This Week in State Tax

The Massachusetts Department of Revenue recently updated its regulation governing corporate nexus to provide that certain Internet business activities will be considered in determining if a corporation has exceeded the protections of P.L 86-272 and thus may be subject to the Commonwealth’s corporate excise tax.

Recall, P.L. 86-272 prohibits states and localities from imposing a tax on or measured by net income on businesses whose only in-state activity is the solicitation of orders of tangible personal property when such orders are fulfilled from an out-of-state location. The updated regulations specifically added the following example as unprotected activities under P.L. 86-272: “… in-state activities that are conducted by a vendor through an Internet website accessible by persons in the state may include activity that is not entirely ancillary to the solicitation of orders of tangible personal property, such as the placement of Internet cookies onto the computers or other electronic devices of in-state customers that gather customer search information used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer for sale.” Please contact Nikhil Sequeira for questions about Regulation 830 CMR 63.39.1. 

The Missouri Court of Appeals recently affirmed a lower court ruling that certain streaming service providers are not subject to Video Service Provider (VSP) fees under the Missouri Video Service Provider Act (VSPA). The VSPA was enacted in 2007 to modernize the franchising system for accessing public rights-of-way in Missouri to provide video services to consumers. Prior to the VSPA, cable companies negotiated individual franchise agreements with municipalities. VSPA replaced this system with a statewide authorization process managed by the Missouri Public Service Commission. In return, “video service providers” were required to pay VSP fees to municipalities for using the public rights-of-way.

As enacted in 2007, the VSPA excluded from the purview of the VSP “… any video programming provided solely as part of and via a service that enables users to access content, … or other services over the public Internet.” In 2018, the City of Creve Coeur brought an action against several video providers arguing they were not excluded under the VSPA because their service involved, in part, delivery via direct internet service provider-to-subscriber connections, thus bypassing the “public Internet” and bringing the services within the scope of the VSPA. In 2024, while the case was pending, the Missouri Legislature amended the VSPA to explicitly exclude “… any video programming accessed via a service that enables users to access content, … or other services offered over the internet, including streaming content” from being subject to the VSP fee.

In December 2024, the trial court issued its decision in the matter, holding that the legislative amendment to the VSPA “did not effectuate a substantive change of law,” but merely resolved any ambiguities in the “video service” definition. It found the taxpayers were not responsible for the VSP. Creve Coeur appealed and raised three issues: (1) the 2024 amendment substantively changed the law, (2) the lower court’s ruling violated the Missouri Constitution by extinguishing municipal indebtedness, and (3) the city was entitled to relief under unjust enrichment.

The appellate court, as had the lower court, found that the 2024 amendment to the VSPA did not substantively change the law. While legislative amendments are presumed to alter existing law, courts recognize that some changes are intended to clarify ambiguity. In this case, the amendment added specific language excluding “streaming content” accessed via the public Internet from the definition of “video service.” The court found these changes to be narrowly tailored to reinforce the original exclusion of streaming services. The court concluded that the legislature never intended the VSPA to apply to streaming platforms such as the taxpayers provided and that the 2024 amendment made that intent explicit. Therefore, the 2024 amendment could be applied retroactively without violating legal principles. Given that the VSPA never applied to streaming content, the streaming service providers were never obligated to pay VSP fees, and no indebtedness was extinguished,] and no unjust enrichment occurred. Contact John Griesedieck for more information on City of Creve Coeur, Mo. v. DirecTV LLC.

The Ohio Board of Tax Appeals recently addressed whether a manufacturer and seller of pharmaceutical products should use its listed price for generic pharmaceutical drugs or the actual price paid by its customers for purposes of its Ohio Commercial Activity Tax (CAT) return. In the case at issue, the taxpayer contracted with retailers to supply drugs at an agreed-upon price. The drugs were distributed to the retailers by third-party wholesalers. Upon shipping their product to the wholesalers, taxpayer issued an invoice showing a “wholesale acquisition cost” (WAC).  Both the taxpayer and the distributor understood that a subsequent chargeback based on the taxpayer’s agreements with the retailers would reduce the purchase price paid by the retailer ultimately receiving the drugs. Accordingly, once the distributor sold the drugs to the retailers, it would submit a chargeback to the taxpayer reflecting the difference between the WAC and the purchase price provided in the retailer contract. Once the chargeback was submitted and processed, the distributor remitted the net sales price to the taxpayer.  

In filing its Ohio CAT return, the taxpayer reported its receipts based on the sales price reduced after all chargebacks, rebates, shortages, and other discounts. The taxpayer was then assessed by the Ohio Tax Commissioner for additional tax, based on using the WAC that was initially charged as the baseline gross receipts from the sale. Other lesser deductions were also involved, some of which were resolved favorably for the taxpayer. Ultimately, however, the Commissioner disallowed the exclusion for chargeback (comprising over 90 percent of the assessment), and the taxpayer appealed to the Board.

Ohio law defines gross receipts as “the total amount realized by a person without deduction for cost of goods sold or expenses incurred, that contributes to the production of gross income of the person.” The taxpayer argued that the chargebacks were not deductible expenses but rather price adjustments that reduce the original invoice amounts. The Board agreed finding that the economic reality showed the end user paid a lower contract price to the wholesalers, who then sought reimbursement from the taxpayer. As such, the taxpayer only received the adjusted sales price, not the full WAC. The distributor paid no consideration in exchange for the chargeback, and it was uncontroverted that the taxpayer “essentially never receives the full WAC.” In the Board’s view, the wholesalers remitted only the net amount after the chargeback, and they understood the WAC is not the true price of the product. As such, the transaction was a single-step, unified transaction. Finally, the Board noted that the CAT is a tax on receipts realized by the taxpayer; the WAC was not that. Please contact Dave Perry and Brandon Erwine for questions about Perrigo Sales Corp. v. Patricia Harris, Comm. Of Ohio. 

The Texas Comptroller of Public Accounts issued a private letter ruling to cement a taxpayer’s understanding of the definition of a “ready-mix concrete contractor” and its interplay with Texas sales tax sourcing rules. Texas defines “ready-mix concrete contractors” to be contractors who “produce, pour, and spread concrete at job sites for the slabs and floors of a building and the parking lots surrounding the building.” The taxpayer requesting the PLR stated that it produces ready-mix concrete but does not incorporate the concrete into real property. The absence of this activity means the taxpayer does not have a strong foundation on which to claim to be a “ready-mix concrete contractor.”

This definitional difference is also determinative for sourcing the taxpayer’s sales. Ready-mix concrete contractors source their sales to the job sites at which the concrete is incorporated into real property. In the case of the taxpayer, because it only produces and sells the concrete, the sales must be sourced to the “place of business” at which the order is fulfilled. The taxpayer operated three plants that qualified as a “place of business.” All sales should be sourced to the plant at which the order was fulfilled, and the corresponding local sales tax will apply at such locations. For further concrete information on Private Letter Ruling PLR20250328150753, please contact Karey Barton.