Post on 28-Apr-2018
Sales and Use Tax for Cloud Computing, Software,
Apps, and Other Digital Products and Services Overcoming Vendor and Customer Compliance Challenges Due to Inconsistent Multi-State Tax Laws
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THURSDAY, DECEMBER 12, 2013
Presenting a live 110-minute teleconference with interactive Q&A
Andrew Appleby, Sutherland Asbill & Brennan, New York
Joseph Endres, Hodgson Russ, Buffalo, N.Y.
Laurie Wik, Tax Director, Deloitte Tax, San Jose, Calif.
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Sales and Use Tax for Cloud Computing, Software, Apps, and Other Digital Products and Services
Andrew Appleby, Sutherland
andrew.appleby@sutherland.com
Dec. 12, 2013
Joseph Endres, Hodgson Russ
jendres@hodgsonruss.com
Laurie Wik, Deloitte Tax
lwik@deloitte.com
Today’s Program
Sales Tax of Cloud Computing—Introduction and Overview
[Laurie Wik]
Potential Nexus Issues
[Joseph Endres]
Sourcing Issues
[Joseph Endres]
Streamlined Sales Tax Update
[Andrew Appleby]
State-by-State Legislative and Regulatory Update
[Andrew Appleby]
Compliance Issues
[Andrew Appleby]
Slide 8 – Slide 28
Slide 29 – Slide 36
Slide 37 – Slide 41
Slide 42 – Slide 44
Slide 45 – Slide 77
Slide 78 – Slide 82
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
SALES TAX OF CLOUD COMPUTING—INTRODUCTION AND OVERVIEW
Dan Davis, Associated Sales Tax Consultants
Copyright © 2013 Deloitte Development LLC. All rights reserved. 9
Agenda
• What are Cloud Computing Services?
• Taxability Overview
What Are Cloud Computing Services?
Copyright © 2013 Deloitte Development LLC. All rights reserved. 11
What are Cloud Computing Services?
• Digital products - products and services provided or furnished
electronically via the Internet Cloud
• Popular terms include - SaaS, Hosted, Cloud Computing, Web-enabled
and Web-based
• Digital products examples -
− Sales to businesses: software, data, information services,
searchable databases
− Sales to consumers: movies, songs, videogames and premium
level subscriptions to online social networks
Copyright © 2013 Deloitte Development LLC. All rights reserved. 12
Cloud Product Characteristics
On-demand self
service
Location independent
resource pooling
Rapid elasticity
Ubiquitous network
access Pay per use
Copyright © 2013 Deloitte Development LLC. All rights reserved. 13
Cloud Product Offerings
Software as a Service (SaaS): Customer/User accesses a software
application running on the SaaS provider’s cloud infrastructure
Copyright © 2013 Deloitte Development LLC. All rights reserved. 14
Cloud Product Offerings
Platform as a Service: (PaaS) Customer uses Cloud Provider’s cloud
infrastructure and tools to build or deploy applications and content.
Customer does not manage or control the underlying cloud
infrastructure but controls its deployed applications/content. 3rd parties
can access the customer’s applications/content.
Copyright © 2013 Deloitte Development LLC. All rights reserved. 15
Cloud Product Offerings
Infrastructure as a Service: IaaS: Customer is provided processing,
storage, networks, and other fundamental computing resources. The
customer does not manage or control the underlying cloud
infrastructure but has control over operating systems, storage, and
deployed applications, and possibly limited control of select
networking components (e.g., host firewalls).
