PODCAST

TWIST - This Week in State Tax

Summary of state tax developments in Arkansas, Massachusetts, Vermont, and a multistate update.

Click on the tabs for the detailed developments:

  • Weekly TWIST recap
  • Arkansas
  • Massachusetts
  • Vermont
  • Multistate

Weekly TWIST recap

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

First up, significant corporate income tax changes have been enacted in Vermont that apply to tax years beginning on or after January 1, 2023. Currently, overseas business organizations that ordinarily have 80 percent or more of their property and payroll outside the U.S. are excluded from the definition of an “affiliated group.” The new law replaces the term “overseas business organizations” with “foreign corporations,” meaning that U.S. organized corporations with significant foreign activity will be included in the Vermont affiliated group. Currently, Vermont applies the Joyce apportionment method; the bill transitions the state to Finnigan. In addition, the current three factor apportionment formula will be replaced with a single-sales factor apportionment method and the throwback rule will be eliminated. Finally, the bill revises the state’s minimum tax structure.

In other corporate income tax news, an Administrative Law Judge (ALJ) for the Arkansas Department of Finance & Administration’s Office of Hearings and Appeals held that a taxpayer “used” leased vehicles in Arkansas and was therefore required to include the value of the vehicles the property factor for the tax years at issue. The dispute centered on the meaning of the term use and the taxpayer had argued that although it owned the vehicles, it did not use them in Arkansas because it did not possess or control the vehicles that were leased to others. Relying on non-tax Arkansas cases, the ALJ concluded that the Arkansas courts would define “use” as meaning “enjoy, hold, occupy, or have in some manner the benefit thereof.” In the ALJ’s view, the deployment of an asset to earn business income would meet that definition.

In sales and use tax news, the Massachusetts Department of Revenue issued a Technical Information Release 22-8, addressing the Massachusetts Supreme Judicial Court (SJC) decision in Oracle USA, Inc. v. Commissioner.

Finally, there have been three recent nexus developments of note all addressing tax years prior to the Wayfair decision.  First, a taxpayer has asked the U.S. Supreme Court to review a decision from the Oregon Supreme Court holding that an out-of-state telecommunications company providing VoIP services to in-state customers was required to collect the state’s E-911 tax. In addition, the Massachusetts Supreme Judicial court has agreed to review the Appellate Tax Board’s decision in U.S. Auto Parts addressing whether a taxpayer had nexus for the pre-Wayfair period under the Commonwealth’s “cookie nexus” regulation. The Board had concluded that Wayfair “leaves no doubt that” the cookies did not satisfy the Quill physical presence rule and that Wayfair did not apply retroactively.

Finally, in Washington State, the Board of Tax Appeals concluded that sellers that participated in an online marketplace’s fulfillment program were required to collect and remit retail sales tax and pay retailing B&O for the tax years at issue. . 

Thank you for listening to TWIST and stay well!

Arkansas

Arkansas: A Taxpayer’s Property was “Used” in State; Refund Based on Reduction in Property Factor Rejected

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Recently an Administrative Law Judge (ALJ) for the Arkansas Department of Finance & Administration’s Office of Hearings and Appeals addressed whether a taxpayer “used” certain property in Arkansas so that it was required to be included in the property factor for the tax years at issue. The taxpayer had filed a corporate income tax refund claim removing the property from the Arkansas property factor numerator, which essentially zeroed out the taxpayer’s property factor. The determination was heavily redacted, but the facts indicated that the taxpayer owned vehicles in Arkansas that were leased to others. The sole issue before the ALJ was whether the taxpayer was “using” the vehicles in Arkansas. Under Arkansas law and regulations property is included in the property factor if it is actually used or is available for use or capable of being used during the tax year in the regular course of a taxpayer’s trade or business.  The Department’s position was that the leasing of property in the regular course of business to generate business income qualified as a “use” of the leased property. The taxpayer, on the other hand, asserted that because it did not possess or control the vehicles in Arkansas, it was not using them in the state. In support of its position the taxpayer cited to the recent the R.J. Reynolds Tobacco case from the Virginia Supreme Court in which the court held that a taxpayer was not using tobacco in Virginia when it was stored in a warehouse during the drying and aging process.

