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December 2, 2022

State and Local Tax Weekly for December 2

Ernst & Young's State and Local Tax Weekly newsletter for December 2 is now available. Prepared by Ernst & Young's State and Local Taxation group, this weekly update summarizes important news, cases, and other developments in U.S. state and local taxation.


Ohio Supreme Court holds a motorsports company's receipts from licensing the rights to use certain intellectual property are not sourced to Ohio

On Nov. 22, 2022, the Ohio Supreme Court held1 that a motorsports holding company's receipts from broadcast, media, licensing and sponsorship agreements were not "based on" the right to use the intellectual property in Ohio and, as such, could not be sourced to Ohio for CAT purposes.

Background: The taxpayer, a motorsports holding company headquartered in Florida (company), entered into agreements giving various parties the rights to use its intellectual property. These agreements included the following:

  • Broadcast rights. The company entered into an agreement with a major US broadcast television network, granting it the right to broadcast motorsports races in a wide territory, which included Ohio. The broadcast network paid the company a fixed fee for the rights. The fee remained the same regardless of whether the races were broadcast in Ohio. The broadcast network, in turn, entered into third-party agreements under which it disseminated the broadcast rights to local markets or cable subscribers.
  • Media revenue. Under a fixed-fee agreement, the company granted a cable network the nonexclusive right to use its brand in marketing efforts (e.g., creation of an online store and motorsports-branded games) and the exclusive right to operate the company's website.
  • Licensing fees. The company granted the right to use its trademark and tradename to a merchandising company to sell motorsports-branded products, such as flags, keychains and barbeque sets anywhere in the United States and Canada.
  • Sponsorship fees. The company collected fixed fees from corporate sponsors, including an insurance company, which was granted the exclusive right to advertise itself as the company's supplemental insurance provider in the United States.

The Ohio Department of Taxation (Department) audited the company for CAT and determined that a portion of the foregoing intellectual property revenue streams were sourced to Ohio. The Department applied ORC 5751.033(I), which sources "all other receipts" not otherwise enumerated in the statute to Ohio "in the proportion that the purchaser's benefit in [Ohio] with respect to what was purchased bears to the purchaser's benefit everywhere … ." In applying the statute, the Department used Nielsen data to apportion the broadcast and media revenues to Ohio based on the proportion of Ohio cable-TV households to all US cable-TV households. The Department used US population data to source the licensing and sponsorship fees to Ohio.

The Department issued its assessment, which the company appealed to the Ohio Board of Tax Appeals (BTA). The company argued that the Department applied the incorrect statutory provision to the assessed receipts. Instead of ORC 5751.033(I), the company argued that the Department should have applied ORC 5751.033(F), which sources receipts from intellectual property based on the use of that property in Ohio or "to the extent that the receipts are based on the right to use the property" in Ohio. The BTA agreed with company that ORC 5751.033(F) applied but concluded that the assessment would have been the same under either provision. In upholding the Department's assessment, the BTA rejected the company's argument that the receipts should have been sourced to its corporate domicile in Florida.

Ohio Supreme Court ruling: The company appealed the BTA's decision to the Ohio Supreme Court. The Court rejected the company's arguments that the BTA erred by affirming the Department's assessment under a different statutory provision than the one cited by the Department. The Court concluded that ORC 5717.03(F) grants the BTA authority to affirm, reverse, vacate, modify or remand an assessment. Accordingly, the modification of the assessment to rely on ORC 5751.033(F) was within the BTA's authority.

Moving to the BTA's application of ORC 5751.033(F) to the various categories of receipts assessed, the Court observed that ORC 5751.033(F) sources receipts to Ohio only to the extent they are based on the right to use the intellectual property in Ohio. As none of the reviewed agreements tied payments to the right to use the intellectual property in Ohio (or even mentioned Ohio), the Court concluded that the Department's sourcing of those receipts to Ohio was problematic.

The Department argued that, although the contracts did not base payment on the right to use the intellectual property in Ohio, the Ohio portion of those receipts could be approximated, and tax assessed on that basis. The Court, however, declined to "stretch the statutory language" that far, stating that ORC 5751.033(F), by "its plain terms," sources receipts from intellectual property to Ohio "based on the right to use the property in Ohio." Noting that its "job is to apply the plain language of the statute," the Court rejected the Department's contention that sourcing is based on where the market for the sale is located. If the Department believes that the statutory language fails to implement good CAT policy, the Court noted, it should "take up the matter with the legislature."