Copyright © 2013 Deloitte Development LLC. All rights reserved. 16
• Pay-Per-Use
• Pay-Per-User
• Pay-Per-Gigabyte Used
• Revenue-Share
• Monthly or Annual Subscription
Cloud Product Pricing Models
Taxability Overview
Copyright © 2013 Deloitte Development LLC. All rights reserved. 18
Taxability
States may assign a Cloud Computing transaction to one of the following
taxable categories:
• Sale, rental, or access to prewritten software
• Data processing or data storage service
• “Digital Automated Service”
• Computer Service
• “Canned” Information Service
• Digital equivalent to traditional tangible personal property ‘aka’
digital goods
• Digital good or specified digital good
Slide Intentionally Left Blank
Copyright © 2013 Deloitte Development LLC. All rights reserved. 20
Taxable because:
• Taxable sale or lease of prewritten software (TPP) despite no
physical transfer because customer has “constructive possession”
• Taxable lease or rental of TPP despite no physical possession
because server is single-tenant server
• Not an enumerated exemption from general tax on services
• Customer receives the benefit of a taxable service such as data
processing or information service in the state
States Positions on Cloud Computing
Copyright © 2013 Deloitte Development LLC. All rights reserved. 21
Not Taxable because:
• Not a sale or lease of prewritten software, i.e., statutory Tangible
Personal Property (“TPP”) because customer does not have physical
possession
• Not a sale or lease of software because vendor’s server is not in the
state
• The product is not prewritten software and not an enumerated taxable
service
States Positions on Cloud Computing
Copyright © 2013 Deloitte Development LLC. All rights reserved. 22
Not Taxable because:
• Not a sale or lease of prewritten software, i.e., statutory Tangible
Personal Property (“TPP”) because customer does not have physical
possession
• Not a sale or lease of software because vendor’s server is not in the
state
• Excluded from definition of a taxable sale; the product is not
prewritten software and not an enumerated taxable service
States Positions on Cloud Computing
Copyright © 2013 Deloitte Development LLC. All rights reserved. 23
Resale and other exemptions
• Texas: 20% exemption from the value of information services and
data processing services. Texas Tax Code Sec. 151.351.
• Washington:
o Multiple Point of Use Exemption, Digital Products: RCW
Section 82.12.02088, WAC458-20-15503(506)
o Multiple Point of Use Exemption, Remote Access Software:
RCW Section 82.08.02088, WAC458-20-15502(11)
o Digital Products or Remote Access Software Made Available
For Free to the General Public. RCW Section 82.08.02082,
WAC458-20-15502(10)(c)(ii), WAC458-20-15503(504)
o Digital Goods Purchased for a Business Purpose. RCW
Section 82.08.02087(1), WAC458-20-15503(505)
Exemptions
Copyright © 2013 Deloitte Development LLC. All rights reserved. 24
True Object/Primary Purpose
Massachusetts
Massachusetts Letter rulings in which a hosted product offering was
deemed access to software considered:
• Substantial use of software by the customer
• The level of taxable to non-taxable elements included in a bundled
offering
• The automated functioning of tasks performed by the product
offering
• The tasks the customer seeks to be performed by the product
offering and the role of the seller’s software in performing such
tasks, i.e, is the software incidental to a task a human is performing
or is the software the means of performing the task
• The intervention in the product offering by seller’s personnel or
lack thereof
Copyright © 2013 Deloitte Development LLC. All rights reserved. 25
True Object/Primary Purpose
Massachusetts: Massachusetts Dept. of Revenue Letter Ruling 11-4, (April 12, 2011)
Massachusetts Dept. of Revenue Letter Ruling 12-5 (May 7, 2012)
Massachusetts Dept. of Revenue Letter Ruling 12-10 (Sept. 12, 2012)
Massachusetts Dept. of Revenue Letter Ruling 12-13 (Nov. 9, 2012)
Massachusetts Dept. of Revenue Letter Ruling 13-2 (March 11, 2013)
Massachusetts Dept. of Revenue Letter Ruling 13-5 (June 4, 2013)
Copyright © 2013 Deloitte Development LLC. All rights reserved. 26
Contacts
Laurie Wik
Tax Director, San Jose, California
408-704-4517, lwik@deloitte.com
Copyright © 2013 Deloitte Development LLC. All rights reserved. 27
This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting,
business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for
such professional advice or services, nor should it be used as a basis for any decision or action that may affect your
business. Before making any decision or taking any action that may affect your business, you should consult a qualified
professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.
About this presentation
About Deloitte
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of
member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed
description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about
for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest
clients under the rules and regulations of public accounting.
Copyright © 2013 Deloitte Development LLC. All rights reserved.
Member of Deloitte Touche Tohmatsu Limited
Where value is law.
