Sales and Use Tax on Digital Products and Services in...
Transcript of Sales and Use Tax on Digital Products and Services in...
Sales and Use Tax on Digital
Products and Services in 2013 Managing Multi-State Compliance Challenges for Vendors and Customers
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TUESDAY, FEBRUARY 12, 2013
Presenting a live 110-minute teleconference with interactive Q&A
Laurie Wik, Tax Director, Deloitte Tax, San Jose, Calif.
Martin Eisenstein, Managing Partner, Brann & Isaacson, Lewiston, Maine
Charles Kearns, Attorney, Sutherland Asbill & Brennan, Washington, D.C.
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Sales and Use Tax on Digital Products and Services in 2013 Seminar
Martin Eisenstein, Brann & Isaacson
Feb. 12, 2013
Laura Wik, Deloitte Tax
Charles Kearns, Sutherland Asbill & Brennan
Today’s Program
Background Issues With Sales Tax And Digital Products
[Laurie Wik]
Special Issues, Latest Developments On Cloud Computing
[Martin Eisenstein]
Legislative Developments
[Charles Kearns]
Meaningful Actions At The SSTP
[Charles Kearns]
Problematic Digital Products And Services
[Martin Eisenstein, Laurie Wik and Charles Kearns]
Practical Issues Faced By Business Taxpayers
[Laurie Wik, Martin Eisenstein and Charles Kearns]
Slide 8 – Slide 16
Slide 63 – Slide 74
Slide 17 – Slide 31
Slide 32 – Slide 34
Slide 35 – Slide 40
Slide 41 – Slide 62
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.
Copyright © 2012 Deloitte Development LLC. All rights reserved. 9
Who, What, Where, Why And When
Digital products: Products and services provided or furnished
electronically
Popular terms include: SaaS, hosted, cloud computing, Web-enabled,
Web-based
Digital products examples
Sales to businesses: Software, data, information services,
searchable databases
Sales to consumers: Movies, songs, video games, premium-level
subscriptions to online social networks
Copyright © 2012 Deloitte Development LLC. All rights reserved. 10
Who, What, Where, Why And When (Cont.)
• States may assign a cloud computing transaction to one of the following
taxable categories:
Sale, rental or access to pre-written software
Data processing or data storage service
“Digital automated service”
Computer service or computer exchange Service
“Canned” information service
Digital equivalent to traditional tangible personal property, a.k.a.
digital goods
Copyright © 2012 Deloitte Development LLC. All rights reserved. 11
States’ positions on cloud computing include:
Not taxable because:
Not a sale or lease of software (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 pre-written software and not an enumerated taxable service.
Taxable because:
Taxable sale or lease of software (TPP) despite no physical transfer, because
customer has “constructive possession”
Taxable lease or rental of tangible personal property 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.
Who, What, Where, Why And When (Cont.)
Copyright © 2012 Deloitte Development LLC. All rights reserved. 12
To which state is the transaction sourced?
Software applications or digital goods: Generally to the state where
accessed/downloaded by “user”
• Hosted services
– “Benefit received”
– “Principal place of business”
– “Point of delivery” or place from which accessed
• Global contracts often do not recognize users in multiple jurisdictions.
Who, What, Where, Why And When (Cont.)
Copyright © 2012 Deloitte Development LLC. All rights reserved. 13
Click-through legislation Affiliate nexus provisions
State Date legislation enacted Effective date of legislation Annual threshold Date legislation enacted Effective date of legislation
Arkansas 4/1/2011 10/24/2011 $10,000 4/1/2011 7/27/2011
California
ABX1-28 Enacted
6/28/2011, Retroactively
repealed 9/23/2011 AB 155
enacted 9/23/2011
9/15/12 $10,000 6/28/2011 9/15/12
Connecticut
Original enactment date
5/4/11, Second enactment
date 6/21/2011
5/4/2011
(Originally effective 7/1/11) $2,000
Georgia 4/19/2012 10/1/2012 $50,000
New York 4/23/2008 6/1/2008 $10,000
North Carolina 8/7/2009 8/7/2009 $10,000
Oklahoma 6/9/2010 7/1/2010 — $100,000 Threshold
Rhode Island 6/30/2009 7/1/2009 $5,000 6/30/2009 7/1/2009
South Dakota 3/11/2011 7/1/2011
Texas 7/19/2011 1/1/2012
Vermont 5/24/2011 When 15 other
states adopt $10,000 5/24/2011
When 15 other
states adopt
Illinois —
Unconstitutional 3/10/2011 7/1/2011 Unconstitutional as of 5/7/12 3/10/2011 7/1/2011
Other
Colorado 2/24/2010 3/1/2010
The Dept. of Revenue is
blocked from imposing the
notification requirements
pending the outcome of the
case effective 3/30/12
2/24/2010 3/1/2010
Maryland The Maryland House and Senate have been unable to reach an agreement regarding the version of the law. A conference committee has been appointed and is
reviewing the law.
