INSIDE SALT
INSIDE SALT
In-depth coverage of legal issues surrounding state and local tax
INSIDE SALT
In-depth coverage of legal issues surrounding state and local tax
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Generative AI chatbot service not subject to Indiana sales tax

by , and | Aug 28, 2025 | , , ,

In one of the first pieces of administrative guidance addressing the sales tax treatment of generative artificial intelligence (AI) services, the Indiana Department of Revenue (DOR) recently issued a revenue ruling confirming that charges for a generative AI chatbot service are not subject to Indiana sales tax. In reaching its conclusion, the Indiana DOR used the legal framework applicable to examining whether services involving software are subject to taxation (a framework we expect other state DORs to apply when examining services involving generative AI functions).

The Indiana DOR previously issued guidance confirming that software “remotely accessed over the internet . . . is not considered an electronic transfer of computer software and is not considered a retail transaction” subject to Indiana sales tax. In the case of the AI chatbot service, the “software that operates the chatbot is never downloaded onto a customer’s computer” but instead is accessed via a “website or free app.” As such, and consistent with its prior guidance addressing remotely accessed software, the Indiana DOR determined that the AI powering the chatbot service was merely “accessed electronically with no permanent ownership aspect” and therefore was not subject to sales tax.

We anticipate that, like the Indiana DOR, other state DORs will rely on their preexisting guidance addressing the taxability of software to determine the taxability of services involving generative AI functions. This means that, depending on a state’s preexisting law and guidance, state DORs will ask questions such as:

  • Whether generative AI functions are downloaded or accessed remotely
  • Whether generative AI functions are directly accessible by a customer or if such functions are used by a service provider in providing their services
  • Whether and to what extent the generative AI function(s) in a service are the “primary function”/“primary purpose”/“true object” of an underlying transaction.


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Fourth Circuit strikes down Maryland’s digital ad tax “pass-through” ban

by , and | Aug 19, 2025 | , , , , ,

Maryland’s attempt to stop businesses from telling customers about a controversial tax has hit a constitutional wall. On August 15, 2025, the US Court of Appeals for the Fourth Circuit ruled that the state’s “pass-through” provision in its Digital Advertising Gross Revenues Tax violates the First Amendment.

In Chamber of Commerce et al. v. Lierman, Case No. 24-1727 (4th Cir. Aug. 15, 2025), a unanimous panel held that Maryland’s “pass-through” provision is facially unconstitutional because it restricts how companies can talk about price increases tied to the tax.

The provision at issue

Maryland’s first-of-its-kind digital advertising tax applies to large companies earning more than $100 million in global revenue from online ads. The controversial “pass-through” provision provided that those companies “may not directly pass on the cost of the tax … by means of a separate fee, surcharge, or line-item.” Businesses could still raise prices to cover the tax, they just had to do it without saying so.

The Fourth Circuit’s reasoning

Writing for a unanimous panel, Judge Julius N. Richardson opened the opinion with a striking historical parallel. Just as colonists objected to Britain’s Stamp Act of 1765, which taxed printed materials and chilled political expression, Maryland’s rule targeted modern equivalents: internet companies and their speech about taxation. “We agree,” Richardson wrote. “As much today as 250 years ago, criticizing the government—for taxes or anything else—is important discourse in a democratic society. The First Amendment forbids Maryland to suppress it.”

The Court found that the pass-through provision regulated protected speech – not conduct –because it dictated how companies communicate price changes attributable to the tax, forbidding certain methods while allowing others. This made the provision a content-based restriction subject to heightened constitutional scrutiny.

Maryland argued that the provision was designed to ensure companies bear the tax’s economic and legal burden, but the Court found that justification hollow. Since businesses could still raise prices silently, the law did nothing to prevent cost-shifting. It only restricted speech about it. Accordingly, the Court found that “[t]he pass-through provision of Maryland’s digital advertising tax is unconstitutional in all of its applications.”

