This Week in State Tax

The California Office of Tax Appeals (OTA) affirmed a Franchise Tax Board (FTB) determination that a company was not entitled to use the three-factor apportionment formula available to businesses with more than 50 percent of their gross receipts from agricultural business activities. The taxpayer, which transitioned from a C-corporation to an S-corporation during the tax years at issue (2013–2015), reported its principal business activity as wholesale sales of agricultural chemicals and related services. Sales of these products made up over 95 percent of the company's total sales in the years at issue. It filed California returns using the three-factor apportionment formula applicable to qualifying agricultural business activities. Following an audit, the FTB determined that the business did not qualify for use of the three-factor exception and was instead required to use the standard single-sales factor apportionment methodology. The company and its shareholders appealed.

The taxpayer argued it qualified for the three-factor method because it sold products used in agricultural operations and therefore engaged in activities “relating to” agriculture. According to the taxpayer, the statutory language was broad enough to include businesses that support agricultural production, even if they do not themselves cultivate crops or raise livestock. The FTB disagreed, arguing that the statute requires examination of the taxpayer's own activities, not the activities of its customers, and that the taxpayer's business consisted primarily of selling and marketing agricultural chemicals rather than conducting agricultural operations.

The OTA agreed with the FTB, concluding that the taxpayer's activities did not fall within the statutory definition of agricultural business activity. While the OTA agreed that the phrase “relating to” should be read broadly, it concluded that, in the context of the statute, it refers only to the activities of the taxpayer claiming the exception — not the activities of, or end use by, its customers. The OTA determined that the taxpayer's own operations did not involve stock, dairy, poultry, fruit, or truck farming, or the cultivation, raising, or harvesting of agricultural commodities. Instead, it found the taxpayer made and sold products that aided such agricultural activities. In reviewing the legislative history of the agricultural apportionment exception, the OTA noted it was intended to protect businesses whose operations have no choice as to their manufacturing or production location due to the location of agricultural resources. The taxpayer's sales and distribution activities were not similarly bound and extending the exception to the company would be inconsistent with that purpose.

Contact Candace Axline and Geoffrey Way with questions about Matter of Yorick, Inc.

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The North Carolina Department of Revenue recently issued a Private Letter Ruling addressing the taxability of a company’s digital marketing and graphic design services. The taxpayer provides strategic marketing, brand development, and creative design services under retainer-based service agreements. The service produces unique digital assets and intangible strategies that are custom developed to client specifications and delivered via a secure cloud platform or by email. No physical goods are created or shipped by the taxpayer to its clients.

The Department determined that the taxpayer’s sales were subject to North Carolina sales and use tax because the taxpayer’s activities most closely resembled those of an advertising agency. Advertising agencies are considered retailers under North Carolina law when they produce items that they sell at retail for any purpose other than resale, including sales of certain digital property and taxable services. The Department concluded that the digital assets created by the taxpayer were taxable digital property because they included digital audiovisual works, and that some of the taxpayer’s services appeared to meet the definition of repair, maintenance, and installation services for such digital property. Further, the taxpayer would not be able to exclude any nontaxable “professional” services from the sales tax base because it did not separately state its charges to clients. Finally, the Department noted that as the taxpayer had no physical presence in North Carolina, it qualified as a remote seller and would be required to register, collect, and remit sales and use tax if its gross sales from digital products exceeded $100,000.

Please contact Nicole Umpleby with questions about SUPLR 2026-0004.

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The Rhode Island Division of Taxation recently issued a declaratory order in response to a taxpayer ’s request for guidance on the sales tax treatment of reports generated through artificial intelligence and human review. The taxpayer produces reports intended to help neurodivergent individuals communicate their needs and support requirements to schools, clinicians, relatives, and others. Customers complete an online intake questionnaire through the taxpayer’s dashboard, and the taxpayer uses those responses to generate a personalized report that is reviewed by humans and made available for download through the dashboard for a one-time fee. The taxpayer requested a ruling on whether the reports were taxable and, if so, how they should be classified.

Rhode Island law imposes tax on the sale, use, or other consumption of vendor-hosted prewritten computer software that is accessed through the internet or a server hosted by a vendor. The Division concluded that what the taxpayer sells is access to and use of its dashboard, explaining that the taxpayer could not receive responses to the questionnaire or deliver the finished report without the dashboard. The software qualifies as prewritten because it was not designed and developed to the specifications of a specific purchaser, and the individualized content of the reports did not convert the software into custom software because the reports were distinct from the software used to generate and deliver them. As customers accessed the software through the taxpayer's internet-hosted platform, the product met the definition of vendor-hosted prewritten computer software and was therefore subject to sales and use tax. The Division interpreted the scenario as one in which taxpayer “sells access to software that allows customers to provide information for, and obtain, the report;” it did not address the role played by the human reviewer in producing the final report.

Please contact Ryanne Tannenbaum and Jon Benson with questions about Declaratory Order 2026-01.

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The Wisconsin Supreme Court has declined to review a state Court of Appeals decision, thus leaving in place the determination that a ticket reseller was responsible for collection of Wisconsin sales tax on the resale of tickets to live sporting and entertainment events that took place of over its marketplace platform for the period 2008-2013. The platform allowed individuals holding tickets to an event to offer them for sale at a price set by the holder. A buyer on the platform would pay the amount of the ticket plus the taxpayer’s fees and remit proceeds to the taxpayer. After retaining its fees, the taxpayer remitted the ticket price to the original holder and provided further instructions for delivery.

On audit, the Wisconsin Department of Revenue determined the taxpayer qualified as the seller of the tickets and was responsible for collecting tax on the proceeds. The taxpayer had argued it was not a seller, but merely a passive facilitator of the sales and thus not required to collect tax. In its review, the Court of Appeals determined the taxpayer was, indeed, the retailer responsible for tax collection as it was the party that “effected the sale [of tickets] by transferring the tickets in exchange for payment;” it was also the only party with whom the buyer interacted.

The taxpayer had also argued that the state’s marketplace collection law defining what constitutes a marketplace and making them responsible for tax on sales conducted via the marketplace was not enacted until 2019. While the taxpayer agreed that it was responsible for collection from that point forward, it argued that prior law did not make an entity such as it liable for collection. The appellate court found that when the legislature passed the marketplace law, it was only clarifying current law as to the breadth of the term “retailer” and trying to resolve confusion. It was not extending the collection obligation to a new class of taxpayers. [For further discussion of the Court of Appeals decision, see our TWIST of January 20, 2026.]

For questions or further information on StubHub Inc. v. Department of Revenue (No. 2024AP455), please contact John Vann.

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