TWIST - This Week in State Tax

Welcome to TWIST for the week of February 7, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.

First up today are two New York decisions addressing whether a taxpayer was selling taxable information services. Under New York law, sales tax is imposed on “the furnishing of information… including the services of collecting, compiling, or analyzing information of any kind or nature and furnishing reports thereof to other persons.” An exclusion applies when the taxpayer is furnishing information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to others.” Lately, a number of disputes have arisen between taxpayers and the Department of Taxation and Finance as to whether taxpayers are selling taxable information services, or whether the information furnished qualifies for the exception as being personal or individual in nature.

In the first determination, an ALJ for the New York Division of Tax Appeals concluded that a taxpayer providing an Internet-based service that connected casting directors with talent representatives seeking roles for their actor clients was not providing a taxable information service. Under New York law, the primary function of the service, and not the means of effectuating the service, dictates whether a service is taxable. In the ALJ’s view, the furnishing of information on available acting roles was just one component of the taxpayer’s overall service, which was facilitating the casting of actors.  

In the second ruling, the New York Tax Appeals Tribunal concluded that an ALJ erred when it determined that one of a taxpayer’s services was a taxable information service. The taxpayer at issue had argued that it qualified for the exclusion from the definition of taxable information services for when the information at issue was personal and individual in nature and was not or may not be incorporated into reports provided to others. The ALJ had determined that the taxpayer did not qualify for the exclusion because although the information from the service at issue was not shared with others, the taxpayer had the right to use the data it collected and may incorporate that data and information into reports furnished to others. The Tribunal disagreed with this finding, noting that the possibility that information may be furnished to third parties in the future if the service provider develops a means to do so does not disqualify an information service from the exclusion. As such, the Tribunal reversed the ALJ’s findings with respect to one of the taxpayer’s services; the other service was taxable because the data gathered from it became part of a database used for multiple purposes. 

Out in the Golden State, business taxpayers should be reminded that a law enacted last year allows the Franchise Tax Board to share certain information related to a taxpayer’s unclaimed property filings with the State Controller’s Office that administers and enforces California’s unclaimed property laws. Taxpayers are required to indicate on certain 2021 income tax forms whether they previously filed an unclaimed property report with the State Controller’s Office. If the taxpayer responds “yes” there are two additional questions that must be answered – when the last report was filed and the amount that was remitted.

Finally, the Wisconsin Tax Appeals Commission concluded that a taxpayer owed tax on its purchase of go-carts that were rented to customers at its indoor speedway. In the Commission’s view, the taxpayer’s transfer of the go-carts to customers was incidental to the service of furnishing of a speedway racing experience and therefore the taxpayer was the end user for sales tax purposes.

Thank you for listening to TWIST and stay well!

California: FTB Can Share Taxpayer Responses to Unclaimed Property Questions

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California Assembly Bill 466, enacted last year, allows the Franchise Tax Board to share certain information related to a taxpayer’s unclaimed property filings with the State Controller’s Office that administers and enforces California’s unclaimed property laws.  Certain 2021 tax year income tax forms (e.g., Form 100, Form 100W, Form 565, Form 568) include questions seeking information related to a company’s California unclaimed property filings. Under California law, companies are required to review their records annually to determine if they hold any property that has remained “unclaimed” for a particular period of time (the “dormancy period”). This can include voided and outstanding disbursements, unused, aged, or written-off credit balances, inactive customer accounts, gift card balances, and other transaction types arising in the normal course of business. Once the property has remained unclaimed for the applicable dormancy period, it is required to be reported and remitted to the state.

Taxpayers are required to indicate on their income tax forms whether they previously filed an unclaimed property report with the State Controller’s Office. If the taxpayer responds “yes” there are two additional questions that must be answered – when the last report was filed and the amount that was remitted. With the enactment of Assembly Bill 466, this information (as well as other information from the return) will now be shared with the State Controller’s Office. California routinely initiates and participates in multistate examinations related to unclaimed property compliance, employs a lookback period in excess of 10 years to determine compliance, and assesses interest on late reported property at 12 percent per year.

Businesses filing income tax returns with the FTB should ascertain in advance of the return due date whether the business has filed a California unclaimed property report or has an obligation to do so. Companies that are uncertain about the extent of their compliance obligations with the state’s unclaimed property statute should consult with their advisors to obtain more information. Note that California has multiple unclaimed property filing deadlines throughout the calendar year, the next upcoming deadline being as early as June 1^st.

For more information, contact a KPMG professional in our Unclaimed Property Practice:

Nina Renda | +1 (973) 912-6528 | akrenda@kpmg.com

Marion Acord | +1 (404) 222-3053 | marionacord@kpmg.com

Will King | +1 (214) 840-6107 | williamking@kpmg.com

Jenna Fenelli | +1 (973) 912-4546 | jfenelli@kpmg.com

New York: Internet-Based Casting Facilitation Service Not Taxable

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Recently, an Administrative Law Judge (ALJ) for the New York Division of Tax Appeals concluded—in a 39-page determination—that a taxpayer was not providing taxable information services. The taxpayer provided an Internet-based casting facilitation service that connected casting directors with talent representatives seeking acting roles for their actor clients. The taxpayer started its business before the advent of the Internet, but later pivoted to remain relevant in the Internet world. The casting facilitation service was subscription-based, and talent representatives were charged a monthly retainer to view acting role descriptions in their geographic region.

