On June 4, 2021, the Texas Comptroller issued a policy statement (Accession No. 202106003L) announcing that it is not going to enforce its previously stated policy of taxing medical billing services. This guidance comes in response to a sales and use tax bill that was signed into law April 30, 2021, which excluded “medical or dental billing services” performed prior to the original submission of a medical or dental insurance claim from insurance services. The Comptroller states that it will immediately treat medical or dental billing services as excluded from the definition of insurance services even though the bill is not effective until January 1, 2022. It remains to be seen if the Comptroller’s interpretation of medical billing services, which has been defined through decades of policy and guidance, is aligned with the legislature’s view of “medical or dental billing services.” Some commentators have suggested there may be points of divergence that will need to be worked out over time. For additional information on this topic, please see our prior blog post.
On May 21, 2021, the Massachusetts Supreme Judicial Court issued a decision affirming the Massachusetts Tax Appeal Board’s decision in favor of Microsoft and Oracle, ruling that the companies may apportion sales tax to other states on software purchased by a Massachusetts company from which the software was accessed and seek a tax refund.
The case involved a claim by vendors for abatement of sales tax collected on software delivered to a location in Massachusetts but accessible from multiple states. The Massachusetts Department of Revenue (DOR) claimed that the statute gave it the sole right to decide whether the sales price of the software could be apportioned and, if so, the methods the buyer and seller had to use to claim apportionment. Under rules promulgated by the DOR, there are three methods to choose from, such as the purchaser giving the seller an exemption certificate claiming the software would be used in multiple states, none of which the purchaser used. The DOR argued that if a taxpayer did not use one of the methods specified in the rule, no apportionment was permitted. The vendors sought abatement of the tax on the portion of the sales price that could have been apportioned to other states had one of the methods specified under the rule been used. The DOR claimed the abatement procedure was not a permissible method of claiming apportionment.
The court held: (1) the statute gave the purchaser the right of apportionment and it was not up to the DOR to decide whether apportionment was permitted; (2) the abatement procedure is an available method for claiming the apportionment; and (3) the taxpayer was not limited to the procedures specified in the rule for claiming sales price apportionment.
The court’s decision was based in part on separation of powers: “Under the commissioner’s reading of [the statute], the Legislature has delegated to the commissioner the ultimate authority to decide whether to allow apportionment of sales tax on software sold in the Commonwealth and transferred for use outside the Commonwealth.” The court found such a determination represented “a fundamental policy decision that cannot be delegated.”
The Massachusetts rules reviewed by the court have their genesis in amendments to the Streamlined Sales and Use Tax Agreement (SSUTA) (that never became effective) providing special sourcing rules for, among other things, computer software concurrently available for use in more than one location. Even though Massachusetts is not a member of the SSUTA, officials from the DOR participate in the Streamlined process and apparently brought those amendments home with them and had them promulgated into the Commonwealth’s sales tax rules.
Practice Notes: This case addresses one of the issues with taxing business models in the digital space. This important decision makes clear, at least in Massachusetts, that taxpayers have post-sale opportunities to reduce sales tax liability on sales/purchases of software accessible from other states where tax on the full sales price initially was collected and remitted by the seller.
Taxpayers may have refund opportunities related to this [...]
Earlier this week, the US Department of the Treasury (Treasury) issued formal guidance regarding the administration of the American Rescue Plan Act of 2021 (ARPA) claw-back provision. The guidance (Interim Final Rule) provides that the claw-back provision is triggered when there is a reduction in net tax revenue caused by changes in law, regulation or interpretation, and the state cannot identify sufficient funds from sources other than federal relief funds to offset the reduction in net tax revenue. The Interim Final Rule recognizes three sources of funds that may offset a net tax revenue reduction other than federal relief funds—organic growth, increases in revenue (e.g., a tax rate increase) and certain spending cuts (i.e., cuts that are not in an area where the recipient government has spent federal relief funds). According to the Treasury, this framework recognizes that money is fungible and “prevents efforts to use Fiscal Recovery Funds to indirectly offset reductions in net tax revenue.”
