TEI s 66 th Midyear Conference Sales and Use Taxes In the New Economy

Transcription

1 TEI s 66 th Midyear Conference Sales and Use Taxes In the New Economy March 15, 2016 Mark W. Yopp Partner McDermott Will & Emery LLP New York, NY (212) myopp@mwe.com Kendall L. Houghton Partner Alston & Bird LLP Washington, DC (202) kendall.houghton@alston.com Boston Brussels Chicago Dallas Düsseldorf Frankfurt Houston London Los Angeles Miami Milan Munich New York Orange County Paris Rome Seoul Silicon Valley Washington, D.C. Strategic alliance with MWE China Law Offices (Shanghai) 2016 McDermott Will & Emery. The following legal entities are collectively referred to as "McDermott Will & Emery," "McDermott" or "the Firm": McDermott Will & Emery LLP, McDermott Will & Emery AARPI, McDermott Will & Emery Belgium LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP. These entities coordinate their activities through service agreements. This communication may be considered attorney advertising. Previous results are not a guarantee of future outcome.

2 Agenda Case Study: Data Center Nexus Taxability Sourcing Incentives 2

3 Case Study: Data Center Company currently operates its data center in a NOMAD state. Is considering relocating the data center out of the state for various reasons and wants to ensure that the sales and use tax consequences are minimal. What are the factors to consider? Nexus Type of products the company sells/buys digital products/software Sourcing of sales/purchases Incentives 3

4 Nexus: Legislation Sales Tax Nexus 2015 Developments: Click-through Click-through was enacted in Tennessee, Washington, Ohio, Nevada, Michigan, and became effective in Vermont. Marketplace Nexus In New York, South Dakota, Utah and Washington, bills were proposed (but ultimately did not pass) that would have placed obligations on marketplace providers for sales made through a marketplace. 4

5 Nexus: Administrative Alabama s Regulation The Alabama Department of Revenue promulgated Rule The Rule establishes an economic nexus standard for sales tax nexus with a threshold of $250,000. Under the Rule, remote sellers exceeding the threshold are required to either collect and remit tax or sign up for the voluntary regime. Earlier this year, Alabama enacted a voluntary simplified collection regime for remote sellers (e.g. one rate for the entire state, one return, no exemptions). The Rule applies to transactions occurring after January 1,

6 Nexus: Judicial DMA v. Brohl Gross Receipts: Ohio In 2016, the Ohio Supreme Court will hear oral arguments in three companion cases: Newegg, Crutchfield, and Mason. Briefs have been filed. Does Quill apply to gross receipts taxes? If it does, do the sellers have physical presence? The state is taking the position that the use of cookies and specific marketing activities meet the requirements of the U.S. Constitution. The state brought in expert witnesses to describe the scope of the taxpayers activities. 6

7 Nexus: Recent Developments 2016 State Legislative Developments Significantly changing Model nexus legislation Marketplace nexus Quill Challenges 2016 Federal Legislative Developments 7

8 Case Study Implications Data Center Seller Perspective Location of servers likely creates nexus Does a lease vs. ownership matter? Customer perspective Is data on a server enough to create nexus? Cookie nexus 8

9 Taxability of Digital Products Streamlined Sales Tax Defines specified digital products Many SST states and a handful of others tax certain digital products. Vermont: Tax applies to specified digital products transferred electronically to an end user, and specified digital products means digital audio-visual works, digital audio works, digital books, or ringtones that are transferred electronically. Vt. Stat. Ann (8) and 9773(4). Alternative approach: Offline equivalents Texas: [T]he sale and use of a taxable item in electronic form instead of on physical media does not alter the item s tax status. Tex. Tax Code Ann Alabama: Smith v. Dept. of Revenue, No. S (Admin. Div. Nov. 17, 2006) (professional photographer s sale of digital images). Missouri: Priv. Ltr. Rul. No (Mar. 13, 2009) (architectural drawings delivered electronically). 9

10 Taxability Sales and Use Tax Exemptions: Legislative 2015 Passed: Idaho: H Exempts certain digital products offered with a less than permanent right to use from the definition of tangible personal property. The bill clarifies that any right to use conditioned upon continued payment from the purchase is not a permanent right of use Proposed: Minnesota: H.F. 848 Would have repealed the tax on digital products. Did not pass. Federal: Digital Goods and Services Tax Fairness Act Digital goods cannot be taxed at a higher rate than the rate for comparable tangible personal property or services that is not delivered electronically. Did not pass in 113 th Congress Re-introduced in 114 th (current) Congress and referred to committees in both houses (no reports issued as of February 2016) 10