After reviewing the various authorities cited to by the parties, the ALJ determined that, the R.J. Reynolds case was not applicable because the taxpayer’s vehicles were not simply owned and stored in Arkansas. Relying on non-tax Arkansas cases, the ALJ concluded that the Arkansas courts would define “use” as meaning “enjoy, hold, occupy, or have in some manner the benefit thereof.” In the ALJ’s view, the deployment of an asset to earn business income would meet that definition. The ALJ declined to consider a whether an alternative apportionment method should be applied, as the taxpayer had not filed a petition for alternative apportionment. Please contact Jennifer Knickel with questions on this determination (Dkt. #22-334). 

Massachusetts

Massachusetts: Department Issues Guidance on Application of Oracle Decision

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The Massachusetts Department of Revenue recently issued a Technical Information Release (TIR 22-8) addressing the Massachusetts Supreme Judicial Court (SJC) decision in Oracle USA, Inc. v. Commissioner. Under Massachusetts law, the Commissioner “may, by regulation, provide rules for apportioning [sales and use] tax in those instances in which software is transferred for use in more than one state.” The key issue in Oracle was whether a purchaser of software that was to be used in more than one state was required to issue a certificate indicating it would assume responsibility for apportioning and paying the tax to Massachusetts and the other states in which the software was used at the time of purchase as required under the Commissioner’s regulation, or whether the purchaser could subsequently apportion the tax based on use and seek a refund through the general abatement process. Before the SJC, the Commissioner argued that the statute at issue constrained the taxpayer to the method of apportionment set forth in the regulations, and empowered the Commissioner to determine, in its discretion, whether to allow apportionment of sales tax in circumstances involving the transfer of software for use in multiple states.  The SLC disagreed and held that a purchaser was not limited to the apportionment process set forth in the regulation and a taxpayer’s noncompliance with the regulations did not preclude apportionment through the abatement process.

The TIR states that Oracle addresses the general procedure for claiming a tax abatement with respect to software transferred for multi-state use but does not address specific methods of apportioning the sales or use tax on such transfers. As such, taxpayers are advised to continue to follow the apportionment process set forth in the regulations but may also apply for an abatement of sales and use tax. The Commissioner will generally accept an apportionment method based on the number of licensed users in a particular state; however, based on the specific facts, other methods may also be considered reasonable. The method used must accurately reflect actual use, or a reasonable approximation of use, of the software in the Commonwealth. The chosen method must be consistent and uniform and supported by the taxpayer’s books and records. The TIR cautions that the burden of proving that the apportionment method meets the reasonableness requirements will fall on the taxpayer. Please contact Ryanne Tannenbaum with questions on TIR 22-8. 

Vermont

Vermont: Governor Signs Bill with Significant Corporate Tax Changes  

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On May 31, 2022, Governor Phil Scott signed Senate Bill 53, which makes significant changes to Vermont’s corporate income tax laws. The changes were first covered in TWIST on May 16, 2022, with the release of the legislative Conference Committee reconciling House and Senate differences in the bill. Here are the major changes enacted. Currently, overseas business organizations that ordinarily have 80 percent or more of their property and payroll outside the U.S. are excluded from the definition of an “affiliated group.” The new law replaces the term “overseas business organizations” with “foreign corporations,” meaning that U.S. organized corporations with significant foreign activity will be included in the Vermont affiliated group. Under Vermont law, affiliated groups engaged in a unitary business are required to file a group return. The bill revises the law to make clear that an affiliated group is treated as a single taxpayer and that the income, gain, or loss from members of the combined group are combined to the extent allowed under the IRC for consolidated filings. Credits, however, are not combined and are limited to the member of the group to which the credit is attributed. Currently, Vermont adopts the Joyce apportionment method; the bill transitions the state to Finnigan and requires the Department of Taxes to adopt rules governing the move to Finnigan and the other combined group changes. In addition, the current three factor apportionment formula will be replaced with a single-sales factor apportionment method under the new law, which also repeals the throwback rule applied to sales of tangible personal property. Finally, the bill revises the state’s minimum tax structures. Under current law, if a corporation has zero or negative taxable income, it is subject to Vermont’s corporate minimum tax. The current highest minimum tax of $750.00 is imposed on corporations with Vermont gross receipts greater than $5 million. The minimum tax increases to $2,000 for taxpayers with Vermont gross receipts from $1 million to $5 million, to $6,000 for taxpayers with Vermont gross receipts of greater than $5 million; and to $100,000 for taxpayers with Vermont gross receipts of over $300 million. The fiscal note for the bill estimates that there are about 10 such corporations. All changes take effect for tax years beginning on or after January 1, 2023. Currently, Vermont adopts the Internal Revenue Code as of December 31, 2020. The state’s conformity date is advanced to December 31, 2021, effective retroactively to tax years beginning on or after January 1, 2021. Please contact Jennifer Bates with questions on these changes. 