What’s next

The Fourth Circuit reversed the district court’s ruling and remanded the case to determine the appropriate remedy, noting that recent Supreme Court of the United States precedent limits the scope of injunctive relief. The broader tax itself remains in effect for now, with separate challenges pending in the Maryland Tax Court.

For businesses, the ruling lifts Maryland’s ban on explicitly itemizing the tax on invoices or contracts and stands as a reminder that states can’t sidestep political accountability by limiting how regulated entities talk about their regulations. For Maryland and other states, the decision sends a clear message: Governments may tax, but they cannot silence the businesses they tax when those businesses tell customers what’s driving prices.



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Washington’s advertising services tax: Sourcing rules clear as mud

by , and | Aug 12, 2025 | , , , , ,

Washington’s sales tax on advertising services takes effect October 1, 2025, and comes in two forms: a tax on digital automated services and a tax on retail sales of advertising services. Both impositions apply to digital advertising services delivered using the internet. This makes Washington an outlier as currently only two other states impose a tax on sales of advertising services: Hawaii and New Mexico.

Washington State is a member of the Streamlined Sales Tax (SST) Governing Board. As an SST member state, it is required to follow – and does follow – the Streamlined Sales and Use Tax Agreement’s (SSUTA) sourcing regime.[1] This sourcing regime uses the familiar hierarchical approach:

  • If the buyer receives the product at the seller’s business location, the sale is sourced to the seller’s business location.
  • If the product is not received at the seller’s business location, the sale is sourced to the location where receipt by the purchaser (or the purchaser’s donee, designated as such by the purchaser) occurs, including the location indicated by instructions for delivery to the purchaser (or donee) known to the seller.
  • If neither apply, the sale is sourced to the location indicated by an address for the purchaser that is available from the seller’s business records (typically the purchaser’s billing address).

As applied to sales of services, the terms “receive” and “receipt,” as used in the sourcing hierarchy, mean “making first use of services.”[2]

As applied to sales of advertising services delivered using the internet, the first rung of the sourcing hierarchy generally would not apply because the first use of the advertising service would not occur at a business location of the purchaser.

The Washington Department of Revenue (DOR) is in the process of developing interim guidance on how sellers are to source sales of advertising services. DOR representatives told us they are taking a close look at whether it is appropriate to source these sales to the location where the advertisement is viewed. They said they are focusing on how to interpret the phrases “receipt by the purchaser” and “known to the seller” in the second rung of the sourcing hierarchy.

In the context of internet advertising, how and where does a purchaser “make first use of” the service?

Internet advertising is a largely automated function capable of serving up millions of advertisements to millions of viewers per minute. Typically, the technology serving the ads is not connected to the service provider’s billing system. Does the second rung of the sourcing hierarchy require such granularity that the sale of the advertising service be sourced to the locations of the myriad ad viewers? Does the supply of each internet ad constitute a separate sale that must be individually sourced? Or does the purchaser make first use of the advertising service at its headquarters? If the answers to the first two questions are “yes,” it would put unbelievable complexity and administrative burden on the seller, make audits unnecessarily time-consuming, and undermine SSUTA’s fundamental [...]

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Maryland sales tax multiple points of use exemptions: Is the juice worth the squeeze?

by , and | Jun 27, 2025 | , , , ,

In the waning days of its 2025 session, the Maryland Legislature passed the Budget Reconciliation and Financing Act, and Governor Wes Moore signed it into law.[1] This bill expands the sales tax base to include sales of various data and information technology and cloud computing services.[2] The sales tax rate on these new categories of taxable services is 3% as opposed to the prevailing state-wide tax rate of 6%. Imposition of the tax on sales of these new categories is effective starting July 1, 2025.

Putting aside the unworkable nature of keying the imposition to North American Industry Classification System codes and the obvious Internet Tax Freedom Act preemption of the imposition on web hosting and data storage, the Maryland Comptroller recently issued interim guidance that adds new, unwarranted complexity in the administration of multiple points of use (MPU) exemption certificates.