11 Taxability Sales and Use Tax Exemptions: Administrative Kentucky Netflix, Inc. v. Finance and Administration Cabinet Dep t of Revenue, Order No. K (Bd. Tax App. Sept. 23, 2015) (Netflix s streaming services provided did not meet the definition of multichannel video programming services ). 11

12 Taxability Sales and Use Tax Exemptions: Judicial Lucent Techs., Inc. v. State Bd. of Equalization, 241 Cal. App. 4th 19, 193 Cal. Rptr. 3d 323 (2015), as modified on denial of reh'g (Nov. 3, 2015), review denied (Jan. 20, 2016). On October 8, 2015, the California Court of Appeal affirmed a trial court decision finding that the BOE s sales tax assessment on software and other intangible portions of a transaction was erroneous consistent with the 2011 Nortel decision. The court held that the manufacturer s decision to give customers copies of the software on tapes and CDs (rather than over the Internet) does not turn the software itself or the rights to use it into tangible personal property subject to the sales tax. Procedurally, the court held that the BOE s trenchant opposition to the manufacturer s refund action in this case was all but foreclosed by Nortel and other binding decisional and statutory law, making the BOE s position not substantially justified and the trial court did not abuse its discretion in awarding the manufacturer its reasonable litigation costs of over $2.6 million. 12

13 Taxability Sales and Use Tax Impositions: Legislative 2015 Passed Tennessee: H.B. 644 Imposed sales and use tax on video game digital products Proposed Pennsylvania: S.B. 117 Gov. Wolf s budget proposal also included language that would have expanded the definition of tangible personal property to include digital goods and services, including video, photographs, books, magazines, newspapers, apps, games, music and any other audio whether electronically or digitally delivered or accessed, or whether purchased singly, by subscription or in any other manner. Language removed before a stop-gap budget was approved; discussions in 2016 have begun. Georgia: H.B. 445 Would impose tax on specified digital products transferred electronically. No movement in 2015, will be discussed in

14 Taxability Sales and Use Tax Impositions: Administrative Chicago On June 9, 2015, the Chicago Department of Finance issued two rulings, one for the Amusement Tax and one for the Lease Transaction Tax, stating that services delivered over the Internet or electronically are subject to those taxes (including digital products, streaming services and software accessed through the cloud). The Amusement Tax ruling s effective date was September 1, 2015 and a lawsuit is underway challenging the ruling. The Lease Transaction Tax ruling s effective date was delayed to January 1, The Mayor s revenue ordinance passed in October 2015 as part of the budget process provided an exemption for small businesses, reduce the rate, and adopted sourcing provisions for the Lease Transaction Tax. Alabama Proposed Regulations Issued Feb that would have expanded the definition of tangible personal property for rental tax purposes to include digital transmissions (including streaming audio/video). Connecticut Opposed by the Legislative Council (a group of legislators responsible for overseeing regulatory changes) in July The DOR ultimately withdrew the regulation, though the Commissioner indicated they would interpret the tax as applying to streaming products regardless of the regulation or statute. Conn. Dep t of Revenue Services Ruling No (Nov. 3, 2015) (finding digital content streaming services to be subject to sales and use tax in Connecticut by characterizing them as taxable computer and data processing services ). 14

15 Current State of Taxability of Digital Products* Updated through December 2015 *Note: Digital products include digital audio, digital audio visual, and digital books delivered electronically. 15

16 Taxability of Streamed Video Content Updated through December 2015 Risk of Taxation High Risk (23) Low Risk (23) No Sales Tax (5) 16

17 Taxability of Software Pre-written (canned) software usually treated as TPP Cases split in the 1970 s and 1980 s. Subsequent near-universal codification of canned software (as opposed to customer) as TPP. Currently, most variation depends on method of delivery Some states tax canned software only if transferred on tangible media. See, e.g., S.C. Rev. Rul. No (Mar. 20, 2012); Mo. Priv. Ltr. Rul. No (Jan. 27, 2012) (purchases of canned and customized software programs delivered electronically were not subject to tax). Some states tax canned software regardless of how it is delivered. See, e.g., 830 Mass. Regs. Code 64H.1.3(3)(a). 17

18 Cloud Computing: Background Delivery of computing as a service provided over the internet SaaS = Software as Services (incl. ASP) PaaS = Platform as Services IaaS = Infrastructure as Services Subscription fee or pay according to usage 18

19 Taxation of Cloud Computing Is it a taxable sale or license of software? What is the definition of a license? Transfer of control? Is the service taxable as an information service or data processing service? Does the state tax cloud computing services as a digital product or enumerated digital service? How are equivalent off-line services or products taxed? How does the state treat bundled transactions? 19

