State Tax Return. Streamlined Sales And Use Tax Agreement Update

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1 September 2006 Volume 13 Number 9 State Tax Return Streamlined Sales And Use Tax Agreement Update Stephen G. Harris Dallas (214) On August 28-31, 2006, the Streamlined Sales Tax Governing Board (the Board ) met in Bismarck, North Dakota to address, among other things, proposed amendments to the Streamlined Sales and Use Tax Agreement (the SSUTA ), the application of the multiple points of use ( MPU ) provisions, the recertification of member states, and the admission of two new states to the Board. These amendments, and other actions taken by the Board, are summarized below. Multiple Points Of Use States and the business community continue to spar over the MPU provisions of the SSUTA. The SSUTA currently provides that a business purchaser that is not a holder of a direct pay permit that knows at the time of purchase of a digital good, computer software, or service that the good or service purchased will be concurrently available for use in more than one jurisdiction shall deliver an exemption certificate to the seller claiming MPU. Receipt of the certificate relieves the seller of all obligations to collect or remit the tax and obligates the purchaser to remit the applicable tax on a direct pay basis using a reasonable means of apportionment. If the purchaser does not provide an MPU certificate, the seller is required to collect and remit tax based on the general sourcing rules even if the seller knows the good or service will be available for use in multiple jurisdictions. 1 The business community has requested that the SSUTA be amended to change the words shall deliver to may elect to deliver. Businesses believe that making the MPU provisions elective will give them greater flexibility, especially in situations where the good or service will be available for concurrent use in a non-member state or in a member state that does not tax the particular good or service. 2 Businesses are reluctant to issue MPU certificates in these situations. Business representatives and the states have pointed out that the MPU provisions do not affect a state s ability to tax a transaction and, therefore, making use of MPU certificates elective will not allow the purchaser to avoid tax. 3 1 See SSUTA See Schibley, Daniel T., MPU Divides Businesses, States Confront Bundling Thicket, During SST Meetings, CCH State Tax Review, August 1, Id.

2 Another unresolved concern involves the allowance for credits and refunds when an MPU certificate is not used. If a purchase is taxed under the default sourcing rules, the purchaser will remit 100% of the tax to the destination state. However, other states where the good or service is available for concurrent use will also be entitled to collect tax based on the state s apportioned share. It is unclear how each individual state will handle credits and refunds for taxes paid in these situations. Tennessee has indicated it will give a full credit for taxes paid to non-member states and a partial credit for taxes paid to member states. 4 Under Tennessee s approach, a purchaser could conceivable pay more than 100% of the applicable tax. It is unclear if other member states will follow this approach. The Board deferred action on MPU issues and referred the matter to the State and Local Advisory Council for further consideration. The Board will take up the matter again at its next meeting. Concurrently Available For Use Interpreted One item relevant to the MPU provisions was resolved by the Board. After months of heated debate, the Board approved an interpretation of the phrase concurrently available for use, which is not defined in the SSUTA, in the context of the purchase of computer software. The interpretation provides that (1) software loaded onto a server located in a single state that will be available for access by employees in multiple jurisdictions is concurrently available for use in more than one jurisdiction if the purchaser knows at the time of purchase that the software will be available for use in more than one jurisdiction; (2) delivery of a copy of a computer program is not necessary for the program to be concurrently available in more than one jurisdiction; and (3) the purchase of a license of a copy of a computer program that allows the purchaser to make copies of the software for use in more than one jurisdiction is concurrently available for use in more than one jurisdiction if the purchaser knows at the time of purchase that the program will be available for use in multiple jurisdictions. 5 Liability Relief For Purchasers The Board approved an amendment to the SSUTA that will require member states to grant certain purchasers relief from tax, penalties, and interest for failing to pay the correct amount of tax based on reliance on erroneous data provided by a member state on tax rates, boundaries, taxing jurisdiction assignments, or contained in the state s taxability matrix. 6 The amendment is effective January 1, The SSUTA already provides similar liability protection for sellers and certified service providers that rely on erroneous information from a member state. 7 4 Id. 5 See Schibley, Daniel T., SST Board Adds Members; Acts on Purchaser Relief, Other Amendments, CCH State Tax Day, September 5, The proposed amendment regarding the purchaser use tax is available at 7 SSUTA 306 2