© 2013 Hodgson Russ LLP
Doc. # 11629792 www.hodgsonruss.com
Sales and Use Tax for Digital Products and Services—Potential Nexus Issues
Joseph N. Endres, Esq. Hodgson Russ LLP
140 Pearl Street, Suite 100
Buffalo, New York 14202
Phone: (716) 848-1504
Fax: (716) 819-4711
jendres@hodgsonruss.com
Where value is law.
Nexus
First question: Nexus, what is it?
1. Nexus is a fancy word for “connection.” In order for a state to require an out-of-state seller to collect its sales tax, there must be a requisite level of connection between the state and the seller.
Quill v. North Dakota, 504 U.S. 298 (1992)
The “Bright Line” Test: Physical Presence
Do you have any people or property in the state?
• Offices
• Employees or independent contractors
• Inventories
• Other property – servers and Texas
30
Where value is law.
Nexus Continued
Just because you have “Nexus” with a state, doesn’t mean you have a sales tax exposure.
1. Not all states tax digital goods. You have to know the rules in each state. Unfortunately the rules are complex and in flux!
For example, California exempts digital goods. New York taxes digitally accessed or transferred software, but exempts other digital products such as music, pictures, etc.
States that tax digital products, other than software: AL, AR, AZ, CO, CT (but at a lower rate), HI, ID, IN, IL, KY, LA, ME, MN (as of 7/1/13), MS, NC, NE, NJ, NM, OH (as of 1/1/14), SD, TN, TX, UT, VT, WA, WI, WY.
31
Where value is law.
Nexus Continued
Can a third party’s activity in a state confer nexus on an out-of-state seller?
1. Yes. Affiliate or Click-Through Nexus!
Scripto, Inc. v. Carson, 362 U.S. 207 (1960)
Tyler Pipe Industries, Inc. v. Washington Dep’t of Revenue, 483 U.S. 232 (1987)
2. Several states now impose some sort of click-through or affiliate nexus, including Arkansas, California, Colorado, Connecticut, Georgia, Illinois, New York, North Carolina, Oklahoma, Rhode Island, South Dakota, Tennessee, Texas and Vermont.
32
Where value is law.
Nexus Continued
The “Click-Through” or Affiliate Nexus laws are likely here to stay, though some have been invalidated recently in certain states.
1. This month the Supreme Court refused to hear a challenge to New York’s Affiliate Nexus laws.
2. In October, the state's highest court found Illinois' Internet sales tax void and unenforceable because it conflicts with a federal law that temporarily blocked new state or federal taxes aimed at online retailers or Internet providers, the first court in the country to take that stance.
So it doesn’t look like a unified solution is going to come from the courts.
What about Congress?
33
Where value is law.
Nexus Continued
The Marketplace Fairness Act of 2013
1. The Marketplace Fairness Act grants states the authority to compel online and catalog retailers ("remote sellers"), no matter where they are located, to collect sales tax at the time of a transaction - exactly like local retailers are already required to do.
2. However, States are only granted this authority after they have simplified their sales tax laws.
• Big retailers have supported the legislation fervently, including Walmart, Amazon, BestBuy, Bed, Bath and Beyond, Barnes and Noble, Target, and Staples, among others
34
Where value is law.
Nexus Continued
States have two options to simplify their sales tax codes:
1. A state can join the twenty-four states that have already voluntarily adopted the simplification measures of the Streamlined Sales and Use Tax Agreement (SSUTA), which has been developed over the last eleven years by forty-four states and more than eighty-five businesses with the goal of making sales tax collection easy. Any state which is in compliance with the SSUTA and has achieved Full Member status as a SSUTA implementing state will have collection authority on the first day of the calendar quarter that is at least 90 days after enactment.
2. Alternatively, states can meet essentially five simplification mandates listed in the bill. States that choose this option must agree to:
• Notify retailers in advance of any rate changes within the state
• Designate a single state organization to handle sales tax registrations, filings, and audits
• Establish a uniform sales tax base for use throughout the state
• Use destination sourcing to determine sales tax rates for out-of-state purchases (a purchase made by a consumer in California from a retailer in Ohio is taxed at the California rate, and the sales tax collected is remitted to California to fund projects and services there)
• Provide free software for managing sales tax compliance, and hold retailers harmless for any errors that result from relying on state-provided systems and data
35
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Where value is law.
