TWIST - This Week in State Tax

Florida: Guidance Issued on Sales Tax Responsibilities for Businesses Using Delivery Companies

Under Florida law, a marketplace provider does not include a person who is a delivery network company unless the delivery network company (1) is a registered dealer and (2) notifies all local merchants that sell through the delivery network company’s website or mobile application that the company is a marketplace provider and is responsible for collecting and remitting Florida sales tax. The Florida Department of Revenue recently issued guidance on who is responsible for remitting sales and use tax when a third-party delivery network company is involved in the transaction. In Tax Information Publication No: 23A01-24, the Department notes that it has become aware of situations in which restaurants, grocery stores, convenience stores, and other local merchants using third-party delivery network companies did not report or remit the correct amount of Florida sales tax on their sales made through these networks. The guidance reminds such retailers that some delivery companies do not collect and remit Florida sales tax on the merchant's behalf; others collect Florida sales tax from customers but return the tax to the merchant to remit to the Department. Still others elect to collect and remit the tax. The Department recommends that local merchants using third-party delivery network companies should closely review the terms of their agreements related to sales tax collection and remittance responsibilities and the effective date of any changes related to those responsibilities. Merchants may also visit their delivery network company's website to determine if and when the delivery network company has made such an election. Interestingly, legislation has been introduced in the Florida Legislature (House Bill 1099 and Senate Bill 676) that, among other things, would require food delivery platforms to itemize and clearly disclose to a customer any taxes due on the transaction and would require an agreement between a food delivery platform and a food service establishment to identify the party responsible for collecting and remitting sales taxes.  Please stay tuned to TWIST for updates on these bills. 

Multistate: Public Law 86-272 Developments

During the last weeks of 2023, there were a couple of state tax developments related to P.L. 86-272. In New Jersey, in H&M Bay, Inc. v. Dir. Div. of Taxation, the tax court denied cross motions for summary judgment in a case addressing whether a freight forwarding company was subject to Corporation Business Tax (CBT). The taxpayer had no physical presence in New Jersey but provided freight forwarding services to New Jersey customers through independently owned trucking companies/carriers and coordinated deliveries of freight to certain New Jersey locations. The taxpayer’s position was that it did not meet any of the criteria to be considered subject to CBT. Notably, the taxpayer asserted that it was not exercising its corporate franchise in New Jersey, had de minimis revenues derived from New Jersey sources, and was not doing business in New Jersey, either itself of through an agent. The taxpayer also argued that it was immune from taxation under P.L. 86-272. The court did not agree with the last contention. Although the taxpayer coordinated shipments of freight— i.e., tangible property—- for its customers, it was not the owner of the freight and was therefore not soliciting orders for sales of tangible personal property. The taxpayer, the court determined, was performing a service and its activities were outside the protections afforded by P.L. 86-272. Although the tax court confirmed that a corporation need not have a physical presence in New Jersey to be subject CBT, it determined that there were material issues of fact that remained unresolved in this matter and therefore the case could not be decided on a summary judgment motion. For instance, it was unclear as to whether the taxpayer’s revenue from New Jersey sources was de minimis, or whether the independently owned trucking companies/carriers had an agency relationship with the taxpayer. 

In other P.L. 86-272 news, on December 13, 2023, a California superior court struck down the California Franchise Tax Board’s guidance (TAM 2022-01 and Publication 1050) that incorporated certain aspects of the Multistate Tax Commission’s revised “Model Statement of Information Concerning Practices of Multistate Commission and Supporting States Under P.L. 86-272.” In the judge’s view, the TAM and Publication 1050 were regulations within the meaning of the Administrative Procedure Act (APA) and because neither was enacted in compliance with the APA requirements, both were void.  As such, the judge granted the American Catalog Mailers Association’s (ACMA) summary judgement motion.  The FTB is now asking the judge to vacate the already-filed summary judgment motion that was drafted by the AMCA. The language in the judgement was not shared with the FTB before it was filed, as is required under California court rules. Further, the FTB is challenging the language in the judgement as being overly broad and inconsistent with the court’s ruling. Notably, the judgment states that “the TAM and Publication 1050 are, accordingly, declared void and without force or effect, and their guidance may not be relied upon . . ..” The FTB asserts that the court did not find that the TAM and Publication 1050 were “without force and effect” nor that they “may not be relied upon.”  Further, the FTB argues that state precedent holds that rules voided due to failure to follow required procedures are void and not to be given deference, but are not necessarily wrong. Rather, a court should independently consider how the governing statute or regulation should be interpreted.  The court has not ruled on the FTB motion.