The new law takes effect July 1, and many taxpayers are scrambling to interpret and implement it. On June 10, the Comptroller issued a bulletin providing guidance on many of its more technical components,[3] which introduces a distinction between installment sales of and subscriptions to the newly taxable categories of services. This distinction has implications for managing MPU exemption certificates.

Included with the guidance are provisions that give buyers of these newly taxable services (if they plan on using the services in more than one jurisdiction) the option of providing the seller with an MPU exemption certificate.[4] Receipt by the seller of an MPU exemption certificate relieves the seller of the obligation to collect and remit Maryland sales tax on the sale, shifting the obligation of paying the use tax to the buyer.[5] The applicable tax the buyer must pay is determined using a reasonable method of apportionment of the use within Maryland as compared to all the locations of use of the service. Relevant headcount is a reasonable method of apportionment.[6] The presentation of an MPU exemption certificate by the buyer to the seller is optional.

In an installment sale context, there is one sale transaction that occurs at the time of contract execution. Buyers electing into the MPU process would need to supply only one certificate to the vendor that would cover all subsequent installment payments under the contract. Subscriptions are treated differently. Many of these newly taxable categories of computer-related services often are sold on a subscription basis. Under the guidance, each subscription payment is considered a separate sale requiring the issuance of a separate MPU exemption certificate for each subscription payment.[7] We told the Comptroller’s staff that requiring a separate MPU exemption certificate for each subscription payment is unnecessary. The staff responded saying that the rigidity of the process they’ve outlined in this context is under consideration and may be updated in subsequent guidance. (Vendors and buyers concerned about the practical implications of the MPU regime outlined are encouraged to contact the authors of this blog post for more details.)



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Washington’s Digital Ad Tax Enacted: Is Litigation Now Inevitable?

by , and | May 21, 2025 | , , , , ,

On May 20, 2025, Washington Governor Bob Ferguson signed into law Senate Bill (SB) 5814, a sweeping tax bill that expands Washington’s retail sales and use tax to digital advertising services and a range of high-tech and IT services. The new law takes effect for sales occurring on and after October 1, 2025.

As we noted previously, this legislation marks a significant shift in Washington’s tax policy, extending sales tax to categories of traditionally exempt business-to-business services. With enactment, legal challenges – particularly under the federal Internet Tax Freedom Act (ITFA) – are ripe and appear inevitable.

WHAT THE LAW DOES

SB 5814 amends RCW 82.04.050 by redefining “sale at retail” to include “advertising services,” broadly covering both digital and nondigital forms of ad creation, planning, and execution. The law specifically includes:

  • Online referrals
  • Search engine marketing
  • Lead generation optimization
  • Web campaign planning
  • Digital ad placement
  • Website traffic analysis

However, the law expressly excludes services rendered in connection with:

  • Newspapers (RCW 82.04.214)
  • Printing or publishing (RCW 82.04.280)
  • Radio and television broadcasting
  • Out-of-home advertising (g., billboards, transit signage, event displays)

With these carve-outs, it is difficult to see how anything other than internet advertising remains subject to tax. The structure of the new tax facially discriminates against e-commerce and is barred by ITFA.

ITFA AND THE CERTAINTY OF A LEGAL CHALLENGE

ITFA prohibits states from imposing taxes that discriminate against digital services when comparable offline equivalents are exempt. While SB 5814 purports to cover both digital and nondigital advertising, the exclusions for nondigital forms of advertising cause it to target the digital side of the industry. For example, a digital banner ad will be taxed, whereas a banner towed by an airplane promoting the same product will not.

This distinction mirrors the structure of Maryland’s Digital Advertising Gross Revenues Tax, which has been tied up in litigation since its enactment in 2021. A Maryland trial court found that law facially violated ITFA and federal preemption principles. That litigation continues, and Washington now finds itself on a similar path.

