1 3/14/12 kelly c. millerdan dixon [email protected] [email protected]

1www.taxingtech.com www.reedsmith.com/statetax 3/14/12

Kelly C. Miller Dan Dixon

[email protected] [email protected]


Agenda/Objectives Affiliate Nexus (“Amazon”) Legislation Update: State Tax Treatment of Electronic Goods & Services

I. Digital Goods & Services

II. Web Hosting

III. Software

IV. Cloud Computing (ASP; SaaS, etc.)

Outlook for 2012

2


Affiliate Nexus (“Amazon”) Legislation


Affiliate Nexus States - 2011

Affiliate Nexus Bill

Reporting Bill

Per DOR Bulletin (09/12)*


Affiliate Nexus States - 2011 Affiliate Nexus States

Arkansas California Colorado Connecticut District of Columbia Illinois North Carolina Rhode Island

Reporting Requirement States Oklahoma South Dakota Vermont

Affiliate Nexus per DOR Pennsylvania (09/12)


States With Pending Affiliate Nexus Legislation - 2012(as of March 2012)

Introduced; Dead

Pending Passed; Awaiting Gov. Sign.


States with Pending Affiliate Legislation - 2012

Introduced Florida Georgia Hawaii Iowa Kansas Louisiana Minnesota Mississippi Missouri New Jersey New Mexico Virginia

Passed; Awaiting Gov. Signature Tennessee

Introduced; Dead Arizona


Federal Nexus Proposals

Main Street Fairness Act S. 1452/H.R. 2701 July 29, 2011

Senate Finance Committee

Marketplace Equity Act H.R. 3179 October 12, 2011

House Committee on Courts, Commercial and Administrative Law

Marketplace Fairness Act S. 1832 November 9, 2011

Senate Finance Committee Reid: “Need 60 for a vote…”

“Norquist” Resolution Sen. Res. 309 November 2, 2011


Recent Developments: Electronic Goods & Services; Cloud Computing


I. Electronic Goods & Services


A. Overview


Digital Products – States Adopting SSUTA

SSUTA:

Specified Digital Products =

•Digital Audio-Visual Works

•Digital Audio Works

•Digital Books


Taxation of Electronic (“Digital”) Goods

Schemes of Taxation DOR

Ruling; formal policy; FAQs; informal guidance

Judicial DOR/TP prevails in court

Statutory Non-Taxable

No guidance Specifically enumerated

Taxable


B. Updates (3/2012)


Digital DownloadsCalifornia

California State Board of Equalization has issued revised guidance on the taxability of internet sales, including downloads of applications (“apps”), eBooks, digital images, and software.

Publication No. 109 (March 2, 2012) clarifies that:

If you are either a California or non-California business and you sell electronic data products, including: software, data, digital books (eBooks), mobile applications (“apps”), or digital images, your sales will not be subject to tax unless as part of the sale you provide the customer with a back up data copy on a physical storage medium such as a CD-ROM; and

If you are either a California or non-California business and you sell canned (read: non-custom; “out-of-the-box”) software to customers who download the software from a server, your sales will not be subject to tax unless as part of the sale you provide the customer with a back up data copy of the software on a physical storage medium such as a CD-ROM (this also holds true if you are selling a customer a database via download).

The Publication goes on to note that when a consumer purchases an eBook it can do so on diskette or CD, but that the most popular method of delivery of eBooks is through a mobile app or other wireless download and that these sales do not involve the transfer of a back up copy on a physical storage medium.


II. Web Hosting


Web Hosting Round-Up Nebraska: Separately stated charges for web hosting and

maintenance of are not taxable. Nebraska DOR Website FAQs – Business Taxes (Mar. 2012). (SSUTA)

South Dakota: Web hosting services are subject to sales tax (Tax Facts No. 02/01/2012) .

California: A web-hosting provider will not be considered an agent or representative of any out-of-state retailer for purposes of California’s forthcoming affiliate nexus law. (Cal. Code Regs. 18 §1684(a), July, 2011).

