This Week in State Tax

The Georgia Court of Appeals recently ruled that the state's Taxicab Regulation, which shifts the sales tax collection and remittance obligation from individual, for-hire drivers to headquarters operators that direct and supervise the drivers, applies to a taxpayer that operates a mobile rideshare application. As a result, the taxpayer was required to remit sales tax for tax periods 2012-2015.

The taxpayer operates a mobile application-based platform that connects consumers seeking transportation services with independent transportation providers. While the drivers are not employees of the taxpayer, they are required to use the app to obtain rides, must follow certain standards, rules, and requirements of the app operator to continue as a driver. All financial matters are handled through the app, including computation of the fees and charges, processing of payments, and remitting proceeds, minus certain fees, to the driver. The taxpayer did not collect and remit sales tax on the rides secured through the app during the audit period, relying instead on the drivers to do so. Following an audit, the Department of Revenue (Department) assessed unpaid sales tax and penalties. On appeal, the Georgia Tax Tribunal concluded that the app operator was responsible for collecting and remitting sales tax on the charges to customers and approved an assessment of roughly $9 million against the taxpayer. The taxpayer appealed to Superior Court, which affirmed the judgment of the Tribunal. The Court of Appeals then accepted a discretionary appeal from the taxpayer.

Since its inception in 1951, transportation by hired cars has been subject to the state sales tax, and owners and operators of such vehicles have been responsible for collecting the tax from riders and remitting it to the state. At issue here was a regulation adopted by the Department in 1991 (Ga. Comp. R. & Regs. r. 560-12-2-.84) which provided that the tax remittance responsibility of for-hire drivers operating out of a “headquarters”, would shift from the drivers to the “headquarters operators”. A “headquarters operator” was defined as any person operating a headquarters for taxicabs and supervising or directing taxicab drivers or receiving and relaying calls to such drivers. The term also included any person allowing the use of the trade name of the headquarters or allowing any driver to hold themselves out as associated with the headquarters. The regulation noted that reliance on the headquarter operators for remittance was necessary to ensure proper collection of the tax.  

On appeal, the taxpayer made two primary arguments: (a) the regulation was invalid and exceeded the authority of the Department to promulgate it; and (b) it was not applicable to the taxpayer as it operated no headquarters. As to the validity of the regulation, the court held, after a lengthy analysis, that the regulation was within the Department’s authority and was consistent with expressed legislative intent to shift the collection responsibility away from individual drivers. In addition, the state supreme court and other courts considered the regulation to be valid in other matters. As to the applicability to the taxpayer, the court concluded that taxpayer’s app functions as a "headquarters" under the regulation, as it supervises or directs for-hire drivers and receives and relays calls to drivers. The court rejected the argument that the taxpayer could not be considered a headquarters due to the lack of physical location, emphasizing that the regulation defines headquarters operators by their actions rather than physical presence. Additionally, the court dismissed the taxpayer’s claim that the collection and remittance responsibility was discriminatory under the Internet Tax Freedom Act, noting that it was subject to the same tax obligations as other taxi and limousine headquarters operators.

Note: In 2020, Georgia exempted “for-hire ground transport” from the sales tax and imposed an excise tax on such services to be collected and remitted by the for-hire ground transport service provider itself. The definition of provider specifically includes rideshare network services as defined in a 2015 Georgia law requiring the licensing and regulation of rideshare app providers. Contact Ben Cella for more information on  Uber Technologies, Inc. v. O'Connell.

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An Administrative Law Judge (ALJ) in the New York Division of Tax Appeals recently affirmed an assessment by the Department of Taxation and Finance (Department) that classified a company's cloud-based service offerings as taxable prewritten software. Under New York law, prewritten computer software is considered tangible personal property regardless of the medium through which the software is delivered to the purchaser, including in Software-as-a-Service transactions.

The taxpayer provided a comprehensive document management system that included integrated workflow tools, enabling users to move, organize, and store files efficiently. The company offered optional add-ons to the base service for document markup and editing, storage, and other services. The core functionality of the software was present, even if the add-ons were absent. The taxpayer argued its service offering was not the sale of software but a comprehensive system providing document storage and security that are not taxable in New York. During its audit, the Department found that certain contractual provisions involved intellectual property protections and licensing commonly found in software transactions, charges for the service were generally on a per user basis, and the service was described and presented as software. The ALJ agreed that these findings provided a rational basis for the Department’s determination.

