Recently passed budget legislation in both Connecticut and Rhode Island included tax increases on sales of digital goods and services. The Connecticut bill has been signed into law. The Rhode Island bill passed late last night awaits executive action. Below are brief summaries of the impacts of these bills on the sales taxation of digital goods and services (assuming the Rhode Island governor signs the bill) beginning October 1, 2019.

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On June 24, 2019, Wisconsin Governor Tony Evers (D), signed into law AB 10, entitled “2019 Wisconsin Act 7.” This Act either bars a deduction for, or requires that amounts deducted be added back to, Wisconsin taxable income “for moving expenses” deducted on federal income tax returns if the expenses are associated with a move of a business either out of the state or out of the country. This requirement would not apply to expenses incurred by a taxpayer in moving a business to a different location within the state of Wisconsin. The provisions apply regardless of the form of ownership of a business, either as a sole proprietorship, a corporation, or a pass through entity such as a partnership, limited liability corporation or subchapter S corporation. 
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This has been an eventful and exciting week for those interested in the states’ taxation of global intangible low-taxed income (GILTI). On Monday, taxpayers received the good news that New York Governor Cuomo signed S. 6615—a bill that excludes 95% of GILTI from the New York State corporate income tax base. By passing this bill,

The Illinois General Assembly enacted a number of new tax measures in a flurry of activity at the end of its legislative session. Some of the changes are taxpayer friendly and others are not. Unlike the no-deal chaos of past years, all of the measures have been or are expected to be signed by the state’s new Democratic governor, J.B. Pritzker.

This blog post summarizes the income-tax and franchise tax-related changes approved by the General Assembly. Subsequent posts will address sales/use, property and other tax changes.
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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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On May 8, Governor Bill Lee (R) signed SB 558, which provides for the exclusion of 95% of Global Intangible Low-Taxed Income (GILTI) and foreign earnings deemed repatriated under IRC section 965 (965 Income) from the tax base for tax years beginning on or after January 1, 2018. By enacting this bill, Tennessee joins about

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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While the state treatment of global intangible low-taxed income (GILTI) was on the mind of many taxpayers, most state legislatures that enacted legislation in 2018 focused on the state treatment of foreign earnings deemed repatriated under IRC § 965, leaving the state treatment of GILTI unclear in many states. That said, of the states that enacted legislation addressing GILTI, very few have decided to tax a material portion of GILTI.

In states that did not address global intangible low-taxed income through legislation, a lack of clarity in the state laws created an opportunity for the STAR Partnership to seek favorable administrative guidance on the treatment of GILTI. The STAR Partnership pursued that opportunity in a number of states, as discussed in more detail below.
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Since the Tax Cuts and Jobs Act (TCJA) passed in December 2017, over 100 bills were proposed by state legislatures responding to the federal legislation. Thus far in 2018, nearly half of states have passed legislation responding to the TCJA. With some exceptions, in this year’s legislative cycles the state legislatures were primarily focused on the treatment of foreign earnings deemed repatriated and included in federal income under IRC § 965 (965 Income).

The STAR Partnership has been very involved in helping the business community navigate the state legislative, executive and regulatory reaction to federal tax reform, and IRC § 965 in particular. The STAR Partnership’s message to states has been clear: decouple from IRC § 965 or provide a 100 percent deduction for 965 income. The STAR Partnership emphasized that excluding 965 Income from the state tax base is consistent with historic state tax policy of not taxing worldwide income and avoids significant apportionment complexity and constitutional issues. 
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