Tax Implications and Best Practices for Conducting Business in the Cloud. Subrina L. Wood, CPA Senior Director

Transcription

1 Tax Implications and Best Practices for Conducting Business in the Cloud Subrina L. Wood, CPA Senior Director

2 Welcome! SUBRINA L. WOOD, CPA Senior Director Subrina has been in public accounting for over thirty years and is a senior director in the tax department of Calibre CPA Group. Having worked with numerous tax-exempt entities including associations, membership organizations, employee benefit funds, labor unions, and other not-for-profit entities, Subrina is considered an authority in our firm for all tax matters relating to this sector of our client base. Subrina is a regular presenter for educational seminars and conferences and has also written numerous articles covering tax related issues that affect tax-exempt organizations. Subrina earned a BA in Fine Art History from the College of the Holy Cross and her MS MBA in accounting from Northeastern University.

3 An Overview of Today s Webinar Breaking down sales and use tax Who s affected and who s not Multistate tax commission Current taxation of software A brief overview of cloud computing, why it is important, and common problems regarding sales and use tax laws Case Study Licensing fees Key Takeaways

4 Who s Exempt from Sales and Use Tax and Who Pays Sales and use tax 45 states and the District of Columbia impose sales tax on the seller of retail products and select services Another 8000 cities and counties impose another layer of local sales and use taxes 501(c)(3) public charities are exempt in most states from paying these taxes on their purchases Must register for an exemption certificate Still must collect and remit sales tax for their sales to the public Everyone else, including tax exempt organizations that are NOT 501(c)(3)s are subject to paying on their purchases and collecting and remitting the tax on their sales. Including tax 501c3 classified

5 Fundamental Court Rulings and Regulations P.L / Interstate Income Act of 1959 Prevents taxation on net income derived with a state by any person from intrastate commerce the only business activities within such state by or on behalf of such person if the solicitation of orders are approved and filled from a point outside the state National Bellas Hess vs. Illinois 1967 Mail order sales by Missouri seller via catalogue were determined not to be subject to sales tax in Illinois. Only businesses with nexus, which is created by physical presence must collect the tax. Administrative recordkeeping entanglement was cited by the Supreme Court. Quill Corp vs. North Dakota 1992 Made physical presence the bright line test to determine is a seller is doing business in a state, citing customers alone or economic presence was not enough. Mail order and internet sales = no sales tax North Dakota argues that physical presence was outmoded

6 Multistate Tax Commission Congress has the power to protect interstate commence from intolerable or even undesirable burdens. Commonwealth Edison v Montana, 452 U.S. 60, 637 (1981) Multistate Tax Commission (MTC) is a US intergovernmental agency created in 1967 with 47 states as members to promote uniformity in state tax laws uniform definition of nexus business activity Owns more than $50,000 property Incurs more than $50,000 in payroll Generates more than $500,000 in sales Exceeds 25% of total property, payroll or total sales in the state Main Street Fairness Act of 2014 blistering opposition

7 Streamlined Sales Tax Project (SSTP) Streamlined Sales & Use Tax Agreement (SSUTA) Organized March 2000 by a coalition of states and businesses to simplify and modernize sales & use tax collection 44 state cooperative effort Encourages remote sellers selling over the internet and by mail to collect tax on sales to customers living in Streamlined states Everyone uses the same rules Levels the playing field for brick and mortar stores Certified Service Providers (CSP) and Certified Automated System (CAS) SpeedTax, Avalara, Exactor, Accurate Tax

8 Current taxation of software Tangible Product Technical Definitions Canned or tangible software software that you can buy off the shelf Downloaded software license purchased and downloaded to their computer Customized software is the designing of software applications for a specific user or group of users within an organization designed to address their precise needs

9 Current taxation of software Tangible Product Tangible product before cloud computing: Off The Shelf Software Tangible products after cloud computing: Inherently intangible Downloads or plug ins Protection under P.L written over 50 years ago is less effective No sales tax is assessed if the sole activity in a state is the solicitation of tangible personal property. Leasing, renting, licensing, or other disposition of tangible personal property, or transactions involving intangible, such as franchise, patents, copyrights trademarks, service marks and the like or any other type of property are not protected activities under P.L The sale or delivery and the solicitation for the sale or delivery of any type of service is not protected.

10 Current taxation of software Nexus Before cloud computing: Presence in the state of employees, equipment, or inventory After cloud computing: When using Software as a service providers (SaaS) can be a data center, where the users are located, or even the billing address States expand their definition of nexus with Amazon laws Click through nexus out of state retailers collect sales tax if a significant number of local sales are generated by affiliate marketers in the state (New York) Required notification retailers to provide information to the state and customers (Colorado) Economic nexus reliant on a local economy to warrant a taxing obligation Bright line tests of property, payroll, or sales

11 What is Cloud Computing? Cloud computing the practice of using a network of remote servers hosted on the internet to store, manage, and process data, rather than a local server of a personal computer.