© 2013 Hodgson Russ LLP
Doc. # 11629792 www.hodgsonruss.com
Sales and Use Tax for Digital Products and Services—Sourcing Issues
Joseph N. Endres, Esq. Hodgson Russ LLP
140 Pearl Street, Suite 100
Buffalo, New York 14202
Phone: (716) 848-1504
Fax: (716) 819-4711
jendres@hodgsonruss.com
Where value is law.
Sourcing Issues
What state’s tax rules apply?
1. General Rule: For software and digital goods, the state where the end user is located typically controls……but be careful!
2. But what happens when users are located across various states? Or what if a service is performed for a business with locations in multiple jurisdictions (e.g., software-based accounting services, accounts payable, payroll, etc.)?
Principal place of business approach.
Reasonable estimates of user locations.
38
Where value is law.
Sourcing Issues
Multiple Points-of-Use (“MPU”) Exemption Certificates
1. A handful of states allow purchasers to provide sellers MPU Exemption Certificates when certain requirements are met.
• For example, in order for the exemption to apply, most states require that the software be transferred or accessed digitally and that the software be used by the customer in multiple jurisdictions.
2. These certificates can be a very effective way for a seller to limit its compliance obligation. A seller that receives the exemption certificate is relieved of its obligation to collect tax on the transaction. Rather, the purchaser is obligated to remit the tax to the state once it determines where the software is used by its employees.
39
Where value is law.
Sourcing Issues
Multiple Points-of-Use (“MPU”) Exemption Certificates
1. The following states have some type of MPU exemption: Colorado, Massachusetts, Minnesota (but only after mid-2013), Ohio and Washington
2. Unfortunately, several states that previously offered the exemption but later repealed it: Indiana , Iowa, Kansas, Kentucky, Nebraska, New Jersey, North Dakota, South Dakota.
3. Some states will still accept the MPU certificates informally.
4. NY accepts information from the purchaser regarding use.
40
Where value is law.
Sourcing Issues
Practical advice for sellers
1. Establish policy and procedure for sourcing sales transactions
e.g., SSTA sourcing hierarchy
2. Implement a rule for each product (SKU) sold
3. Information, information, information! Identify the best available information for sourcing purposes.
4. Maintain excellent record keeping with respect to exemption certificates.
Keep both a hard copy and a digital copy.
41
©2013 Sutherland Asbill & Brennan LLP
STREAMLINED SALES TAX
UPDATE
Digital Products
©2013 Sutherland Asbill & Brennan LLP
Streamlined Digital Products
Sourcing
• Background
SSUTA §§ 309, 310, 311 (sourcing) and SSUTA §§ 332,
333, and Library of Definitions (digital products)
Formation of the Digital Products Sourcing Workgroup
• Issues
Location of “receipt” SSUTA § 310
Collecting and maintaining buyer address information
Sourcing allocation
Origin sourcing
43
©2013 Sutherland Asbill & Brennan LLP
Streamlined (cont’d)
• Options for the Workgroup:
1. Develop stand-along Issue Paper; or
2. Develop Issue Paper with Interpretive Rule
• Draft Issue Paper available on
www.streamlinedsalestax.org
44
©2013 Sutherland Asbill & Brennan LLP
STATE-BY-STATE
LEGISLATIVE AND
REGULATORY UPDATE
Digital Products
©2013 Sutherland Asbill & Brennan LLP
LEGISLATIVE UPDATE
Digital Products
©2013 Sutherland Asbill & Brennan LLP
Maine Legislation
• Explained as a codification of existing administrative
practice, Maine enacted legislation that imposes sales
tax on “products transferred electronically.” See MRS
36 §§ 1752(9-E), 1811 (eff. 6/23/2013).
• “Products transferred electronically” means “a digital
product transferred to the purchaser electronically the
sale of which in nondigital physical form would be
subject to tax under this Part as a sale of tangible
personal property.”