As for the broadcast revenues, media revenues and sponsorship fees, the Court held that the payments the company received were fixed fees and were not tied to the amount of use of, or right to use, the company's intellectual property in Ohio. Regarding the licensing fees, the Court reversed the BTA on the ground that the applicable contracts did not designate any payment to the company based on the right to use the trademarks and tradenames in Ohio. Unlike the other categories of receipts, the licensing fees varied based on the merchandising companies' sales. Neither the Department nor the BTA, however, predicated the assessment of the licensing fees on the "actual use" language of ORC 5751.033(F); instead, they relied on the "right to use" language.2

For additional information on this development, see Tax Alert 2022-1784.


Colorado: In Avnet, Inc., the Colorado Court of Appeals (court) held that a taxpayer's subsidiary was an "includible corporation" for combined reporting purposes under Colo. Rev. Stat. §39-22-303(12)(c) because 20% of its property and payroll, considered together, was in the United States. The taxpayer, a Delaware corporation, was headquartered in Arizona and had an office in Colorado. The taxpayer did not include the subsidiary in its Colorado combined corporate income tax returns for tax years 2011-14. The Colorado Department of Revenue (Department) conducted an audit, concluding the subsidiary should have been included in the combined return, and assessed tax against the taxpayer. Colo. Rev. Stat. §39-22-303(11) requires combined reporting for affiliated groups of corporations if certain requirements are met. For the audit period at issue, Colo. Rev. Stat. §39-22-303(12) defined an "affiliated group" as an "includible corporation." An "includible corporation" was defined as any corporation that "has more than [20%] of [its] property and payroll as determined by factoring pursuant to [Colo. Rev. Stat. §24-60-1301] assigned to locations inside the United States." The taxpayer argued that the subsidiary was not an includible corporation because the subsidiary did not have 20% of its property and 20% of its payroll within the United States. The court, agreeing with the Department, held that Colo. Rev. Stat. §39-22-303(12) applies the 20% figure to one number, which is computed by combining the results produced by property and payroll factoring. The court said that the separate calculation of the property and payroll factors does not necessarily mean that Colo. Rev. Stat. §39-22-302(12)'s 20% requirement must apply to each of those factors separately. The court also said that its conclusion was consistent with the 80/20 test in Colo. Rev. Stat. §39-22-303(8), noting that the two tests were "reciprocal" of one another. Avnet, Inc. v. Colorado Dept. of Rev., No. 21CA1231 (Colo. App. Ct. Nov. 17, 2022) (unpublished). For additional information on this development, see Tax Alert 2022-1783.

Colorado: In a matter of first impression, the Colorado Court of Appeals (appeals court) held in Anschutz v. Colo. Dept. of Rev., that individual taxpayers were allowed to amend their state income tax return after retroactive changes to federal law made by the CARES Act (P.L. 116-136) reduced their state taxable income for those years. On March 27, 2020, Congress enacted the CARES Act, which, among other things, suspended the "excess business loss" deduction limits for the 2018-20 tax years. In April 2020, the taxpayers, a married couple filing jointly, amended their 2018 federal and Colorado income tax returns, claiming the entirety of their "excess business losses" and seeking refunds based on the retroactive reduction of their federal and state taxable income. The taxpayers based their claim on Colo. Rev. Stat. § 39-22-103(5.3), which, for Colorado income tax purposes, defines Colorado's version of the IRC as "the provisions of the [federal IRC], as amended … as the same may become effective at any time or from time to time, for the taxable year." In June 2020, the Colorado Department of Revenue (CO DOR) adopted Emergency Rule § 39-22-103(5.3), which was replaced with a permanent rule effective Sept. 30, 2020. Under that rule, federal changes enacted after the end of a tax year do not affect a taxpayer's Colorado tax liability for that tax year and those changes are incorporated into Colo. Rev. Stat. §39-22-103(5.3) only to the extent they were in effect in the tax year in which they were enacted and prospectively. Citing the Emergency Rule, the CO DOR denied the taxpayers' refund claim. On appeal, the district court granted the CO DOR's motion to dismiss the case. The appeals court, however, reversed the dismissal. In doing so, the appeals court agreed with the taxpayers' interpretation based on the plain language of the Colorado statutory provision, which they concluded was unambiguous. The appeals court noted that there are two types of federal statutory provisions that make up the definition of IRC in Colo. Rev. Stat. §39-22-103(5.3): (1) those found in the IRC "as amended"; and (2) those found elsewhere in the law of the United States to the extent they relate to federal income tax laws. The appeals court reasoned that both provisions are modified by the phrase "for the taxable year" without any limitation as to when any amendment is enacted or goes into effect. The appeals court declined to defer to the CO DOR's Emergency Rule, concluding that it was contrary to the statute's plain language. The appeals court noted that the legislature can amend the Colorado income tax code to decouple with changes in the IRC, but, until such amendments become effective, Colorado law automatically incorporates amendments to the IRC. in Anschutz v. Colo. Dept. of Rev., No. 21CA1242 (Colo. Ct. App. Nov. 17, 2022). For more on this development, see Tax Alert 2022-1769.