12 What is Cloud Computing Current Platforms ACCESS TO SOFTWARE (SaaS) ACCESS TO PLATFORM (PaaS) ACCESS TO INFRASTRUCTURE/HARDWARE (IaaS)

13 What is Cloud Computing Major Advantages of Cloud Computing Flexibility Disaster Recovery Automatic Updates Work from anywhere Security IT Cost savings

14 Why Is Cloud Computing Important? In a February 2016 survey by NTEN, The State of Nonprofit Use Cloud Software reported, 100% of respondents indicated they use at least two cloud services, up from 80% in the 2011 survey. 80% of respondents indicated multiple workplaces Data access was a critical issue. The most significant concern by far was reliable access to data. The newest addition to organizations cloud services is document storage By % of all CRM software will be cloud based. Forbes.com

15 Why Is Cloud Computing Important? Private Cloud is Operated Solely For An Organization Greater security and customization Medical & financial industries 19.1% of surveyed nonprofit organizations use a private cloud Public Cloud is an Infrastructure Made Available To The General Public Scalability and lower costs Minimal customization Security depends on the provider 29.5% use a public cloud (e.g. Microsoft, Google or Amazon) Hybrid cloud combines features of both 28.4% use a hybrid of some sort

16 Determining Nexus in the Cloud Determining nexus of sales Billing address Customer s physical location Where service is performed (Server or data center location) Apportionment for sales to multiple locations Software providers may not consistently audit their sales tax procedures so don t rely on the software provider to correctly determine your taxing jurisdiction.

17 Determining Nexus in the Cloud

18 Three Main Issues With the Cloud and Current Sales and Use Tax Laws 1. Physical Presence When is nexus created? Outmoded for most cloud applications 2. Interstate Commerce Where is the point of sale or use? Difficult to determine where the transaction happened and usage of data center may fluctuate 3 Licensing Fees How best to structure the service? Care is needed to determine that the right licensing agreement is selected for the organizations current and future needs

19 Case Study ABC Providers A nonprofit organization contracts for a payment and membership dues SaaS program Review of the included services, contract, and invoice Required security protocols Enough capacity for future growth or changes Will in work with other hardware and software

20 Case Study ABC Providers Service Review What will the software do for the organization How are the training and maintenance services handled Where will the service be provided, used, billed Is there enough room for growth or operational changes Will is work on your current software or hardware, or is middleware required and provided Documentation of review for sales and use tax audit proposes

21 Case Study ABC Providers

22 Case Study ABC Providers

23 Case Study ABC Providers Contract Review Review of how and when payments are due Training and maintenance services Tangibles and intangibles States to consider for nexus Documentation of review for sales and use tax audit proposes

24 Case Study ABC Providers

25 Case Study ABC Providers

26 Case Study ABC Providers Invoice Review Identification of line items Determine that the taxing jurisdiction is correct Apply rate test to stated sale tax

27 Case Study Documentation for Audit & Compliance Purposes Document how the transactions are characterized by the state Service, tangible personal property, or an intangible Document how the transactions are sourced by the state Employee location, user access point, data storage location, billing address, vendor location If it is characterized as tangible source is destination or use Use can be controversial (some state, where the software resides, and some where the users are located) If it is characterized as a service source is where the service is derived, which may be more than one state Taxed at the time of the sale, but may not know in advance where service will be used Allocation of tax by percentage of use MPU ( multiple points of use) Exemptions burden placed on user to collect use tax

28 A Word about Licensing Fees The most software licensing challenges are with shared control over the cloud Infrastructure as a service (IaaS) no control over the cloud infrastructure but has control over the operating system and applications Platform as a service (PaaS) no control over the operating system, but may have control over the applications Less problems when the software is part of the service Software as a service (SaaS)

29 A Word about Licensing Fees Problems arise with how software manufacturers address cloud use in their software licenses. The three basic license types: number of users concurrent or total per processor or core that the software runs on most often in databases and large applications actual usage a metric distinct from the number of users The items that must be licensed: operating system the application the databases the end users development tools and middleware (software the glues together programs)

30 Conclusion Work with the software providers to document services provided as accurately as possible Consult your IT and tax professionals prior to signing the contract Determine what the flow of work and access will be and consult those states regulations and nexus rules Unbundle services, licenses fees, hardware, and training wherever possible. Review initial billings for proper sales tax assessments Document state sourcing determinations, tax base allocation method, and transactional characterizations

31 QUESTIONS?

32 Contact Information Subrina L. Wood-CPA Senior Director

33 Appendix

34 Technical Definitions Licensing agreement a written contract under which the owner of the software allows a licensee to use, mail or sells copies of the original. ipaas integration platform as a service is a platform for building and deploying applications within the cloud and between the cloud and the enterprise without installing hardware or middleware. SaaS Services Software as a Service is a model that allows the consumer to use a provider s application on a cloud infrastructure. The applications can be accessed from various client devices through a client interface.

35 Technical Definitions Server farm is used interchangeably with data center, but a service farm houses numerous rack mounted computer servers simultaneously running common operating system and application. Software development the process of developing a software product that may be used for the implementation of a single application of far reaching system. The process includes requirement gathering, design, implementation, testing and maintenance. Web hosting a service in which a web host maintain client s websites on its computers and provided related services.

36 Technical Definitions Data Center is a place that houses computer systems and related equipment, including the data library. Remote servers a computer that is not attached to the user s keyboard but over which he or she has some degree of control, whether in the same room another part of the building or another part of the world. Host application management (Host AM) the software is hosted with the vendor and the customer accesses it via the internet (also called web hosting)

37 Technical Definitions Canned or tangible software software that you can buy off the shelf Downloaded software license purchased and downloaded to their computer Customized software is the designing of software applications for a specific user or group of users within an organization designed to address their precise needs

38 Technical Definitions Community cloud is a cloud shared several organizations and supports a specific community that has shared concerns (e.g. mission, security, requirements, policy, and compliance considerations). Private cloud operated solely for an organization, a private cloud may be manages by the organization or a third party and may exist off premises. Public cloud the infrastructure made available to the general public or a large industry group and owned by an organization selling its services.