47
©2013 Sutherland Asbill & Brennan LLP
Maine (cont’d)
• Sourcing Rules
“A product transferred electronically is sold in this State if:
the product is delivered electronically to a purchaser located
in this State, the product is received by the purchaser at the
seller’s location in this State, a Maine billing address is
provided by the purchaser in connection with the transaction
or a Maine billing address is indicated in the seller’s
business records”
48
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©2013 Sutherland Asbill & Brennan LLP
Minnesota Legislation
• Minnesota imposes sales or use tax on “specified digital
products” or “other digital products.” Minn. Stat. §
297A.61, Subd. 3(l) (eff. 6/30/2013); see also Minnesota
Sales Tax Fact Sheet No. 177, 07/01/2013.
• Tax applies to sales of specified digital products or other
digital products to an “end user” with rights of permanent
use (downloaded) or less than permanent use (streaming),
and regardless of whether rights or use are conditioned
upon payment by the purchaser is a taxable retail sale
(subscriptions). Minn. Stat. § 297A.61, Subd. 4(o).
50
©2013 Sutherland Asbill & Brennan LLP
Minnesota (cont’d)
• Digital Codes
Minnesota follows the Streamlined Sales and Use Tax
Agreement’s rules related to digital codes.
“Digital code” means a code which provides a purchaser with a
right to obtain one or more specified digital products or other digital
products. A digital code may be transferred electronically (e-mail)
or it may be transferred on a tangible medium (plastic card). Minn.
Stat. § 297A.61, Subd. 53.
When a digital code has been purchased that relates to specified
digital products or other digital products, tax applies at the time of
purchase of the code – not the subsequent receipt of or access to
the related specified digital products or other digital products is not
a retail sale. Minn. Stat. § 297A.61, Subd. 4(o).
51
©2013 Sutherland Asbill & Brennan LLP
Minnesota (cont’d)
A digital code is not a code that represents a stored
monetary value that is deducted from a total as it is used by
the purchaser, and it is not a code that represents a
redeemable card, gift card, or gift certificate that entitles the
holder to select a digital product of an indicated cash value.
The end user of a digital code is any purchaser except one
who receives the contractual right to redistribute a digital
product which is the subject of the transaction. Minn. Stat. §
297A.61, Subd. 53.
52
©2013 Sutherland Asbill & Brennan LLP
Minnesota (cont’d)
“Digital audiovisual works” means a series of related images
which, when shown in succession, impart an impression of
motion, together with accompanying sounds, if any, that are
transferred electronically. Digital audiovisual works includes
such items as motion pictures, movies, musical videos,
news and entertainment, and live events. Digital audiovisual
works does not include video greeting cards sent by
electronic mail. Unless the context provides otherwise, in the
sales and use tax law audiovisual works includes the digital
code, or a subscription to or access to a digital code, for
receiving, accessing, or otherwise obtaining digital
audiovisual works. Minn. Stat. § 297A.61, Subd. 51.
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©2013 Sutherland Asbill & Brennan LLP
Minnesota (cont’d)
“Digital books” means any literary works, other than digital
audiovisual works or digital audio works, expressed in
words, numbers, or other verbal or numerical symbols or
indicia so long as the product is generally recognized in the
ordinary and usual sense as a “book.” It includes works of
fiction and nonfiction and short stories. It does not include
periodicals, magazines, newspapers, or other news or
information products, chat rooms, or weblogs. Unless the
context provides otherwise, in the sales and use tax law
digital books includes the digital code, or a subscription to or
access to a digital code, for receiving, accessing, or
otherwise obtaining digital books. Minn. Stat. § 297A.61,
Subd. 52.
54
©2013 Sutherland Asbill & Brennan LLP
Minnesota (cont’d)
• Definitions
In general, Minnesota adopts the Streamlined Sales and
Use Tax Agreement’s “specified digital products” definitions,
but with more specificity, and separately defines “other
digital products” in a unique manner.
“Specified digital products” means “digital audio” works,”
“digital audiovisual works,” and “digital books” that are
transferred electronically to a customer. Minn. Stat.
§297A.61, Subd. 55.
“Other digital products” means the following items when
transferred electronically: (1) greeting cards; and (2) online
video or electronic games. Minn. Stat. § 297A.61, Subd.