HIGH-TECH AND IT SERVICES ARE NOW TAXABLE

In addition to digital advertising, SB 5814 extends the retail sales tax to high-tech services, including:

  • Custom website development
  • IT technical support and network operations
  • Data processing and data entry
  • In-person or live-virtual technical training

Like advertising, these intermediate services typically are purchased by businesses in support of operations rather than for end consumption. Taxing their sale introduces tax pyramiding and adds costs that will ultimately be passed on to consumers. For Washington’s tech-driven economy, this change will inflate prices and reduce competitiveness.

Local advertisers and businesses that rely on digital marketing and high-tech services will see these costs rise and lead to higher prices for consumers.

OUTLOOK

While SB 5814 is now law, its enforceability remains far from certain. Taxing digital advertising services while expressly excluding offline media places the new law on a collision course with ITFA. A legal challenge is all but guaranteed.

At the [...]

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Washington’s Digital Ad Tax: A Lawsuit Waiting To Happen?

by , and | May 1, 2025 | , , , , ,

On April 27, 2025, the Washington Legislature delivered to Governor Bob Ferguson’s desk Senate Bill (SB) 5814, a sweeping tax bill that, among other changes, would expand the state’s retail sales and use tax to sales of digital advertising services and a range of high-tech and IT services. The bill now awaits the governor’s signature, with a decision due by May 20, 2025.

If enacted, the changes would take effect October 1, 2025, marking a significant expansion of Washington’s tax base into areas that have long been exempt, particularly intermediate business services such as digital marketing, data processing, and custom software support.

WHAT THE BILL DOES

SB 5814 amends RCW 82.04.050 by redefining “sale at retail” to include a broad range of services previously excluded from the sales tax. Specifically, it adds “advertising services,” defined as:

All digital and nondigital services related to the creation, preparation, production, or dissemination of advertisements including, but not limited to: layout, art direction, graphic design, mechanical preparation, production supervision, placement, referrals, acquisition of advertising space, and rendering advice…

The definition also expressly includes:

  • Online referrals
  • Search engine marketing
  • Lead generation optimization
  • Web campaign planning
  • The acquisition of advertising space in the internet media
  • Website traffic analysis for determining the effectiveness of an advertising campaign.

However, the bill expressly excludes advertising services rendered in connection with newspapers (as defined in RCW 82.04.214); printing or publishing (RCW 82.04.280); radio and television broadcasting; and out-of-home advertising such as billboards, transit displays, and signage at events.

With that list of exclusions, it’s hard to imagine what advertising services other than internet advertising services are left to tax. This focus on internet advertising creates a prima facie discriminatory tax on electronic commerce barred by the federal Internet Tax Freedom Act (ITFA).

ITFA AND THE CERTAINTY OF A LEGAL CHALLENGE

ITFA prohibits states from imposing “discriminatory taxes on electronic commerce.” A tax is discriminatory if it applies to digital services but not similar offline equivalents.

While SB 5814 expressly includes both digital and non-digital advertising services, the carve-outs for traditional formats such as print, TV, and radio effectively leave out non-digital advertising. As the bill itself states, services connected to newspapers, publishing, and broadcast media are not taxable. This distinction creates a classic ITFA problem:

  • A digital banner ad campaign will be taxed.
  • A newspaper ad or radio spot promoting the same product will not.

This kind of structural bias has been challenged before. Maryland’s Digital Advertising Gross Revenues Tax (the first of its kind in the United States) was enacted in 2021 and quickly faced multiple lawsuits on ITFA and other grounds. In 2022, a Maryland trial court struck down the law as unconstitutional, citing ITFA violations and federal preemption (although the decision was later reversed on procedural grounds). That litigation continues while the stack of taxpayer refund claims on the Maryland Comptroller’s desk grows taller.

Washington faces a similar outcome. SB 5814’s facial discrimination against digital advertising is precisely the kind of unequal [...]

