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Mark Nebergall advises clients on all aspects of tax policy with respect to software transactions at state, federal and international levels. He also works with McDermott’s tax controversy team handling tax litigation where he brings his former experience as a litigator for the US Department of Justice, Tax Division. Mark combines tax policy and tax litigation skills to help solve client tax problems holistically. Read Mark Nebergall's full bio. 

Legislators in Frankfort added a new “video streaming service” tax to the omnibus tax bill (HB 354) as part of a closed-door conference committee process before the bill was hastily passed in the House and Senate. Notably, the new video streaming service tax was not previously raised or discussed as part of HB 354 (or any other Kentucky legislation) before it was included in the final conference committee report that passed the General Assembly in March.

Specifically, as passed by the General Assembly, HB 354 will add “video streaming services” to the definition of “multichannel video programming service” subject to the telecom excise tax.  This is the same tax imposition that the Department of Revenue argued applied to video streaming services in the Netflix litigation—an argument that was rejected by the courts in Kentucky and then subsequently settled on appeal. Under existing law, Kentucky taxes “digital property” under the sales and use tax. The term is broadly defined and applies to audio streaming services, but expressly carves out “digital audio-visual works” (i.e., downloaded movies, TV shows and video; defined consistently with the SSUTA) from the scope of the sales and use tax imposition. HB 354 would not modify the treatment of digital goods and services under the sales and use tax, and changes that would be implemented are limited to the telecom excise tax imposed on the retail purchase of a multichannel video programming service.
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Judicial deference to state tax agencies puts taxpayers at a steep disadvantage and wastes time and resources on costly tax disputes. A united advocacy effort can help promote passage of state-level legislation that takes the tax administrator’s thumb off the scales of justice in administrative and judicial review of tax determinations.

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California legislators have recently introduced a bill, AB 1270, that would amend the False Claims Act (Act) to strike the tax bar. As introduced, the bill would amend the existing false claims statute in the state of California to expressly authorize tax-related false claims actions against a person whose reported taxable income, net income,

A bill (AB 447) was introduced on March 25th in the Nevada Assembly that would create a broad new excise tax on the retail sale of “specified digital products” to Nevada customers. Instead of expanding the scope of Nevada’s sales and use tax, the bill would enact an entirely new chapter of the Revenue and Taxation Title imposing this new excise tax. Currently, sales of digital products, including electronic transfers of computer software, are not subject to the sales and use tax. Thus, the new proposal represents a major policy departure from the status quo. The introduced bill also would create inconsistencies with the Streamlined Sales and Use Tax Agreement (SSUTA)—to which Nevada is a member state—and contains many potential violations of federal law under the Permanent Internet Tax Freedom Act (PITFA) that do not appear to have been carefully considered.

Broad New Tax

Specifically, the bill would impose the new excise tax “upon the retail sale of specified digital products to an end user in this State . . . [and] applies whether the purchaser obtains permanent use or less than permanent use of the specified digital product, whether the sale is conditioned or not conditioned upon continued payment from the purchaser and whether the sale is on a subscription basis or is not on a subscription basis.” Based on this broad imposition, subscription-based services and leases or rentals of “specified digital products” would be covered by the new tax. “Specified digital products” is defined as “electronically transferred: (a) Digital audio works; (b) Digital audio-visual works; (c) Digital books; (d) Digital code; and (e) Other digital products.” Except for “other digital products,” these terms are defined consistently with the definitions in the SSUTA (of which Nevada is a member). The bill defines the term “other digital products” as “greeting cards, images, video or electronic games or entertainment, news or information products and computer software applications.”
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Today, US Senators John Thune (R-SD) and Ron Wyden (D-OR) filed the Digital Goods and Services Tax Fairness Act of 2018 (S.3581) for reintroduction in the United States Senate. A companion version is expected to be reintroduced tomorrow in the House of Representatives by Representatives Lamar Smith (R-TX) and Steve Cohen (D-TN). This bill, if enacted, would establish a national framework for how states apply their sales and use tax systems to sales and uses of digital goods and digital services.  The bill would resolve current uncertainty regarding which state has the right to tax certain sales and whether a state has the right to tax the sale of a digital good or digital service. The bill also would establish uniform, destination-based, sourcing rules for sales of such products and services.

Sales of digital goods and services are highly mobile transactions. A customer could have a billing address in one state and download a digital good from the seller’s server in another state while the customer is traveling in a third state. Whether such a transaction has sufficient attributes in any one of the three states to give rise to the right to tax the transaction by any one of them is open to question. Assuming one of the states has the right to tax the sale, there is a question as to which state that might be. The bill would clearly specify that one of the states has the right to tax the sale and clearly delineate which state has such taxing rights. 
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The US House Committee on the Judiciary has scheduled a hearing for Tuesday, July 24 at 10:00 am EDT in 2141 Rayburn House Office Building. According to a press release circulated last night, the topic of the hearing will be “[e]xamining the Wayfair decision and its ramifications for consumers and small businesses.” According to comments

Due to the current impact and the likelihood that states will consider legislation and agency guidance addressing federal tax reform implications for state business taxes, a united, effective, nationwide advocacy effort is needed to ensure the issues are consistently addressed on a multi-state basis. In preparation for anticipated ramifications, a multi-state coalition will need to consider the subjects summarized below. For further coverage, continue reading here.

How McDermott Will & Emery Can Help You:

  • Formation of a coalition of companies and industry trade organizations dedicated to proactively addressing state tax issues raised by federal tax reform on a nationwide basis
  • Identify and track, in real time, proposed state legislative and regulatory responses to federal tax reform
  • Analyze proposed state reforms and develop substantive amendments and comments
  • Develop and implement advocacy campaigns to secure favorable legislative and regulatory outcomes, including
    • Preparation of all advocacy collateral
    • Organization of on the ground advocacy, including retaining in-state advocates where needed
    • Activating allied organizations to ensure broad support
  • Provide support concerning the proper reporting of state responses to federal tax reform on company financial statements

Coalition Goals: 

  • Prevent state legislation expanding tax base through decoupling from federal deductions
  • Support state legislation adopting comprehensive federal reform conformity, with appropriate deviations
  • Identify and remedy Commerce Clause issues
  • Encourage states revenue department to publish guidance on issues such as definitional questions, apportionment approaches and problems with different group calculations
  • Identify and act on opportunities to address related issues through state responses to federal reform
  • Prepare to address potential nexus changes in response to South Dakota v. Wayfair


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While there are differences between the House and Senate tax reform bills that remain to be worked out between the two chambers, both bills are positioned to broaden the tax base and reduce the tax rate. This article highlights the possible impact on state income tax liabilities stemming from the base broadening provisions.

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