3 Digital Products Definitions Meet Continued Resistance The Board failed to reach an expected agreement on the definition of digital products. Current efforts to define digital goods have turned away from trying to reach agreement on a general definition of digital products and have instead focused on defining specific types of digital products (e.g., book and audio works ). However these efforts have also met resistance from the business community who question whether states can tax digital goods that remain undefined under the existing definition of tangible personal property, or whether a separate imposition statute is necessary. 8 There does not appear to be any end to the years long struggle to reach a consensus on a definition of digital products. Recertification of Member States The SSUTA requires all member states to annually recertify that the state remains in compliance with the agreement. In its recertification letter, each state is required to identify any changes in its statutes, rules, or other authorities that could effect compliance with the agreement. 9 Initially the Board believed that it was required to vote on and approve the recertification of each member state. Votes were cast on the first day of meetings and the recertifications of all member states, except New Jersey (discussed below), were approved. 10 After voting on the recertifications, the Board reversed its position and concluded that the SSUTA does not required it to vote on the annual recertification of member states. 11 Although the Board acknowledged that it was not required to vote on each state s recertification, it recognized that an objection can be raised regarding a state s compliance at any time and that it was appropriate for the Board to address such objections. A rule was proposed that would outline the procedures that the Board would follow when an issue of noncompliance was raised, but action was postponed to allow the Executive Committee time to consider the rule. 12 New Jersey s Compliance Questioned The Board declined to accept New Jersey s recertification and requested that the state respond at the next meeting regarding a challenge raised regarding its continued compliance. At issue are questions raised by the Board s Business Advisory Council regarding New Jersey s replacement tax on fur clothing. 8 See Schibley, SST Board Adds Members; Acts on Purchaser Relief, Other Amendments. Proposed amendments to the SSUTA defining various digital products are available at 9 See SSUTA The Board accepted the recertification of the following states: Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, North Carolina, North Dakota, Oklahoma, South Dakota, and West Virginia. 11 See Schibley, SST Board Adds Members; Acts on Purchaser Relief, Other Amendments. 12 Id. 3

4 Effective July 15, 2006, New Jersey imposes a 6% sales tax (and corresponding use tax) on gross receipts from the retail sale of fur clothing and accessories. 13 Fur clothing is defined as an article of clothing exempt from tax under the sales and use tax that is made of fur on the hide or pelt of an animal or animals and if that fur is the component material of chief value of the article. 14 The tax on fur clothing is separate from the general New Jersey sales and use tax and the exemptions and partial rate reductions that are part of the Sales and Use Tax Act do not apply. 15 New Jersey s enactment of a separate tax on fur clothing is viewed by some as an abusive act and an attempt to circumvent the uniformity of the SSUTA. 16 Under the SSUTA, fur clothing is included within the broad definition of clothing. 17 Member states are required to use the general definition of clothing and either tax or exempt all items falling within that definition. 18 Accordingly, in order to tax fur clothing, but continue to exempt other clothing from the sales and use tax, New Jersey enacted the separate gross receipts tax on fur clothing outside of the general sales and use tax. As a result of the perceived abuse, the Board decided to delay New Jersey s recertification while the state s compliance is investigated. 19 Replacement taxes, or carve-outs, such as the New Jersey fur tax, have the potential to create significant challenges for the streamlined sales tax project and the passage of federal authorizing legislation. How the Board responds at the next meeting will likely be crucial to the future compliance of member states and to maintaining the SSUTA s stated goals of simplification and uniformity of state sales and use taxes. New Members Approved; Implementing States Advisory Role Extended The Board accepted petitions by Rhode Island and Vermont for membership to the Streamlined Sales Tax Project. Both states will become full members effective January 1, 2007, assuming they satisfy all certified service provider requirements by that date. Vermont also applied for, and was granted, immediate membership as an associate member of the Streamlined Sales Tax Project. 20 The Board also approved an amendment to the SSUTA that will permit states to serve as ex officio members once their status as implementing states expires. 21 Prior to 13 N.J. Rev. Stat. 54:32G-1(a)(1). 14 N.J. Rev. Stat. 54:32G-1(c) 15 See NJ Division of Taxation Release, Fur Clothing Retail Gross Receipts Tax and Use Tax, July 20, See, e.g., Wolski, Mark, Streamlined Governing Board Approves Vermont, Rhode Island as Member States, BNA Daily Tax Report (August 30, 2006). 17 SSUTA Appendix C, Part II. 18 SSUTA The SSUTA permits the Governing Board to impose sanctions, including penalties or expulsion, to combat such perceived abuses. SSUTA 809. States. 20 See Wolski, Streamlined Governing Board Approves Vermont, Rhode Island as Member 21 The group of Implementing States held its last meeting on August 28,

5 October 1, 2005, when responsibility for the SSUTA passed to the Board, the Implementing States were responsible for the SSUTA. 22 Under the amendment, Implementing States that have not enacted conforming legislation will become Advisory States. Each Advisory State will be permitted to appoint four representatives to the Board. Advisory States will be permitted to speak on matters before the Board and serve on standing committees (except for the Executive, Finance, and Compliance Review and Interpretations Committees) but will not be given any voting rights See SSUTA See Executive Committee Amendment to Section 703 available at 5

6 This article is reprinted from the State Tax Return, a Jones Day monthly newsletter reporting on recent developments in state and local tax. Requests for a subscription to the State Tax Return or permission to reproduce this publication, in whole or in part, or comments and suggestions should be sent to Susan Ervien (214/ or shervien@jonesday.com) in Jones Day s Dallas Office, 2727 N. Harwood, Dallas, Texas Jones Day All Rights Reserved. No portion of the article may be reproduced or used without express permission. Because of its generality, the information contained herein should not be construed as legal advice on any specific facts and circumstances. The contents are intended for general information purposes only.