Tennessee: Online hosting services not taxable telecommunications services under true object/primary purpose test. Tenn. Rev. Rul. 11-22 (June 10, 2011); Online web hosting services not taxable Let. Rul. No. 11-38 (July 27, 2011).

Vermont: Website hosting not subject to tax. Tech. Bulletin TB-54 (Apr. 11, 2011).

Texas: A person whose only Texas activity is as a user of Internet hosting is not engaged in business in this state. Tex. Policy Letter Rul. No. 201103016L (Mar. 24, 2011).


III. Software


Software California

Nortel Networks v. SBE, 119 Cal Rptr 3d 905 (2011) In 2011, California Appellate Court determined that all software subject to copyrights or

patents is exempt from California sales and use tax, even if they are delivered to the customer on tangible media.

When canned software is transferred pursuant to a TTA, the appropriate measure of tax (when a separately stated cost for the TPP is not stated on the invoice) is 200 percent of the cost of the materials and labor used to produce the tangible personal property (the CD).

For the past 6 months, the Board has been telling taxpayers that it is in the midst of conducting an industry study to help with the “200%” tax computation. The Board has contacted over 300 companies to participate in the study, and only one company has replied. The Board intends to follow up with these companies and encourage their participation.

The Board’s has also suggested starting an "interested parties process" to discuss whether clarifying amendments are necessary because, without the study, the amendments would not include an "optional percentage" to estimate the retail fair market value of tangible personal property transferred in a "software media TTA.“

The Board intends to meet on March 20, 2012 to discuss these issues further. Companies should continue to file refund claims.


Software Colorado

In passing H.B. 1293 (6/7/2011), Colorado repealed a sales tax on prewritten (“standardized”), canned software other than canned software delivered by tangible storage medium.

The repeal essentially reinstates the prior guidance in Colorado on this issue—Special Regulation 7—that exempts all software delivered or accessed by application service providers (ASP), delivered electronically or through “load-and-leave.”

Effective date, July 1, 2012.

Connecticut

Software remains taxable; (data processing still taxed at 1%). Connecticut Informational Publication No. 2011(15), 10/20/2011.

Louisiana

Taxes are still imposed on the sale, use, or lease of canned computer software and software maintenance agreements. Louisiana Revenue Information Bulletin No. 11-005 (Feb. 14, 2011).

Missouri

Purchases of: canned software downloaded over the internet; customized software downloaded over the internet (by tangible form or electronically); licenses to use software purchased and downloaded electronically; ‘mandatory’ software maintenance if delivered electronically where original software was delivered electronically or original software was separately stated in tangible form are all non-taxable. Private Letter Ruling No. 6991 (Jan. 1, 2012).


Software Pennsylvania

Dechert LLP v. Commonwealth of Pennsylvania, 998 A.2d 575 (2010) “Software maintenance” not taxable. Uniformity: Lead case on this issue could be litigated later this year. Companies should continue to file refund claims based on these issues to preserve their

rights.

Rhode Island

Sale tax applies to a computer software download (including applications, or “apps”). Sales Tax Advisory (9/30/2011)

Vermont

Sale of prewritten, canned software is taxable. Tech. Bulletin TB-54 (Apr. 11, 2011).

Virginia

Department's long-standing policy is that the sale of prewritten software delivered electronically to customers does not constitute the sale of tangible personal property and is generally not subject to sales and use taxation. See Va. Code § 58.1-609.5 1 and Public Document (P.D.) 05-44 (4/4/05). Virginia Public Document Ruling No. 11-112, 06/20/2011.


IV. Cloud Computing


Cloud Computing Update – Terms Remote Access

Remote Access Software is housed on a server (in/out-of-state) and accessed on a computer or

web-enabled device via the internet or other network.

SaaS Software-as-a-Service

Software “on-demand”, if you will. With SaaS, software and the code running that software is hosted on a server or series of servers and is access on a computer or web-enabled device.

ASP Application Service Provider.

An ASP is a company that is providing what amounts to remote access, software on-demand, or SaaS.