54.
55
©2013 Sutherland Asbill & Brennan LLP
Minnesota (cont’d)
“Digital audio works” means works that result from a fixation
of a series of musical, spoken, or other sounds, that are
transferred electronically. Digital audio works includes such
items as the following, which may either be prerecorded or
live: songs, music, readings of books or other written
materials, speeches, ring tones, or other sound recordings.
Digital audio works does not include audio greeting cards
sent by electronic mail. Unless the context provides
otherwise, in the sales and use tax law, digital audio works
includes the digital code, or a subscription to or access to a
digital code, for receiving, accessing, or otherwise obtaining
digital audio works. Minn. Stat. § 297A.61, Subd. 50.
56
©2013 Sutherland Asbill & Brennan LLP
Ohio Legislation
• Ohio will impose sales or use tax on “specified digital
products.” See ORC § 5739.01(B)(12) (eff. 1/1/2014).
• Tax applies when a specified digital product is
provided for permanent (downloaded) or less than
permanent use (streaming), and regardless of
whether continued payments are required
(subscriptions).
57
©2013 Sutherland Asbill & Brennan LLP
Ohio (cont’d)
• As a full member in the Streamlined Sales and Use
Tax Agreement, Ohio adopted the Agreement’s
“specified digital products” definitions and operating
rules. See ORC § 5739.01(B)(12) (QQQ).
Note – Ohio does not statutorily define “digital code,” but in
order to remain compliant with the Agreement, Ohio will be
required to follow the rules in Section 332 related to the
purchase such codes.
• “Specified digital product” means an electronically
transferred digital audiovisual work, digital audio work,
or digital book.
• “Electronically transferred” means obtained by the
purchaser by means other than tangible storage
media.
58
©2013 Sutherland Asbill & Brennan LLP
Ohio (cont’d)
• “Digital audiovisual work” means a series of related images
that, when shown in succession, impart an impression of
motion, together with accompanying sounds, if any.
• “Digital audio work” means a work that results from the
fixation of a series of musical, spoken, or other sounds,
including digitized sound files that are downloaded onto a
device and that may be used to alert the customer with
respect to a communication.
• “Digital book” means a work that is generally recognized in
the ordinary and usual sense as a book.
59
©2013 Sutherland Asbill & Brennan LLP
Massachusetts Repeal
• Less than two months after enacting a tax on computer
design and software services (eff. 7/31/2013),
Massachusetts repealed the new tax with the passage of
HB 3662 (eff. 9/27/2013).
“Computer system design services” were defined as “the planning,
consulting, or designing of computer systems that integrate
computer hardware, software, or communication technologies and
are provided by a vendor or a third party.”
MA also briefly taxed other software-related services including: “the
modification, integration, enhancement, installation or configuration
of standardized software,” but excluding “data access, data
processing or information management services.” Mass. St. 2013
c. 46; Mass. G.L. c. 63 § 38(f), c. 64H § 1.
60
©2013 Sutherland Asbill & Brennan LLP
Massachusetts (cont’d)
• Under HB 3662, a taxpayer that collected and
remitted the software tax to the DOR may claim a
refund for the full amount paid by filing an application
for abatement by 12/31/2013.
• A taxpayer must refund all relevant amounts to its
customers within 30 days of receiving the refund.
• A taxpayer who previously collected but did not remit
such funds to the DOR must make “reasonable
efforts” to refund such amounts to its customers.
61
©2013 Sutherland Asbill & Brennan LLP
New York State Proposal
• Draft tax reform legislation under consideration by
Governor Cuomo (drafted by the Department of Taxation
and Finance) includes the impose of sales and use tax on
the sale of, license to use, or granting of remote access to
digital products in the state, according to hierarchical
sourcing rules.
62
©2013 Sutherland Asbill & Brennan LLP
New York State Proposal (cont’d)
• Draft defines “digital product” as any property or
service, or combination thereof, of whatever nature
delivered to the purchaser through the use of wire,
cable, fiber-optic, laser, microwave, radio wave,
satellite or similar successor media, or any
combination thereof… [including] an audio work,
audiovisual work, visual work, book or literary work,
graphic work, game, information or entertainment
service, storage of digital products and computer
software by whatever means delivered.