The Interim Final Rule also provides guidance on what is considered a change in law, regulation or interpretation that could trigger the claw-back (called covered changes), but that point remains somewhat ambiguous. The Rule provides that:
The offset provision is triggered by a reduction in net tax revenue resulting from ‘a change in law, regulation, or administrative interpretation.’ A covered change includes any final legislative or regulatory action, a new or changed administrative interpretation, and the phase-in or taking effect of any statute or rule where the phase-in or taking effect was not prescribed prior to the start of the covered period. [The covered period is March 3, 2021 through December 31, 2024.] Changed administrative interpretations would not include corrections to replace prior inaccurate interpretations; such corrections would instead be treated as changes implementing legislation enacted or regulations issued prior to the covered period; the operative change in those circumstances is the underlying legislation or regulation that occurred prior to the covered period. Moreover, only the changes within the control of the State or territory are considered covered changes. Covered changes do not include a change in rate that is triggered automatically and based on statutory or regulatory criteria in effect prior to the covered period. For example, a state law that sets its earned income tax credit (EITC) at a fixed percentage of the Federal EITC will see its EITC payments automatically increase—and thus its tax revenue reduced—because of the Federal government’s expansion of the EITC in the ARPA. This would not be considered a covered change. In addition, the offset provision applies only to actions for which the change in policy occurs during the covered period; it excludes regulations or other actions that implement a change or law substantively enacted prior to March 3, 2021. Finally, Treasury has determined and previously announced that income tax changes—even those made during the covered period—that simply conform with recent changes in Federal law (including those to conform to recent changes in Federal taxation of unemployment insurance benefits and taxation of loan [...]
Texas Governor Greg Abbott has signed HB 1445 into law, making “medical or dental billing services” exempt from sales tax. Under the statute, a “medical or dental billing service” is defined as “assigning codes for the preparation of a medical or dental claim, verifying medical or dental insurance eligibility, preparing a medical or dental claim form for filing, and filing a medical or dental claim.” Beginning in 2002, the Texas Comptroller’s office took the position for sales tax purposes that “medical billing services” were not taxable data processing services. In November 2019, the Comptroller published a notice stating that it was going to treat “medical billing services” as taxable “insurance services.” Implementation of that notice was delayed multiple times, most recently through October 2021. The Comptroller’s office may now take the position that the legislative definition of “medical or dental billing services” is narrower than the definition the Comptroller has applied in its recent guidance and assert that some items are still subject to tax effective October 2021. Companies should consider whether their medical billing services fall within the legislative definition of “medical or dental billing services.”
The US Department of the Treasury Says State IRC Conformity Bills Do Not Trigger Federal Relief Claw-Back Provision
As we’ve blogged about in the past, the recently enacted American Rescue Plan Act of 2021 (ARPA) includes an ambiguous claw-back provision. If broadly interpreted, it could result in states losing relief funding provided under the APRA if there is any state legislative or administrative change that results in the reduction of state revenue. This provision is causing havoc in the state tax world, rightfully so.
After much yelling and screaming from state attorneys general and those in the tax world, including McDermott (see McDermott letter to Treasury Secretary Janet Yellen attached), the US Department of the Treasury issued a press release announcing forthcoming “comprehensive guidance” on this provision. Treasury also addressed a question that has been on the top of our minds since the provision was enacted: Could state legislation addressing state conformity to the Internal Revenue Code trigger the claw-back? States routinely conform to and decouple from changes to the Internal Revenue Code, so if such actions could trigger the claw-back, state legislatures would be reluctant to consider them. We were so concerned about this issue that we specifically addressed it in our letter to Secretary Yellen.
This week, we received the Treasury’s guidance on this issue: Conformity bills will not trigger the claw-back. In its press release, Treasury stated:
… Treasury has decided to address a question that has arisen frequently: whether income tax changes that simply conform a State or territory’s tax law with recent changes in federal income tax law are subject to the offset provision of section 602(c)(2)(A) of the Social Security Act, as added by the American Rescue Plan Act of 2021. Regardless of the particular method of conformity and the effect on net tax revenue, Treasury views such changes as permissible under the offset provision.
This is a step in the right direction and should ease concerns of state legislatures. Passing a conformity bill will not cause any loss of federal funding. Treasury’s guidance, because it applies to all “methods of conformity,” should cover any legislation that either couples with or decouples from the Internal Revenue Code.
