This Week in State Tax

The Maryland Tax Court recently upheld a decision by the Department of Finance of Baltimore City (City) to deny a taxpayer’s Outdoor Advertising Tax refund claims . As enacted by the City Council, the tax is imposed on “advertising hosts,” defined as a “person who: (1) owns or controls a billboard, posterboard, or other sign; and (2) charges for its use as an outdoor advertising display.” The taxpayer owned and controlled roughly 700 displays during the years at issue (2019-2021). The taxpayer filed original returns paying the tax due and subsequently filed a claim for refund. The claim was denied by the City, and the taxpayer appealed to the state tax court.

The taxpayer’s primary argument was that the display of advertising on these billboards by customers should not be considered “use” of the billboards because the customers did not own, maintain, or control the billboards. Consequently, the taxpayer argued that it did not qualify as an "advertising host" and was not obligated to pay the tax. The court found the  argument unpersuasive. The tax is imposed on the privilege of exhibiting advertising displays in the city. The court clarified that the term "use" in the definition of “advertising host” refers to use of the billboard for outdoor advertising, not the ownership or control by advertisers. In a brief, the taxpayer attempted to liken the definition of “use” to that in the Maryland retail sales tax. The court rejected this as relating to a different tax scheme that was not enacted by the Baltimore City Council. The court noted that the taxpayer owned or controlled the billboards and charged fees for the use of billboards as advertising displays, which are the two defining characteristics of an “advertising host” under the tax. The court concluded that the taxpayer was indeed an "advertising host" and was obligated to remit the tax. Interestingly, the court also stated that the taxpayer was estopped from claiming it was not an advertising host as it had agreed that it was a host in earlier litigation so it could pursue a refund. For more information on Clear Channel Outdoor, LLC v. Director, Department of Finance of Baltimore City, contact Jeremy Jester.

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The New Mexico Taxation and Revenue Department (TRD) recently issued a ruling concerning the application of the Gross Receipts and Compensating Tax Act (GRT) to a marketplace provider’s (MPP) services to marketplace sellers (MPS). TRD addressed five questions posed in the ruling request.

•      First, TRD addressed whether charges for the shipment of customer return packages qualify as deductible transportation services. TRD explained that return shipment fees are deductible as transportation services if: (1) the tangible personal property is transported from between two points in New Mexico; (2) the transportation is in interstate commerce; and (3) the MPP must have a single contract for the transportation of the return product. The TRD clarified that the fee could be deductible if the returned item was transported to a location outside New Mexico under a single contract. However, transportation to a New Mexico warehouse would fail to meet the interstate commerce test.  For sourcing purposes, TRD noted that if the exact entry point was unknown, the buyer’s shipping address may be used as a proxy, provided it is applied consistently and in good faith. 

•      Second, TRD addressed whether fees charged by an MPP as part of the sale of tangible personal property are subject to GRT, given the fees were already taxed as part of the underlying sale. TRD concluded that the MPP’s gross receipts included the total amount collected from customers, including any fees retained for listing items or providing services related to the sale. The MPS may deduct the receipts passed on to them, but the MPP must report the total gross receipts from the sale. If, however, the MPP receipts are the result of a separate transaction with the seller not related to a sale (e.g., separate monthly fee or other contractual arrangements), the fees would be separately subject to GRT as a transaction between the MPP and MPS.

•      Third, TRD addressed whether certain separate MPS fees should be sourced to the location of the seller based on the address maintained in the MPP’s records. The MPP offered the MPS a monthly fee plan, which included marketing, back-office, and administrative support, an alternative to the per-transaction fee. TRD identified these services as the “freedom from responsibility” for marketing and administrative tasks delivered at the MPS location. Consequently, TRD concluded that the gross receipts from the monthly fee plan should be sourced to the location of the MPS, as recorded in the MPP’s records, since that was where the seller benefitted from the services.

•      Fourth, TRD addressed whether logistics fees deducted from the sale of tangible personal property were subject to GRT. The MPP imposed fees on the MPS for order fulfillment and additional logistics services such as special packaging. The TRD determined the logistics service receipts were inherently linked to the initial sale to the purchaser and not treated as separate transactions. Therefore, the logistics service receipts were subject to GRT as part of the overall transaction.

•      Finally, TRD addressed whether warehouse fees constitute deductible receipts from storage and shipping. TRD mirrored the criteria outlined in question one, requiring that the property involved must have moved or will move in interstate or foreign commerce, and the services must be performed by a local agent for a carrier or by a carrier under a single contract related to transportation services. TRD determined that the MPP was engaged in storing and distributing sellers’ property, potentially qualifying for the deduction. TRD explained that to qualify for the deduction, however, the MPP must have acted as the carrier or a local agent for a carrier, and the services must be performed under a single contract related to transportation. For more information on  New Mexico Ruling 401-24-03, contact Carolyn Owens.

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The New York Tax Appeals Tribunal recently held that the New York combined return of a real estate investment company should not include an indirect subsidiary that functioned as a passive, part-owner of an out-of-state shopping mall. The parent, an Australian company, indirectly owned Yarmouth Lend Lease KOP, Inc. (KOP), an entity that had no employees or business activities. KOP’s sole asset was a 50 percent ownership stake in King of Prussia Associates, the entity that operated one of the largest shopping malls in the U.S. in King of Prussia, PA. Prior to tax-year-ending December 31, 2007, the taxpayer included KOP on its New York combined return as part of its retail property business. In the years leading up to tax year 2007, however, the taxpayer sold most of its interests in retail property. By 2007, KOP was the only mall in which the taxpayer maintained an interest, and the taxpayer ceased including KOP in its New York combined group. The returns for tax years 2007-2009 were audited, and the auditor determined that the taxpayer should have continued to include KOP in its New York combined group. After conclusion of the audit, an Administrative Law Judge (ALJ) agreed with the taxpayer that KOP was properly excluded from the return. The Department of Taxation and Finance appealed.

Under New York law for the years involved, an entity must be included on a combined return if a substantial ownership requirement was met (undisputed here), and there were “substantial intercorporate transactions” (generally meaning 50 percent of expenditures, not counting administrative services such as accounting, legal and personnel services) among related companies. Alternatively, combined reporting could be mandated if failure to include an entity on a combined report would result in distortion of tax liability.

The Tax Tribunal ruled that the ALJ had correctly determined that the taxpayer’s transactions with KOP did not meet the “substantial intercorporate transactions” threshold. Furthermore, there was no unitary business between KOP and the taxpayer because the taxpayer was no longer in the retail property business aside from its ownership of KOP, meaning there was no flow of value or integration between the entities. In addition, the Tribunal determined that exclusion of KOP from the New York return was not distortive because the taxpayer did not play an active role in managing the King of Prussia Mall investment. Contact Aaron Balken with questions about In the Matter of Lendlease Americas Holdings, Inc.

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