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Let the Shakedowns Begin: Tax False Claims Legislation in California

by , and | Apr 22, 2025 | , , ,

Legislators in Sacramento, California, are mulling over one of the most (if not the most) troubling state and local tax bills of the past decade.

Senate Bill (SB) 799, introduced earlier this year and recently amended, would expand the California False Claims Act (CFCA) by removing the “tax bar,” a prohibition that exists in the federal False Claims Act (FCA) and the vast majority of states with similar laws.

If enacted, SB 799 will open the floodgates for a cottage industry of financially driven plaintiffs’ lawyers to act as bounty hunters in the state and local tax arena. California taxpayers would be forced to defend themselves in high-stakes civil investigations and/or litigation – even when the California Attorney General’s Office declines to intervene. As seen in other states, this racket leads to abusive practices and undermines the goal of voluntary compliance in tax administration.

While the CFCA is intended to promote the discovery and prosecution of fraudulent behavior, Senator Ben Allen introduced the bill specifically to “protect public dollars and combat fraud.” The enumerated list of acts that lead to a CFCA violation does not require a finding of civil fraud. In fact, a taxpayer who “knowingly and improperly avoids, or decreases an obligation to pay or transmit money or property to the state or to any political subdivision” would be in violation of the CFCA (See Cal. Gov’t Code § 12651(a)(7)).

This standard is particularly inappropriate in the tax context and is tantamount to allowing vague accusations of noncompliance with the law, leading to taxpayers being hauled into court. Once there, taxpayers would be held hostage between an expensive legal battle and paying an extortion fee to settle. The CFCA is extremely punitive: Violators would be subject to (1) treble damages (i.e., three times the amount of the underreported tax, interest, and penalties), (2) an additional civil penalty of $5,500 to $11,000 for each violation, plus (3) the costs of the civil action to recover the damages and penalties (attorneys’ fees).

To the extent the action was raised by a private plaintiff (or relator) in a qui tam action, the recovered damages or settlement proceeds would be divided between the state and the relator, with the relator permitted to recover up to 50% of the proceeds (Cal. Gov’t Code § 12652(g)(3)). If the state attorney general or a local government attorney initiates the investigation or suit, a fixed 33% of the damages or settlement proceeds would be allotted to their office to support the ongoing investigation and prosecution of false claims (Cal. Gov’t Code § 12652(g)(1)).

Adding further insult to injury, the CFCA has its own statute of limitations independent of the tax laws. Specifically, the CFCA allows claims to be pursued for up to 10 years after the date the violation was committed (Cal. Gov’t Code § 12654(a)). A qui tam bounty hunter’s claim would supersede the tax statutes of limitations.

Next, the elements of a CFCA violation must only be shown “by a preponderance of the evidence” [...]

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Kentucky Legislature Ends Judicial Deference To State Agencies

by , , and | Apr 2, 2025 | ,

In a realignment of judicial review standards, the Kentucky General Assembly overrode Governor Andy Beshear’s (D-KY) veto of Senate Bill (SB) 84, effectively abolishing judicial deference to all agency interpretations of statutes and regulations. This development marks a shift in administrative law in the Commonwealth.

A RESPONSE TO CHEVRON AND TO KENTUCKY COURTS

SB 84 invokes the Supreme Court of the United States’ 2024 decision in Loper Bright Enterprises v. Raimondo, which overturned the Chevron doctrine and ended judicial deference to federal agency interpretations of statutes. The bill’s preamble provides:

In Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024), the United States Supreme Court ruled that the federal judiciary’s deference to the interpretation of statutes by federal agencies as articulated in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), and its progeny was unlawful.