Finally, the New York Department of Taxation and Finance recently finalized the 9-A corporate franchise tax regulations, which incorporate aspects of the MTC’s revised Statement on P.L. 86-272. Please stay tuned to TWIST for additional P.L. 86-272 developments. 

New York: Corporate Franchise Tax Regulations Finalized

On December 27, 2023, the New York Department of Taxation and Finance (Department) adopted regulations to implement the sweeping Article 9-A corporate franchise tax reforms first enacted almost a decade ago.  As adopted, the regulations are 417 pages and can be accessed here. It is likely that almost every New York business taxpayer will be affected by some aspect of the final regulations. Most of the significant changes are in Parts 1 through 9 of Subchapter A of Chapter I of Title 20 of the Codes, Rules and Regulations of the State of New York, which are repealed and replaced with entirely new language.

The regulations had been in draft form for some time, and the Department had solicited feedback from the taxpayer community before the regulations were officially proposed in the New York Register. In its “Assessment of Public Comment” document, which it posted on the Department’s website, it notes that a majority of the written comments submitted in response to the proposed rule duplicated feedback submitted to it during the development of the proposed rule. The Department also addresses the substantive comments received during the formal comment period and explains its reasons for rejecting suggested changes.

The regulations were adopted without any specific effective date and in the “Assessment of Public Comment,” the Department notes that by law the regulations are technically in effect when they were signed as final.  The Department’s Assessment of Public Comment” then addressed what it correctly understood the question of “effective date” to mean, which is the extent to which the regulations would be retroactively applied.  The Department’s answer to that is that, since the regulations interpret the statutory amendments of tax reform, they therefore will be applied to the same periods, i.e., as far back as to the 2015 tax year of the tax reform to the extent a tax reform year is still open under the statute of limitations. However, the Department notes, it may choose not to apply penalties in cases where taxpayers took a position in their tax filings prior to adoption of the proposed rule in reliance upon prior article 9-A regulations or prior drafts of the proposed rule. Below is a summary of what is covered in Parts 1 through 9 of the adopted regulations.

Part 1 addresses when corporations are subject to New York tax and incorporates the state’s post-reform economic nexus standard whereby a corporation or combined group will be subject to New York tax if it derives receipts from activity in New York that equals or exceeds $1 million (adjusted periodically for inflation and set at $1.283 million for the 2024 tax year).

This part also provides examples of activities that are, and are not, protected under P.L. 86-272.  These examples cover situations where a foreign corporation will be subject to New York tax, and the regulations incorporate aspects of the Multistate Tax Commission’s revised Statement on P.L. 86-272. Notably, a business that provides post-sales assistance to customers via email or chat will not be protected under P.L. 86-272 because these activities are not entirely ancillary to solicitation of orders for sales of tangible personal property. Other activities that exceed the scope of P.L. 86-272 protection include a corporation receiving branded credit card applications over its website and allowing prospective employees to submit an electronic application over a website for non-sales positions. The regulations also incorporate the MTC’s guidance on the use of cookies by Internet sellers. Cookies placed on customer devises to gather information that will be used to adjust production schedules and inventory amounts, develop new products, or identify new items to offer customers are not protected activities under P.L. 86-272.

Part 2 addresses accounting periods and methods and is largely unchanged from its predecessor regulations.

Part 3 provides guidelines for the computation of tax on the business income base, capital base and the fixed dollar minimum tax. This part is substantially revised and, in addition to capturing the New York tax reform related changes to computing the business income tax base, the regulation also addresses certain federal tax reform items, such as 163(j). Post-reform, New York NOLs are computed on an apportioned basis and are no longer limited to the allowed federal NOL amount. The regulation addresses the post-reform NOL computation, and provides guidance on computing the prior net operating loss conversion subtraction used to convert pre-reform NOLs into a new subtraction to be used in post-reform years.

