TWIST - This Week in State Tax

In Alaska, which has no state-level sales tax, over 100 cities, villages, and boroughs impose locally administered sales and use taxes. Post-Wayfair, localities requiring collection by remote sellers and marketplace facilitators must adopt a uniform remote seller’s municipal code, which sets forth the state-measured economic nexus standards and uniform definitions. The Alaska Remote Sellers Sales Tax Commission serves as the central organization responsible for seller registration, receipt of returns and remittances, distribution of funds to participating local governments, and auditing remote sellers and marketplaces.

Recently proposed House Bill 378 would adopt a new state-level tax called the “Marketplace Facilitator Sales Tax” imposed on marketplace facilitators meeting the over $100,000 of sales/two hundred transactions into the state threshold. The two percent tax would be levied on the annual gross sales of a marketplace facilitator from the sale of property or services delivered into the state. The bill would not require in-state sellers or remote sellers not using the facilities of a marketplace to collect the new tax. The revenues collected from the tax may be appropriated to fund a new “organized retail theft fund,” the money from which could be provided to law enforcement agencies to investigate and prosecute organized retail theft. Please stay tuned to TWIST for future updates. 

Louisiana Governor Jeff Landry recently signed an executive order making changes to the Industrial Tax Exemption Program (ITEP). The program allows certain qualifying manufacturing businesses, either new to Louisiana or already in the state, to receive an 80 percent ad valorem tax abatement for up to 10 years for new investments and capitalized additions.  The Governor’s executive order makes a couple of important changes to the program. Previously, applications to the program required various levels of state and local approvals; each local body collecting property taxes was required to independently approve an application. Going forward, an ITEP application will no longer need to go through multiple local agencies to be approved. Instead, the application will first be sent to the state Board of Commerce and Industry. If approved, the application will be forwarded to a local ITEP Committee consisting of various local officials and employees. That local committee will have 45 days to consider the application. Decisions of the local ITEP Committee are not dispositive and do not bind the Governor or the state Board of Commerce and Industry. In the event there is a disagreement over the approval of an application between the local committee and the Board of Commerce and Industry, Governor Landry will make the final decision.  The other significant change to ITEP is that businesses will no longer be required to create jobs to maintain the property tax abatement. Governor Landry was quoted as saying “This program is about capital investment. It is not about job creation.”  The changes contained in the executive order apply for prospectively to applications filed on or after February 21, 2024.  Please contact Randy Serpas with questions on Executive Order JML 24-23. 

An Administrative Law Judge (ALJ) for the New York Division of Tax Appeals recently concluded that a taxpayer engaged in viticulture, which is the cultivation of grapevines for the purpose of growing and producing grapes, was a “qualified New York manufacturer or QNYM” for the tax years at issue (2016-2019).  The taxpayer used certain of its grapes to make wine and sold the remainder to unrelated winemakers. Under New York law for the relevant period, corporate taxpayers paid tax on the highest of three alternative bases. Each base provided some benefit to a QNYM; the rate imposed on the business income base was zero for the years at issue.   To be considered a QNYM, the taxpayer had to establish that (1) it was a manufacturer principally engaged in the production of goods by various activities, including viticulture; (2) it had property in New York the adjusted basis of which for federal income tax purposes was at least equal to $1 million, and (3) that the property was “principally used” by the taxpayer in the production of goods by viticulture. The taxpayer met the first two requirements; the outstanding issue was whether the taxpayer “used” its property in New York when it contracted with an unrelated land-management contractor to perform the work at the New York vineyard in accordance with the taxpayer’s objectives and requirements. The Division asserted that because the taxpayer had no employees in New York, it could not have “used” its property in New York, as required to be a QNYM.

