TWIST - This Week in State Tax

Colorado: Sales of Streaming Platform Credits Not Subject to Sales Tax

In a recent private letter ruling, the Colorado Department of Revenue (Department) addressed the taxability of streaming platform credits. The taxpayer, a streaming platform, allowed viewers of its streaming content to purchase so-called platform credits. The platform credits could be used to show support for a particular streamer (a third party whose video content was streamed on the platform) and essentially allowed the viewer enhanced interaction with streamers. The ruling addressed whether the company’s sales of platform credits and/or the subsequent redemption of platform credits, were subject to state and state administered sales tax.

Under Colorado law, sales tax is imposed on the purchase of tangible personal property, which includes all tangible or corporeal things that are capable of being possessed and exchanged. Sales tax is not imposed on intangibles that provide a mere right of action without intrinsic value, like a contract. Colorado taxes digital goods as tangible personal property, however, electronically delivered computer software is statutorily excluded from the definition of tangible personal property.

The Department analogized the sales tax considerations of streaming platform credits to those arising from the sale of a gift card. Because a gift card is a representation of the issuer’s agreement to provide goods or services, then sales tax is imposed only when the card is redeemed and not when the gift card itself is acquired. A subsequent transaction in which a viewer redeems a gift card is not immune from sales tax if the individual receives anything taxable in the exchange, such as tangible personal property or services. On the contrary, if the gift card is redeemed to acquire an intangible that is otherwise not subject to sales tax, then the redemption does not have sales tax consequences. Much like a gift card, the Department determined that a viewer’s purchase of platform credits entitled it to receive the benefits and rewards of the credits when the viewer elected to redeem them at a later date. As a result, purchases of the streaming credits were not subject to sales and use tax. Likewise, when the credits were redeemed, a viewer was receiving services that were non-taxable, such as emphasizing a chat message to the streamer or other viewers. A viewer might also redeem the credits to compensate the streamer, which was treated as a non-taxable gratuity. Other nontaxable services received in exchange for platform credits included third party enhancements that altered the appearance or functionality of the live stream. These enhancements, in the Department’s view, were similar to exempt electronically received computer software. The Department concluded that sales and use tax also did not apply when the credits were redeemed. Please contact Steve Metz with questions on PLR-22-005.

New York: Taxpayer was Not Licensing Prewritten Computer Software

An Administrative Law Judge (ALJ) for the New York Division of Tax Appeals recently concluded that a taxpayer was providing nontaxable information services, not licensing taxable prewritten computer software. The taxpayer’s mission was to help companies sell smarter and more effectively by identifying effective and ineffective email messaging.  In all cases, the taxpayer’s customers used their own email application to interact with their clients. To provide these services, of which there were three options that varied by price, the taxpayer tracked data received from email recipients and provided individualized reports that summarized a customer’s sales leads. The information the taxpayer collected included data on how the email recipients interact with those emails, including whether they read the emails, clicked links, downloaded attachments, or replied to the emails. To perform the email tracking, analytics, and reporting, the taxpayer’s clients downloaded a browser extension. The browser extension was software that was licensed to clients, but clients did not pay separately for the extension.  In addition to the reports, the taxpayer’s services, depending on the option selected, included certain enhancements, such as offering clients sharing of templates, mail merge, touchpoint campaigns, click-to-call, and integration with Salesforce. After an audit, the Division of Taxation asserted that the taxpayer was selling prewritten computer software and issued an assessment accordingly. The taxpayer challenged this assessment.

