Welcome to TWIST for the week of June 27th, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.
First up today, Iowa Senate File 2367, which was recently signed into law, makes several important changes to the administration of the state’s sales and use taxes. Prior to July 1, 2022, businesses needed to have separate sales and use tax permits and file separate returns for sales tax, retailer’s use, and consumer’s use tax. Going forward, businesses will report sales and use taxes on a single, consolidated return and will need only one permit for both sales and use tax. Currently, many businesses file returns on a quarterly basis, but semi-monthly deposits of tax are required. Under the revised law, businesses will either file and pay monthly or annually, depending on the amount of tax collected. Senate File 2367 also makes certain changes to Iowa’s sales and use tax exemptions and incrementally reduces the bank franchise tax from the current 5 percent rate down to 3.5 percent for tax years beginning on or after January 1, 2027.
In U.S. Supreme Court news, the high court recently denied certiorari in two state tax cases. On June 13, 2022, the U.S. Supreme Court declined to review a case from Washington State upholding the constitutionality of the 1.2 percent B&O surcharge imposed on specified financial institutions. Just a week later, on June 21, 2022, the court denied certiorari in an Oregon Supreme Court decision holding that for the pre-Wayfair tax years at issue, a service provider was required to collect and remit the state E911 tax imposed on VoIP lines.
Also in Washington State, an appeals court recently upheld a lower court’s dismissal of a lawsuit challenging the City of Seattle’s payroll expense tax. The tax, which was approved in 2020, applies to businesses with payroll of more than $7 million in the prior calendar year.
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On June 17, 2022, Iowa Senate File 2367 was signed into law by Governor Kim Reynolds. The bill makes important changes related sales and use tax administration that take effect July 1, 2022. Prior to July 1, 2022, businesses needed to have separate sales and use tax permits and file separate returns for sales tax, retailer’s use, and consumer’s use tax. Going forward, separate returns for consumer’s use and retailer’s use taxes will no longer be used. Businesses will report both sales and use taxes on a single, consolidated return and will need only one permit for both sales and use tax. Currently, many businesses file returns on a quarterly basis, but semi-monthly deposits of tax are required. Under the revised law, businesses will either file and pay monthly or annually, depending on the amount of tax collected. For monthly filers, returns and remittances will be due on the last day of the month following the tax period. Remittances must be paid electronically, and semimonthly deposit payments are no longer required. Existing permit holders will still need to file a quarterly return for the second quarter of 2022 as they have in the past, due July 31, 2022. Under guidance issued by the Department of Revenue, the permit numbers for businesses that have both sales and use tax permits will be merged by the Department, and the businesses will receive a letter regarding their new filing frequencies. Taxpayers with both sales and use tax permits currently will fill all returns using their existing sales tax permit number going forward.
Senate File 2367 also makes changes to Iowa’s sales and use tax exemptions. Effective January 1, 2023, new exemptions apply to purchases of diapers (children or adult) and feminine hygiene products. The current sales/use tax exemption that applies to the sale or rental of computers or computer peripherals used in processing or storage of date or information by an insurance company, financial institution, or commercial enterprise is eliminated effective January 1, 2024. Finally, Senate File 2372 expands the sales tax exemption for items and services used by a manufacturer to produce marketable food products for human consumption by modifying the exemption to apply to a manufacturer of food or food ingredients. The amendment requires that the qualifying property by used “primarily” in the manufacturing process to qualify for exemption. The change is effective upon enactment and applies retroactively to January 1, 2019. Due to the retroactive applicability, refund claims are required to be filed prior to October 1, 2022, and total refund claims cannot exceed $100,000 for any calendar year during the period of retroactivity.
Finally, Senate File 2367 incrementally reduces Iowa’s current bank franchise tax rate of 5.0 percent. Specifically, the bank franchise tax will be reduced from 5 percent to 4.7 percent for tax years beginning on or after January 1, 2023; to 4.4 percent for tax years beginning on or after January 1, 2024; to 4.1 percent for tax years beginning on or after January 1, 2025; to 3.8 percent for tax years beginning on or after January 1, 2026; and to 3.5 percent for tax years beginning on or after January 1, 2027. Please contact Jill Nielsen at (312) 665-2794 with questions on the sales and use tax changes included in Senate File 2367.
