TWIST - This Week in State Tax

Welcome to TWIST for the week of May 9th, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.

Today we have two development from New York State. First, the New York Department of Taxation and Finance recently issued revised draft Article 9-A Business Corporation Franchise Tax regulations. Notably, Part 1 of the draft regulations adopts certain aspects of the Multistate Tax Commission’s statement on Public Law 86-272, which was recently revised to include certain activities that, if conducted by a business over the Internet, would cause the loss of Public Law 86-272 protection The Department is soliciting comments on the draft regulations through June 30, 2022 and has indicated that it intends to move forward with the formal regulatory process in 2022.

The New York Division of Tax Appeals recently issued a decision addressing “who” is a securities broker’s “customer” for purposes of applying the state’s corporate tax receipts factor sourcing rules.   The taxpayer and the Department disagreed as to whether the taxpayer’s customer with respect to the payment of certain fees was a bank or the taxpayer’s brokerage clients. Although it was “beyond question” that the amounts used to pay the fees were determined based upon the yield the taxpayer received on the cash swept from its brokerage clients’ accounts, the bank was the entity that paid the fee. As such, the ALJ concluded that the banks were the “customers.”

Moving out west, retailers in Colorado will soon need to start collecting a new retail delivery fee. In 2021, legislation was signed into law in Colorado that established new sources of funding for the state’s transportation system. Specifically, the bill imposes new fees on electric motor vehicle registrations, purchases of gas and diesel, passenger ride services and short-term vehicle rentals. In addition, the bill requires Colorado-licensed retailers to collect a $0.27 retail delivery fee from purchasers on every retail sale of tangible personal property that is delivered by a motor vehicle to a purchaser in Colorado.  Retailers will need to begin collecting this new fee on July 1, 2022. 

Finally, in a recent nonprecedential opinion, the California Office of Tax Appeals or OTA ruled that a taxpayer was not entitled to a refund of franchise tax as a result of including treasury function receipts and certain vendor allowances in its sales factor for the tax years at issue.   The taxpayer argued that a regulation excluding treasury function receipts was not valid and that under earlier caselaw, treasury function receipts were included in gross receipts unless and until the FTB proved distortion. The OTA disagreed, holding that the FTB properly excluded the treasury gross receipts under the regulation, which was validly adopted and within FTB’s well established broad rule-making authority. The OTA also concluded that the taxpayer’s vendor allowances were included in gross receipts for purposes of the sales factor.  However, in the OTA’s view, the taxpayer had not substantiated that it was entitled to a refund of any specific amount if the vendor allowances were included in gross receipts. 

Thank you for listening to TWIST and stay well!

California: OTA Addresses Treasury Function Regulation; Treatment of Vendor Allowances

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In a recent nonprecedential opinion, the California Office of Tax Appeals (OTA) concluded that a taxpayer was not entitled to a refund of franchise tax as a result of including treasury function receipts and certain vendor allowances in its sales factor for the tax years at issue.  In the Microsoft and General Motors cases, the California courts addressed the inclusion of treasury function receipts in the California sales factor. In general, the courts held that the sales factor includes all gross receipts, including certain treasury function receipts, but that inclusion of such receipts may be distortive, and in that case, treasury function receipts should be excluded under an alternative apportionment theory. In 2008, the Franchise Tax Board promulgated a regulation under the statute that allows it to require use of an alternative apportionment formula.  Under the regulation, treasury function receipts were excluded from the numerator and denominator of the sales factor. The law was later amended to specifically exclude treasury function receipts from the sales factor.   For the tax years at issue, the taxpayer argued that the regulation was not valid and that under the earlier caselaw, treasury function receipts were included in gross receipts unless and until the FTB proved distortion. In the taxpayer’s view, distortion did not exist and therefore imposition of an alternative apportionment method was inappropriate.  The OTA disagreed, holding that the FTB properly excluded the treasury gross receipts under regulation, which was validly adopted and within FTB’s well-established broad rule-making authority. The OTA also determined that it was reasonable for the FTB to conclude that the inclusion of treasury receipts was distortive and to issue a regulation requiring such receipts to be excluded. With respect to the 2009 revision to the statutory definition of “sales,” the OTA noted that the amendments were described as “clarifying, nonsubstantive changes.”

The OTA next addressed whether the taxpayer’s five enumerated categories of vendor allowances were included in the sales factor.  In general, these were amounts or rebates paid to the taxpayer as a result of selling a vendor’s merchandise.  The OTA rejected the FTB’s position that the vendor allowances were an offset to COGS and concluded that the vendor allowances were gross receipts for purposes of the sales factor.  “We are not convinced that such a strict interpretation of what constitutes a “gross receipt” is consistent with the holdings in Microsoft and General Motors.” However, the OTA declined to agree with the taxpayer’s position that the vendor allowances were a separate category of sales that should be treated for apportionment purposes as the sale of an intangible. In the OTA’s view, the taxpayer’s various types of vendor allowances were generally so intertwined with the purchase of inventory from the vendors that they could not be separated from the sale of tangible personal property (at least based on the record as developed).  With respect to whether the taxpayer was entitled to refunds as a result of the vendor allowances being included in the sales factor, the OTA noted that the taxpayer had the burden of proving that that it was entitled to a refund. In the OTA’s view, the taxpayer had not substantiated that it was entitled to a refund of any specific amount.  Please contact Oksana Jaffe with questions on Matter of Bed, Bath and Beyond, Inc. 