But our work is not done. In our letter to Secretary Yellen we also asked for guidance confirming that state actions in other areas will not trigger the claw-back. Specifically, we made concrete suggestions that actions to correcting tax statutes or rules that are either unconstitutional or barred by or violate federal law also should not trigger the claw-back. Treasury’s recent press release gives us a glimmer of hope that Treasury will exclude such actions from the clutches of the claw-back provision as well. Stay tuned for more!
McDermott Provides Treasury Department with Concrete Suggestions for Guidance on the American Rescue Plan Act’s Claw-Back Provision
The recently enacted American Rescue Plan Act of 2021 (ARPA) includes an ambiguous claw-back provision that has brought the world of state and local tax policymaking to a grinding halt. Because ARPA’s adoption occurred during the final weeks of many states’ legislative sessions, rapid issuance of guidance from the US Department of the Treasury is needed before the sessions adjourn to prevent the irreversible damage that will occur if a state foregoes enacting policies aimed at alleviating the economic disruption caused by COVID-19 out of fear of facing claw-back of federal relief.
McDermott recently sent a letter to Treasury Secretary Janet Yellen, urging the issuance of guidance giving a balanced interpretation of the claw-back provision. This guidance is necessary to avoid putting state legislatures, governors and tax administrators across the country in an untenable situation where every tax change or adjustment being considered—no matter how innocuous or routine—will carry the risk of a reduction to their state’s share of federal funding for the next three years.
In the letter, we provided concrete suggestions on areas where the ARPA left room for such balanced interpretation. We suggested that Treasury interpret the claw-back provision as either inapplicable to or provide a safe harbor for:
- Changes addressing state conformity to the Internal Revenue Code (IRC)
- Corrections of unconstitutional tax statutes or rules
- Corrections of tax provisions barred by or that violate federal law
- Actions in which there is no or only a weak connection between the law change reducing net revenue and the use of federal relief funds
- Changes in the law announced before the enactment of ARPA
- Reductions in net revenue related to purposes that further ARPA’s objectives.
The letter pointed out that states need concrete guidance, whether formal or informal, addressing these areas. Such guidance will alleviate the concerns of state governments and allow state policymakers to function and continue the orderly administration of state taxes.
On March 11, 2021, US President Joe Biden signed the American Rescue Plan Act of 2021 (ARPA), the COVID-19 relief bill that includes $350 billion in relief to states and localities. To prevent states from using federal relief funds to finance tax cuts, Congress included a clawback provision requiring that any relief funds used to offset tax cuts during the next three years be returned to the federal government. Here is the text of the provision:
- A State or territory shall not use the funds provided under this section or transferred pursuant to section 603(c)(4) to either directly or indirectly offset a reduction in the net tax revenue of such State or territory resulting from a change in law, regulation or administrative interpretation during the covered period that reduces any tax (by providing for a reduction in a rate, a rebate, a deduction, a credit or otherwise) or delays the imposition of any tax or tax increase.
This language broadly prohibits states from taking legislative or administrative action through the end of 2024 that reduces state tax revenues by any means (deduction, credit, delay, rate change, etc.) if doing so could be characterized as the use of federal relief funds to offset, directly or indirectly, the tax reduction. Practically speaking, this limitation will completely hamstring state and local governments from the normal ebb and flow of tax policy changes, adjustments and interpretations. Taken to its logical conclusion, this language freezes state legislative and administrative tax policy development out of fear anything they may do would require the return of federal relief funds. We expect the US Department of the Treasury will issue guidance clarifying this provision in the coming weeks.
Practice Note: This provision of ARPA is, in our view, the most significant federal pre-emption of state tax policy in history. For the next three years, legislators and tax administrators alike will be scrutinized as their tax policy decisions are evaluated through the lens of this prohibition. This level of congressional control over state tax policy decisions and fiscal autonomy likely violates the Tenth Amendment of the US Constitution and would dismay the framers’ basic notions of federalism.
While Congress has the ability to limit the use of federal funds in ensuring its policy goals are accomplished, the overly broad state tax limitation adopted by Congress goes far beyond its stated purpose and prevents states from furthering ARPA’s goals by using tax policy to craft their own COVID-19 relief measures. Any regulation or administrative interpretation that reduces state tax revenue or delays the implementation of a tax is, effectively, barred by the unprecedented intrusion into state tax policy-making.
