax audits when transfer pricing issues exist. Second, the hope is to provide certainty and uniformity to taxpayers on the resolution of transfer pricing issues for open audit periods and a defined period of future tax years. Revenue Information Bulletin 21-029 sets forth the eligibility requirements for participation, the program’s procedures, and other key information for interested taxpayers. Generally, eligible taxpayers are those with an established history of compliance with Louisiana’s tax laws that have the time and resources to participate in the program and would reasonably be able to pay any resulting liability. A taxpayer must also have suitable records regarding intercompany transactions. 

Taxpayers interested in participating will need to contact the Department via email. If approved to be part of the program, the taxpayer must provide certain information to the Department’s representative within 30 days, including, but not limited to, federal income tax returns, a list of all intercompany transactions, financial statements on a GAAP basis for each party to an intercompany transaction (if these are not available, the Department will determine operating income using the federal return and M-3 schedules), and any transfer pricing studies. The Department’s representative will review the documentation provided and will issue a written determination as to whether the Department agrees or disagrees with the taxpayer’s transfer pricing studies and methods used. The Department may utilize external consultants to assist it with this endeavor.  After receiving the Department’s determination, a taxpayer will have 30 days to accept the determination or offer modifications or adjustments. The Department will review comments from the taxpayer regarding modifications or adjustments to its determination, but it is not clear to what extent the Department will make additional adjustments based on the taxpayer’s comments.

Participating taxpayers will receive an abatement of penalties associated with additional taxes owed as a result of the managed audit, as well as an abatement of interest during the course of the managed audit. Periods available for resolution under the program include the current tax year for calendar and fiscal year filers, any open tax periods that have not yet prescribed, and up to four future tax periods. Taxpayers that are under audit may participate in the program, but the only issues that can be resolved via the managed audit process are transfer pricing issues. While a taxpayer can engage a representative to assist with the managed audit, a taxpayer cannot participate anonymously through a representative. Requests for approval to participate in the program must be received by the Department on or before April 30, 2022. All managed audits must be closed by June 30, 2022. Please contact Shirley Sicilian with questions on the program. 

Texas: Fees of Food Delivery Service Companies Held Taxable Data Processing Services

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The Texas Comptroller recently addressed the taxability of fees paid to a taxpayer that offered a mobile ordering and payment platform that allowed restaurants to accept food orders from customers placed through an app. App users were provided restaurant information—such as menu items, hours of operation, and pricing—and were able to place orders through the app. The taxpayer collected all charges associated with food orders, and after deducting its fees, remitted the remaining proceeds to the restaurant. The taxpayer also remitted the sales tax on the food orders. Participating restaurants were charged various fees for the taxpayer’s services. General “service fees” were based on a percentage of gross sales per week. The taxpayer also charged a credit card fee to offset its costs associated with the use of a third-party payment processor. These credit card fees were based on a percentage of the transaction plus a fixed dollar amount per transaction. A setup fee covered the initial installation and configuration of the equipment used to operate the app. Other fees were optional and designed to increase a restaurant’s visibility. These fees included an “offer fee” to prominently place the restaurant on the app and to offer incentives to first time purchasers. An “earn plus fee” was charged to restaurants that wanted to offer bonus points to taxpayers as an incentive to purchase food from the restaurant. Finally, the taxpayer also charged a subscription fee for access to the taxpayer’s platform without a mobile app.

Under Texas law, taxable data processing services are generally defined as “word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, and other computerized data and information storage or manipulation.” The Comptroller determined that the taxpayer’s service fee, credit card fee, and setup fees were taxable data processing services. The service fee was associated with allowing restaurants access to the mobile application. The mobile app stored and retrieved restaurants’ data, including address information, distance information based on GPS location data, cover photos, menu information, and approximate time food would be ready. The mobile app also created orders, optimized orders, processed payments, and stored customers credit card payment information.   In the Comptroller’s view, these activities involved the compilation, storage, and manipulation of data for the restaurants and the service fee was therefore fell within the definition of data processing services. The Comptroller reached a similar conclusion with respect to the set-up fee.

With regard to the credit card fee, the Comptroller determined that because the taxpayer was a marketplace provider, the fee was taxable as essentially being “part of the sales price of the service fee.” The credit card fee charged to restaurants was a charge for an expense that the taxpayer incurred to provide its taxable service. Although Texas recently enacted legislation excluding settlement of an electronic payment transaction by a licensed money transmitter from the definition of data processing, this exclusion does not include a charge made by a marketplace provider. The Comptroller determined that the taxpayer was a marketplace and thus the credit card fee it charged was not excluded from the definition of data processing. On the other hand, the Comptroller concluded that the “offers fee” was a nontaxable service because advertising services are not taxable in Texas. Additionally, the Comptroller clarified that fees related to bonus, reward points, or special new-customer deals were similar to gift certificates, which are nontaxable when purchased or acquired. Lastly, the monthly subscription fee considered a taxable data processing service because, as with the service fee for the mobile application, it related to a service involving “the manipulation and retrieval of data.” For more information on Private Letter Ruling No. PLR20200218100745, please contact Sarah Vergel de Dios.