Survey of State Guidance on Remote Access Software

No Specific Guidance

No Sales Tax

Statute or Regulation

DOR Ruling or Policy

Unofficial Position or Policy


Software?

Remote Access?

Information Service?

Not enumerated.

Sale of TPP? No.

Automated Service?

IT’S ALL MADNESS…


Remote Access; Info Services; ASP/SaaSBrand New and Notable …

Utah The Utah Tax Commission recently issued Private Letter Ruling No. 10-011

(2/24/12) in which it determined that the provision of certain web-based “services” are subject to sales tax because the download of the “applet” was considered the transfer of tangible personal property. The ruling cites several new provisions in Utah law and is a a significant shift from prior

rulings in Utah that held that access to software on an out-of-state server was not taxable.

The applet was as a free download to the user that had no function by itself and was “merely incidental” to the provision of the aforementioned web-based services.

The Commission determined that the applet, coupled with the user’s purchase of the service, equated to the transfer of a “right to use” the company’s proprietary software under either a lease or contract.

The Commission further determined that the company’s users were really paying for use of the company’s proprietary software rather than a service even though there was no actual transfer of software to the users.

Notable because Commission focused on the applet, but ultimately determined that the users were really paying for the use of the software.


Remote Access; Info Services; ASP/SaaSNONTAXABLE

Colorado Online services are not taxable as sale of software. FYI Tax Pub. No. Sales

89 (July 1, 2011). Florida

Software delivered electronically and services (training; installation; live support) delivered online are not taxable as software and services only delivered in electronic form. Tech. Asst. Advisement No. 11A-021 (July 23, 2011).

Licenses to use software are not subject to tax if the software is delivered electronically. Tech. Asst. Advisement No. 10A-028 (June 21, 2010).

Illinois Acknowledging “challenges” posed by cloud computing, DOR declined to

issue guidance. See e.g., GIL 10-0062 (Aug. 4, 2010); then on January 6, 2012, issued GIL 12-0002-GIL (Jan. 6, 2012): Information services; customized software (maybe); license to use

software (maybe); software installation = non-taxable; [Canned, electronically delivered software = taxable]

“Please note that the Department has determined that the proper forum to determine the appropriate taxation of computer software Application Service Providers (ASPs), software hosting and web-based software is through a formal administrative rulemaking process rather than on a case-by-case basis through individual inquiries.”


Remote Access; Info Services; ASP/SaaS

NONTAXABLE Illinois

Taxpayer provides two services; the first is a subscription service whereby customers are notified of product recalls (information is communicated electronically); the second is an electronically-maintained database of suppliers that have available medical products for acquisition. Service #2 is only provided through an online database that is accessed on a customer’s computer.

Data for both services is maintained on servers in IL and out-of-the state. State determined that information or data services, transferred electronically, are not

taxable. State rules that overall purpose is the sharing of database information and not TPP; delivery of data or information services electronically from database – not taxable. (GIL Letter No. ST 11-0094, Nov. 30, 2011).

Indiana Taxpayer develops online games played using social media networks. Software is hosted

on servers outside the state. Games include multi-player offerings, such as poker. Games are generally free to play, however, certain add-ons (ex: poker chips) are not. The

only way to play these games is by going online. Players cannot access games by downloading software.

Moreover, taxpayer explained, there is no actual software to download. In some instances, the user may download an app (“application”) to a web-enabled device, however, user can only play the game by accessing it online through the application.

Application may be downloadable but game software is not. No ownership tranferred; only limited license-of-use.

Ruling: Taxpayer’s products transferred electronically are not specified digital products or pre-written computer software; sales to end-users of digital goods (chips) for use in the games, or the games themselves, accessed online, are not taxable. (Rev. Rul. No. ST 11-04, 09/02/11).


Remote Access; Info Services; ASP/SaaSNONTAXABLE Kansas

Kansas Department of Revenue determined that determined that charges for a “hosted software product”—in that case, videos offering continuing medical instruction for physicians—are not subject to sales tax. Kansas Opinion Letter No. O-2012-001 (February 12, 2012).

