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.
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. Continue Reading Wisconsin Enacts Discriminatory Exit Charge for Businesses Moving out of State
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, New York joins many other states—including neighboring states Massachusetts, Connecticut and Pennsylvania—that chose not to tax a material portion of GILTI. The New York law instructs taxpayers that have GILTI to include the 5% of GILTI that is taxed in the denominator of the apportionment formula (no portion of GILTI is included in the numerator of the apportionment formula).
Perhaps not surprisingly, after the New York news broke, the Florida legislature presented its GILTI exclusion bill (HB 7127) to Governor DeSantis. HB 7127 passed the legislature back in May but had not been transmitted to the governor until yesterday. Those on the ground in Florida believe that the transmittal to the governor now, on the heels of the New York legislation, suggests that the governor will sign the bill. The governor has 15 days to sign or veto the bill (if he does neither, the bill becomes law after the 15-day period).
There was also GILTI action on the west coast. On Monday, the Oregon legislature passed a bill (SB 851) that allows taxpayers to deduct 80% of GILTI under the state’s dividend-received deduction. While, under this legislation, Oregon would tax a larger portion of GILTI than many other states, the willingness of the legislature to extend the 80% deduction to GILTI is consistent with the trend among states to not tax this new category of income from foreign operations. The bill has not yet been signed by Oregon Governor Kate Brown.
Stephen Kranz is quoted in a press release from STAR Partnership regarding state-level action on the Tax Cuts and Jobs Act’s GILTI provisions.
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. Continue Reading Illinois Fiscal Year 2020 Income and Franchise Tax Changes
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. Continue Reading Kentucky to Begin Taxing Video Streaming Services under Telecom Tax
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 20 other states that explicitly exclude at least 95% of GILTI from the tax base and joins about 25 other states that explicitly exclude at least 95% of 965 Income from the tax base.
Despite this win for taxpayers, many may be wondering, “what about 965 Income included in 2017?” With respect to 2017, the Tennessee Department of Revenue issued guidance providing that 965 Income should not be included in the Tennessee tax base because such income was not reported on Line 28 of the Federal 1120 (the federal form changed for 2018 and 965 Income is included on Line 28 of the 2018 Form 1120). We understand that SB 558 has not impacted the department’s guidance in any way and that it remains the department’s position that 100% of 965 Income should be excluded from the tax base for 2017.
SB 558 does not address whether or how the 5% of GILTI and 965 Income that is taxed will be represented in the apportionment formula. Some states that have opted to tax 5% of GILTI and 965 Income consider the taxed amount to be a disallowed expense related to the GILTI and 965 Income that is excluded from the base. Tennessee does not frame its 5% tax as an expense disallowance so such taxed amounts should be represented in the apportionment formula. However, at least for now, there is no guidance from the legislature or Department of Revenue on this issue.
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.
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, or sales totaled $500,000 or more in to which the claim pertained, and the damages pleaded in the action total $200,000 or more. Also, “[t]he bill would authorize the Attorney General or the prosecuting authority, but not the qui tam plaintiff, to obtain otherwise confidential records relating to taxes, fees, or other obligations under the Revenue and Taxation Code. The bill would prohibit the disclosure of federal tax information to the Attorney General or the prosecuting authority without authorization from the Internal Revenue Service.”
Under current California law, those making false or fraudulent claims to state or local governments can be liable to the state or locality for treble damages, including consequential damages, attorneys’ fees and a civil penalty of between $5,500 and $11,000 for each violation. The False Claims Act does not apply to claims made under the Revenue and Taxation Code.
In addition to repealing the exception for false claims made under the Revenue and Taxation code, the bill would expand the definition of “prosecuting authority” to include “counsel retained by a political subdivision to act on its behalf.” This opens a wide door to the use of contingent fee “bounty hunters” by localities for the prosecution of false tax claims. The bill makes no provision for review of the allegedly false tax claims by any of the governmental agencies charged with interpretation of the Revenue and Tax Code, such as the Franchise Tax Board or the California Department of Tax and Fee Administration.
As we have seen in jurisdictions like New York and Illinois, opening the door to tax-related false claims can lead to significant headaches for taxpayers and usurp the authority of the state tax agency by involving profit-motivated private parties and the state Attorney General in tax enforcement decisions. Allowing private parties to intervene in the administration, interpretation or enforcement of the tax law commandeers the authority of the tax agency, compounded by the use by local governments of contingent-fee outside attorneys, creates uncertainty and can result in inequitable tax treatment. While many other problems exist with application of false claims to tax matters, those issues are beyond the scope of this blog.
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.” Continue Reading Nevada Bill Proposes Broad New Excise Tax on Sales of Digital Goods and Services