Massachusetts: The Massachusetts Department of Revenue (MA DOR) issued guidance on the apportionment of gain from the sale of a pass-through entity (PTE) interest following the Massachusetts Supreme Judicial Court's (MA SJC) ruling in VAS Holdings & Investments LLC.3 In VAS Holdings, the MA SJC held that the commonwealth lacked statutory authority under the unitary business principle to impose corporate excise and nonresident composite taxes on gain that an out-of-state limited liability company (LLC) treated as an S corporation and its nonresident owners realized from selling its interests in an in-state LLC treated as a partnership. (See Tax Alert 2022-0922.) As part of its decision, the MA SJC held that it would have been constitutionally permissible for Massachusetts to tax this capital gain. The MA DOR said that it "will construe VAS Holdings as controlling with respect to the facts of the case … " Regarding other sales of PTE interests, the MA DOR will apply the decision as follows. The MA DOR will consider the ruling in VAS Holdings applicable to gain from the sale of PTE interest derived by a corporation commercially domiciled in Massachusetts. The MA SJC noted that its ruling in VAS Holdings does not apply when a non-domiciliary corporation sells an interest in a PTE and the PTE and the non-domiciliary corporation are engaged in a unitary business. Given this, the MA DOR said that it will not apply the ruling in VAS Holdings when (1) a PTE and its non-domiciliary corporate owner are engaged in a unitary business directly or through tiers of PTEs, or (2) the taxable gain is includible in the unitary business income of the non-domiciliary corporate seller because the investment in the PTE served the business's operational function. In addition, the MA DOR said that it will not apply the ruling in VAS Holdings to the following: (1) when the seller of the PTE interest is an individual who actively engaged in the in-state business of the PTE either in the sale year or the year prior to the sale; (2) when gain derived by a non-domiciliary corporation or a non-resident individual from the sale of the PTE interest is allocable to Massachusetts (e.g., PTE only did business in MA); (3) the taxation of a PTE owner's distributive share income derived from a PTE's regular business operations or from the ownership or disposition of real property located in Massachusetts; or (4) gain derived by a resident individual from the sale of a PTE interest. The MA DOR further explained how to allocate or apportion gain from the sale of a PTE interest in various situations and when it will grant an abatement based on VAS Holding to non-domiciliary corporate taxpayers and non-resident personal income taxpayers. Mass. Dept. of Rev., TIR 22-14 "VAS Holdings & Investments LLC v. Commissioner of Revenue: Apportionment of Gain from the Sale of a Pass-through Entity (PTE) Interest Based Entirely Upon the Attributes of the PTE" (Nov. 30, 2022).

Montana: The Montana Department of Revenue (MT DOR) issued guidance on claiming a tax credit for income tax paid to another state for pass-through entity (PTE) taxes. The credit is for a resident's distributive share of income tax imposed by and paid to another state on the PTE's activity in that state; the tax may be paid by the owner or the PTE. Taxes qualifying for the credit include PTE composite taxes, excise or franchise taxes that are imposed on and measure by net income, and PTE taxes paid on income derived from sources in another state. The credit is available to the extent of the owner's tax liability in the other state; it isn't allowed on carried over excess tax paid in the other state. The credit is calculated based on the PTE owner's distributive share of the tax paid to the other state. The MT DOR noted that before claiming the credit, the owner's distributive share of any deductions for the other state's income tax must be added back to federal adjusted gross income. Mont. Dept. of Rev., Tax News You Can Use: "Credit for Income Taxes Paid to Another State or Country For Pass-Through Entity Taxes" (Dec. 1, 2022).

Washington: The Washington Supreme Court granted the state's Motion to Stay the lower court's ruling that Washington's 7% excise tax on sales of certain long-term capital assets violates the Washington State Constitution, pending this Court's final decision on this matter. The Court is scheduled to hear arguments in the case on Jan. 26, 2023. Quinn v. State of Washington, No. 100769-8 Order (Wash. S.Ct. Nov. 30, 2022). The Washington Department of Revenue (WA DOR) noted on its website that while the "stay does not resolve the issues surrounding the constitutionality of the capital gains tax … it does preserve the agency's ability to effectively administer and implement the tax and meet statutory obligations, including accepting tax payments, pending a final decision … " The WA DOR said it will continue to provide guidance on the tax and that the guidance will apply only if the tax is ultimately ruled constitutional and valid. Wash. Dept. of Rev., "Frequently asked questions about Washington's capital gains tax" (Dec. 2022).