[Contrast to Texas Policy Ruling No. 200812241L (12/16/08): Access to an online training course via a website equals information services, even where no software is used.

The Department determined access to software or applications, etc., by itself, is not a taxable service in Kansas so long as there is no downloading, leasing or owning that software or applications (which would be subject to tax).

Kansas

Downloaded prewritten computer software is taxable; remote access software is not. Department determined that remote access to the video gaming software and virtual goods is not taxable, but if downloaded, would be taxable as downloaded prewritten software. Kan. Op. Letter P-2011-004 (June 16, 2011).

Kansas

Only when an ASP sells canned software to a client that can be used independently of the ASP service is the charge taxable. All other separately stated ASP charges are not subject to tax. Kan. Op. Letter O-2010-005 (June 22, 2010).

So in Kansas, as long as there is no physical download,

remote access is not taxable.



Massachusetts The use of software was nontaxable because

object of transaction was database access rather than the use of the software. Letter Ruling No. 11-4 (Apr. 12, 2011).

Nebraska Not taxable when the Application Service Provider (ASP) retains

title to the software and does not grant a license with ownership rights to the user/customer. Neb. Information Guide No. 6-511-2011 (July 27, 2011).

Pennsylvania “Access to software solely through the Internet is not a taxable transfer

of software, unless the server resides in Pennsylvania." PA SUT-08-005; PA SUT-10-005.

Ruling is rumored to be under review and could be revised. Administrative agencies not strictly following the ruling.



Rhode Island Remote access to software is not considered sale of pre-written

computer software (provided there is no downloading of the software). SU 11-25.7(3).

Tennessee Fee for access to software ASP not taxable. Tenn. Rev. Rul. No.

11-22 (June 10, 2011) Charges for data storage and retrieval were not taxable. Let. Rul.

No. 11-38 (July 27, 2011) Fee for access to software housed outside of TN not taxable

because there was no transfer of possession or control. Let. Rul. No. 11-58 (Oct. 10, 2011).

Virginia Online services are not taxable because there was no transfer of TPP.

Vir. Pub. Doc. No. 10-264 (Dec. 15, 2010). Wisconsin

ASP was not taxable because the software was incidental to service and the users are not controlling software. PLR No. W1025002 (March 24, 2010).


Remote Access; Info Services; ASP/SaaSTAXABLE

Arizona Cloud services treated as the taxable license of TPP TIR No. LR10-007

(Mar. 24, 2010). Gross receipts derived from hosting software were subject to the

transaction privilege tax. Letter Ruling 11-011 (Jun. 22, 2011). Indiana

Access to pre-written software maintained on servers outside of the state subject to tax when accessed electronically. Ltr. of Finding 09-0746 (May 27, 2010).

New York Online services constitute sale of pre-written software. See Adobe

Systems Inc., TSB-A-08(62)S; TSB-A-09(19)S (May 21, 2009); TSB-A-10(2)S (January 20, 2010); TSB-A-10(44)S (Sept. 22, 2010); TSB-A-11(17)S (June 1, 2011).

New York Remote access to canned software is taxable. Taxpayer deemed to

have constructive possession of the software via "right to use or control or direct the use" of the software. The situs of the sale was the location associated with the license to use (i.e., the location of the taxpayer’s employees that use the software). TSB-A-09(37)S, New York Commissioner of Taxation and Finance, Aug. 25, 2009)


Remote Access; Info Services; ASP/SaaSTAXABLE

South Carolina Rev. Rul. 05-13 (“charges by the [ASP] are similar to

charges by database access services and are therefore subject to [tax].”)

Washington Rev. Code Wash § 82.08.020(1)(b) (sales tax

imposed on ‘‘digital automated service’’ which describes ‘‘any service transferred electronically that uses one or more software applications.’’)


Outlook for 2012 & Final Thoughts…

Dan Dixon Kelley C. Miller

Reed Smith LLP Reed Smith LLP

215.851.8854 215.851.8855

[email protected] [email protected]

1 3/14/12 kelly c. millerdan dixon [email protected] [email protected]

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