Part 4: New York’s tax reform bills significantly overhauled the state’s apportionment rules, including generally adopting customer-based sourcing rules for service receipts in lieu of sourcing service receipts to the location where services were performed. Under the sourcing rules, there is a hierarchy that must be applied to determine a customer’s location. The first step in the hierarchy is to look to the location where the customer receives the benefit of the service.

While the general rule sources service receipts to customer location, specific statutory provisions address various types of service receipts. In fact, per the Department’s summary of the changes to the Article 9-A regulations, post-reform, there are over 50 categories of receipts and income addressed in the statutory apportionment provisions. The regulation does not address each and every category but, per the Department, provides guidance “where needed.”  For each category of receipts addressed in the regulation, there are numerous illustrative examples.

The statute was silent with respect to sourcing asset management fees. Of interest to those in the non-real estate asset management industry, the regulation provides a hierarchy to determine where the benefit of a service is received if services are provided to a “passive investment customer” (including a passive corporation or passive partnership, among other business entities), as opposed to an individual customer or a business customer that is an active business. The benefit of management, distribution, and administration services provided to a passive investment customer is presumed to be received at the location of the investors in such passive investment customer unless the investor is holding the interest in the passive investment customer for a beneficial owner. If the investor is holding the interest in the passive investment customer for a beneficial owner, the benefit of the services is presumed to be received at the beneficial owner’s location. The location of an individual investor or beneficial owner is its billing address; the location of a non-individual is its principal place of business. Management, distribution and administration services provided to a passive investment customer are apportioned to New York in proportion to the average value of the interests in the passive investment customer held by the passive investment customer’s investors and beneficial owners located in New York. To calculate the average value of the interests in, taxpayers are instructed to add the percentage of the value of the interests held by investors and beneficial owners located in New York at the beginning of the taxable year to the percentage of the value of the interests held by investors and beneficial owners located in New York at the end of the taxable year and divide by two. If a corporation cannot determine the location under the general rule, the benefit of management, distribution, and administration services provided to a passive investment customer is presumed to be received at the location where the contract for such services is managed by the passive investment customer.  Apparently, that default approach would consider the location of where the contract is managed to be the corporate taxpayer’s location of performing such management if it has been delegated with trading authority in that regard.  Moreover, the Department rejected public comments on the proposed regulations, which had requested a bifurcated approach to applying this two-step hierarchy, i.e., source to the location of where the passive business entity customer’s owners are located to the extent that is known, and source to the default “contract managed location” to the extent such look-thru owners’ locations are not known.  The Department’s explanation for rejecting such bifurcation is that it could pose administrative complexities, and also set up potential tax avoidance “manipulation” strategies for the sourcing.  The Department’s decision thereby could often lead to the situation where the default approach swallows up the primary approach, if the taxpayer does not have 100 percent knowledge of the locations of the underlying investors of the business entity being managed.     

Another point to note is that the regulation recognizes the increasing use of intermediaries to facilitate sales and adopts specific rules for “intermediary transactions.” An intermediary transaction means a transaction where the business customer derives value from a product or service (digital or otherwise) at the location of the consumer rather than the location of the business customer itself. Various examples illustrate what, in the Department’s view, is and is not considered an intermediary transaction. 

Part 5 addresses tax credits and makes minimal changes to its predecessor regulations.

Part 6 provides guidance on New York’s reporting requirements. Importantly, Subpart 6-2 implements the tax change to mandatory unitary combined reporting by defining terms, providing explicit guidance, and presenting illustrative examples of the application of the new combined reporting rules in specific circumstances.

Part 7 relates to the payment of tax and estimated tax, as well as collection.  It is largely unchanged.

Part 8 is dedicated to the computation of the Metropolitan Transportation Business Tax Surcharge and Part 9 provides definitions of terms and rules pertaining to the following special entities: qualified New York manufacturers, corporate partners, New York S corporations, real estate investment trusts and regulated investment companies, and domestic international sales corporations.

The New York City Department of Finance is expected soon to propose and then enact its own corporate tax reform regulations.  It is expected that virtually all of those will be in conformity with those of the State as the State and City tax reform laws were enacted in virtually a parallel manner. However, may be a few areas where the City, nonetheless, diverts from the State.  Please contact Russ Levitt or Aaron Balken with questions.