On June 21, 2022, the U.S. Supreme Court denied certiorari in a case addressing nexus for pre-Wayfair tax years. In the case, the Oregon Supreme Court had held that a VoIP service provider was required to collect and remit the state E911 tax imposed on VoIP lines. The taxpayer did not collect the E911 tax from Oregon customers or remit the tax during the relevant tax period, which covered January 2013 through March 2016. Before the Oregon court, the taxpayer argued that it did not have the requisite contacts under the Due Process Clause or sufficient nexus under the Commerce Clause to be required to collect and remit the tax. During the relevant time, the taxpayer had no physical presence in Oregon. The number of VoIP lines provided to Oregon customers during the tax period ranged from 6,633 to 13,467 and the service billings for those lines generated $2.2 million in revenue over the 39-month audit period.
The Oregon Supreme Court first addressed the taxpayer’s argument that it did not purposefully avail itself of the Oregon market and therefore lacked the minimum contacts necessary to establish Due Process Clause nexus. The taxpayer’s position was that it was not purposefully availing itself of Oregon’s market because its marketing efforts were not targeted specifically at Oregon customers. However, in the court’s view, the efforts to target customers in other states in addition to Oregon did not affect or diminish the constitutional significance of the taxpayer’s effort to target customers in Oregon. The taxpayer developed marketing plans and employed business strategies intended to reach Oregon residents (and residents of other states), shipped products directly into Oregon, and engaged retailers to sell its products in Oregon. These efforts to attract Oregon customers and the services provided in Oregon to those customers established its purposeful availment of the Oregon market.
The court next addressed the taxpayer’s Commerce Clause argument, which was based on the Wayfair decision although the tax years at issue predated Wayfair. The taxpayer appeared to be arguing that in assessing the extent of a company’s economic activity in a state it was not enough to simply establish that a company did more than $100,000 of sales or had more than 200 transactions with in-state customers. In addition, the taxpayer argued that “a court may not conclude that an out-of-state company satisfies the substantial nexus requirement without finding that the company maintains an extensive virtual presence.” The court rejected both arguments, stating that a company that earned far greater revenue and engaged in far more transactions than involved in Wayfair must be deemed to have also availed itself of the substantial privilege of carrying on business in Oregon. And, while the taxpayers in Wayfair undoubtedly had an extensive virtual presence, the court noted that the U.S. Supreme Court did not articulate that as a specific requirement for establishing nexus. And the taxpayer offered no explanation as to why it would make sense to impose such a requirement when a nexus is otherwise established through sales, marketing, and service delivery efforts. Please contact Vinh Tran with questions on OOMA, Inc. v. Oregon Dep’t of Revenue.
Recently, the Court of Appeals of Washington State upheld the dismissal of a lawsuit over the constitutionality of Seattle’s payroll expense tax imposed on entities engaged in business in the City. The tax, which was approved in 2020, applies to businesses with payroll of more than $7 million in the prior calendar year. The tax base is an employer’s payroll expense, which is defined as “compensation paid in Seattle to employees.” Compensation includes wages, commissions, salaries, stock, grants, gifts, bonuses, and stipends. The Greater Seattle Chamber of Commerce had alleged that the tax was an unconstitutional tax on employee wages that must be invalidated under an earlier case, Cary v. City of Bellingham. After a trial court dismissed the case in favor of the City, the Chamber appealed. The appeals court noted that in Cary the tax at issue was imposed on an employee’s wages and the Cary court held that a municipality had no power to levy a tax on the right to work for wages. In the instant case, however, the payroll tax is imposed on a business and applies to the privilege of engaging in business. The taxation of a business's payroll expense and the taxation of an individual employee's earnings are not the same taxable incident, and the court concluded that Cary did not support the chamber’s position. Holding that engaging in business is a substantial privilege on which the City may properly levy taxes, and the use of a business's payroll expense is an appropriate measure of that taxable incident, the appeals court affirmed the lower court’s dismissal of the case. It remains to be seen if the Chamber will appeal.
In other Washington State news, the U.S. Supreme Court recently denied certiorari in the case addressing the constitutionality of Washington state’s B&O surcharge imposed on financial institutions. Recall, last year, the Washington State Supreme Court upheld the state’s 1.2 percent B&O tax surcharge imposed on specified financial institutions that became effective January 1, 2020. A “specified financial institution” is a financial institution that is a member of a consolidated financial institution group that reported an annual net income of at least $1 billion on its consolidated financial statement for the previous calendar year. The Washington State high court concluded that the surcharge was not discriminatory on its face or in effect and was not enacted with discriminatory purpose. Because the tax applied equally to in-state and out-of-state financial institutions and was limited to Washington-apportioned income, it did not discriminate against interstate commerce. The American Bankers Association and the Washington Banker’s Association petitioned the U.S. Supreme Court for review, but the Court denied cert on June 13, 2022. Please contact Michele Baisler at (206) 913-4117 with questions on these cases and other Washington State matters.