IPT 2015 Sales Tax Symposium Indian Wells, California. Buyer (and Seller) Beware! Concepts of the Cloud

Transcription

1 IPT 2015 Sales Tax Symposium Indian Wells, California Buyer (and Seller) Beware! Concepts of the Cloud

2 Presenters 2 Rafael Garces AOL, Inc. Rafael.Garces@teamaol.com (703) Carolynn Iafrate Kranz Kranz & Associates / ISTS cskranz@saltattorneys.com / cskranz@industrysalestax.com (215) Lenore Vidal Forsythe Technology, Inc. lvidal@forsythe.com (847)

3 Agenda Overview of Cloud Computing Developing a Corporate Policy around Your High Tech Spend Why develop a corporate policy What should be included How to implement the policy 3

4 Cloud Computing Services Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction. (National Institute of Standards and Technology) 4

5 dels Cloud Computing Benefits Cloud Computing Benefits Cost savings and efficiency. Businesses no longer need to expend their limited resources on purchasing and maintaining costly computer hardware and software. Limits IT costs associated with managing computer hardware and software resources. Global SaaS software revenues are forecasted to reach $106B in 2016, increasing 21% over projected 2015 spending levels. Forbes (1/24/2015). 5

6 Cloud Services Division of Ownership Service Provider Customer 6 Indicates separation between Provider and Customer

7 Digital Goods & Services Tax Fairness Act (DGSTFA) 7 A bill to promote neutrality, simplicity, and fairness in the taxation of digital goods and digital services H.R (Smith/Cohen 55 cosponsors/28 R s & 27 D s) measure pending consideration before full House S. 971 (Wyden/Thune 5 cosponsors 2 D s/3 R s) measure pending in SFC What the measure does Ensures digital goods are taxed only once, precluding multiple states from claiming the right to tax same transaction or multiple taxation in the course of production Ensures only generally applicable taxes can be imposed (i.e., general sales taxes) and that it must be done legislatively Precludes discriminatory telecom/utility taxes from applying to digital commerce solely because these goods and services are riding over broadband/communication networks Ensures that digital commerce is subject to same rules as comparable tangible goods Provides certainty in how segments of the new economy can be taxed for state & local tax purposes

8 8 Why Develop A Corporate Policy?

9 Why Develop A Corporate Policy? States are aggressively pursuing technology purchases on audit: Most taxpayers have a significantly high tech spend. Many states are moving to tax these transactions based on user location versus software location. To avoid assessment and refund surprises 9

10 Why Develop A Corporate Policy? 10 National focus on high tech remotely accessed software: The Streamlined Sales Tax State & Local Advisory Council has proposed: The Streamlined Sales & Use Tax Agreement be amended to clarify that remote access software is prewritten computer software and can be taxed as such. Sourcing of these transactions be modified to tax based on user location. The Business Advisory Council is working on numerous alternative proposals. National Conference of State Legislators Federal Legislation Digital Goods & Services Tax Fairness Act

11 11 What Should be Included in the Policy?

12 Mandatory Tax Review Consider when tax should be involved (i.e., contract writing, purchase above a dollar threshold, etc., any capitalized purchases, etc.). The purposes of tax department review / involvement: Proactively assist in characterization of the sale; Create tax categories according to intent of parties/language of contract (i.e., license, maintenance, service, etc.); Assure tax base is legally minimized: Evaluate bundling rules and consider de-bundling nontaxable components (are services offered on a separate basis). True Object - Is there one? Is one service subservient to the other? Consider services related to the purchase and how they may be taxed. May want to consider using a 3rd party vendor for consulting / implementation work. 12 Assist in situsing considerations.

13 Mandatory Tax Review (cont.) Understanding Impact of Characterization: What are you buying? Tangible personal property Software Service Digital Good Something else What does the Agreement state you are buying? How is it delivered? Tangible form Electronically delivered Electronically accessed Electronically streamed 13 Auditors and courts heavily rely on the contractual language in characterizing the item being purchased. If a software license agreement is executed, it will be difficult to argue that you are not licensing software.

14 Mandatory Tax Review (cont.) Examples of State Departments of Revenue which have taken numerous differing approaches in characterization of SaaS: 14 Taxable as sale of Prewritten or Canned Computer Software AZ, IN*, MA, MI (in litigation), NY, PA, TN*, UT* Taxable as the sale of a service Computer Service CT Data processing service TX Telecommunications service SC Expressly enumerated as taxable - WA Beware of localities, such as City of Chicago and Colorado home rule cities

15 Mandatory Tax Review (cont.) 15 Nontaxable / Exempt Not an enumerated service IA, KS, MO, NE, NJ, WI Statutory exemption - ID, VT No specific position Prewritten or computer software exempt when delivered electronically and the state does not tax service which may capture this category CA, FL, VA

16 Mandatory Tax Review (cont.) 16 Characterization - PaaS Hardware Issues Web hosting Remote Data Storage Managed Services Varying State Positions Colorado - LR New York TSB-A-15(2)S, 04/14/2015 South Carolina SC PLR 14-2 (8/26/2014) Texas - Tex. Comp. of Publ. Accts. Ltr. Rul. No L (1/17/2008) Vermont - TB 54 (and its many reiterations)

17 Require Electronic Delivery of Software If software, digital product or information service is being received, delivery should always be electronic. There are still a number of states that exempt prewritten computer software when delivered in tangible form. To the extent another state attempts to tax subsequent use, it may be exempt if electronically delivered. 17

18 Document Delivery Method Document delivery method in contract and purchase order, if applicable. If no delivery (i.e., access), specify in contract. Incorporate Certificate of Electronic Delivery into contract (both parties execute). Do not rely on seller documenting mode of delivery. Retain documentation of in which software was delivered, or memorandum for IT manager indicating electronic delivery. 18

19 Document Location of Delivery and Use States differ in regards to how to situs these transactions. The following should be documented in the contract (and whenever possible on invoices, PO s, SOW s, etc.): Location at which software is installed. Location of users of the software, service, etc. 19 Submit documentation of use in multiple states to vendor to minimize overpayment of taxes; or issue applicable exemption certificate.