Colorado: New Retail Delivery Fee Collection Starting July 1, 2022

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In 2021, Colorado enacted legislation (SB 21-260) that established new sources of funding for the state’s transportation system. Specifically, the bill imposes new fees on electric motor vehicle registrations, purchases of gas and diesel, passenger ride services and short-term vehicle rentals. In addition, the bill requires Colorado-licensed retailers to collect a $0.27 retail delivery fee from purchasers on every retail sale of tangible personal property that is delivered by a motor vehicle to a purchaser in Colorado.  Retailers will need to begin collecting this new fee on July 1, 2022.  The fee is required to be collected only when the retailer is making a taxable retail sale of the underlying goods. In other words, if the tangible personal property sold is exempt from sales tax (e.g., a sale for resale) or the purchaser is exempt (e.g., a qualified charitable organization), then the retail delivery fee will not apply.  If a sale transaction includes both exempt and taxable items, the retail delivery fee will be imposed. The fee applies regardless of whether the motor vehicle used to deliver the goods to the customer is owned by the retailer or a third party. A single order will be subject to only one delivery fee, even if multiple deliveries are required.

Prior to remitting the fee, affected retailers will need to register to add a retail delivery fee to their account profile. Information on doing so will be forthcoming from the Department of Revenue.  Retail delivery fees collected will be remitted to the Colorado Department of Revenue on the same filing and payment schedule as the retailer’s state sales tax return but will be remitted on a specific retail delivery fee form (Form DR 1786). A return is required to be filed even if no delivery fees are due for the reporting period. The Department is expected to issue the form and regulations on the retail delivery fee in the near future. Please contact Steve Metz with questions. 

New York: Draft Rule Incorporates MTC’s Revised Statement on P.L. 86-272

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Recently, the New York Department of Taxation and Finance issued revised draft Article 9-A Business Corporation Franchise Tax regulations. Notably, Part 1 of the newly issued draft regulations adopts certain aspects of the Multistate Tax Commission’s revised “Model Statement of Information Concerning Practices of Multistate Commission and Supporting States Under Public Law 86-272.” The revised statement, which was approved by the MTC in August 2021, addresses the application of P.L. 86-272 to business activity conducted by an Internet seller. Importantly, under the revised MTC statement, if a business interacts with a customer via the business’s website or app, as opposed to providing static text and photos to the customer, the business is generally considered to be engaged in a business activity within the customer’s state. Thus far, California is the only state that has publicly adopted the MTC’s revised statement on P.L. 86-272.

The draft regulation incorporates certain examples from the MTC’s statement of activities conducted over the Internet that will cause the loss of P.L. 86-272 protection for a corporation. These examples include: providing post-sales assistance to customers via email or a chat icon that is on a corporation’s website, receiving applications online for branded credit cards, inviting viewers to apply for jobs online, placing internet cookies on a customer’s device that allow the corporation to gather information used to develop production schedules, develop new products, etc., remotely upgrading or fixing products purchased by customers, selling extended warranty plans, and providing access to streaming content. The Department is soliciting comments on the draft regulations through June 30, 2022 and has indicated that it intends to move forward with the formal regulatory process in 2022. Please stay tuned to TWIST for future news on states adopting the MTC’s revised statement on P.L. 86-272. 

New York: ALJ Addresses Who is the Taxpayer’s Customer? 

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The New York Division of Tax Appeals recently issued a decision addressing “who” is a securities broker’s “customer” for purposes of applying the state’s corporate tax receipts factor sourcing rules.  In a vast simplification of the facts, the brokerage firm taxpayer deposited cash received from its customers in the bank. In return for performing certain services related to the deposits, the bank paid the taxpayer a fee that was described as an “aggregate” or “marketing” fee. On audit, the Division took the position that the fees should be sourced based on the mailing addresses of the brokerage firm’s clients. This was the same method the state used to source commission receipts. This resulted in additional tax due and substantial understatement penalties, which the taxpayer protested.

 The issue before the Administrative Law Judge (ALJ) was how the fees should be sourced under the customer-based sourcing rules applicable to registered broker/dealers.  The parties agreed that the fees must be sourced to the “mailing address in the records of the customer who is responsible for paying” such fee. However, the parties disagreed as to who the “customer” was for the purposes of making this determination. In other words, was the bank the relevant customer responsible for paying the fee (the taxpayer’s position), or the brokerage clients (the Division’s position).  Although it was “beyond question” that the amounts used to pay the fees were determined based upon the yield the taxpayer received on the cash swept from its brokerage clients’ accounts, the actual fees themselves were paid by the banks. As such, the ALJ concluded that the banks that paid the fees at issue were the “customers,” and their New Jersey addresses controlled the sourcing of the fees.   The ALJ further held that in the alternative, if it was determined that the banks were not the taxpayer’s customers, then in the ALJ’s view the broker dealer sourcing rules would not apply, and for the pre-2015 tax years at issue the fees would be sourced based on where the brokerage firm had performed its work to earn the fees. This would have been in Texas and Nebraska where the firm performed most of its services. While the case addressed the 2012-2014 years, as noted above, the broker-dealer sourcing rules have basically remained intact in this regard under state tax reform and also apply for purposes of the New York City Unincorporated Business Tax.  It remains to be seen whether the Department of Taxation and Finance appeals the case to the Tax Appeals Tribunal. Please contact Russ Levitt or Aaron Balken with questions on Matter of the Petition of TD Ameritrade.