TWIST - This Week in State Tax

The Department of Revenue recently issued guidance (TIP No. 24A01-02) reminding taxpayers that the state sales tax imposed on the total rent charged for renting, leasing, letting or granting a license to use real property will be reduced from 4.5 percent to 2.0 percent effective June 1, 2024. Taxable rentals include, but are not limited to, rentals of commercial office or retail space, warehouses, and self-storage units or mini warehouses. The total rent charged includes all consideration due and payable by the tenant for the privilege or right to use or occupy the real property. The local option discretionary sales surtax imposed by the county in which the real property is located continues to apply to the total rent charged. The guidance clarifies that sales tax is due at the rate in effect during the time the tenant occupies or is entitled to occupy the real property, regardless of when the rent is paid. The reduced state sales tax rate on commercial rentals does not apply to transient rentals, parking, or storage spaces for motor vehicles in parking lots or garages, docking or storage spaces for boats in boat docks or marinas, or tie-down or storage space for aircraft at airports. Please contact Amanda Ribeiro with questions. 

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. Part 1 of the new regulations addresses when corporations are subject to New York tax and provides examples of activities that are, and are not, protected under P.L. 86-272. Importantly, the newly adopted regulations incorporate aspects of the Multistate Tax Commission’s revised Statement on P.L. 86-272, which addresses businesses that conduct activities over the Internet. Notably, per examples in the regulations, 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 devices 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.

On April 5, 2024, the American Catalog Mailer’s Association filed a complaint seeking to invalidate the New York regulations interpreting P.L. 86-272 (hereinafter the P.L. 86-272 regulations).  The American Catalog Mailer’s Association (ACMA) is not an Internet seller itself but is a non-profit trade organization that advocates for the interests of catalog, online, direct mail and other remote sellers. The ACMA filed a similar lawsuit in California after the Franchise Tax Board incorporated aspects of the MTC’s revised statement in certain FTB publications (TAM 2022-01 and FTB Publication 1050). The ACMA prevailed in that lawsuit, but on the grounds that the FTB improperly incorporated the MTC’s guidance into publications that were not adopted under the state’s Administrative Procedures Act.

Recall, P.L. 86-272 prevents a state from imposing a net income tax on a person if the person’s only business activities in the state are solicitating orders for sales of tangible personal property. In its complaint, the ACMA asserts that the P.L. 86-272 regulations effectively rewrite the federal statute to include as activities performed in New York activities performed by employees of an Internet seller outside of New York using computers outside New York.  Under these rules, if a Virginia-based employee of a Virginia retailer using computer equipment in Virginia receives and responds to an email or electronic chat; a credit card application, a job application, or a request for technical assistance, that employee has engaged in a business activity in New York without ever leaving their desk in Virginia. The ACMA alleges that these provisions effectively rewrite P.L. 86-272, which only Congress is empowered to do. The ACMA further argues that because the Department announced its intention to apply the new regulations in their entirety retroactively, its members “that have relied in good faith on the plain text of P.L. 86-272, not to mention decades of settled law and practice, could suddenly find themselves at risk of audits by the Department stretching back nearly a decade.” The ACMA seeks a judgment declaring that the P.L. 86-272 regulation is invalid as it conflicts with P.L. 86-272. In the alterative, the ACMA seeks a judgment that the P.L. 86-272 regulation cannot be applied to any time periods prior to the publication date.  Please stay tuned to TWIST for future updates. 

The Pennsylvania Board of Finance and Revenue often releases dozens of decisions on a single day; one relatively recent decision includes some interesting issues for marketplace facilitators. The taxpayer at issue was a ticketing and marketing platform that allowed event organizers (termed “creators”) to list, advertise, and sell admissions to their events live and virtual events.  The taxpayer received service fees from the creators for the use of the platform, and payment processing fees in the event a creator elected to have the taxpayer process ticket payments. The Board was asked to determine two primary issues. One was the taxability of the service and payment processing fees charged to creators who were selling admissions to their events via the platform.  The second issue was the taxability of the tickets for access to the live and virtual events. The Statement of the Case noted several times that the taxpayer had not kept good records and was not particularly responsive to the auditor’s requests for such.

With respect to the taxability of the service and payment processing fees, the Board agreed with the Department of Revenue and concluded that the taxpayer was providing taxable SaaS. Although customers did not receive control or possession of the software, a sale at retail includes “the grant of a license to use or consume whether such transfer be absolute or conditional and by whatsoever means the same shall have been effected.” The taxpayer’s terms of service supported this conclusion; they granted users a limited right to use its services to, among other things, “create event registration, Organizer profile, and other webpages to promote, market, manage, track, and collect sales proceeds for an event.” The facts indicated that the taxpayer was also paid a percentage of the sales initiated through its platform; the taxability of these commissions did not appear to be an issue in the dispute.

The second issue was the taxability of the ticket sales. Notably, tickets for admissions to live events are not taxable under Pennsylvania law. However, the Department’s position on audit appeared to be that because certain customers who purchased tickets to live events received some type of tangible personal property, those ticket purchases were taxable.  Although not specifically addressed in the decision, in a hearing on the matter the taxpayer’s counsel noted that the taxpayer had no way of knowing in all instances whether tangible property was provided at the live event, and the tangible property that was provided might be de minimis.  However, the taxpayer’s records did not clearly identify the transactions that did provide customers with tangible property along with access to the live events. Due to the inadequacy of the taxpayer’s records, the Department applied an estimated error rate to determine the taxable transactions. The Board concluded that the Department’s use of alternative methodologies to determine an error rate for the ticket sales to live events was appropriate given the lack of records and the fact that the taxpayer bore the burden of proving that the Department’s methods were not valid.

The Department had also concluded that when the taxpayer sold tickets to online or virtual events, those tickets were taxable as SaaS or (as noted at the hearing) digital goods. The taxpayer argued that imposing sales tax on access to online events, but generally not taxing tickets to live events, violated the Internet Tax Freedom Act in violation of the Supremacy Clause of the U.S. Constitution.  The Board declined to address this challenge, noting that it was not empowered to decide whether a Pennsylvania statute was unconstitutional.  The Board did agree to abate penalties. The decision has been appealed to Commonwealth Court. Please contact Sarah McGahan with questions on In re Eventbrite, Inc.