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As Minnesota Moves Toward GILTI Taxation, New Jersey May Be Moving Away from It

We previously reported that the Minnesota Legislature was considering imposing mandatory worldwide combined reporting through an omnibus tax bill. Subsequent to our report and in the face of numerous criticisms, Minnesota Senate leaders backed away from the proposal. But ominously, those same leaders said they would examine other tax increases to make up for the (potentially hypothetical) revenue left on the table by moving away from mandatory worldwide combined reporting.

After a series of negotiations, an updated omnibus tax bill (HF 1938) emerged from the Minnesota Legislature conference committee over the weekend, which has already been passed by both the Minnesota House and Senate. Most notably for corporate taxpayers, the legislation:

  • Recouples Minnesota with the Internal Revenue Code provision providing for the inclusion of global intangible low-taxed income (GILTI) (under IRC § 951A) in the corporate tax base while providing a 50% dividends received deduction (but no deduction under IRC § 250)
  • Reduces the dividends received deduction from 80% to 50% for corporations in which the recipient owns 20% or more of the stock and from 70% to 40% for corporations in which the recipient owns less than 20% of the stock and
  • Decreases a corporation’s maximum net operating loss deduction from 80% to 70% of taxable net income each year.

As no prior bills proposing these tax increases had been introduced in the Minnesota Legislature, these tax increases have been passed without any public hearing or public testimony. The rush to put these proposals together may explain why the legislation fails to address how income from GILTI must be accounted for in determining a taxpayer’s apportionment factor.

Minnesota’s move toward GILTI taxation is out of step with legislation introduced in New Jersey, which would increase the state’s GILTI deduction to 95% from 50%. The proposal, which is part of a broader legislative compromise package negotiated by New Jersey government officials and businesses, has the support of the chair of the New Jersey Senate Budget and Appropriations Committee and has been publicly called “win-win” legislation by a New Jersey Division of Taxation representative.

As litigation addressing the constitutionality of taxing GILTI is already percolating through administrative appeals in numerous states, it is likely that New Jersey’s potential move away from GILTI taxation will prove to be the more fiscally prudent way to go.




New Mexico Proposes Regulations Addressing Gross Receipts Tax Treatment of Digital Advertising Services

On August 9, 2022, the New Mexico Taxation and Revenue Department published proposed regulations addressing the gross receipts tax (New Mexico’s version of a sales tax) treatment of digital advertising services. The Department states the proposed regulations do not reflect a change in policy but instead ensure the rules are consistent for all advertising platforms.

While the proposed regulations provide some clarity regarding the taxation of digital advertising services under preexisting rules, they introduce several inconsistencies and other gaps, particularly with respect to the finer details of the sourcing provisions. For example, we believe the proposed regulations leave ambiguity regarding whether gross receipts from the provision of digital advertising services should be sourced to:

  1. The purchaser’s address
  2. The server’s location
  3. The viewer’s location

Separately, the proposed regulations would allow a deduction for gross receipts from national or regional advertising. However, the deduction is not allowed if the purchaser is incorporated in or has its principal place of business in New Mexico. While this significantly narrows the base for the tax, it injects complexity by requiring that the seller know the state in which its purchaser is incorporated or has its principal place of business, information not likely available in the context of internet-based advertising platforms.

Collectively, these inconsistencies and lack of clarity could lead to future compliance issues, which we hope will be mitigated as part of the Department’s regulatory approval process.

The Department scheduled a public hearing on the proposed rules for September 8, 2022, at 10:00 am MDT, which also is the due date for submission of written comments. The proposed regulations would be effective upon publication in the New Mexico Register, which could happen as soon as October 11, 2022 (or thereabout).

Please contact the McDermott Will & Emery State & Local Tax team if you have any questions about the potential impact of these proposed regulations on your company. In the meantime, we will be monitoring the regulation approval process and participating in next month’s public hearing.




Washington Department of Revenue Announces LendingTree Decision Does Not Prevent Sourcing of Services to Customer’s Customer Location

The Washington State Department of Revenue (the “Department”) recently announced its interpretation of the Washington Court of Appeals’ March 30, 2020, adverse ruling in LendingTree, LLC v. Dep’t of Revenue, no. 80637-8-I (Wash. App. Ct. Mar. 30, 2020). See here for our prior analysis of the LendingTree opinion. In its interpretation, the Department takes the view that the LendingTree opinion “does not represent a new legal framework,” but rather that the court simply followed the applicable business and occupation tax apportionment rules in sourcing service receipts to the customer’s location and rejecting the Department’s methodology sourcing to the customers’ customers’ location.

