TWIST - This Week in State Tax

Mississippi: Supreme Court Holds Digital Photography Service Is Not Taxable

The Mississippi Supreme Court recently held that a taxpayer’s sales of wedding photography packages were not subject to sales and use tax. The taxpayer offered photography packages at varying prices. After capturing photos during the wedding, the taxpayer adjusted and cropped the images. Every package included a transfer of digital images via a DVD, flash drive, or a tablet. The more expensive packages included options such as engagement photo sessions, slide shows, linen prints, and coffee-table picture books. The Mississippi Department of Revenue assessed sales and use tax on the basis that the taxpayer was selling tangible personal property. After the Board of Review upheld the Department’s assessment, the taxpayer appealed to the Lafayette County Chancery Court. That court held that the taxpayer was selling not selling tangible personal property or engaging in a taxable business activity. The Department appealed to the State Supreme Court.

Under Mississippi law, sales and use tax is imposed on tangible personal property, specified digital products, and certain enumerated services. The Department argued that the taxpayer’s services were taxable because customers were receiving their photos in tangible form through a flash drive or disk. The court disagreed, however, finding that the flash drive and disk were incidental to the taxpayer’s photography service. In the court’s view, the customers were paying for the digital photographs of their wedding, not the tangible drive or disk. The court also found it significant that the taxpayer paid sales tax on the drives, disks, and other media that were purchased, as well as the photobooks he gave to certain customers. The court further noted that the sales of digital images were not taxable specified digital products, as the definition of the term does not include still digital images. Finally, the court rejected the Department’s argument that the taxpayer was providing taxable photo finishing services because he edited the digital photos.  In the court’s view, there was no indication in Mississippi law that digital photo editing was intended to be included in “photo finishing” services, which was first included as a taxable service in 1955. Please contact Randy Serpas with questions about Department of Revenue v. EKB, Inc.

Tennessee: Sales of Subscriptions to Electronic Publications Not Taxable

In a recent letter ruling, the Tennessee Department of Revenue addressed the application of sales and use tax to print and electronic magazines, sales of advertising, and access to publications, and databases. The taxpayer at issue provided subscriptions to print and electronic publications. Electronic versions of the publications were available daily, by email or through the taxpayer’s website. The taxpayer also sold advertising space within the print and electronic versions of its publications and provided subscriptions to research databases. The taxpayer requested a ruling as to whether any of these activities were taxable. Under Tennessee law, retail sales of tangible personal property, specified digital products, remotely accessed software, and specifically enumerated services are subject to sales and use tax, unless an exemption applies. Although specified digital products includes digital books, there is an exemption for newspapers, magazines, periodicals, chat room discussion and weblogs. Likening the taxpayer’s subscriptions to publications as magazines, the Department concluded neither the print nor electronic versions were subject to sales and use tax. Under a Tennessee regulation, the sale of advertising space, including in newspapers, magazines, billboards, and commercials is not subject to sales and use tax. Thus, the taxpayer was not required to collect and remit Tennessee sales and use tax on its sales of advertising space in both the print and electronic versions of its publications. Finally, the Department concluded that the provision of access to databases and other electronic publications was properly classified as an information service that was not subject to Tennessee sales and use tax. The Department noted that access to the electronic publications and databases must take place through some software function, and subscribers can perform searches for specific terms within the website, which could be considered the furnishing of taxable computer software. However, in the Department’s view, the limited functionality of the software made these access and search functions merely incidental to the information services the customers were accessing. The use of computer software to access databases did not subject the offerings to Tennessee sales and use tax. Please contact Justin Stringfield with questions on PLR 22-06.

Texas: Weather Forecasting Service Not Taxable

The Texas Comptroller recently ruled that a web-based weather forecasting service was not a taxable information service. The taxpayer’s service included location-specific forecasts, severe weather alerts, and on-demand email and phone access to meteorologists. To provide its service, the taxpayer purchased third-party meteorological data and employed in-house meteorologists to create forecasting models. The taxpayer’s clients included retailers, refineries, oil rigs, and technology firms that utilized the taxpayer’s forecasts when determining whether to perform shutdown or emergency operations. In Texas, information services are subject to tax and are defined as “furnishing general or specialized news or other current information, including financial information.” An exclusion is provided, however, for the “sale of information primarily derived from laboratory, medical, or exploratory testing or experimentation or any similar method of direct scientific observation of physical phenomena.” Examples include geophysical survey information, polygraph tests, and medical test results. In response to a letter ruling request, the Comptroller found that the taxpayer primarily derived its service from the direct scientific observation of physical phenomena, meaning the information service was not subject to tax. Please contact Sarah Vergel de Dios with questions on Private Letter Ruling No. PLR20210503122657.

Multistate: Nexus Litigation Updates

There are several cases pending currently in courts across the country that address sales and use tax nexus for years both before and after the Wayfair decision.  Here are a few status updates. First, the Pennsylvania Department of Revenue announced that it will not appeal the Commonwealth Court’s recent decision in Online Merchants Guild v. Hassell. In that case, the court held that the merchants that sold through Amazon’s “Fulfillment by Amazon” program did not place their merchandise in the stream of commerce with the expectation that the goods would be purchased by a consumer in Pennsylvania (even though some inventory may have ended up in Pennsylvania). Further, the merchants had not availed themselves of Pennsylvania’s protections, opportunities, and services. As such, they lacked the requisite due process clause contacts to establish nexus with the Commonwealth.

In another case addressing pre-Wayfair sales, the litigation in South Carolina over whether Amazon was required to collect and remit sales tax on its facilitated sales will remain pending at the Court of Appeals. Recall, in 2019, the state Administrative Law Court concluded that Amazon was a “retailer” required to collect sales and use tax during pre-Wayfair tax years. The appeals court had requested that the South Carolina Supreme Court certify the case for review before the state highest court.  Finally, the oral arguments in U.S. Auto Parts, which addresses “cookie nexus” and whether the holding in Wayfair applied retroactively, will be held before the Massachusetts Supreme Judicial Court on November 4, 2022.

In other news, an Arizona-based online bead seller appealed the dismissal of its lawsuit challenging the constitutionality of Louisiana’s locally administered sales tax regime to the Fifth Circuit Court of Appeals. The bead seller had avoided doing business in Louisiana because of its burdensome and costly parish tax system. The federal district court had determined that it lacked jurisdiction over the case under the Tax Injunction Act (TIA). Under the TIA, a court cannot “enjoin, suspend or restrain the assessment, levy or collection of any tax under State law.” That bar, however, applies only if “a plain, speedy and efficient remedy may be had in the courts of such State.” The bead company argued that it was not challenging the levy or assessment of a tax; it was challenging the state’s overall local tax regime. Further, the company argued that because it had not been assessed tax and was therefore not seeking a refund, it did not have a remedy in state court.  Please stay tuned to TWIST for updates on these cases!