20 Problems with Understanding Delivery & Use From a sales tax perspective, the concepts of destination and benefit are not easily applied to digital items. The Seller may have no idea where the receipt of the items takes place, or where the item is used. From a purchaser perspective, location of use may not always be known or may be from multiple locations. 20

21 Problems with Understanding Delivery & Use Consider remote storage (backup): Is Use at location where the data is stored as a backup? Is Use at the location where the equipment is located on which the original data exists? Is Use at the location of the user who will retrieve the data? 21

22 Allocation or Apportionment of Tax Base 22 Many states not only permit allocation or apportionment of the tax base, but require it. State statutes and regulations often do not provide an answer/approach. Rather, a range of acceptable answers is the norm. Consider Washington state: The taxable amount is determined by the number of users in this state compared to users everywhere. Most auditors will look for a sensible approach that assigns sales to locations where the service is being received. State Authority Silent? Consider: Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977); Goldberg v. Sweet, 488 U.S. 252 (1989); Central Greyhound Lines, Inc. v. Mealy et al., 334 U.S. 653 (1948) Oklahoma Tax Commission v. Jefferson Lines, Inc., 514 U.S. 175 (1995)

23 Allocation or Apportionment of Tax Base 23 In allocating or apportioning the tax base: Develop a Sensible and Uniform Approach Uniform does not mean that all transactions are equal, but rather that a particular purchase should be allocated in the same manner to each state (unless a particular state has a different sourcing regime). How does one source between multiple states? Based on expected usage? Based on actual usage? Based on a pro-rata split? Based on value of the usage (management versus line employees)? Others?

24 Seller Considerations with Situsing 24 What is a seller s obligation to obtain data and collect sales tax for one transaction from multiple states? Does your system have the ability to charge multiple states taxes on the same transaction? What information is known to the seller at the time of sale? What is on the invoice? What is in the contract? Consider obtaining an affidavit from your customer attesting to where use will be. Does the state permit the seller to obtain an exemption certificate?

25 Purchaser Considerations with Situsing 25 What is a purchaser s obligation to remit use tax for one transaction to multiple states? What if the seller charged tax from one state on the entire transaction? Was the tax legally imposed? Which state had the right of first assessment? May have to consider refunds. May have to consider use tax for rate differential. May have to consider subsequent use.

26 Review of Tax Clauses 26 Most software license agreements contain a tax clause, such as the following: Taxes. The fees and other amounts payable by Customer to Seller under this Agreement do not include any taxes of any jurisdiction that may be assessed or imposed upon the services provided under this Agreement or the copies of the Documentation provided to Customer, including sales, use, excise, value added, personal property, export, import and withholding taxes, excluding only taxes based upon Seller s net income. Customer shall directly pay any such taxes assessed against it, and Customer shall promptly reimburse Seller for any such taxes payable or collectable by Seller.

27 Review of Tax Clauses (cont.) Review of Tax Clauses Be cautious of these provisions as it is common for sellers to bill for taxes after the sale has taken place. In the case of an audit, this can be problematic, particularly if the Seller underwent a sample. 27

28 Other Considerations Develop policy on presentation of exemption certificates: Enterprise zones, resale, manufacturing, R&D, MPU, and other exemptions that might apply to technology purchases Consider nexus implications of a purchase of cloud services. Use an addendum to all software licenses which covers not only method of delivery, but fulfills 86 IAC s signature requirement 28

29 29 How to Implement the Policy

30 How to Implement the Policy 30 Success of implementing a corporate policy is dependent on training the personnel involved in any major cloud purchases. The key groups to focus on are: Legal: involved in major cloud/technology/software purchases - likely that these purchases require legal sign off on the contract Accounting: may be reclassing items after the fact into auditable accounts IT: involved in every major software purchase as they will be responsible for installation and implementation AP: team training, submission of exemption certificates, feasibility of AP indicating whether tax paid, ERP data collection on technology purchases.

31 31 Questions?

32 32 Appendix

33 Software as a Service The SaaS model allows the consumer to use the provider s software applications running on a cloud infrastructure. The applications are accessible from various client devices through a client interface such as a web browser (e.g., web-based ). The consumer does not manage or control the underlying cloud infrastructure including network, servers, operating systems, storage, or application capabilities. Under the SaaS model a service agreement is almost always executed (vs. a software license agreement or services agreement for an ASP). SaaS model is familiar to most Internet users, and includes such offerings as web-based , calendars, word processing, and digital photo applications. 33

34 34 Nature of the Issues Nature of the Issues

35 as Platform a Service as a ( ) Service The PaaS model allows the consumer to run consumer-created or acquired applications on the cloud provider s platform. The consumer does not manage or control the underlying cloud infrastructure including network, servers, operating systems, or storage, but has control over the deployed applications and possibly the application hosting environment configurations. 35

36 Infrastructure as a Service ( 36 The IaaS model provides the consumer with processing, storage, network capabilities, and other fundamental computing resources where the consumer is able to deploy and run software, which can include operating systems and applications. The consumer does not manage or control the underlying cloud infrastructure but has control over operating systems, storage, deployed applications, and possibly limited control of select networking components (e.g., host firewall). An example of an IaaS model includes web hosting and managed services.