However, SB 84 does more than align Kentucky with the new federal standard. It also repudiates the approach taken by Kentucky’s own courts. The bill notes that decisions such as Metzinger v. Kentucky Retirement Systems, 299 S.W.3d 541 (Ky. 2009), and Kentucky Occupational Safety and Health Review Commission v. Estill County Fiscal Court, 503 S.W.3d 924 (Ky. 2016), which embraced Chevron-like deference at the state level, is a practice that the legislature now declares inconsistent with the separation of powers under the Kentucky Constitution.

KEY PROVISIONS: DE NOVO REVIEW MANDATED

The operative language of SB 84 creates two new sections of the Kentucky Revised Statutes (KRS) and amends an existing provision by establishing a de novo standard of review for agency, including the Kentucky Department of Revenue, interpretations:

  • An administrative body shall not interpret a statute or administrative regulation with the expectation that the interpretation of the administrative body is entitled to deference from a reviewing court. (New Section of KRS Chapter 13A.)
  • The interpretation of a statute or administrative regulation by an administrative body shall not be entitled to deference from a reviewing court. (New Section of KRS Chapter 13A.)
  • A court reviewing an administrative body’s action… shall apply de novo review to the administrative body’s interpretation of statutes, administrative regulations, and other questions of law. (New Section of KRS Chapter 446.)
  • The court shall apply de novo review of the agency’s final order on questions of law. An agency’s interpretation of a statute or administrative regulation shall not be entitled to deference from a reviewing court. (Amended KRS 13B.150.)

This means Kentucky courts must now independently review all legal interpretations made by agencies, including in tax cases before the Kentucky Board of Tax Appeals, without any presumption of correctness.

A CONSTITUTIONAL FLASHPOINT

Governor Beshear vetoed the bill, arguing in his veto message that it violates the separation of powers by dictating to the judiciary how it should interpret laws. Governor Beshear’s message provides that:

Senate Bill 84 is unconstitutional by telling the judiciary what standard of review it must apply to legal cases…It prohibits courts from deferring to a state [...]

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ITFA Is Alive and Well: New York Advisory Opinion Reaffirms Sales Tax Exemption for Internet Access Services

by and | Oct 2, 2024 | , , , ,

In its latest Advisory Opinion, TSB-A-24(4)S (June 26, 2024), the New York State Department of Taxation and Finance (the Department) reaffirmed the broad protections offered by the Internet Tax Freedom Act (ITFA) against state and local taxation of internet access. The Petitioner, a New York-based business, sought clarity on whether its subscription to a secure hosted exchange service, which facilitates critical email functions without requiring internal IT infrastructure, would be subject to New York State sales tax.

KEY FACTS AND BACKGROUND

The Petitioner subscribes to a secure hosted exchange service from a provider located in Florida. This service offers comprehensive email management, including mobile device synchronization and Microsoft Exchange functionalities. The service includes (1) unlimited mailbox storage, (2) premium email security protection, (3) anti-virus protection, and (4) live phone support. The service relies on the Petitioner maintaining its own internet connection, with software licensing obligations dictated by agreements with third-party vendors.

THE DEPARTMENT’S RULING

After acknowledging that email service qualifies as taxable telephony or telegraphy service under New York Tax Law § 1105(b)(1), the Department concluded unequivocally that “[e]lectronic mail services are included in the ITFA definition of Internet access, regardless of whether such services are provided independently or packaged with Internet access” and are, therefore, not subject to New York State sales tax. This decision hinges on the protections established by ITFA, which precludes state and local governments from imposing taxes on Internet Access.

ITFA: A CRITICAL SAFEGUARD AGAINST STATE TAXATION

ITFA, enacted in 1998 and made permanent in 2016, has consistently served as a bulwark against state efforts to impose tax on Internet Access and multiple or discriminatory taxes on electronic commerce. See ITFA § 1101(a). Under ITFA’s Internet Access prong, services that enable users to access content, information, email, or other services offered over the internet are shielded from state and local sales taxes.[1] The Advisory Opinion underscores this federal protection, categorizing the Petitioner’s email services as an Internet access service, which is exempt from New York State sales tax under ITFA.