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©2013 Sutherland Asbill & Brennan LLP
ADMINISTRATIVE GUIDANCE
AND LITIGATION UPDATE
Digital Products
©2013 Sutherland Asbill & Brennan LLP
New Jersey Technical Bulletin
• The Division of Taxation issued a technical bulletin that
confirmed the state does not tax sales of cloud computing
services including SaaS, PaaS, and IaaS. New Jersey
Division of Taxation Technical Bulletin TB-72 (July 3,
2013).
• The Division explained:
SaaS retailers provide customers with access to software
through remote means;
PaaS retailers provide customers with computing platforms
through remote means; and
IaaS retailers provide customers with equipment and
services necessary to support and manage the customer’s
content and dataflow through remote means.
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©2013 Sutherland Asbill & Brennan LLP
New Jersey (cont’d)
• The Division stated that SaaS, PaaS, and IaaS do fit
not within the definition of tangible personal property
(which includes “computer software”) because the
retailer does not transfer any software to its
customers.
• Further, New Jersey does not enumerate SaaS,
PaaS, or IaaS as taxable services.
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Arizona
• The AZ DOR determined that a taxpayer providing
online backup and restoration services was subject to
transaction privilege tax (TPT) because the services
were taxable rentals of prewritten software. Ariz. Priv.
Ltr. Rul. No. LR 13-002 (Mar. 25, 2013).
• Notably, the Department did not undertake a “true
object” analysis to examine whether or not the
software conduit was de minimis compared to the
overall backup service.
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Minnesota Tax Court Decision
• The MN Tax Court held that computer software consulting
and implementation services were not subject to sales tax.
SAP Retail, Inc. v. Comm’r of Revenue, No. 8345-R (Minn.
Tax Ct. Sept. 19, 2013).
• The taxpayer licensed enterprise resource planning
software. It also provided consultation and implementation
services to configure the software to a customer’s
particular business activities.
• The court recognized that consulting and implementation
services were not specifically enumerated as taxable
services.
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Minnesota (cont’d)
• The taxpayer’s services did not constitute taxable
fabrication services because the consumers of the
services did not furnish materials used to create the
software.
• Further, the Tax Court found that the services were not
part of the taxable software license fee because (1) they
were provided pursuant to a separate agreement and,
even if sold as a package, were separately itemized, and
(2) the services were not necessary to complete the sale of
a software license that could be purchased without the
services and vice versa.
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Tennessee Letter Ruling
• The TN DOR determined that a taxpayer’s sale of remote
storage services and virtual computing services are not
subject to sales or use tax where the data centers and
servers used to provide such services are located outside
the state. Tennessee Letter Ruling 13-12 (Sept. 12, 2013).
The DOR determined neither service was subject to
Tennessee sales and use tax because there was no sale,
transfer or electronic delivery of tangible personal property
or computer software in Tennessee in connection with the
furnishing of these services.
The DOR noted that the taxpayer prohibited customers from
downloading any part of its remote storage interface or its
virtual computing software.
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Tennessee (cont’d)
• The DOR determined that the primary purpose of the
remote storage service was the remote storage of digital
data, applications and information, and the primary
purpose of the virtual computing service was to access
processed data or information stored on the taxpayer’s
servers located outside the state.
• Accordingly, the DOR categorized both services as data
processing and information services, which are specifically
excluded from the definition of telecommunications
services.
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Missouri Letter Rulings
• The MO DOR has recently issued to notable letter rulings.
• In the first ruling, the DOR determined that a company’s
telecommunications services provided to customers on its
cloud computer network are subject to sales tax. L.R.
7248, Mo. Dept. of Rev. (May 24, 2013).
• The company hosted its cloud network on servers located
outside of MO, and customers accessed the network
through public telecommunications lines and through the
customers’ internal network; customers separately
purchased the necessary hardware and Internet access.
• Services provided to customers through the cloud network
include voice, video, messaging, and conferencing.
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Missouri (cont’d)
• The DOR determined that the company is providing
taxable “telecommunication services” because it transmits
information through its services that direct and control its
customers’ hardware and because it stores messages on
its server, which are taxable events in Missouri.