The Department’s response suggests that it intends to narrowly apply LendingTree‘s holding. The Department admits that the court agreed with LendingTree in designating the service at issue to be LendingTree’s referral services (lenders pay a fee to receive referrals of potential borrowers) and rejected the Department’s characterization of the service as marketing and outreach to potential borrowers. Under this characterization, the Department observes, in accordance with a Washington regulation sourcing services to where the customer’s related business activity occurs, the referral services are sourced to the lender’s location, where lenders evaluate the referrals received by LendingTree.

The response goes on to emphasize, however, that there are circumstances where the Department will continue to source service receipts to a customer’s customers’ location. The Department announced that one such circumstance would be for taxpayers who have revenues from the sale of marketing or advertising services to a customer engaged in the business of selling.

Taxpayers should be forewarned that despite the LendingTree ruling, they may still have to battle Department efforts to source service receipts based on the location of their customers’ customers (particularly if they are engaged in the sale of marketing or advertising services), despite a Washington statute requiring service receipts to be sourced to the customer and federal constitutional principles requiring that an apportionment method reflect a taxpayer’s in-state activity. (See: e.g., Oklahoma Tax Commission v. Jefferson Lines, 514 U.S. 175 (1995); Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983).) Unfortunately, it appears that “look through” sourcing disputes between taxpayers and the Department will continue.




Washington Appellate Court Rejects Department’s B&O Tax Apportionment Method

In a recently issued taxpayer-favorable opinion, the Washington Appellate Court rejected the apportionment methodology used by the Department of Revenue, which sourced service receipts to the location of a taxpayer’s customers’ customers. The Court then affirmed the taxpayer’s methodology, which sourced the receipts to the location of its customers. LendingTree, LLC v. State of Wash. Dep’t of Revenue, no. 80637-8-I (Wash. App. Ct. Mar. 30, 2020) (“LendingTree Op.”).

The dispute concerned the receipts LendingTree, LLC (“LendingTree”) earned from operating its online loan marketplace for purposes of Washington’s Business and Occupation Tax. LendingTree’s business sought to match prospective borrowers and lenders though its website. Prospective borrowers provided LendingTree with requested financial information for no charge, and LendingTree analyzed this data to make referrals to lenders. Lenders paid fees to LendingTree related to its referral services. On audit, the Washington Department of Revenue (“Department”) took the position that LendingTree should have apportioned its service receipts based on the location of potential borrowers rather than its lenders’ locations. Both the Administrative Review and Hearings Division and trial court found for the Department, and LendingTree appealed.

Washington law, like the law of other states, requires multi-state taxpayers earning income from the performance of services to apportion the income to Washington if a customer receives the benefit of the taxpayer’s services in Washington (see Wash. Rev. Code § 82.04.462(3)(b)(i)). A related Washington regulation clarifies where a customer engaged in business receives the benefit of a taxpayer’s service: If the service relates to a customer’s business activities (and the service does not relate to real or tangible property), then the benefit is received where the customer’s related business activities occur. See Wash. Admin. Code 458-20-19402(303)(c). Citing this regulation, the Appellate Court concluded that “taxes are attributed to the state where the lenders conduct their business activity that most closely or directly relates to the services performed by LendingTree” (LendingTree Op. at 5).

The Appellate Court went on to conclude that the services at issue were LendingTree’s referrals of prospective borrowers to lenders, and that the lenders’ related business activities were their receipt and evaluation of the referrals at lender business locations. The Court rejected the Department’s argument that lenders received the benefit of LendingTree’s services where the borrowers (LendingTree’s customers’ customers) were located, reasoning that lenders received no benefit from LendingTree’s services until LendingTree made referrals to lenders identifying prospective borrowers. In support of its conclusion, the Court noted that lenders did not even know the identity of potential borrowers at the onset of the referral evaluation process. (LendingTree Op. at 7).

