sales and use tax for cloud computing, software, apps,...

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

[email protected]

Dec. 12, 2013

Joseph Endres, Hodgson Russ

[email protected]

Laurie Wik, Deloitte Tax

[email protected]

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






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?


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


Cloud Product Characteristics

On-demand self

service

Location independent

resource pooling

Rapid elasticity

Ubiquitous network

access Pay per use


Cloud Product Offerings

Software as a Service (SaaS): Customer/User accesses a software

application running on the SaaS provider’s cloud infrastructure



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.



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).


• Pay-Per-Use

• Pay-Per-User

• Pay-Per-Gigabyte Used

• Revenue-Share

• Monthly or Annual Subscription

Cloud Product Pricing Models

Taxability Overview


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


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


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



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



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


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


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)


Contacts

Laurie Wik

Tax Director, San Jose, California

408-704-4517, [email protected]


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

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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

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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—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

[email protected]

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

Where value is law.



Sales and Use Tax for Digital Products and Services—Sourcing Issues




Phone: (716) 848-1504

Fax: (716) 819-4711

[email protected]

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


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


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

http://www.streamlinedsalestax.org/


STATE-BY-STATE

LEGISLATIVE AND

REGULATORY UPDATE

Digital Products


LEGISLATIVE UPDATE

Digital Products


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


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


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


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



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



“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.

53



“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



• 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



“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


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


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


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


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


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


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


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.

63


ADMINISTRATIVE GUIDANCE

AND LITIGATION UPDATE

Digital Products


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.

66


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.

67


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.

68


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.

69



• 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.

70


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.

71


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.

73


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).

75


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.

76


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.



Sales and Use Tax for Digital Products and Services—Compliance Issues




Phone: (716) 848-1504

Fax: (716) 819-4711

[email protected]

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

79

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.

80

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

82

Joseph N. Endres, Esq. Hodgson Russ LLP 140 Pearl Street, Suite 100

Buffalo, NY 14202 Phone: (716) 848-1504 Fax: (716) 819-4711

[email protected]

mailto:[email protected]

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