TWIST - This Week in State Tax

Alabama: Monthly Sales Tax Filing Threshold Increased

Under current law, businesses with an average monthly state sales tax liability of $5,000 or greater in the preceding calendar year are required to make estimated payments to the Department of Revenue each month. The estimated payment is the lesser of 2/3 of the liability for the same month in the previous year or 2/3 of the estimated liability for the current month. Recently signed House Bill 77 increases this threshold amount to an average monthly state sales tax liability of $20,000 or more. The fiscal note for the bill estimates that an additional 3,100 small businesses will no longer be required to prepay their sales taxes under the revised law. This change is effective on October 1, 2023.  Please stay tuned to TWIST for additional sales tax changes. 

Michigan: Memo Did Not Constitute a Request for Refund

The Michigan Court of Appeals recently addressed when interest started to accrue on a tax refund. All parties agreed the taxpayer was entitled to a corporate income tax refund; the issue before the court was when the taxpayer filed its refund claim.  This was important because under Michigan law, interest on refunds “shall be added to the refund commencing 45 days after the claim is filed….” In this case, the taxpayer argued that interest started to accrue after it emailed a memo to a Department of Treasury auditor asserting that a particular subsidiary should have been included in its unitary business group. While the inclusion of the subsidiary’s losses would have reduced the group’s liability for the tax years at issue, the memo did not explicitly demand a tax refund. It was the taxpayer’s position that the emailed memo constituted a refund request. The Department of Treasury, on the other hand, asserted that the first time the taxpayer made a clear, express claim for refund was when it requested an informal conference to discuss the audit almost two years later.  The matter eventually came before the appeals court.

In an earlier case, Ford Motor Co v Dep’t of Treasury, the Michigan Supreme Court held that although a “claim” or “petition” for refund need not take any specific form, it must clearly demand, request, or assert a right to a refund of tax payments made to the Department of Treasury. Additionally, to “file” the claim or petition, a taxpayer must submit the claim to Treasury in a manner sufficient to provide Treasury with adequate notice of the taxpayer’s claim. In the instant case, the court noted that the emailed memo did not contain any request or demand for tax money to be refunded. Rather, the memo was focused solely on arguing that the subsidiary should have been included in the unitary group.  The taxpayer also asserted that its representative orally requested a refund in her discussion with the auditor. However, the under Michigan law, a claim or petition for a tax refund must be made in writing. The appeals court concluded that the email memo was insufficiently definite and specific to constitute an explicit demand or request for a tax refund. Please contact Dan De Jong with questions on United States Steel Corp. v. Dep’t of Treasury.

Multistate: Alabama and Texas Enact Laws Reducing Taxes on Necessities

Over the last couple years, several states have adopted permanent or temporary sales and use tax exemptions for certain personal necessities, such as food and food ingredients, diapers, and feminine hygiene products. A few additional bills of this sort were recently signed into law. In Alabama, House Bill 479 reduces the sales and use tax rate applied food (newly defined with reference to the federal Supplemental Nutrition Assistance Program definition) from four percent to three percent on September 1, 2023. The rate drops to two percent on September 1, 2024, if the average of the estimated growth in total net receipts from all revenue sources to the Education Trust Fund for the fiscal year ending September 30, 2025 is at least three and a half percent higher than the previous fiscal year. If the revenue growth requirement is not satisfied the rate will be reduced in a subsequent fiscal year when it is met.  The bill also prohibits increases in the rate of current local sales and use taxes on food as well as the enactment of new local taxes on food.

Effective September 1, 2023, Texas Senate Bill 379 adopts new sales and use tax exemptions for certain “family care” items, including wound care dressings, adult or children's diapers, baby wipes, baby bottles, feminine hygiene products, maternity clothing, and breast milk pumping products, including the pump and its power source. The bill includes definitions for the soon to be exempt products.  Please stay tuned to TWIST for additional sales tax exemption updates.

Washington State: Taxpayer’s Services Were Not Data Processing

In a recently released determination, the Washington State Department of Revenue’s Administrative Review and Hearings Division concluded that a taxpayer was selling credit bureau services, rather than data processing services. The taxpayer’s primary service was recommending to retail clients whether to accept a check as a form of payment. The objective of this service was to reduce a client’s risk of business loss. The taxpayer’s recommendations were based on it analyzing certain data, such as the customer’s driver license or state-issued identification, information on the customers recent purchases, and product information. The taxpayer also provided similar services to payroll check cashing businesses by providing clients with immediate check acceptance recommendations. Both processes were fully automated. Following an audit, the taxpayer was assessed retail sales and use tax and retailing B&O on its sales on the basis that they were sales of credit bureau services to Washington customers. The taxpayer petitioned the Department’s Administrative Review and Hearings Division (Division) for correction of the assessments.

Under Washington law “credit bureau services” are included in the definition of a retail sale and are subject to sales and use tax. The term “credit bureau services” is not defined, but the Department has previously interpreted the term to involve situations in which a business analyzes data and makes recommendations to minimize its clients’ business risk of loss. The taxpayer, however, argued that it was providing data processing services because it was extracting information to convert data to useable information. Under Washington law, a “data processing service” means a primarily automated service provided to a business or other organization where the primary object of the service is the systematic performance of operations by the service provider on data supplied in whole or in part by the customer to extract the required information in an appropriate form or to convert the data to usable information. Data processing services, which are not subject to retail sales and use tax, include check processing services. In the Division’s view, the taxpayer’s services concerned more than simply extracting data provided by its clients; its services involved analyzing the data through algorithms to evaluate business risk. As such, the Division concluded that the taxpayer was selling “credit bureau services” and was subject to retail sales tax and retailing B&O.  Please contact Michele Baisler with questions on Det. No. 18-0025, 42 WTD 001 (2023).