Click-through And Affiliate Nexus Summary
Copyright © 2012 Deloitte Development LLC. All rights reserved. 14
Examples of states with guidance about in-state use of third-party servers:
• California
• Massachusetts
• New Mexico
• New York
• Ohio
• Pennsylvania
• Vermont
• Washington
• Texas
Sales Tax Nexus
Copyright © 2012 Deloitte Development LLC. All rights reserved. 15
Generally, states hold digital products purchasers responsible for unpaid
sales tax, when the vendor has not collected it from the purchaser. Sellers
may not collect because:
• Seller may not have established nexus for sales and use tax purposes
in the purchaser’s state; OR
• Seller may have established nexus for sales and use tax purposes,
but does not realize it or have the systems to handle sales tax
collection; OR
• Seller may have established nexus for sales and use tax purposes,
but has not researched or does not understand the proper taxability of
digital product offering; OR
• Seller may not be required to collect sales tax when the Streamlined
Sales Tax Project sourcing hierarchy is applicable.
Sellers And Purchasers: The Great Divide
Copyright © 2012 Deloitte Development LLC. All rights reserved. 16
Introduced federal legislation to require use tax collection by remote
sellers:
The Main Street Fairness Act (see also S.1452), H.R. 2701
The Marketplace Equity Act, H.R. 3179
The Marketplace Fairness Act, S. 1832
Legislation In Congress
Cloud Computing: What Is it?
• Amalgam of computer services
– Provider owns or leases equipment and software from third parties.
• Normally maintained in a data center
– Cloud computing customer contracts to access host equipment and/or software, and/or to obtain related services from the provider, on demand or on a usage/subscription fee basis.
– Access is usually over the Internet through any of a number of platforms (mobile devices, laptops, tablets, desktops).
18
Cloud Computing: What Is It? (Cont.)
• Types of service
– IaaS: Infrastructure as a service
• Access to data storage and computing resources
• E.g., Amazon Web services (“elastic compute cloud … elastic block storage”)
– SaaS: Software as a service (e.g., Salesforce.com)
• Access to software and/or applications
• Similar to application services
• Software remains on provider’s equipment and is not downloaded or physically delivered on CDs or DVDs.
19
Cloud Computing: What Is It? (Cont.)
– PaaS: Platform as a service
• Use by customer of customer’s created or owned applications on
provider’s software (languages, libraries, tools)
• E.g., Google app. engine
• May be a hybrid of SaaS and IaaS, but is treated most often as SaaS
as true object
– Hosting and managing e-mail
– Miscellaneous services such as privacy protection, or hosting Web page
or virtual private network within the cloud
20
Drivers Of Taxability Determination:
The Framework
• Characterization of the service
– Is it tangible personal property or a taxable service?
– Statutory/rule treatment: E.g., pre-written software
• Sourcing
– Where is the host situated?
– Where is the service used, and what documentation must be
provided to the provider?
» PA Form Rev – 1220
» Certificate of Multistate Points of Use
22
Drivers Of Taxability Determination:
The Framework (Cont.)
• State statutes re: whether taxable sale or lease takes place
• Bundled charge or separate charge by service
• Pertinent exemptions
• Nexus for customers and providers
• Resale exemptions for providers
23
Taxability Test By Service: IaaS
• Characterization
– Data processing or computer service
• TX, DC, CT and OH
– Lease or rental of computer space if provider’s computer is
situated there
• FL
• Storage: Chicago (lease tax) and UT (Utah Op. No. 06-
004)
– WA statute (digital automated services): Unclear at this point.
