Recent state tax news includes corporate and individual income tax rate reductions in Idaho, a business services sales tax development in Maryland, a B&O tax development in Washington, and a retail sales tax update in Washington.
On March 6, 2025, Governor Little signed a bill that reduces Idaho income tax rates from 5.695 percent to 5.3 percent for both individuals and corporations. The bill is effective retroactive to January 1, 2025. Contact Chris Hoge with questions about H.B. 40.
To address a projected $3 billion budget deficit for FY 2026, the Maryland General Assembly is considering a variety of revenue-raising proposals. House Bill 1554 and its companion, Senate Bill 1045, would impose a new 2.5 percent sales and use tax on certain specified business services. The tax would apply only if both the provider of the service and the buyer are business entities. The bills amend the definitions of “taxable price” and “taxable service” to impose tax on the following:
• Accounting, payroll, and bookkeeping services,
• Office support services,
• Permanent or temporary employee or contractor placement services,
• Data or information technology services,
• System software or application software publishing services,
• Consulting services,
• Experimental development services,
• Photography, design or printing services,
• Lobbying, public relations, or marketing services,
• Landscaping and nonresidential building or property maintenance services,
• Heavy truck or bus repair services,
• Repair services,
• Financial planning or tax preparation services,
• Appraisal services,
• Sports or performing arts advertising services, and
• Valet or parking services
Each listed service is defined by reference to various sectors under the North American Classification System. If a higher rate than 2.5 percent could be applied to a transaction involving the sale or use of tangible personal property, a digital code, a digital product, or a taxable service, the higher rate shall apply. Maryland’s general sales and use tax rate is 6 percent. If enacted, the legislation would take effect on July 1, 2025. The state estimates that imposing tax on the specified business services would raise approximately $944 million annually.
The General Assembly is also considering a measure to create a data broker registry and impose a six percent tax on gross income from data brokering receipts attributable to Maryland. S.B. 904 is similar to the data brokering measure introduced in Washington State (H.B. 1884) as discussed in the February 25 TWIST. For questions on House Bill 1554, Senate Bill 1045, and Senate Bill 904, please contact Jeremy Jester.
The Washington State Board of Tax Appeals (Board) held that reimbursements for payments a taxpayer made to third parties were not subject to Washington Business and Occupation (B&O) tax. The taxpayer, a towing company, was contracted by its customer, an automobile auction business, to transport damaged vehicles from third-party facilities to auction locations. Pursuant to the contract, the taxpayer paid the third-party facilities for the release of the vehicles (e.g., for repairs, storage, etc.) and was subsequently reimbursed by the customer for such payments. The taxpayer reported and paid B&O tax on amounts it was paid by its customer for its towing services but not on the release payment reimbursements received from the customer. Regulations adopted by the Washington Department of Revenue (Department) exempt “advances” and “reimbursements” from B&O tax so long as the customer is solely liable for the underlying payment obligation, and the taxpayer is not liable for such payment other than as its customer’s agent.
On audit, the Department assessed tax on the release payment reimbursements. The Administrative Review and Hearings Division rejected the taxpayer’s appeal, citing the taxpayer’s use of its own checks to make the release payments (indicating that the taxpayer was personally liable for such payments), and the express disclaimer of an agency relationship between the taxpayer and the customer in their contract.
The Board was unpersuaded by these positions, finding instead that the taxpayer acted solely as its customer’s agent in making the release payments to third-party facilities. The customer expressly authorized the taxpayer to make such payments on its behalf by providing the taxpayer with written direction on the vehicles to be retrieved and the amounts of the release payments. Also, based on their interactions with the customer prior to the taxpayer’s retrieval of the vehicles, the third-party facilities presumably knew the customer was the principal authorizing the taxpayer to act as its agent in making the release payments. Finally, as the taxpayer did not itself procure any materials or services from the third-party facilities (but rather paid for them on the customer’s behalf), the taxpayer did not have any payment obligation to the third parties separate from its obligation to its customer. Based on these findings, the Board concluded that the taxpayer’s release payment reimbursements were not subject to B&O tax. For further information on IST Solution, Inc. v. Washington Department of Revenue, contact Michele Baisler.
The Washington Board of Tax Appeals (Board) recently issued a determination on whether a taxpayer’s content delivery network (CDN) services were digital automated services (DAS) subject to the Washington retail sales tax. The taxpayer provided CDN services which involved replicating and caching customer data across a global network of servers designed to speed the delivery of internet content to the user by ensuring that content was delivered from the server geographically closest to the end user. The taxpayer’s customers uploaded their content to the CDN servers, and when end-users requested content from the customer’s website, the request was rerouted to the taxpayer’s server geographically closest to the end-user for delivery to the user by the user’s Internet service provider. Customers were billed on bandwidth utilization or total data transferred. Additionally, the taxpayer offered several supplementary services, including cloud storage, reporting, data analytics, and access to software applications to modify and monetize digital content. On audit, the Department of Revenue determined that the taxpayer’s CDN service and its related services were DAS subject to retail sales tax and retailing B&O tax. The assessment was upheld at the administrative level, and the taxpayer appealed to the Board.
Washington imposes a retail sales tax and B&O tax on DAS, defined broadly as services transferred electronically using one or more software applications. The law provides 16 exceptions to taxation for certain types of DAS. Before the Board, the taxpayer argued its CDN services should be exempt as meeting either of two exceptions (1) the internet and internet access as defined in state law, and (2) the “mere storage” of digital products, including providing space for “web hosting” and the back-up of data. With respect to the first exception, the Board found that the terms “internet” and “internet access” incorporate by reference the definitions of the Internet Tax Freedom Act (ITFA), and the “obvious legislative intent” is to comply with the ITFA preemption of state taxation of internet access services. As such, for the CDN services to be exempt, the taxpayer would have to show that they would be excluded from taxation under the ITFA. While the taxpayer’s services were a part of the internet, helping speed up the transmission of content over the internet, customers and end-users were required to have internet access to use its services.
With respect to the second exception, the Board found that the taxpayer’s CDN service qualified as excluded web hosting service under applicable law. Customers paid the taxpayer to replicate and store their digital content on geographically distributed servers for quicker and more cost-effective delivery to end-users. The use of interconnected servers rather than a single host service did not change the nature of the service. Despite the Department's argument that the taxpayer’s services went beyond “mere storage,” the Board determined that the application of proprietary algorithms to retrieve, copy, store, route, and purge the customer’s digital content were inseparable components of the taxpayer’s web hosting service. Therefore, the CDN services were not subject to retail sales tax. In addition, the Board found the taxpayer’s ancillary services aimed at monetizing digital assets were taxable as they went beyond mere storage and web hosting. Contact Michele Baisler for more information on Limelight Networks, Inc. v. Wash. Dept. Rev.
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This Week in State Tax
This Week in State Tax (TWIST) is a series providing the latest updates on the ever-changing state and local tax environment.
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TWIST - This Week in State Tax
What’s included: Discussion on noteworthy developments with broad applicability to taxpayers across the country. Brought to you by: KPMG Washington National Tax – State and Local Tax practice.