• The DOR also noted that customers would not be able to
use their equipment without the company’s software and
hosting unless the customer was willing to engage another
telecommunications company or built its own in-house
system.
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Missouri (cont’d)
• In the second notable MO ruling, the DOR ruled that a
telecommunications services provider that employs VoIP
technologies may use a customer’s registration IP address
for sourcing purposes in determining the applicable sales
tax rate on sales of its subscription-based and prepaid
credit telecommunication services since the service is
delivered to the customer at the time payment is remitted.
L.R. No. 7314, Mo. Dept. of Rev. (Nov. 4, 2013).
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Missouri (cont’d)
• Further, the service provider’s presentation of applicable
sales tax to customers on the sale of its services is in
compliance with MO sales tax law.
• The provider does not itemize tax on the statement but
instead notifies the customer on an online invoice that
taxes are included in the price of each of its offered
telecommunications services and directs the customer, at
the customer’s option, to view and examine a table listing
such taxes.
• The provider also separately accounts for sales tax
collected in its books and records.
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Illinois Supreme Court ITFA Decision
• In a 6-1 decision, the Illinois Supreme Court affirmed
an Illinois Circuit Court holding that Illinois Public Act
96-1544 (The Click-Through Nexus Act), requiring
out-of-state retailers to collect and remit use tax,
violates the Internet Tax Freedom Act. Performance
Marketing Ass’n v. Hamer, Docket No. 114496 (Oct.
18, 2013).
• PMA is the most significant application of ITFA’s
prohibition against “multiple or discriminatory taxes on
electronic commerce” (Section 1101(a)(2)), which
may have implications with respect to taxes on digital
products. 77
Where value is law.
© 2013 Hodgson Russ LLP
Doc. # 11629792 www.hodgsonruss.com
Sales and Use Tax for Digital Products and Services—Compliance Issues
Joseph N. Endres, Esq. Hodgson Russ LLP
140 Pearl Street, Suite 100
Buffalo, New York 14202
Phone: (716) 848-1504
Fax: (716) 819-4711
jendres@hodgsonruss.com
Where value is law.
Compliance Issues
Define the Product Appropriately
E.g., Tax Preparation Services
Primary Purpose Test
Speak with One Voice
1. Make sure the following items all define the product consistently:
Contracts
Invoices
Marketing brochures
Website material
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Where value is law.
Compliance Issues
Frequently, a company’s sales tax obligations are complicated by the manner in which its products are sold. For example, when the company sells multiple products or deliverables (some taxable and some exempt) its sales tax liability can unnecessarily increase if the transaction is not billed properly.
New York’s Cheeseboard Rule: When taxable and exempt items are bundled into a single price, the entire charge can be subject to sales tax. See 20 NYCRR 527.1
If multiple products are sold (some taxable and some exempt), the company must be able to track the different revenue streams.
Sales tax audits are always more difficult and problematic if you don’t have good records detailing the transactions at issue.
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Where value is law.
Compliance Issues
In order to minimize potential sales tax exposure, a company must know the sales tax rules in effect in the jurisdictions where it is obligated to collect the tax. Simple changes in transaction structure can greatly reduce tax liability
EXAMPLE: A business in New York State maintains a catalog of stock photos that various magazines and other publications frequently purchase in order to reproduce.
1. If the photo is sold in hard copy to a New York customer, then the sale constitutes a taxable sale of tangible personal property.
2. If, however, the photo is transferred electronically via e-mail or download from a Web site, the sale is not subject to tax, because New York does not tax digital products such as photos, music, movies, etc.
3. What if the seller also provided access to software through its Web site that allowed the purchaser to manipulate the digital photo? Then, the transaction is probably taxable. This demonstrates the need to separately state the taxable charge for the software from the non-taxable charge for the photograph.
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Where value is law.
Thank You
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Joseph N. Endres, Esq. Hodgson Russ LLP 140 Pearl Street, Suite 100
Buffalo, NY 14202 Phone: (716) 848-1504 Fax: (716) 819-4711
jendres@hodgsonruss.com