In reaching its conclusion that service receipts must be apportioned based on where the customers received the benefit of the taxpayer’s services, rather than where the customers’ customers were located, the court relied on its recently published opinion in ARUP Laboratories, Inc. v. State of Washington Department of Revenue, no. 52349-3-II (Wash. App. Ct. Feb. 11, 2020) (“ARUP Op.”). Interpreting the same rules at issue in [...]

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New State Digital Ad Taxes? Will Maryland’s Take Effect? Which States Will Follow? Litigation Guaranteed!

On March 18, 2020, Maryland legislature sent a massive new tax on digital advertising services to Governor Hogan for consideration. The tax imposes a rate of up to 10% on annual gross revenue in the state derived from digital advertising services. This tax is on a sliding scale based on companies’ global revenues and would take effect with tax year 2021. There are many legal problems with the legislation, including the violations of the Internet Tax Freedom Act, the Commerce Clause and the First Amendment. Other states have considered and are considering similar proposals. It is imperative that companies know how broadly this new tax will apply.

Click below to watch our recent webinar on this new tax. We discuss the legal challenges that can be made and how to protect your company from the unlawful reach of such laws.




Maryland General Assembly Sends Digital Advertising Tax to Governor; Nearly Identical Bill Pending in New York

With gatherings larger than 50 people banned and the State House cleared of visitors, on March 18, 2020, Maryland’s legislature approved HB 732, which contains a massive new punitive tax on digital advertising services, and sent it to Governor Larry Hogan (R) for his consideration.

Digital Advertising Gross Revenues Tax

Contradicting the clear legislative trend in the advertising space to exempt the facilitation of advertising services (but tax the consumer transactions that may result therefrom), HB 732 would impose a new, one-of-a-kind tax on the annual gross revenue of digital advertising services that are deemed to be provided in the State. The proposed tax contains a tiered tax rate structure (arbitrarily determined based on the advertising service provider’s global annual gross revenues) that would allow for a tax rate of up to a whopping 10% of the annual gross revenue in the State derived from digital advertising services. As passed, HB 732 would take effect July 1, 2020, and the new tax would apply to all taxable years beginning after December 31, 2020.

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Tax Takes Video: State Tax after Reform…Where Are We Going?

Determining financial statement impact from the state flow through of federal tax reform will be complicated by changes in state tax policy expected to be adopted. In our latest Tax Takes video, McDermott’s Steve Kranz and Diann Smith discuss the issues with Joe Henchman, Executive Vice President of the Tax Foundation. The group suggests options for companies to protect against negative policy changes.




Choices for Illinois Taxpayers in Implementing the 2017 Income Tax Rate Increase

Last year, Illinois enacted a mid-year income tax rate increase. Effective July 1, 2017, Illinois increased the income tax rate for individuals, trusts and estates from 3.75 percent to 4.95 percent, and for corporations from 5.25 percent to 7 percent. The Illinois Personal Property Replacement Tax (imposed on corporations, partnerships, trusts, S corporations and public utilities at various rates) was not changed.

As we previously reported, the Illinois Income Tax Act contains a number of provisions intended to resolve questions regarding how income should be allocated between the two income tax rates applicable in 2017. 35 ILCS 5/202.5(a). The default rule is a proration based on the number of days in each period (181/184). For taxpayers choosing this method, the Department of Revenue (Department) has recommended the use of a blended tax rate to calculate tax liability. A schedule of blended rates is included in the Department’s instructions for the 2017 returns. The blended rate is 4.3549 percent for calendar year individual taxpayers and 6.1322 percent for calendar year C corporation taxpayers. (more…)




SALT Implications of the House and Senate Tax Reform Bill

Many provisions of the House and Senate tax reform proposals would affect state and local tax regimes. SALT practitioners should monitor the progress of this legislation and consider contacting their state tax administrators and legislative bodies to voice their opinions.

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State and Local Tax Aspects of Republican Tax Reform Framework

The White House and Republican congressional leadership released an outline this week to guide forthcoming legislation on federal tax reform. The states conform to the federal tax laws to varying degrees and the extent to which they will adopt any federal changes is uncertain. This memorandum outlines some of the key areas—individual taxation, general business taxation and international taxation— with which the states will be concerned as details continue to unfold.

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