Sharing may be caring, but is it also taxable?

Transcription

1 Sharing may be caring, but is it also taxable? State Taxation of the Sharing Economy 23 rd Annual Paul J. Hartman State and Local Tax Forum Vanderbilt University Law School October 25-27, 2016

2 Agenda I. What is the Sharing Economy? II. Common Business Models III. Sales and Use Tax Challenges IV.Recent Developments in Related Areas V. Questions 2

3 What is the Sharing Economy?

4 Definitions An economic system in which assets or services are shared between private individuals, either for free or for a fee, typically by means of the Internet. Thanks to the sharing economy you can easily rent out your car, your apartment, your bike, even your Wi-Fi network when you don't need it" Oxford Dictionary Online Economic activity that involves individuals buying or selling usually temporary access to goods or services especially as arranged through an online company or organization. Arguably the biggest sector of the sharing economy is travel. People are renting their beds to out-of-towners (Airbnb and Couchsurfer), leading them on guided tours (Vayable and CanaryHop) and hosting meals (Voulez Vouz DOner and EatWith), sometimes for free but on most sites for a price though one far below those found at local hotels. Eliana Dockterman, Time, 16 Sept

5 Not so official definitions Technology-enabled sharing of assets or services Peer-to-Peer sharing of goods or services I have an asset and can monetize that asset by sharing it with anyone willing to pay What s mine is yours for a price. 5

6 The Economics Enabled by technology to reduce transaction cost and expand very quickly. Technology removes the noise and friction from a transaction thereby reducing cost. Economics concept of perfect elasticity larger supply can meet increasing demand so price is controlled. 6

7 Common Business Models

8 Marketplace Operator Diagram 8

9 Sharing Economy Diagram 9

10 Physical Transaction vs. Contractual Transaction Physical Transaction Flow Customer executes transaction with online marketplace or platform and pays platform for good/service and tax Marketplace or platform handles logistics and gets goods or services to Customer Online marketplace or platform retains fee for services rendered and passes on remaining amount to merchant/asset owner/seller. Contractual Transaction Flow Customer buys goods from 3 rd Party merchant/asset owner/seller 3 rd Party merchant/asset owner/seller provides good or service to Customer, enabled by technology platform 3 rd Party merchant/asset owner/seller has contractual agreement with online marketplace or platform operator and pays platform operator a fee for services or use of the platform. 10

11 Sales and Use Tax Challenges

12 What is the character of the service charge or 'commission'? Service commission Lead fee Referral fee Advertising Technology fee for use of platform License fee Digital automated services Follows the main charge Something else completely 12

13 How do you source the charge? Multiple jurisdictions taxing different components of the same transaction Is tax charged in the location where the asset is used? - Pick-up versus destination - Date of booking versus date of stay Can you use the address stored in the customer account, i.e., the billing address? Delivery service (food or goods) where the good is picked-up and delivered to your house. Origin or destination? 13

14 Who has collection duty? Who is required to collect and remit sales tax? - Who controls inventory? - Who handles customer invoicing? - Who is responsible for customer service requests? - Who handles returns and warranties? Differing state opinions on who is the retailer creates compliance and system issues Efficient administration collection statute Recordkeeping requirements for state tax reporting Contractual obligation to provide adequate reporting data to retailers Proposed Marketplace Operator collection legislation in NY and WA Impact of Marketplace Fairness or similar federal legislation 14

15 Nexus Considerations "Significantly associated with establishing and maintaining a market in the state Tyler Pipe Does the technology platform company give nexus to the asset owners? Does the location of the asset owners create nexus for the technology platform? Who's activity footprint drives nexus? Platform company s ability to collect sales tax using multiple nexus profiles and contractual risk 15

16 Other Tax Considerations The internet is not taxable; Internet Tax Freedom Act Introduction of transaction taxes other than sales tax: telecommunication, transportation and accommodation taxes Local taxes that differ from state level taxes; review enabling statutes 16

17 Impact of Proposed Legislation Proposed Marketplace Operator collection legislation in NY and WA Impact of Marketplace Fairness or similar federal legislation 17

18 State Regulation Can Impact Tax Limits what companies can do, i.e., cannot rent out rooms for less than 30 days. (Portland) Can affect characterization decisions CA Public Utilities Commission initially issued $20,000 citation to Lyft, Sidecar and Uber for "illegally operating" These penalties were subsequently abated. NY issued subpoenas to AirBnB seeking information re: all the rooms rented in the state Austin fingerprinting for Uber 18

19 Other Policy Considerations Know what is in your contracts with assets owners information is promised for tax reporting and state requirement to provide First to pay could drive the rules for everyone else Paying tax legitimizes a business makes it real more than just two guys in a garage/mom's basement 19

20 Recent Developments in Related Areas

21 Recent Developments: VA PD The Role of Data Centers PD (6/24/16):Out of State Taxpayer ( TP ) purchase of cloud computing services includes possible remote access to Seller s physical Data Center in Virginia. Comm r rules Cloud computing being the same as or similar to electronic delivery of software is not taxable. No TPP involved. Comm r found no taxable use by the TP. 21

22 Recent Developments: VA P.D What about Out of State User catching Income Tax Nexus from the Cloud? PD discusses whether/how TP might acquire positive Property, Payroll or Sales Factors from purchasing third party Cloud services with VA presence. Happily,VA extends P.L to Intangible as well as Tangible Personal Property. Therefore, buying cloud hosting/services from VA Provider does not create VA tax nexus. 22

23 Recent Developments: VA P.D However, PD notes that Out of State User renting or having continuous use of a VA-located server would be unprotected activities and create nexus as not de minimis under VA s expanded version of P.L Also, Out of State User having an instate representative doing more than sales solicitations that is not an independent contractor loses protection. McWane v. Va. Dept. Tax. (5/23/97). TP won by proving de minimis. 23

24 Recent Developments: MI Auto-Owners Loss In Auto-Owners (10/27/15) Michigan Court held that software downloaded by in-state Buyer was merely incidental to vendor rendering of professional service (aka the True Object Test elsewhere). Software program downloaded in its entirety remains taxable but arguably rare today. Michigan Treasury Dept. now issuing full retroactive relief to all open years. A warning to other states? 24

25 Recent Developments: Taxation of Cloud Storage Pits New York vs. Arizona NY Dept of Tax Opinion (5/20/16) rules that Out of State web-based data-hosting service that uses Cloud based technology to provide data storage to NY Users in NOT taxable. Not taxed because(1)no charge for the software,(2) web accessed,(3) User accesses only its Data(thus not an information service and data storage not a NY taxable service). 25

26 Recent Developments: Taxation of Cloud Storage Pits New York vs. Arizona AZ PLR (3/23/16) has virtually the exact same fact set as NY but under its Virtual Container Theory finds that Cloud Storage is taxable TPP. Held: encryption of User data forms virtual containers that travel between out of state storage locations and Users & thus are TPP taxable in AZ. Held: Cloud storage taxed where AZ User uses the Data not where servers are located. 26

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28 Speakers Jeremy Abrams Counsel, Crowell & Moring French Slaughter Partner, Fox Rothschild LLP Reid Okimoto Principal, KPMG LLP 28

29 Thank you