– General services statute: NM, SD, HI
24
Taxability Test By Service: IaaS (Cont.)
• Sourcing
– Where benefit received
• TX, WA, OH, CT
• Chicago re: data processing terminals
– Where service provided
• FL, Chicago, UT
– Where first use occurs
• WA: At host or customer’s terminals?
25
Taxability Test By Service: SaaS/PaaS
• Characterization
– As tangible personal property: 12 states do not tax pre-written
software delivered electronically.
– Increasing of states have dealt with taxability of SaaS and App
service provider services
• Generally treated under a true object test as pre-written
software delivered electronically
– CT treats it as a computer service.
– TX treats it as a data processing service. See, e.g., Letter Ruling No.
200401223L
– SC treats it as a communications service.
26
Taxability Test By Service:
SaaS/PaaS (Cont.)
• Sourcing
– To state where software is hosted and not where used
• KS: Private letter rulings 0-2010-005, P-2007-006, P-2011-010
– To state where used/accessed
• Increasing number of states: PA, UT, NY, TX, OH, DC, WA,
NM and HI
– Not taxable (e.g., MD)
– SC taxes only intrastate communications.
27
Taxability Test By Service:
SaaS/PaaS (Cont.)
• Has a sale taken place of SaaS (when treated as tangible personal
property)?
– Expansive definition
• NY: Sale is “any transfer of title or possession or both and
any lease or license to use” and a right to use constitutes a
license to use. 20 N.Y. Comp. Codes R and Regs. Sect.
526.7(e)(4)(iii)
– Narrow definition
• AZ (Ariz. Reg. 15-5-154.B), IL 86 IL Admin. Code Sec.
130.1935(a)(1) and RI (RI Code R. SU11-25.7(2) may
also restrict taxability, because SaaS is not deemed a sale.
28
Taxability Test By Service:
Web Hosting • True object test governs?
– Is the object tangible personal property?
• Treated similarly to IaaS if object is service, unless pure management services
• Treated as SaaS if object is software program
• Exempt under most state statutes. See, e.g., Wash. Rev. Code § 82.04.192(3)
• Is there an exemption under the ITFA?
– ITFA (Sect. 1105 definition of Internet access)
• Services packaged with access to the Internet, such as a home page, e-mail and instant messaging, video clips and personal electronic storage capacity
• Services described in bullet above that are not packaged with Internet access
• Any other products and services, even if they utilize Internet protocol, are not exempt Internet access.
29
New Developments
• SaaS taxable where accessed
– PA Letter Ruling No. SUT-12-001: Reverses prior ruling so taxable if used in PA
• Presumption used in PA if billed to PA, unless submit PA certificate REV-1220
– UT: Letter Ruling No. 10-001 reverses course like PA
• True object tax
– TN Revenue Ruling No. 12-11: Electronic access to books on server located outside TN is deemed sale of tangible personal property in TN.
• Exemption of SaaS in certain states
– VT: Statutory moratorium until 6/30/13 on tax on SaaS
– WI: 1/25/13 – SaaS and IaaS not taxable
30
Other Issues Regarding Taxability
• Billing
– Should there be a bundled fee or a fee by type of service?
• SSTA may not permit unbundling as relates to cloud
computing. See also TN ruling
• Some state statutes may permit
– 34 Texas Admin. Code Sect. 3.330(d)(2)
• Ideal is to break up fee into separate charges by service.
– Into IaaS, SaaS/PaaS, and other services
– Characterization on invoice is important.
31
Digital Economy Legislation
• Tax base expansion
• Minnesota
• Maine
• Massachusetts
• Exemptions
• Utah
• Washington State
• Vermont
• Michigan
33
Digital Economy Legislation (Cont.)
