TWIST - This Week in State Tax

Welcome to TWIST for the week of November 8th, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.

First up, we are covering two General Information Letters issued by the Illinois Department of Revenue. In the first, the Department addressed how Bitcoin is characterized for purposes of applying the state’s apportionment rules. In the Department’s view, Bitcoin is considered intangible personal property, but it is not included in the more limited definition of patents, trademarks, copyright, or other similar items.

In the other letter, the Department concluded that a taxpayer was not a “marketplace facilitator” when it did not inform customers purchasing goods on its platform that the goods were being sold on behalf of third-party sellers. Rather, when goods are sold without being identified as originating from the third-party marketplace seller, the goods are treated as a sale of goods directly from an online retailer. This is significant in Illinois because the sourcing rules for an online retailer are dependent on the online retailer’s contacts with Illinois.

In other marketplace facilitator news, the Kansas Department of Revenue issued guidance on the marketplace facilitator law that became effective July 1, 2021. The Notice provides some insights that aren’t necessarily clear in the statute, such as noting that a marketplace facilitator that makes both direct and facilitated sales may choose to report sales separately or on one return and providing some additional information on waivers. 

Finally, the Massachusetts Appellate Tax Board recently held that a taxpayer was not eligible to be classified as a manufacturing corporation for tax purposes when it was not engaged in manufacturing as of January 1 of the calendar year. Although the taxpayer planned to begin manufacturing activities later in the year, the Board held that it had to be engaged in manufacturing as of January 1 to be classified by the Commissioner as a “manufacturing corporation.”

Thank you for listening to TWIST and stay well.

Illinois: Department Addresses Apportionment Treatment of Bitcoin

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The Illinois Department of Revenue recently issued a general information letter addressing how bitcoin is characterized for purposes of applying the state’s apportionment rules and regulations. The taxpayer requested a ruling that bitcoin is considered “intangible personal property,” but that it is not similar to a “patent, copyright, trademark, or other similar item of intangible personal property.” Under Illinois’ regulations, intangible personal property includes “only an item that can ordinarily be resold or otherwise reconveyed by the person acquiring the item from the taxpayer.”  This includes items such as tickets, software, membership interests, and “tokens” similar to bitcoin. In contrast, “patents, copyrights, trademarks, and other similar items” are more limited to items registered under the U.S. code as a patent, copyright, or trademark, or recognized under U.S. law or another country’s law as such. Upon review of applicable Illinois law and regulations, the Department confirmed that bitcoin is considered intangible personal property, but it is not included under the more limited definition of patents, trademarks, copyrights, or other similar items. Please contact Brad Wilhelmson with questions on IT-21-0004.

Illinois: Taxpayer not a Marketplace because it Does Not Advertise that Third Parties are Sellers 

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The Illinois Department of Revenue recently issued a general information letter addressing whether a taxpayer was considered a “marketplace facilitator.” Under Illinois law, a marketplace facilitator is a person who “directly or indirectly . . . facilitates a retail sale by an unrelated third-party marketplace seller by” both listing or advertising tangible goods of the marketplace seller and collecting payment from the customer on behalf of the seller. The taxpayer requesting guidance from the Department sold third-party goods through its website. The website contained no individualized information about the third-party sellers. Additionally, the items listed on the website by the third-party seller appeared indistinguishable from the items sold by the taxpayer, and the taxpayer’s website did not indicate to purchasers that the items were being sold on behalf of identified marketplace sellers. The question posed by the taxpayer was whether it met the first part of the definition of a marketplace facilitator that requires it to list or advertise goods on behalf of a marketplace seller.

The Department concluded if the online retailer of the goods does not inform buyers that the goods are being sold on behalf of a third-party marketplace seller, the online retailer is not considered a marketplace facilitator. Rather, when goods are sold without being identified as originating from the third-party marketplace seller, the goods are treated as a sale of goods directly from the online retailer. This is significant in Illinois because the sourcing rules for an online retailer are dependent on the online retailer’s contacts with Illinois. The online retailer may be obligate to collect either state use tax or state and local retailer’s occupation tax, depending on the individual transaction and the retailer’s activities in Illinois. Please contact Drew Olson with questions on ST-21-0032. 