The ALJ rejected this position for several reasons. First, authorities addressing the Investment Tax Credit, which also had a “use” requirement, supported a finding that “use” by a subcontractor (short of a lease) does not negate the property owner’s right to the credit. Further, nothing in the statute required a taxpayer to have employees in the state. This contrasted with another statutory test for QNYM status that specifically required 2,500 manufacturing employees in the state. The ALJ noted that, in the absence of any employee requirement in the QNYM provisions, the Division was attempting to force one into the statute. The ALJ also determined that the ordinary meaning of “use” contemplated use by a third party.  Regardless of who is subcontracted to perform day-to-day labor at the vineyard, the ALJ observed that the taxpayer employed its grapevines for a purpose and put the grapevines into service. The ALJ also concluded that the taxpayer “used” the property at the vineyard during the 2016 tax year, even though it acquired the vineyard on December 15, 2016. The Division had argued that this time was during the “dormancy period” in the growing of grapes and so there was not much manual work to perform. The ALJ rejected this view, noting that there was no provision in the law requiring a taxpayer to own property for a specific period to qualify as a QNYM. Further, the natural components of viticulture could not be disregarded, and they occurred throughout the entire year, including during dormancy. The Division offered no expertise or other evidence to contradict this fact. As such, the ALJ concluded that the taxpayer was a QNYM for the 2016-2019 tax years. Please contact Russ Levitt with questions of Matter of E&J Gallo Winery. 

The Wisconsin Tax Appeals Commission recently addressed a matter involving the licensing of computer software to Wisconsin users by an out-of-state LLC. It addressed two questions: (1) was such licensing a protected activity under P.L. 86-272; and (2) if not, were the LLC and its owner required to withhold and pay Wisconsin income tax on the income generated from licensing activities in Wisconsin. The taxpayers at issue were the individual owner of an LLC that licensed software to customers, including customers in Wisconsin, and the LLC itself. During the 2012-2018 tax years at issue, the taxpayers’ only activity related to Wisconsin was the solicitation of orders that were rejected or approved and filled outside of Wisconsin, the delivery of software to Wisconsin customers (by mailing disks or via download), and the licensing software for use in Wisconsin schools. The taxpayers provided customer service from Maryland and did not directly solicit Wisconsin customers. Sales into Wisconsin for each tax year ranged from just over $17,000 to just over 32,000. The issue arose as to whether the individual owner owed Wisconsin income taxes and (for certain tax years) whether the LLC was subject to pass-through withholding tax.  

Before the Commission, the Department’s position was that Wisconsin corporate income tax law treated the licensing of software as the sale of an intangible. Although software was not specially included in the definition of intangible property, the Department asserted that the legislature intended software to be treated as an intangible for income tax purposes. The Department also argued that the individual- and the LLC- were deriving income from business transacted in the state and doing business in the state under the individual and corporate nexus statutes. In contrast, the taxpayers argued that the sales of their software licenses were protected sales of tangible personal property under P.L. 86-272. Because P.L. 86-272 is a federal law, the taxpayers’ position was that federal definitions and law governed the determination of whether software was tangible personal property. The taxpayers also asserted that Wisconsin sales tax law specifically included prewritten computer software regardless of delivery method, within the definition of tangible personal property. Finally, the taxpayers argued their Wisconsin activities were de minimis.  The Commission rejected these arguments, finding first that state law applied to determine the characterization of software for purposes of determining whether P.L. 86-272 applies. “Before one can conclude what limits federal law places on the power of the state, one must determine what the state power is. And the determination of the state power must be derived from the review of the state statutes, administrative code and relevant caselaw.” Under state income tax law, the Commission determined that taxpayers’ sales of licenses involved intangible personal property; the sales tax code did not govern the matter.  As such, P.L. 86-272 was not applicable to the case. Further, the Commission determined that the taxpayers’ activities were not limited to solicitation and there was nothing in P.L. 86-272 that stated “other” non-solicitation activities (such as the taxpayer’s customer support services) could be de minimis. The Commission concluded that because the taxpayers licensed computer software to Wisconsin schools, for use in Wisconsin classrooms, the taxpayers were "doing business in Wisconsin" and had "business transacted in Wisconsin" sufficient to subject them to tax. Please contact Brad Wilhelmson with questions on Kuta Software LLC v. Wisconsin Department of Revenue.