• Video game taxes
• New York
• Connecticut
• Credits and incentives
• Data center equipment
• Video game development
• Streamlined conformity legislation
• Federal legislation affecting state taxes
• Marketplace Fairness Act
• Digital Goods and Services Tax Fairness Act
34
©2012 Sutherland Asbill & Brennan LLP
DC
Streamlined Sales Tax Overview
SSTP member states
SSTP associate member
states
States with SSTP
legislation
introduced/considered
in 2012
SSTP bills drafted but
not yet introduced
WA
OR
CA
NV
ID
MT
WY
UT
AZ
CO
NM
TX
ND
LA
SD
NE
KS
OK
MN
IA
MO
AR
WI
IL
MI
IN OH
KY
TN
MS AL GA
FL
SC
NC
WV VA
PA
NY
VT NH
ME
NJ
MA
RI
NH
CT
MD
DE
AK
As of Feb. 23, 2012
36
©2012 Sutherland Asbill & Brennan LLP
Uniform Definitions
• “Specified digital products”
Digital audio works (includes “ringtones”)
Digital audio-visual works
Digital books
Digital codes
• “Transferred electronically”
As used in the digital goods context, defined as “obtained by
the purchaser by means other than tangible storage media”
Compare “delivered electronically,” as used in the computer
software context, with “delivered to the purchaser by means
other than tangible storage media”
Implications on cloud computing in SSTP member states
37
©2012 Sutherland Asbill & Brennan LLP 38
Operating Rules
Sect. 332
• Operating rules that permit member states to select “toggles” in
their digital goods tax imposition statutes, or mandate how
certain transactions should be taxed
“Electronically transferred” or “specified digital products”
• “End user”
• “Permanent use”
• “Continued payment”
• Subscriptions
38
©2012 Sutherland Asbill & Brennan LLP
Digital Products Sourcing
SLAC sourcing work group
SLAC formed a digital products sourcing work group in
October 2011 to address sourcing regime for digital goods
under the Agreement.
Definitions of “receipt,” recordkeeping and MPU
39
PROBLEMATIC DIGITAL PRODUCTS AND SERVICES
Martin Eisenstein, Brann & Isaacson
Laurie Wik, Deloitte Tax
Charles Kearns, Sutherland Asbill & Brennan
Digital Products
• Typical situation: Download of books, music, videos to computer
• Access on servers situated outside of state
– TN: Digital products that can be viewed or downloaded in TN
are deemed sales of digital products.
• Providing online code to access products
– True object test as to taxability
– States vary as to when taxable
• TX, IL and NY
• TN and SSUTA states
42
Taxability Of E-Books, Digital Audio Works
(Music), Software And Digital Video
State Electronic Books
Taxable?
Digital Music
Taxable?
Digital Canned
Software Taxable?
Digital Video Taxable?
AL Yes Yes Yes Yes
AK n/a n/a n/a n/a
AZ Yes Yes Yes Yes
AR* No No No No
CA No No No No
CO Yes Yes No** Yes
CT Yes, at a reduced rate
of 1%
Yes, at a reduced rate
of 1%
Yes, at a reduced rate
of 1%
Yes, at a reduced rate
of 1%
DE n/a n/a n/a n/a
.
DC Yes Yes Yes Yes
43
* Per SSTA Taxability Matrix Appendix ** Changed from presentation of March 2012
Taxability Of E-Books, Digital Audio Works
(Music) Software And Digital Video (Cont.)
State Electronic Books
Taxable?
Digital Music
Taxable?
Digital Canned
Software Taxable?
Digital Video
Taxable? FL No No No No
GA* No No No No
HI Yes Yes Yes Yes
ID Yes Yes Yes Yes
IL No No Yes, unless qualified as
an exempt software
license
No
IN* Yes Yes Yes Yes
IA* No No No No
KS* No No Yes No
KY* Yes Yes Yes No**
LA Yes Yes** Yes Yes
44
* Per SSTA Taxability Matrix Appendix ** Changed from presentation of March 2012
Taxability Of E-Books, Digital Audio Works
(Music) Software And Digital Video (Cont.)
State Electronic Books
Taxable?
Digital Music
Taxable?
Digital Canned
Software Taxable?
Digital Video
Taxable? ME Yes Yes Yes Yes
MD No No No No
MA No No Yes No
MI* No No Yes No
MN* No No Yes No
MS Yes Yes Yes Yes
MO No No No No
MT n/a n/a n/a n/a
NE* Yes Yes Yes Yes
NV* No No No No
45
Taxability Of E-Books, Digital Audio Works
(Music) Software And Digital Video (Cont.) State Electronic Books
Taxable?