Kansas: Marketplace Facilitator Guidance Issued

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The Kansas Department of Revenue recently issued Notice 21-14, which addresses the state’s marketplace facilitator requirements that became effective July 1, 2021. While much of the guidance reiterates the statutory provisions, there are a few important points to note. The collection and remittance requirements apply to marketplace facilitators with calendar year sales sourced into Kansas in excess of $100,000 of “cumulative gross receipts.”  The Notice confirms that only taxable sales are included in determining whether a marketplace exceeds the state’s $100,000 receipts threshold. Interestingly, a remote seller must consider all sales in determining whether it meets the economic nexus threshold.  A marketplace facilitator whose calendar year sales sourced to Kansas are in excess of $100,000 is not required to collect and remit tax on the first $100,000 of sales made to customers in Kansas during the first year the marketplace facilitator is required to collect and remit tax. This does not mean these sales are exempt from tax, only that the marketplace facilitator is not required to collect the tax. Once a marketplace facilitator has made sales to Kansas customers equal to or in excess of the $100,000 threshold, the facilitator must collect and remit sales tax on any additional sales to Kansas customers during that year.  The marketplace facilitator must collect and remit sales tax on all sales made to Kansas customers in the following year.

Under the marketplace facilitator law, the Department of Revenue may waive the obligation of a marketplace facilitator to collect and remit taxes upon a showing by the marketplace facilitator that substantially all of its marketplace sellers are already collecting and remitting all applicable taxes. The Notice clarifies that for purposes of obtaining a waiver from the Department, the phrase “substantially all” means 95 percent or more.

A marketplace facilitator located in Kansas (i.e., physical presence) will register for, collect, and remit Kansas retailers’ sales tax. A marketplace facilitator located outside of Kansas will collect and remit Kansas retailers’ compensating use tax. A marketplace facilitator that makes both direct and facilitated sales may choose to report sales separately or on one return. If sales will be reported separately it will be necessary for the marketplace facilitator to have two accounts; one for its direct sales and one for facilitated sales. In addition, each marketplace facilitator’s reporting and remittance schedule will be determined, based on the total amount of tax collected. Please contact Jeff Cook with additional questions on Kansas’ marketplace facilitator requirements.

Massachusetts: Department Denies Taxpayer’s Request for Manufacturing Corporation Status

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The Massachusetts Appellate Tax Board recently held that a taxpayer was not eligible to be classified as a manufacturing corporation for tax purposes. Under Massachusetts law, by April 1 of each year, the Commissioner of Revenue is required to inform the board of assessors of all corporations classified as “manufacturing corporations” for that year.  A regulation sets forth the procedures for submitting an application to the Commissioner to be classified as a manufacturing corporation. The regulation provides that “[a] corporation may be classified as a manufacturing corporation for any calendar year if it is in existence and is engaged in manufacturing in Massachusetts as of January 1 of that year.” The taxpayer at issue filed an application alleging that it was not yet engaged in manufacturing in the Commonwealth, but that it planned to begin manufacturing in April 2019.The Commissioner denied the taxpayer’s manufacturing corporation request because it was not engaged in manufacturing on January 1, 2019, and the taxpayer subsequently appealed.

Before the Board, the taxpayer argued that the January 1 requirement conflicted with another regulation that required the activities to have begun by July 1.  In the Board’s view, however, taxpayer “construed conflict where there is none.” The regulation relied on by the taxpayer that included the July 1 date addressed timing of an exemption from property taxes, which could be approved only after a manufacturing corporation received its classification. The Board further noted that the Commissioner is required to send a list of corporations classified as manufacturing corporations by April 1, well before the July 1 date that the taxpayer argued applied.  Thus, Board ruled in favor of the Commissioner of Revenue. Please contact Nick Sequeira with questions on Zero Waste Solutions, LLC v. Commissioner of Revenue.