The effects of ARPA’s state tax limitation are immediate and far-reaching. It will chill continuing state efforts to couple/decouple state tax codes to or from the Tax Cuts and Jobs Act of 2017. Additionally, ARPA already stalled legislation pending in Maryland that would delay, for one year, implementation of its digital advertising services gross receipts tax, restoring return filing and tax [...]
On Monday, November 30, 2020, Governor Gavin Newsom announced that California will provide temporary tax relief for eligible businesses impacted by restrictions imposed to control the COVID-19 pandemic.
The announcement indicates that the Governor will direct the California Department of Tax and Fee Administration (CDTFA) to:
- Provide an automatic three-month extension for taxpayers filing less than $1 million in sales tax on the return and extend the availability of existing interest- and penalty-free payment agreements to companies with up to $5 million in taxable sales;
- Broaden opportunities for more businesses to enter into interest-free payment arrangements; and
- Expand interest-free payment options for larger businesses particularly affected by significant restrictions on operations based on COVID-19 transmissions.
No information was provided as to how the CDTFA will expand interest-free payment options for larger businesses, or what constitutes “significant restrictions” on a business’ operations for purposes of this temporary tax relief. Nevertheless, we applaud the governor’s move to initiate this relief for California’s taxpayers, and we will keep readers up to date as additional details are revealed for this program.
Yesterday Governor Gavin Newsom turned to a familiar gambit from California’s playbook to help tackle the budgetary hole wrought by COVID-19. In January, the Governor proposed his budget for the 2020-2021 fiscal year, which projected a $5.6 billion surplus. Indeed, revenues through March are reported as having run $1.35 billion above projections. But, as the Governor says in his May Revision to his January Budget, “[t]he COVID-19 pandemic and the resulting recession has changed the fiscal landscape significantly.” Without the various changes proposed by the May Revision, which includes the “revenue solutions” described below, the Governor’s Budget projects a $54 billion deficit.
The May Revision proposes two significant changes to business taxation. The Governor proposes suspending net operating losses for 2020, 2021, and 2022 for medium and large businesses. The Governor also proposes limiting business incentive tax credits from offsetting more than $5 million of tax liability per year for 2020, 2021, and 2022.
While it is not known what parameters were used for the May Revision revenue estimates, and the actual threshold for being a medium or large business subject to NOL suspension will be set during the legislative process should the Governor’s proposal be enacted, standards used for prior NOL suspension periods may provide a guide. For taxable years beginning in 2008 and 2009, California suspended the NOL carryover deduction for taxpayers with a net business income of $500,000 or more. For taxable years beginning in 2010 and 2011, California’s NOL suspension affected taxpayers with a modified adjusted gross income of $300,000 or more. In neither case were disaster losses affected by the NOL suspension rules.
The May Revision also includes two proposals to address the sales and use tax gap: (1) Used car dealers would have to remit sales tax to the Department of Motor Vehicles with the registration fees, and (2) Market value will be used to determine the price paid in private auto sales.
Also tagged as “revenue solutions” in the May Revision are three General Fund proposals from the Governor’s January Budget Proposal: (1) Extending the sales tax exemption for diapers and menstrual products through the end of 2022-23; (2) Extending the carryover period for film credits awarded under Program 2.0 from six years to nine years; and (3) Extending the current exemption from the minimum tax for first year corporations to first year LLCs, partnerships and LLPs. The May revision also maintains a new tax on e-cigarettes based on nicotine content and will be deposited in a new special fund.
Overall, the revenue solutions in the May Revision are projected to net $4.4 billion in 2020-21, $3.3 billion in 2021-22 and $1.4 billion in 2022-23. The Governor states, “These tax measures as a whole are intended to raise revenue, stimulate economic growth, and help those in need.”
He explains that his May Revision revenue solutions “recognize the disproportionate tax relief that has been provided to larger corporations, compared to small businesses, which has resulted in relatively lower tax payments.” And he adds that [...]
The debate over state marketplace laws may resume again, after the Uniform Law Commission (ULC) announced it has set up a committee to study whether to draft a uniform state law on online sales tax collection, focusing on marketplaces. The study committee is chaired by Utah Sen. Lyle Hillyard. The lead staffer (“reporter”) will be Professor Adam Thimmesch of the University of Nebraska College of Law. The members of the committee are listed here and information to sign up to be notified of developments is available here.