SeeSALT BlogOn April 13, Pillsbury senior counsel Richard Nielsen presents “Sales Taxation of Digital Commerce in the United States” during the the “Digital Economy in the Crosshairs” panel session at the American Bar Association’s 18th Annual Tax Planning Strategies U.S. and Europe Conference.
Articles Posted in Issues
Implications of the MTC’s Market-Based Sourcing Model Regulations
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(Note this originally appeared in March 26, 2018, edition of State Tax Notes)
Nearly every state that imposes a corporate income tax includes a sales factor in its apportionment formula. Generally, the sales factor in computed by comparing a taxpayer’s “in-state” sales to its total sales. Determining in-state sales of tangible personal property is a straightforward concept—good shipped to a customer’s location are included as in-state sales only in the state of the customer’s location. It is more complicated to determine an in-state sale regarding the provision of multistate services or licenses of intangibles. Historically, states looked to a taxpayer’s costs of performing the service of licensing the intangible. Some states have become critical of this cost-of-performance method and replaced it with a market-based method of computing in-state sales.
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Ballot Initiative Seeks to Eliminate Prop 13 for Commercial and Industrial Real Estate
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TAKEAWAYS
Initiative 17-0055 seeks to put two significant changes to California’s property tax system before voters in November—(1) the elimination of Proposition 13 protection for commercial and industrial properties in favor of reassessment at least every three years and (2) the addition of a tangible personal property tax exemption of $500,000 for all taxpayers and a full tangible personal property tax exemption for taxpayers with less than 50 California employees. Proponents of the Initiative claim these revisions are needed to raise funding to support California schools.
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Dueling Rent Taxes Come Up before San Francisco Voters in June
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TAKEAWAYS
- It is estimated that about $65 million annually would be collected from the commercial real estate industry under the Housing for All tax.
- It is estimated that about $150 million annually would be collected from the commercial real estate industry under the Universal Childcare for San Francisco Families tax.
- The election presents commercial landlords with the prospect of a massive tax increase from the current 0.3% rent tax, though the Housing for all Measure is clearly the less burdensome of the two.
There will be competing commercial rent tax measures on San Francisco’s June 2018 ballot. The “Housing for All” measure would impose a new 1.7% tax on commercial rents in San Francisco, effective January 1, 2019. The “Universal Childcare for San Francisco Families” measure would impose a new 3.5% tax on commercial rents (1% on rents from warehouses) in San Francisco (also operative January 1, 2019). Both measures specify that only one measure can be adopted, and that if both measures secure sufficient votes for passage, the measure with the most votes will prevail. If either of these measures were to be adopted it would be in addition to San Francisco’s existing 0.3% gross receipts tax on rentals.
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How States Are Trying New Strategies To Collect Sales Tax
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(This article originally was published by Law360 on October 10, 2017.)
States historically have had one major impediment to their ability to collect sales tax—the decision in Quill Corporation v. North Dakota to uphold a physical presence test standard for determining nexus.[1] Since the Quill decision, states have applied various approaches to limit or even eliminate Quill’s physical presence nexus standard. These approaches included lobbying Congress to provide federal legislation that would redefine nexus, enacting state “click-through” nexus statutes, and taking aggressive audit positions that limit the applicability of physical presence nexus.
Some Observations on Gross Receipts Taxes
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The majority of states impose a form of a corporate income tax. However, currently five states—Delaware, Ohio, Nevada, Texas and Washington—impose a broad-based, statewide corporate gross receipts tax. The most recent addition to that list is Nevada, which in its 2015 Legislative Session enacted a new Commerce Tax that is imposed on gross revenue. More recently, there have been and are, at the time of writing, ongoing efforts in Oregon to enact a corporate gross receipts tax, either as a separate tax or as an alternative tax to the existing Oregon corporate income/excise tax. Even more recently, both West Virginia and Louisiana have considered a gross receipts tax.
(The remainder of this article can be access in the July 2017 edition of the Journal of Multistate Taxation and Incentives.)
Nortel, Lucent and Taxing Embedded Software in California Under a Technology Transfer Agreement
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As consumer products become more high tech, the line between computers and traditional devices has blurred. Even basic products, such as toothbrushes, alarm clocks, doorbells, smartphones, cameras, home security systems, printers and copiers now include technical software that enables new functionality options for the device. As a general principle, tangible personal property, but not intangibles or services, is subject to California Sales and Use Tax. Software “embedded” into a product has value distinct from the value of the rest of the device and that distinct (intangible) value is not subject to sales tax. On the heels of two recent taxpayer victories in the California Court of Appeal relating to taxation of software, this article discusses current developments on how to treat such embedded software for California sales (and use) tax purposes.
(The remainder of this article can be accessed in the January 2017 edition of the Journal of Multistate Taxation and Incentives.)
Quick Points – Property Taxation and Software in California
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(This article originally was published in Vol. 25, No. 4 of the California Lawyers Association’s California Tax Lawyer.)
Section 995 and 995.2 of the California Revenue & Taxation Code exempt all software except for basic operational programs from property taxation. Basic input output systems, known as BIOS, draw the line between the taxable and nontaxable. BIOS, which by definition is necessary to the operation of the computer, handles primitive functions such as turning the computer on and off. BIOS is taxable. Everything else, such as operating systems like Windows, is not taxable. (Property Tax Rule 152; Cardinal health 301 Inc. v. County of Orange (2008) 167 Cal.Appl.4th 219.) Often, computers or other electronic devices are sold with nontaxable software (i.e., non-basic operating systems or application software) preloaded onto the device. When there is no separate sales price for the nontaxable software, it is termed “bundled” or “embedded” software. Embedded software is not taxable. Id.
New York Untangles Unauthorized Insurance Co. Taxation
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(This article originally was published by Law360 on March 17, 2016.)
A New York state Division of Tax Appeals administrative law judge issued three determinations addressing the tax implications for unauthorized insurance companies, both life and nonlife.[1] Significant uncertainty has surrounded New York state’s taxation of unauthorized insurance companies since New York state amended its insurance tax provisions (Article 33) in 2003. The Department of Taxation and Finance even issued a technical memorandum in 2012 reversing its prior position on unauthorized life insurance company taxation. These ALJ determinations provide much needed clarity, although questions still remain.
Court of Appeal Holds Transfer Tax Applies to Legal Entity Changes in Ownership
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In 926 North Ardmore Avenue, LLC v. County of Los Angeles, the 2nd District Court of Appeal held that Proposition 13 changes in ownership prompted by transfers of legal entity interests should also be characterized as “realty sold,” resulting in the imposition of realty transfer taxes under the California Documentary Transfer Tax Act in cases even where no real property interests are transferred at all.