Kansas: The Kansas Department of Revenue issued guidance on the phase-out of the state's sales and use tax on food and food ingredients. Under law enacted in 2022 (HB 2106), the current 6.5% tax rate will be reduced to 4% on Jan. 1, 2023, and to 2% on Jan. 1, 2024. The rate is reduced to zero as of Jan. 1, 2025. Food and food ingredients remain subject to local sales and use taxes imposed by cities and counties. The guidance includes definitions of food and food ingredients. Kan. Dept. of Rev., Notice 22-15 "Kansas Food Sales Tax Rate Reduction" (Dec. 1, 2022).

Iowa: The Iowa Department of Revenue (IA DOR) has adopted various non-substantive revisions and substantive changes to rules related to services subject to the state's sales and use tax. According to the rule's "Purpose and Summary", non-substantive changes include the rescission of ch. 26, the "longstanding" rules on taxation of services, and replacement with new ch. 211. The rules also have been reorganized to include more subject-focused chapters. The substantive changes include modifications to current rules and the adoption of new rules to implement recently taxable services. Rule 701-211.17(423), regarding machine operators, excludes language from the prior rule that created confusion (i.e., use of the word "primary") and includes examples that describe when a person is a machine operator based on the person's use of a computer to perform job functions. The IA DOR also adopted as binding administrative rules, the nonbinding guidance it had issued on the imposition of sales tax on digital-based services. The new and amended rules4 were adopted on Nov. 9, 2022, and they take effect Jan. 4, 2023.

Tennessee: In response to a ruling request, the Tennessee Department of Revenue (TN DOR) found that a data and technology company's sales of its license and credential verification and compliance monitoring services are not subject to the state's sales and use tax because they are sales of nontaxable information and data processing services. The TN DOR determine that using various sources of information to build a proprietary database that customers can access is a type of information service. Further, while customer access to the services through the company's online portal or an application programming interface could be seen as taxable computer services, the TN DOR found that use of such was "merely incidental" to the non-taxable information and data processing services. The TN DOR reasoned that there is no additional charge for use of the application, both the portal and application are only used to gain access to the nontaxable services, and they are worthless without the nontaxable services. Tenn. Dept. of Rev., Letter Ruling #22-08 (Oct. 12, 2022).

Tennessee: In response to a ruling request, the Tennessee Department of Revenue (TN DOR) determined that a company's subscription-based online platform and mobile application (collectively, "product") used to create and manage rental property advertising listings is computer software that users can use to generate and manage their own advertising content, and not advertising services. Accordingly, the company's sales of subscriptions the product are subject to the state's sales and use tax. In contrasting this ruling with TN DOR Revenue Ruling 19-01 (May 2019), the TN DOR noted that while there are similarities between the two rulings, in Ruling 19-01 the taxpayer's customers used the taxpayer's product to create event listings that were posted on the taxpayer's platform; they did not use software tools to create reports or manage data. In Ruling 19-01, the true object of the transaction was the non-taxable platform and listing services. Here, the company's product does not provide a platform for users to list their advertisements. Rather, the product allows users to create advertisements and publish them on other platforms, collects communications data, and contacts prospective buyers through automated emails and texts. In this instance, the TN DOR determined that the true object of the transaction is access to computer software. Tenn. Dept. of Rev., Letter Ruling #22-07 (Oct. 5, 2022).


Federal: In Notice 2022-61 (Notice), issued Nov. 30, 2022, the IRS explains how taxpayers (e.g., builders, developers and owners of clean energy facilities) may receive the increased tax credits or deductions added by the Inflation Reduction Act (IRA) by satisfying certain wage and apprenticeship requirements. The new requirements apply to credits under IRC §§ 30C, 45, 45L, 45Q, 45U, 45V, 45Y, 45Z, 48, 48C, and 48E and the deduction under IRC § 179D. The Notice describes how to (1) determine the prevailing wage and apprenticeship requirements, (2) maintain adequate records and (3) determine the beginning of construction and installation dates. The new requirements apply to projects beginning construction on or after Jan. 30, 2023 (60 days after the Notice was published). Taxpayers can still receive the increased credits for projects begun before this date but do not have to comply with the new requirements. The IRS said it anticipates issuing proposed regulations and other guidance later. For more on this development, see Tax Alert 2022-1832.

