TWIST - This Week in State Tax

Welcome to TWIST for the week of December 13, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.

Recently, legislation was signed into law in Arkansas that reduces the state’s corporate and individual income tax rates over a period of years. The rate reductions, however, will not occur if a “revenue shortfall” develops that necessitates a transfer of funds from the state’s newly renamed Catastrophic Reserve Fund to provide for education and/or the effective operation of state government.

On December 7, 2021, the Massachusetts Appellate Tax Board concluded that the Commissioner could not require an out-of-state online retailer to collect and remit Massachusetts use tax under a regulation promulgated by the Commissioner before the Wayfair decision. Under the regulation, a taxpayer with more than $500,000 in Massachusetts sales from 100 or more online transactions with Massachusetts customers, coupled with the placement of cookies and use of apps and content delivery networks, was deemed to have nexus with Massachusetts. In the Board’s view, the Wayfair decision could not be applied retroactively, and the use of cookies, apps, and content delivery network servers did not constitute sufficient physical presence under Quill to justify the assessment.

Finally, a Tax Review Officer in Washington State recently determined that the Department’s use of a secure messaging system to notify a taxpayer of an assessment was sufficient notice. The taxpayer argued that because it never received the electronic copy or hardcopy of the assessment, it was invalid and must be cancelled. However, the Department established that it sent the assessment to the taxpayer, and the taxpayer’s failure to open the secure message was paramount to receiving an envelope and choosing not to open it. 

Stay well and thank you for listening to TWIST. 

Arkansas: Legislature Passes Income Tax Rate Reductions

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After a recent special session, legislation (House Bill 1001/ Senate Bill 1) has been signed into law in Arkansas that reduces the state’s individual and corporate income tax rates. For tax years beginning on or after January 1, 2022, the maximum corporate income tax rate is 5.9 percent on income exceeding $25,000. Prior to the law change, the rate would have remained at 5.9 percent. Under the recently signed bills, for tax years beginning on or after January 1, 2023, the highest corporate rate will be reduced to 5.7 percent for income exceeding $25,000. For tax years beginning on or after January 1, 2024, the highest corporate rate is 5.5 percent for income exceeding $25,000, and for tax years beginning on or after January 1, 2025, the highest rate is 5.3 percent on income exceeding $25,000.  However, the rate reductions will not occur if a “revenue shortfall” develops that necessitates a transfer of funds from the state’s newly renamed Catastrophic Reserve Fund to provide for education and/or the effective operation of state government.  If funds are transferred from the Catastrophic Reserve Fund between July 1, 2022 and January 1, 2024, then the 2023 rate of 5.7 percent would continue to apply.  If a transfer from the Catastrophic Reserve Fund occurs for any reason between January 1, 2024 and December 31, 2024, then the corporate rate would remain at the 2024 rate of 5.5 percent.  Please contact Jennifer Knickel with questions on the rate reduction.  

Massachusetts:  Appellate Tax Board Rejects Cookie Nexus

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On December 7, 2021, the Massachusetts Appellate Tax Board issued a decision in an appeal addressing whether the Commissioner could impose a use tax collection and remittance responsibility on an out-of-state online retailer whose presence in Massachusetts was limited to the placement of “cookies” and “apps” on the computers and portable devices of its Massachusetts customers. The retailer also used content delivery networks with servers in Massachusetts to expedite access by customers to its website. Under a regulation promulgated by the Commissioner effective October 1, 2017 (pre-Wayfair), a taxpayer with more than $500,000 in Massachusetts sales from 100 or more online transactions with Massachusetts customers, coupled with the placement of cookies on customer devices and the use of content delivery networks, was deemed to have sufficient contacts with the Commonwealth to be required to register, collect and remit Massachusetts use tax. After the Commissioner assessed the taxpayer for uncollected use tax, the taxpayer appealed. Before the Board, the taxpayer argued that it did not have a physical presence in Massachusetts as required for the tax years at issue. The Commissioner’s position, on the other hand, was that the Wayfair decision, released nine months after the effective date of the “cookie” regulation, could be applied retroactively to the effective date of the Massachusetts regulation. The Commissioner also asserted that the taxpayer’s use of cookies, apps, and content delivery networks constituted the requisite physical presence to create nexus.

The Board first rejected the Commissioner’s position that the Wayfair decision could be applied retroactively against taxpayers that were acting consistently with then-current law. Although other constitutional decisions have been applied retroactively, the Board noted that retroactive application in those instances was to avoid similarly situated taxpayers from being treated unequally. In the instant case, in contrast, the Commissioner was seeking to retroactively apply a ruling that overturned prior U.S. Supreme Court precedent and that expanded the ability of states to tax out-of-state vendors who were not previously subject to tax. The Board also rejected the Commissioner’s position that use of cookies, apps, and content delivery network servers constituted sufficient physical presence under Quill to justify the assessment. After reviewing the Wayfair opinion and the Courts repeated references to people and property creating state nexus, the Board concluded that it was clear the Court did not view the “physical aspects” of modern technology (e.g., cookies, apps, and use of in-state servers) as satisfying the physical presence rule under Quill. The Massachusetts regulation was specifically referenced in the Wayfair opinion, and the U.S. Supreme Court noted that the Commissioner’s attempt to define physical presence in the cyber age was likely to “embroil courts in technical and arbitrary disputes about what counts as physical presence.” In the Board’s view, the Court’s analysis left “no doubt” that physical presence nexus was not created by cookies, apps, and content delivery network servers.  Please contact Ryanne Tannenbaum or Jon Benson with questions on U.S. Auto Parts Network, Inc. v. Commissioner of Revenue.

Washington State: Department’s Secure Messaging System Satisfies Notice Requirement

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A Tax Review Officer for the Administrative Review and Hearings Division recently determined that the Department’s use of a secure messaging system to notify a taxpayer of an assessment was sufficient notice. The out-of-state taxpayer was registered to do business in Washington and maintained an online account with the Department. An online account allowed the taxpayer to file returns, make payments, and send and receive secure messages. Under Washington law, electronic notice of an assessment is deemed to have been received by a person on the date the Department electronically sends the information or electronically notifies the person that the information is available to be accessed. A message notifying the taxpayer of the assessment was deposited into the taxpayer’s secure inbox on the Department’s website. At the same time, the system sent an email to the email address associated with the account notifying the taxpayer that they had a new secure message on the system. The Department’s Information Services Division provided records indicating that the taxpayer had never opened the secure message containing the assessment, but that the taxpayer had opened previous secure messages, as well as a secure message sent more than a month after the notification of assessment. In the petition, the taxpayer argued that because it never received the electronic copy or hardcopy of the assessment, the assessment was invalid and must be cancelled. However, the Department had established that it sent the assessment to the taxpayer, and the taxpayer’s failure to open the secure message was paramount to receiving an envelope and choosing not to open it. Therefore, the Review Officer determined the Department had met its statutory obligations, and that the taxpayer was deemed to have received the assessment. The Review Officer also upheld the application of the 29 percent delinquency penalty. Please contact Michele Baisler with questions on Det. No. 19-0083, 40 WTD 183 (2021).