Digital Music
Taxable?
Digital Canned
Software Taxable?
Digital Video
Taxable? NH n/a n/a n/a n/a
NJ* Yes Yes Yes Yes
NM Yes Yes Yes Yes
NY No, provided e-book is
not revised or updated
more than annually and
is not designed to work
with software other than
the e-reader software**
Generally, products
transferred
electronically are not
taxable unless they are
taxable software or
otherwise qualify as
taxable TPP.
Yes No
NC* Yes Yes Yes Yes
ND* No No Yes No
OH* No No Yes No
OK* No No No No
OR n/a n/a n/a n/a
PA No No Yes No
46
* Per SSTA Taxability Matrix Appendix **Changed from presentation of March 2012
Taxability Of E-Books, Digital Audio Works
(Music) Software And Digital Video (Cont.)
State Electronic Books
Taxable?
Digital Music
Taxable?
Digital Canned
Software Taxable?
Digital Video
Taxable? RI* No No Yes No
SC No No No No
SD* Yes Yes Yes Yes
TN Yes Yes Yes Yes
TX* Yes Yes Yes Yes
UT* Yes Yes Yes Yes
VT* Yes Yes Yes Yes
VA No No No No
WA* Yes Yes Yes Yes
WV* No No Yes No
WI* Yes Yes Yes Yes
WY* Yes Yes Yes Yes
47
Data Processing
• TX, CT, OH and DC tax
• Includes storage, processing of information and retrieval of information
• Examples include:
– Entry of data
– Maintenance of employee work time
– Preparing payroll
• Who operates the computers?
– TX (taxable) vs. OH (non-taxable), if operated by customers
48
Information Services
• Right to access content contained in a common data base vs. access
to software or information stored by provider on behalf of user
• Examples: Westlaw, credit reports, D & B reports
• Note common definition: Same or similar information can be sold to
others, even though each user may, through a data base inquiry, use a
different search term.
• Data are not owned by user and not personal to user.
49
Information Services (Cont.)
• Many big states (including FL, OH, NY, NJ, TX and CT) impose tax, with varying exemptions and rates/
– Texas exempts 20%/
– CT tax is s reduced rate of 1%/
• But, note that MA and many other states do not tax. See, e.g., MA Letter Ruling 11-2
– Internet-based service can be exempt under ITFA.
• Varying interpretation of term and taxability
– NY: Broad interpretation includes individual reports/
– FL: More narrow interpretation excludes furnishing of information of a personal nature.
– NY taxes information provided electronically; FL does not.
– Taxability of webinars: Follows taxability of information services, except in FL and NJ
50
What Is A Communication Service?
• In general, a communication service is the transmission of signals,
images, sounds, data or other information between two points. In
general, it includes related services such as voice mail.
• FL statute (Sect. 202.11(2)) as an example:
– Taxable communications services means the “transmission,
conveyance, or routing of voice, data, audio, video, or any other
information or signals … to a point or between or among points …
[and includes] computer processing applications that are used to act
on the form … of the content for purposes of the transmission.” But,
the term excludes Internet access service, e-mail or similar computer
services.
• The emphasis is on the transmission of data and not on the content.
51
How Sourcing Can
Become Problematic
• Three sourcing situations:
1) Delivery within the state by a provider situated in the state
2) Customer has access via a terminal connected to a server in another state.
3) Receipt of service at more than one location
52
How Sourcing Can
Become Problematic (Cont.)
1) Delivery within the state by a provider situated in the state
• All states treat this as an intra-state sale and subject to tax only in the state of service.
• No other state has nexus with the transaction and could tax the sale under the Commerce Clause. See Goldberg v. Sweet, 488 U.S. 252 (1989)
53
Sourcing Issues: State
Approaches To Interstate Delivery
2) Customer has access via a terminal connected to a server in another state.
• All states tax 100% of taxable services delivered in the state, except for FL’s tax on use of a server situated in FL, Chicago’s tax on lease of personal property insofar as storage space (but not on data processing/information services), and SSTA states in limited circumstances (as described in a subsequent slide).