The ALJ noted at the outset that when a service is an integrated service, it is taxed according to its primary function. The primary function of the service, and not the means of effectuating the service, dictates whether the service is taxable. In the ALJ’s view, likely aided by the thorough description of the taxpayer’s overall service, the furnishing of information on available acting roles was but one component of the overall service of facilitating the casting of actors. Interestingly, the taxpayer also alleged that the imposition of tax on its services violated the Internet Tax Freedom Act (ITFA) because taxing services that are provided over the internet, but not taxing the same services that are provided orally, is prohibited under the ITFA. The ALJ addressed the issue to have a complete record and concluded that the taxpayer presented no evidence that there was any similar business that escaped taxation because it transmitted information orally. The ALJ also determined that the tax law at issue (Tax Law § 1105 (c)) was a taxing statute of general application that in no way was intended to discriminate against electronic commerce. Please contact Judy Cheng at 212-872-3530 with questions on Matter of Breakdown Services, Ltd.  

New York: Tax Appeals Tribunal Partly Reverses Information Service Ruling

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Under New York law, sales tax is imposed on “the furnishing of information … including the services of collecting, compiling, or analyzing information of any kind or nature and furnishing reports thereof to other persons, but excluding the furnishing of information which is personal or individual in nature and which is not or may not be substantially incorporated in reports furnished to others.” Lately, a number of disputes have arisen between taxpayers and the Department of Taxation and Finance as to whether taxpayers are selling taxable information services, or whether information furnished qualifies for the exception as being personal or individual in nature.

The New York Tax Appeals Tribunal recently reviewed Matter of the Petition of Dynamic Logic, Inc., in which the taxpayer asserted that the Administrative Law Judge (ALJ) for the Division of Tax Appeals erred when it concluded that the taxpayer was providing taxable information services and did not qualify for the exclusion for information personal or individual in nature that is not incorporated in reports provided to others.  In its exceptions, the taxpayer first argued that it was providing a nontaxable consulting service when it provided customers with advice and recommendations to improve their advertising campaigns. The ALJ had concluded that the taxpayer was primarily engaged in furnishing information to customers on the effectiveness of their advertising campaigns and that it was this information, gathered through surveys, that was the primary function of the taxpayer’s service. The Tax Appeals Tribunal concluded that the recommendation component of the taxpayer’s service was subordinate to the evaluation component, and the taxpayer was therefore providing taxable information services. The next issue before the Tribunal was whether the ALJ erred when it concluded that although the information at issue was personal and individual in nature, the taxpayer did not qualify for the exclusion because the taxpayer’s contracts with clients allowed it to copy, distribute, resell, modify, and otherwise use the data it collected, provided client confidentiality was maintained. Importantly, the ALJ had concluded that although information from one of the taxpayer’s services was not shared with others, the exclusion did not apply because the taxpayer had the right to use the data it collected and may incorporate that data and information into reports furnished to others. The Tribunal disagreed with this finding, noting that the possibility that information may be furnished to third parties in the future if the service provider develops a means to do so does not disqualify an information service from the exclusion under the substantially incorporated language. As such, the Tribunal reversed the ALJ’s findings with respect to one of the taxpayer’s services; the other service was taxable because the data gathered from it became part of a database used for multiple purposes. Please contact Judy Cheng at 212-872-3530 with questions.

Wisconsin: Indoor Racetrack Required to Pay Sales Tax on Go-Karts Rented to Customer

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The Wisconsin Tax Appeals Commission recently addressed whether a taxpayer’s purchases of go-carts were exempt from sales and use tax under the resale exemption or whether the taxpayer was the end-user of the go-carts in providing its services. The taxpayer’s primary business was leasing go-carts to its customers and allowing customers to use its indoor racetrack. The taxpayer did not charge for admission to its facilities; the only charges were for the lease of go-carts on which the taxpayer collected tax. The taxpayer had sought a declaratory ruling that tax was not due on the initial purchase of the go-karts as a sale for resale. The Department of Revenue issued a ruling that the taxpayer was the end-user of the go-karts in providing its services and is not eligible for the resale exemption. The taxpayer appealed to the Commission.

Under Wisconsin law, purchases of property “to be used solely for lease, license or rental” shall be exempt as a purchase for resale. However, the exemption excludes transfers of tangible personal property to a service provider that the service provider subsequently transfers to a customer in conjunction with selling, performing, or furnishing of any service if the property is incidental to the service. Under Wisconsin law, “incidental” is defined as depending up something else as necessary, and clarifies that property transferred by a service provider is “incidental to the service if the purchaser’s main purpose or objective is to obtain the service ...even though the property may be necessary or essential to providing the service.” The question before the Commission was whether the objective of the taxpayer’s customer was to rent the go-kart or to enjoy the speedway experience.

In the Commission’s view, the taxpayer’s transfer of the go-carts to customers was incidental to the service of furnishing of a speedway racing experience and therefore the taxpayer was the end user for sales tax purposes. The Commission first noted that once rented, the go-karts could be used only on the taxpayer’s track and were not available for use or transport elsewhere by the customer. The Commission relied on a Wisconsin Supreme Court case holding that receipts from the sale of “lift tickets” by a ski hill was a taxable admission fee for access to the taxpayer’s recreational facilities. Just as the taxpayer at hand did not charge admission to its facility but did charge a fee for the use of its go-carts, the taxpayer in the former case did not charge “admission” to its parking lot, chalet, or recreational areas, but did charge for the lift tickets which the court ultimately found were admission fees, regardless of the terminology used. The Commission also drew attention to a departmental publication discussing the taxability of golf cart rentals and noting that they are taxable to the course owner if the use of a cart is required to play at the course but may be purchased tax exempt if use of the cart is optional and a separate charge is made for the cart rental. The Commission found that here that the taxpayer required that its karts be used on the track, there was no separate charge for the track, and customers were not allowed to use the track without renting the cart. The Commission concluded that the taxpayer’s provision of go-carts was incidental to its business of offering speedway racing experiences. It was required to pay tax on its purchase of go-karts as well as to collect tax on the charges for use of its track. For questions about Spa Indoor Speedway, LLC please contact Jill Nielsen.