TWIST - This Week in State Tax

Welcome to TWIST for the week of December 6th, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.

First up today is a general information letter from the Illinois Department of Revenue concluding that taxpayer selling electricity through an electric vehicle charging station was a “delivering supplier” required to collect and remit Electricity Excise Tax on its sales. In other indirect tax news, the New York Department of Taxation and Finance concluded that a taxpayer’s service of creating, operating, and hosting websites and applications accessed via mobile devices was not subject to sales and use tax, in part because the taxpayer did not transfer any software to its clients. Further, the taxpayer was not providing a taxable information service because the information provided to customers was individual in nature and not incorporated in the reports of other customers.

Finally, an Ohio appellate court rejected a challenge to a state law addressing withholding for municipal income tax purposes during COVID-19.   The legislation mandated that any personal services required to be performed at a location other than the employee’s principal place of work (e.g., employee’s residence) during the declared period of emergency would be deemed performed at the employee’s principal place of work. A Columbus, Ohio based company challenged the law arguing that (1) the legislature was not authorized to expand the taxing power of municipalities beyond established limits and (2) taxing nonresidents on income earned outside the city of Columbus was an exercise of extraterritorial jurisdiction and was unconstitutional under the due process clause of the U.S. Constitution. The appeals court rejected both of the company’s arguments. It remains to be seen if the company will appeal.

Thank you for listening to TWIST. 

Illinois: Electric Vehicle Charging Stations Subject to Electricity Excise Tax

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The Illinois Department of Revenue issued a letter ruling clarifying the taxability of selling electricity through an Electric Vehicle (EV) charging station. Under Illinois law, the Electricity Excise Tax is imposed on the privilege of using electricity in Illinois.  The tax is typically collected and remitted by the delivering supplier. The Public Utilities Act imposes a tax on invested capital and the distribution of electricity. Although the Public Utilities Act specifically provides that furnishing the service of charging electric vehicles does not make an entity a public utility and does not constitute selling electricity for purposes of the Public Utilities Act, that language is not included in the Electricity Excise Tax Act and does not exempt electricity sold through an EV charging station from the excise tax. The Department concluded that EV charging stations are considered delivering suppliers that must register with the Department and collect and remit the electricity excise tax. Please contact Drew Olson with questions on General Information Letter ST21-0040. 

New York: Department Holds Mobile Website Creation, Operation and Hosting Services Not Taxable

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The New York Department of Taxation and Finance recently addressed whether a taxpayer’s service of creating, operating, and hosting websites and applications accessed via mobile devices were subject to sales and use tax. The taxpayer tailored each mobile website based on the unique specifications of the customers. The taxpayer also provided professional services, which were add-ons such as adding new features and functionality to the mobile website. The Department concluded that the taxpayer’s website development services were not subject to tax as they were not a specifically enumerated taxable service. The Department also noted that the taxpayer maintained exclusive control over the website, and as a result, there was no transfer of prewritten software. Charges for additional custom website features and functionalities would also be exempt from tax if separately stated. Finally, the taxpayer was also analyzing information and providing a report unique to each client. The Department determined that the taxpayer was not providing a taxable information service because the information provided to customers was individual in nature and not incorporated in the reports of other customers. For more information on Advisory Opinion TSB-A-20(70)S, please contact Judy Cheng.

Ohio: Court Upholds Convenience of the Employer Rule

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The Ohio Court of Appeals recently addressed the constitutionality of legislation enacted in response to COVID-19 that governed where employees were deemed to be working for municipal income tax purposes. The legislation mandated that any personal services required to be performed at a location other than the employee’s principal place of work (e.g., employee’s residence) during the declared period of emergency would be deemed performed at the employee’s principal place of work. The company challenging this law had its principal place of business in Columbus. Due to the state’s stay at home order, the company’s employees began working from their homes in other municipalities. These other municipalities had lower municipal income tax rates, but under the law, the employer was required to withhold income taxes at the higher Columbus rate. The company challenged the law on the basis that taxing nonresidents on income earned outside the city of Columbus was an exercise of extraterritorial jurisdiction and was unconstitutional under the due process clause of the U.S. Constitution. Alternatively, the company argued that the Ohio Constitution did not authorize the legislature to expand the taxing power of municipalities beyond established limits.

After the trial court dismissed the complaint, the matter was appealed.  The appeals court noted at the outset that statutes are presumed to be constitutional, and before a court may declare a law unconstitutional, it must appear beyond reasonable doubt that the legislation and constitutional provisions are clearly incompatible. The appeals court agreed with the trial court and determined that the Legislature was authorized to pass legislation limiting or restricting the power of municipalities to tax. In the court’s view, the law at issue did not expand a municipality’s taxing power, as the appellants asserted, but instead restricted it. Further, a municipality may act extraterritorially when grated authority by statute and in this instance, the General Assembly was also legislating in response to a state-wide emergency. In sum, the court concluded that the General Assembly was authorized under the state constitution to enact the legislation.  The court next addressed the company’s position that the due process clause of the U.S. Constitution prohibits a municipality from taxing the income of employee working beyond its borders. In the court’s view, due process is “generally not suited for a bright line test” but employs a “flexible standard focused on where the taxpayer receives benefits and protections from the taxing government.” Although the appellants cited to case law holding that compensation must be allocated to the place where the employee performed the work, the court determined that the prior holding was not that “rigid,” and if a taxpayer has income from multiple jurisdictions, the taxing jurisdiction can reach only the income associated with the activity in that jurisdiction. The court determined that none of the authorities cited by the appellants involved the issue of whether the remote work of an employee could be reasonably associated with the activities of an employer’s office to support the imposition of a municipal tax, particularly in the context of a public health crisis.  The court appeared to be saying that the municipality could continue to provide protections and benefits to the employer, despite the fact that the employees were working elsewhere.  The court concluded that the trial court did not err in rejecting the taxpayer’s due process arguments.  Please contact Sarah McGahan with questions on Buckeye Institute v. Kilgore.