54
Sourcing Issues: State
Approaches (Cont.) – Interstate delivery: The general rule
• The location of the terminal for access to the service controls; see, e.g., NYS (TSB-A-10(52)S 10/18/10); CT (ADC 12-426-27(d)); TX (Rules 3.330 and 3.342)
• Issue is the proof of where the service is received.
• OH and WA permit use of billing address as a proxy of where the service is used, in the absence of a certificate of use. Ohio Rev. Code Sect. 5739.033.
• Test under Goldberg: Is the billing address or service address in the state, and does service originate or terminate in the state?
56
Sourcing Issues: State
Approaches (SSTA)
• The SSTA waterfall approach (OH: R.C. 5739.033(C))
• If service received (i.e., first use) at the vendor’s place of
business, sourced at the vendor’s place of business
• If not received at the vendor’s place of business, sourced at
the location of receipt known to the vendor
• If neither of the above, then sourced at the address of the
customer, as known from the vendor’s business records
• If none of the above, then the address given in the transaction
• If none of the above, from where the service was provided
57
Sourcing Issues: State Approaches
(Several Locations For Receipt Of Service)
3) Receipt of service at more than one location
• NY, CT, DC rules are generally silent on multi-office access.
• In TSB-A-10(52)S 10/18/10, New York permitted apportionment based on the ratio of New York-based employees with access to the service to the number of employees located throughout the U.S. with access.
• In TSB-A-03(5)S, 1/31/03, acceptance of certificate relieved a provider of liability for non-NY employees, so long as the provider obtains detailed information regarding address of employees of customer. Provider is still liable for tax for NY-based employees.
• This is consistent with Goldberg and avoids multiple-taxation.
58
Sourcing Issues: State Approaches (Several
Locations For Receipt Of Service), Cont.
• TX: Rule 3.342(g) provides a more straightforward approach.
• The general theme is for the purchaser to identify the segment of the business that the service benefits, and then issue an exemption certificate to the service provider that bases the exempt amount on a reasonable method of allocation.
• Provider liable for tax for TX portion
• It is important that the customer issue an exemption certificate and be able to justify its calculation from its books and records.
• A reasonable method of allocation is the ratio of employees with terminals situated in TX to the total number of employees with terminals.
59
Sourcing Issues: State Approaches (Several
Locations For Receipt Of Service), Cont.
• OH approach: R.C. 5739.033(D)
• If the purchaser provides an exemption certificate, then the
vendor is relieved of collection responsibility for the entire
tax, and the purchaser may use any reasonable, consistent and
uniform method of apportioning purchases by jurisdiction.
• In the absence of an exemption certificate, the vendor and
customer can work out a reasonable, consistent and uniform
method of apportionment. If the customer certifies to the
same, then this method governs, and the provider pays tax on
the OH percentage.
• If the customer does not certify, the law requires reversion to
the SSTA waterfall approach. But, that leads to uncertainty.
60
Sourcing Issues: Multi-State Uses
• Use of exemption certificates
• WA (WA Rev. Code Sect. 82.08.02088) permits provider to obtain an exemption certificate from the user for services used outside of the state, if the customer accepts responsibility for payment of the tax due on services used in the state.
61
Copyright © 2012 Deloitte Development LLC. All rights reserved. 62
• Subscriptions to hosted games
• Microtransactions, e.g., a weapon or item for a game avatar, a map
(interactive or not), “cheat” codes
• Unlock fees for games originally purchased on a tangible media disk
• Free model games supported by subsequent sales of
microtransactions
• Gift transactions in which a gamer purchases a gift for a “giftee”
• Gift cards – sold at brick-and-mortar retailers
• Music downloads, game downloads
• “Virtual wallets” containing virtual currencies purchased with real
money and redeemed over time for microtransactions
• Marketing programs, including “bounty” programs
Transactions Unique To Interactive Online Gaming
PRACTICAL ISSUES FACED BY BUSINESS TAXPAYERS
Laurie Wik, Deloitte Tax
Martin Eisenstein, Brann & Isaacson
Charles Kearns, Sutherland Asbill & Brennan
Copyright © 2012 Deloitte Development LLC. All rights reserved.
A company will purchase certain commercial information from a vendor
that provides the information via its “risk management solutions
database”. The company’s users will access the vendor’s database from
California, Massachusetts and New Jersey.