REINFORCING ITFA’S PREEMPTIVE POWER: RECENT CASES

This is not an isolated application of ITFA. ITFA has recently been at the center of significant legal challenges, reinforcing its importance in protecting digital services from state taxation. For example, in Petition of Verizon New York Inc., DTA No. 829240 (N.Y. Div. Tax App. May 4, 2023), an administrative law judge (ALJ) ruled that the gross receipts tax on transportation and transmission corporations could not be applied to revenues from asymmetric digital subscriber line and fiber broadband services because these services are federally preempted under ITFA as Internet Access. In rejecting the Department’s narrow interpretation of internet access services, which only included services provided to end-user consumers, the ALJ emphasized that US Congress intended ITFA’s prohibition on taxing Internet Access to be broad, using the definition from ITFA rather than state tax law.

ITFA’S ONGOING RELEVANCE

New York’s Advisory Opinion highlights the continued importance of ITFA in today’s digital economy. As businesses increasingly [...]

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Texas Comptroller Proposes Rule Changes Cementing Tax on 130% of Marketplace Sales

by , and | Sep 17, 2024 | , , , , ,

In a controversial move, the Texas Comptroller is poised to amend Rule 3.330, Data Processing Services, effectively rewriting the rules to favor the contentious stance it has adopted in recent audits and litigation. This proposed amendment, which aims to cement the aggressive stance the Comptroller has taken in audits and litigation that a marketplace provider’s commission-based earnings are taxable “data processing services,” represents a significant departure from long-standing practices and highlights a disturbing trend of what is effectively a retroactive regulatory adjustment.

A LOOK AT THE PROPOSED CHANGES

The crux of the proposed amendment is the addition of paragraph (b)(5) to Rule 3.330, which the Comptroller explains is being added “to clarify that marketplace providers provide data processing services to their customers as they enter, retrieve, search, manipulate, and store data or information in the course of their business.” New paragraph (b)(5) provides that:

Marketplace provider services may be included in taxable data processing services when they involve the computerized entry, retrieval, search, compilation, manipulation, or storage of data or information provided by the purchaser or the purchaser’s designee. For example, services to store product listings and photographs, maintain records of transactions, and to compile analytics are taxable data processing services.

This new paragraph specifically targets the commissions that marketplace providers charge for facilitating sales, taxing them separately from the underlying transactions themselves. This is not just an expansion of the tax base; it’s a redefinition of what constitutes a taxable service, applying it in ways that were never intended under previous interpretations of the law that considered such commissions nontaxable auctioneer/brokerage fees.

WHY THIS AMENDMENT IS PROBLEMATIC

The Comptroller’s approach is problematic for several reasons, including:

  1. Effective Retroactivity. The proposed amendment seeks to justify an aggressive (and questionable) agency position that the Comptroller has only recently begun to assert in audits and litigation after it quietly revoked a long-standing administrative ruling in 2020. The revocation of this ruling in 2020, without public notice or legislative approval, was a stark deviation from established practices. By changing the rules after the fact, the proposed amendment undermines the stability and predictability of the law.
  2. Double Taxation. If a marketplace facilitates a sale where a consumer pays $100 and the marketplace earns a $30 commission, the proposed amendment would not only tax the $100 transaction but also the $30 commission. This results in an effective tax on 130% of marketplace sales, with the additional 30% a double tax on the portion of the sales proceeds paid to the marketplace provider as a commission. Under this scheme, the Comptroller is demanding that marketplace providers pay tax on 130% of the sales price and charge the consumer for tax on the 100% and the seller for the 30%.
  3. Discriminatory Tax Under ITFA. The proposed amendment subjects commissions earned by online marketplace providers to taxation as data processing services while similar services provided offline, such as commissions earned by auctioneers of oil and gas leases, consignment stores, and real estate agents using [...]

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Stephen P. Kranz

Mary Kay McCalla Martire

Richard C. Call

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