Multistate

Multistate: A Round Up of Recent Nexus Developments

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There have recently been a few nexus developments of note, all addressing tax years prior to the Wayfair decision.  First, a taxpayer has asked the U.S. Supreme Court to review a decision from the Oregon Supreme Court holding that an out-of-state telecommunications company providing VoIP services to in-state customers was required to collect the state’s E-911 tax. The taxpayer argued that imposition of the tax violated the Commerce Clause of the U.S. Constitution for lack of substantial nexus. Before the Oregon Supreme Court, the Department argued that the taxpayer had established substantial nexus with Oregon because the taxpayer had significantly exceeded the Wayfair sales and use tax nexus standard. The taxpayer argued it was not enough to simply establish the in-state sales or transaction threshold amounts, but that Wayfair requires that taxpayers must also maintain an “extensive virtual presence” within a state to establish substantial nexus. The court was unpersuaded, finding that a company that earned far greater revenue and conducted far more transactions than were involved in Wayfair must be deemed to have availed itself of the privilege of carrying on business in Oregon. The court also explained that the Wayfair Court did not articulate that an extensive virtual presence was a requirement for finding nexus. The question presented in the cert petition is “does the Commerce Clause prevent the imposition of Oregon’s E911 tax in this case where the lower court wholly dismissed the virtual contacts inquiry as irrelevant to the determination of substantial nexus?”

In other news, the Massachusetts Supreme Judicial court has agreed to review the Appellate Tax Board’s decision in U.S. Auto Parts. The taxpayer in U.S. Auto Parts was an out-of-state retailer of automobile parts and accessories whose only contacts within Massachusetts were through cookies, apps, or content delivery networks. The issue before the Board was whether the taxpayer had nexus for the pre-Wayfair period under the Commonwealth’s “cookie nexus” regulation. The Board concluded that Wayfair “leaves no doubt that” the cookies did not satisfy the Quill physical presence rule and that Wayfair did not apply retroactively.

Finally, in Washington State, the Board of Tax Appeals concluded that sellers that participated in an online marketplace’s fulfillment program were required to collect and remit retail sales tax and pay retailing B&O. The tax years at issue were prior to Wayfair and before Washington adopted laws specifically requiring marketplace facilitators to collect and remit sales taxes. Importantly, the sellers had inventory present in Washington State during the tax periods. With respect to the B&O tax, the taxpayer had goods in Washington that were sold to customers in Washington. “The Taxpayers have provided no persuasive arguments that would exempt them from the B&O tax.” In reaching its conclusion on the sales tax question, the Board rejected the taxpayers’ argument that they did not know they had a collection responsibility and that the marketplace never told them of their liabilities. “The Taxpayers cannot rely on ignorance of the law to excuse their failure to collect and remit Washington’s taxes.” The Board also rejected the taxpayer’s argument that the marketplace should have collected and remitted sales tax as the consignee of the goods. The Board was not convinced that this was a consignee relationship and further, there would have been no need for the Legislature to act in 2019 to adopt a marketplace facilitator law if consignees were already required to collect taxes. Please stay tuned to TWIST for futures updates on these nexus developments. 

Podcast host

Sarah McGahan

Sarah McGahan

Managing Director, State & Local Tax, KPMG US

+1 213-593-6769