The taxpayer also argued that certain nontaxable components of the service were included in the assessment. The service was, however, sold as a mixed bundle of tangible personal property and services for a single, undivided charge. Under New York law, the entire transaction is subject to taxation in such instances. The taxpayer also contended it was entitled to apportion the tax based on the location of its users; the ALJ found it failed to provide sufficient documentation to support this claim. As a result, the ALJ denied the apportionment request and agreed that the Department had taken steps to limit the assessment only to customers in New York. For questions regarding the Matter of the Petition of NETVOYAGE CORP. AKA NETDOCUMENTS.COM, please reach out to Judy Cheng and Jenn White. 

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The Oregon Tax Court revised its opinion in Microsoft Corp. v. Department of Revenue. (See prior TWIST from September 2024.) The revised opinion does not alter the court’s decision but clarifies its rationale following the taxpayer’s motion for reconsideration. Recall, the Tax Court agreed that the taxpayer was entitled to factor representation for the amount of its one-time deemed repatriation that was included in the tax base (reasoning that the income was ultimately derived from activities in the taxpayer’s primary business), but denied the taxpayer’s argument for alternative apportionment because it had not shown that denying factor representation for either the portion of the deemed repatriation that was deductible from the Oregon tax base or the gross sales of the relevant foreign subsidiaries resulted in distortion. The taxpayer subsequently moved for reconsideration, arguing primarily that the court had applied the wrong baseline amount when making this determination.

As part of its initial ruling, the court compared the taxpayer’s actual Oregon taxable income in the years during which the deemed repatriation amount was generated (between $734 million and $785 million) to the amount that would have been generated had the taxpayer been subject to worldwide reporting in those years ($872 million). The court determined that application of the statutory apportionment formula was not distortive of the taxpayer’s Oregon taxable income because the actual amount was less than the hypothetical amount. In its motion for reconsideration, the taxpayer argued that this method improperly applies its Oregon sales in prior years when determining its apportionment percentage in the repatriation year, and that a better method would apportion repatriation-year income (including the deemed repatriation) based on the repatriation-year Oregon sales over repatriation-year water’s edge sales plus foreign subsidiary sales in all the years generating the repatriation amount.

In determining which of these approaches served as the better comparator, the court considered the purpose Congress in adopting the deemed repatriation. While it acknowledged that the mechanics of the statute resulted in an increased tax base in a single year, it interpreted the U.S. Supreme Court ruling in Moore v. United States to stand for the proposition that “Congress's goal was to create a one-time increase in the tax base that was entirely consistent with” its original multi-year approach, and that “the requirement to add that amount to only a single year's income may simply have been a practical modification to reduce the administrative burden for taxpayers and the government alike.” When the deemed repatriation is considered as an additional tax for all the years in which the relevant income was generated,  the court’s approach of using the taxpayer’s Oregon sales over all those years (rather than just in the repatriation year) was appropriate. Please contact Nisha Mathew for questions about Microsoft Corp. v. Oregon Department of Revenue.

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As many of the remaining state legislative sessions draw to a close, several states have updated  conformity with the Internal Revenue Code (or appear on the path toward doing so).

Hawaii

Senate Bill 1464 was sent to Governor Green on May 2, 2025. A provision of the bill updates Hawaii’s income tax code to conform with the federal Internal Revenue Code as amended as of December 31, 2024 for tax years beginning in 2025 or later. Contact Julie Quick with questions about S.B. 1464.

Virginia

House Bill 1600—Virginia’s biennial budget legislation—was signed into law by Governor Youngkin on May 2, 2025. A provision of this bill pauses the state’s rolling conformity to the Internal Revenue Code. Currently, Virginia conforms to the Internal Revenue Code on a rolling basis for tax years beginning on or after January 1, 2023, except for federal amendments with a state revenue effect of greater than $15 million. H.B. 1600 provides, however, that Virginia will not conform to any federal amendment passed between January 1, 2025 and January 1, 2027, if the amendment will increase or decrease state revenue by any amount in the fiscal year when passed, or any of the succeeding four fiscal years. The limitation does not apply to “federal tax extenders”, defined as amendments extending the expiration of measures to which the Commonwealth already conforms. Contact Diana Smith with questions about H.B. 1600.

Vermont

The final details of House Bill 493—Vermont’s Fiscal Year 2026 appropriations bill—are being reconciled in a conference committee. Both the House and Senate versions of H. 493 include provisions to update Vermont’s conformity with the Internal Revenue Code to the IRC “as amended through December 31, 2024,” effective for taxable years beginning on or after January 1, 2025. Note: The conference committee report containing this language is scheduled for action during the week of May 12. Contact Jennifer Bates with questions about H. 493.

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