While acknowledging that the Division of Taxation had a rational basis for its conclusion, the ALJ disagreed that the taxpayer was licensing prewritten computer software. In the ALJ’s view, the taxpayer’s service was a bundled service, and the primary function test must be applied to determine its taxability. The Division had argued that the primary function test should not be applied because the transactions at issue involved the licensing of software. However, the ALJ rejected this assertion and determined that the primary function of the taxpayer’s services was to provide customers with reports regarding activity that occurred with the emails they sent to their prospective clients, including whether they read the emails, clicked links, downloaded attachments, or replied to the emails. To provide this service, the taxpayer tracked, processed, and analyzed data received from email recipients and generated information and individualized reports to assist clients with their email prospecting and customer relations. While the taxpayer provided software to customers as part of its services, the ALJ concluded that customers did not have the use of the software, or access to the software.  With respect to the customers’ ability to engage in sharing templates, mail merge, touchpoint campaigns, click-to-call, and integration with Salesforce, the ALJ determined that all these things were ancillary to the primary service, which is to inform the taxpayer’s customers as to which of their sales solicitations are effective.  Because the reports provided to clients consisted solely of the customer’s own data and the reports were not furnished to or incorporated in reports to others, the ALJ concluded that the taxpayer was providing a nontaxable information service. Please contact Judy Cheng with questions on Matter of Petition of Yesware, Inc.

Oregon: Portland Adopts Market-Based Sourcing

The City of Portland, Oregon recently amended its Business License Tax law (City Code Chapter 7.02) to adopt market-based sourcing effective for tax years beginning on or after January 1, 2023. Currently, receipts from sales of other than tangible personal property are sourced to the City if the income producing activity is performed in the City. The impetus behind the change is for the City tax to align with the rules for apportioning income under Oregon’s corporate excise tax law. Although the amended ordinance has been approved, it will not take effect until substantially similar provisions are adopted by the governing bodies of Multnomah County and Metro. Recall, the City of Portland’s Revenue Division administers the business income taxes for Multnomah County and Metro. In the City’s view, to ease the Revenue Division’s administration of the taxes for the three jurisdictions, it is important that substantially similar provisions are adopted by each jurisdiction. The Multnomah County Board of Commissioners approved the first reading of a revised ordinance at its September 29, 2022, meeting. The second reading is scheduled for October 13, 2022. It appears that Metro has yet to propose an ordinance change. Please stay tuned to TWIST for future updates.

South Dakota: Court Rules in State's Favor on Computation of Federal Tax Deduction

Recently, the South Dakota Supreme Court addressed the computation of a bank’s deduction for federal taxes paid. Under South Dakota bank franchise tax law, a financial institution is allowed a subtraction for taxes imposed under the Internal Revenue Code. The bank at issue was part of a federal consolidated return, but filed a separate South Dakota bank franchise tax return. The method used by the bank to compute the deduction for the disputed tax years was to take its separate federal taxable income and multiply it by 35 percent. The resulting deduction was between 133 percent and 175 percent higher than the total payments to the IRS of the bank’s consolidated group.  After an audit, the Department’s view was that the subtraction was limited to the amount of federal taxes the bank actually paid, which would be taxes after the application of various credits. A trial court upheld that position, and the taxpayer appealed to the state’s highest court.

The issue in the case centered whether “taxes imposed” meant total income multiplied by the applicable tax rate or meant the amount of taxes paid or compulsory tax liability required by federal law. After determining that the statutory text did not answer the question before it, the court reviewed the overall statutory scheme and determined that the Legislature did not intend to allow a taxpayer to subtract amounts for taxes imposed that did not involve the payment of money. In the court’s view, a taxpayer should not expect to subtract a larger amount of federal taxes than it is obligated to pay. To do otherwise would lead to a disproportionately large deduction and irrational results that would not correspond to the amount of federal tax owed. In reaching this conclusion, the court rejected the bank’s argument that the credits claimed were equivalent to the expenditure of cash. While the court may have described a tax credit as a rebate, it had never held that its use is the same as an expenditure of money. The court also rejected the taxpayer’s argument that the Department’s lack of guidance on the proper method of computing the deduction meant the Department was required to accept the bank’s methodology.  Please contact Jodie Scott with questions on U.S. Bank N.A. v. South Dakota Dep’t of Revenue.