How should tax apply in each state tor the vendor’s product offerings?
Core service offering: For a subscription fee, the company can access
business information about potential or existing customers and suppliers
through the “core service offering,” which is an interactive, customizable,
Web-based application. It provides the company’s users access to the
vendor’s global database of more than 110 million businesses. The
company’s users will be able to run searches and create customizable
reports containing summary trade data, basic credit scores, legal filings
and general company information.
Case Study (Deloitte)
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Copyright © 2012 Deloitte Development LLC. All rights reserved.
Workflow “add-ons”: The company can add to the core service offering
by purchasing workflow add-ons for a separately invoiced additional fee.
The company will not receive any software to install on its server. The
workflow add-ons include the following:
1. Decision-making tool: A customizable tool that enables users to
establish rules and approval limits to automate credit decisions. It
provides access to a credit service and has the ability to verify trade
and bank references.
2. Account manager: A feature with which the company can manage the
risk of its customer base by blending the company’s credit policy and
customer's accounts receivable data with information from the
vendor’s database.
Case Study (Deloitte), Cont.
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Copyright © 2012 Deloitte Development LLC. All rights reserved.
Workflow “add-ons” (Cont.)
3. Collection tool: The collection tool is an on-demand tool to help manage
overall risk exposure. It enables the company to enter invoice-level trade
details and provides workflow information related to collection activities.
4. Online credit application: The online credit application allows the user
to create a customizable credit application. The data entered into the
application is analyzed by the vendor’s software, and that analysis is
made available to the user. The software provides internal automatic
alerts when an application is submitted.
Case Study (Deloitte), Cont.
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Copyright © 2012 Deloitte Development LLC. All rights reserved. 67
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.
Copyright © 2012 Deloitte Development LLC. All rights reserved. 68
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
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Certain services may not be available to attest clients under the
rules and regulations of public accounting.
Hypotheticals
(From Brann & Isaacson)
• Cloud service provider with data centers in Ohio but
with offices in Tennessee and Texas
• Cloud service provider provides the following services:
– Bundled service including storing customer’s data,
processing data, use of provider’s SAS accounting
software, hosting e-mail
– Remote access services provided from the data
center that allow a customer to establish a secure
connection between a customer’s home-based
computer and remote computers
69
Hypotheticals (From Brann
& Isaacson), Cont.
• Customer 1, headquartered in Texas but with offices in Illinois
and New York, has contracted for the bundled service, for which
it is billed at its Texas headquarters. Where, if anywhere, is the
service taxable?
– Would the answer differ if the customer did not use
exemption certificates?
• Customer 2, which has offices in Massachusetts (home base),
New York and Maryland, contracts for the remote access
services.
– Is the service taxable, and if so, where?
– Where does the customer have nexus?
– Where should the provider collect tax on orders?
– Where must the customer pay taxes?
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©2012 Sutherland Asbill & Brennan LLP
Bundled Transactions
• Existing bundled transaction rules may be ill-equipped to
address innovative digital bundles.
• Problematic areas
• Streamlined states vs. non-Streamlined states
• Bundles involving communications services
• Divergent sourcing regimes
• Application of Internet Tax Freedom Act’s “accounting rule”
• Promotions and reallocation of sales price
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©2012 Sutherland Asbill & Brennan LLP
Hypothetical (Sutherland Asbill)
Bundled transactions
• Kentucky
• Bundles involving tangible personal property, “digital
property” and/or streaming video
• Sales and use taxes
• Excise tax
• Gross revenues tax
• Florida
• Bundles involving tangible personal property, digital goods
and/or “communications services”
• Sales and use taxes
• Communications services tax
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©2012 Sutherland Asbill & Brennan LLP
Hypothetical (Sutherland Asbill), Cont.
• Over-the-top video customer purchases a subscription with a vendor-supplied converter box in:
Miami
Chicago
Indianapolis
Kenner, La.
Seattle
• Over-the-top video customer purchases a subscription for viewing on laptop in:
Miami
Chicago
Indianapolis
Kenner, La.
Seattle
• Do the results change if the customer purchases on-demand video for one-time viewing, rather than a subscription?
74