State and Local Tax Shifts: Mid-Year Updates and Implications

By Jennifer W. Karpchuk, Esq., Chamberlain Hrdlicka – June 19, 2024

With courts across the country issuing rules that redefine tax obligations, clarify interpretations and set precedents, staying informed about mid-year case law updates is essential for taxpayers and their advisors. Here are some of the most notable state and local decisions of the year:

California: PL 86-272 Guidance Tossed

In 2022, the California Franchise Tax Board (FTB) issued Technical Advice Memorandum 2022-01 and a revision of Publication 1050 seeking to implement new interpretations of Public Law 86-272, a federal law that limits when a state may impose its income tax on an out-of-state business. The FTB s guidance adopted the restrictive views that the Multistate Tax Commission (MTC) issued in its Revised Statement of Information in 2021. These revisions were meant to address how Public Law 86-272 should be viewed in the age of the internet. Notably, Public Law 86-272 is a federal law and the MTC s guidance is not binding.

In August 2022, the American Catalog Mailers Association (ACMA) filed suit arguing that the guidance violated the federal law and that it was unlawfully retroactive and a de facto regulation adopted without adhering to the state’s Administrative Procedure Act.

While the case was a win for the taxpayers, it did not address the core tax issue as to whether the guidance violates Public Law 86-272. With other states adopting similar language, there will likely be some court decisions in the near future addressing this issue.

Mississippi: Exemption Certificate Issues for the Unwary

Practitioners often grapple with emphasizing to their clients the importance of maintaining exemption certificates. A recent case out of Mississippi, Toolpushers Supply Co. v. Mississippi Department of Revenue, creates added compliance issues. Toolpushers was a Wyoming corporation that sold various items to purchasers in the oil and gas industry. The sales in question in Mississippi were made to oilfield service providers with a valid retail sales tax permit. The Mississippi Department of Revenue audited and assessed Toolpushers based on the fact that the purchaser later consumed the products for its own use.

Mississippi’s wholesale sales statute contains a good faith requirement. Tool pushers relied upon the purchasers’ presentation of their permits to do business to determine that it would not charge such purchasers the 7% retail sales tax.

The court emphasized that there was no evidence that the purchasers were ever asked any questions about the nature of their business or the purpose for which each specific purchase was being made. The only evidence Toolpushers presented to chancery court to support its contention that the sales made were wholesale was the fact that the purchasers had sales tax licenses. The court found that, as a matter of law, accepting a resale certificate in good faith required something more.

South Carolina: Amazon Liable for Third-Party Sales

In February 2024, the South Carolina Court of Appeals held that Amazon, as a marketplace facilitator, had a duty to collect and remit sales taxes from third parties (pre-Wayfair). Amazon Services LLC is a subsidiary of Amazon.com Inc. and operates the Amazon.com website (i.e., marketplace). Amazon sells products through its marketplace from Amazon, its affiliates and third-party sellers. Amazon maintained distribution centers in South Carolina thus, for pre-Wayfair years, had established physical presence. Amazon Services collected and remitted sales tax for the sales of Amazon and its affiliates. However, it did not collect tax on sales of products by third-party sellers on the marketplace.

The South Carolina Department of Revenue audited and assessed Amazon for more than $12 million in taxes, penalties and interest related to the first quarter of 2016, asserting that Amazon Services owed tax on sales of products by third-party sellers through its marketplace.

Before the South Carolina Court of Appeals, Amazon made a number of arguments all of which were ultimately rejected by the court. The court adopted a broad view of the statute, finding that Amazon Services was selling tangible personal property at retail and was therefore responsible for collecting and remitting sales tax on the third-party transactions. Amazon has appealed the decision to the South Carolina Supreme Court. Those interested in the outcome of this case should stay tuned.

Pennsylvania: Unconstitutional Jock Tax

The City of Pittsburgh implemented a tax on nonresident athletes that used publicly funded facilities. Referred to as the jock tax, it was challenged by the players associations for the National Hockey League, National Football League and Major League Baseball, among others, on the grounds that it violated the state’s Uniformity Clause. The Uniformity Clause requires that all taxes be uniform upon the same class of subjects.

The jock tax required nonresident athletes to pay a 3% tax on income earned while working in the city if the athletes used the publicly funded facilities. The city argued the tax did not violate the uniformity clause because residents were subject to a 1% earned income tax and a 2% school tax, which the city argued was equivalent to the 3% jock tax.

The Commonwealth Court upheld a trial court ruling, finding that the jock tax violated the state s uniformity clause. The court reasoned that the tax could not be considered uniform when it is paid to two distinct taxing authorities (i.e., the city and the school district).

As we move into the latter half of 2024, taxpayers and tax preparers should continue to monitor these cases and others in order to remain vigilant and responsive to the latest developments in state and local tax.