Hawaii: The Hawaii Department of Taxation (HI DOT) issued updated guidance on the state's renewable energy technologies income tax credit. The credit can only be claimed by the "economic owner" of the photovoltaic (PV) system; the "economic owner", however, does not have to be the owner of the property being served by the PV system. The "economic owner" is determined at the time the system is installed and placed in service, and the determination is based on the facts and circumstances of the transaction. While there is not a single test for making this determination, the HI DOT's guidance lists general rules that it will apply when analyzing the transaction. The HI DOT also said that its prior guidance on when repairs, maintenance and additions would qualify for the credit is not necessary under the current "total output capacity" method of calculating the credit. Accordingly, that guidance should no longer be relied upon. The HI DOT further explained that because the total output capacity calculation does not consider whether a renewable energy technology system (system) was previously installed on the property, the total output capacity calculation should be done without considering any prior installations. Actual cost of the system includes "accessories". To be eligible for the credit, the "accessory" must meet the following requirements: (1) capture a renewable source of energy, convert the renewable source of energy, or store the converted energy; and (2) be installed and placed in service on the same property in the same tax year the system that qualifies for the credit is installed and placed in service. The guidance also explains how to calculate the credit when there is multiple installation during a tax year and describes when a system is installed and placed in service. The guidance includes illustrative examples. Haw. Dept. of Taxn., Tax Information Release No. 2022-02 (Nov. 21, 2022); see also Haw. Dept. of Taxn., Tax Facts 2022-2 (Dec. 2022).


Arkansas: The Arkansas Tax Appeals Commission has adopted rules and procedures that describe the Commission's process for adjudicating appeal petitions challenging the determination of the Arkansas Department of Finance and Administration (DFA). Topics addressed by the adjudication rules include: (1) appearances and representation; (2) consolidation of separate matters that involve similar issues of law or fact and identical or related parties; (3) appeal petition, answers, replies and amended pleadings; (4) transition from the DFA's Office of Hearings and Appeals; (5) motions; (6) hearing procedures, evidence, and recordings of hearings; (7) issuance of a decision and redaction and publication of decisions; (8) scope and application of electronic filing, time of filing, and signatures; and (9) technical failures of the electronic filing systems. Under law enacted in 2021 (Act 586 and Act 593), the Arkansas Tax Appeals Commission had to be created by July 1, 2022, and it must be ready to begin accepting and trying tax disputes by Jan. 1, 2023. Ark. Tax App. Comm., "Rules of Procedure of the Arkansas Tax Appeals Commission" (Nov. 2022).


Virginia: The Virginia Department of Taxation announced that the Virginia Disposable Plastic Bag Tax has been adopted by Albemare County and the Cities of Charlottesville and Fairfax effective Jan. 1, 2023. The cities of Alexandria, Fredericksburg and Roanoke and the counties of Arlington and Fairfax began collecting the bag tax on Jan. 1, 2022; the City of Falls Church began collecting the tax on April 1, 2022; and Loudoun County began collecting the tax July 1, 2022. The tax applies to disposable plastic bags provided to customers in grocery stores, convenience stores and drugstores within the locality. Additional information on the tax is available here. Va. Dept. of Taxn., Tax Bulletin 22-13 (Dec. 1, 2022).


New York: New law (S. 9360) amends the state's abandoned property tax law to include provisions related to unclaimed virtual currency. Under the new law, any virtual currency held or owing by any banking organization, corporation or other entity engaged in the business of virtual currency that remains unclaimed for five years will be deemed abandoned property if: (1) the last known address of the person entitled to the virtual currency as shown on the entity's books and records is located in the state, or (2) the last known address of the person entitled to the virtual currency is not shown on the entity's books and records and the entity is incorporated in New York. The new law took effect immediately. N.Y. Laws 2022, ch. 640 (S. 9360), signed by the governor on Nov. 22, 2022.

Because the matters covered herein are complicated, State and Local Tax Weekly should not be regarded as offering a complete explanation and should not be used for making decisions. Any decision concerning matters covered herein should be reviewed with a qualified tax advisor.


1 NASCAR Holdings, Inc. v. McClain, Slip Opinion No. 2022-Ohio-4131 (Ohio S.Ct. Nov. 22, 2022).

2 Accordingly, a licensing agreement that makes payment contingent on sales could be sourced to Ohio based on the "actual use" language of ORC 5751.033(F).

3 VAS Holdings & Investments LLC v. Commissioner of Revenue, 489 Mass. 669 (MA SJC 2022).

4 The new rules include ch. 211 and ch. 218. Amended rules: ch. 203, ch. 213 through ch. 16, ch. 19, ch. 20, ch. 25.