20 Taxability of Cloud Computing Exemptions: Legislative 2015 Passed Vermont: S. 138 Charges for the right to access remotely prewritten software shall not be considered charges for tangible personal property. 20

21 Taxability of Cloud Computing Exemptions: Judicial Auto-Owners Ins. Co. v. Dep t of Treasury, No (Mich. Ct. App. Oct. 27, 2015) [T]he Court of Claims correctly determined that the mere transfer of information and data that was processed using the software of the thirdparty businesses does not constitute delivery by any means of prewritten computer software noting that [i]n that situation, only data resulting from the third-party use of software is delivered. In the handful of contracts where tangible property was controlled by/delivered to Auto-Owners, the property was merely incidental to the services received. Treasury has stated it will not petition Michigan Supreme Court for review. The Department released guidance that it will allow refunds for open periods and stipulated to the dismissal of other related cases that were ongoing. Exemption legislation is likely no longer being considered; will the Department push for an imposition statute? 21

22 Taxability of Cloud Computing Impositions: Legislative 2015 Passed Tennessee: H.B. 644 Imposes sales and use tax on the access and use of remotely hosted software that remains in the possession of a dealer or a third party on behalf of such dealer Proposed Pennsylvania: S.B. 117 Gov. Wolf s budget proposal included language that would have expanded the definition of tangible personal property to include software, whether electronically or digitally delivered or accessed, or whether purchased singly, by subscription or in any other manner. Unanimously rejected by House in June. Language removed before a stop-gap budget was approved; discussions have begun for Georgia: H.B. 445 Proposes the imposition of sales and use tax on prewritten computer software transferred electronically, which includes a charge to consumers for the right to access and use prewritten software, where possession of the software is maintained by the seller or a third party, regardless of whether the charge for the service is on a per use, per user, per license, subscription, or some other basis. No movement in 2015, will be discussed in

23 Current State of Taxability of Cloud Computing (SaaS)* Statutory Imposition (2) Taxable by DOR/Judicial Interpretation (18) No Specific State Guidance (3) Non Taxable by DOR/Judicial Interpretation (20) Statutory Exemption (3) No Sales Tax (5) *Note: Software as a Service is defined as a service that provides the customer with remote access to software applications. Consideration was given to the taxability of SaaS with and without a license agreement when analyzing risk. 23

24 Case Study Implications Data Center Sellers Taxability of products likely not too significant, as the destination will determine the taxability. Purchasers Taxability significant concern, particularly important with respect to sourcing as discussed below. Taxability with respect to intercompany transactions (assuming they are taxable) is important. 24

25 Sourcing Sales Which jurisdiction s laws/rules apply to determine taxability and rate? SST hierarchy approach E.g., Wash. Rev. Code (1): 1. Business location of seller if received there by purchaser 2. Purchaser s place of receipt 3. Purchaser s address in business records 4. Purchaser s address in payment information 5. Location where made available to buyer Other potential methods Where benefit is received Allocate pro rata over multiple points of use Intra-State Origin Sourcing (e.g. California) How does one source between multiple states? 25

26 Sales Tax Sourcing Consider electronically delivered software: Is Use where the software resides? Is Use where the user is located? Alabama Software Location New York User Location Pennsylvania Previously software location, but new change in policy to user location Trend towards user location, but be careful of states that include software or digital products in their definition of tangible personal property these states may take a more traditional view of where these items should be sourced one location.

27 Sales Tax Sourcing 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. 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).

28 Sales Tax Sourcing: Data Collection What is a seller s obligation to obtain data and collect sales tax for one transaction from multiple states? 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?

29 Use Tax Sourcing 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.

30 Sourcing of Digital Goods Transactions Federal: Digital Goods and Services Fairness Act The act provides a sourcing regime based on a customer s tax address No state or local jurisdiction may impose a sales or use tax on digital goods or services unless it gives credit for comparable taxes paid to other states for the same transaction. Did not pass in 113th Congress Re-introduced in 114th (current) Congress and referred to committees in both houses 30

31 Other Sourcing Issues Intercompany licensing issues Sublicense to operational companies? Assignment of the software to operational companies? Is it taxable? Does sale for resale exemption apply? Use tax if initial sale is exempt? 31

32 Case Study Implications Data Center Sourcing is the most significant issue with respect to locating a data center. 32

33 Incentives Data Center Many states have enacted specific incentives for data center location, including sales and use tax and property tax exemptions. 33