27th Annual Tuesday & Wednesday, January 23 24, 2018 Hya Regency Columbus, Columbus, Ohio Ohio Tax Workshop U Advanced: The Taxation Tuesday, January 23, 2018 4:15 p.m. to 5:15 p.m.
Biographical Information Edward J. ("Ted") Bernert, Partner, Baker & Hostetler LLP 65 E. State Street, Suite 2100, Columbus, Ohio 43215 ebernert@bakerlaw.com 614.462.2687 Fax 614.228.1541 Edward J. ( Ted ) Bernert concentrates his practice in the area of state and local taxes with a particular emphasis on the major Ohio taxes affecting businesses and business owners sales and use, financial institution, personal income, commercial activity and real property taxes. He represents national companies concerning Ohio tax matters related to compliance, planning and tax legislation. Mr. Bernert regularly deals with various tax department officials upon audit or administrative appeals. He has an active tax litigation practice before the Ohio Board of Tax Appeals and upon appeal to the courts, including the Supreme Court of Ohio. Mr. Bernert is a member of the Executive Committee of the American Bar Association s State and Local Tax Committee and is a past chair of the Ohio State Bar Association Taxation Committee and the State and Local Tax Section of the Columbus Bar Association. Mr. Bernert was appointed by the Governor to the Ohio Business Gateway Steering Committee to address the continued development of an electronic link for filing taxes and other matters affecting business. He also serves as a member of The Ohio Chamber of Commerce Taxation Committee. Mr. Bernert is an adjunct professor of state and local taxes at the Capital University Law and Graduate Center and served as Chief Editor of Ohio Tax Review, formerly published by the Center. He currently serves as the co-editor of the Guidebook to Ohio Taxes, published by Commerce Clearing House. He has repeatedly been named an Ohio Super Lawyer in the area of Taxation and holds an AV rating by Martindale-Hubbell. Todd A. Whittaker, Program Chair, Information Technology, Franklin University 201 S. Grant Ave, Columbus, OH 43215 Todd.whittaker@franklin.edu 614.947.6110 Todd Whittaker currently serves as the Information Technology and Information Security Program Chair at Franklin University. He has more than 22 years experience in computer related fields and has previously held positions as an associate professor at DeVry University, software engineer at Battelle Memorial Institute, and UNIX systems administrator at the University of Akron. He has extensive knowledge of object-oriented programming languages, design patterns, development processes, systems administration, and technology education. When not writing about himself in the third person, he enjoys spending time with his wife and children, and teaching in a small home group Bible study. Anthony C. Ott, Director, State & Local Tax, GBQ Partners LLC 230 West Street, Suite 700, Columbus, Ohio 43215 aott@gbq.com 614.947.5311 Fax: 614.947.5511 Anthony has over 16 years of experience in the state and local tax field. He leads GBQ s Indirect Tax Service Line and is uniquely positioned to assist GBQ s clients with state & local tax issues, having spent time in both tax consulting and internal corporate roles. He has served clients in the manufacturing, distribution, technology, healthcare, financial and service industries. Prior to joining GBQ, Anthony was with a Fortune 20 company where he held several roles, including Director, Transactional & Property Taxes. In this role, Anthony led the sales/use/property tax function and was responsible for, among numerous other duties, indirect tax compliancy, related audits and transactional planning. Anthony also spent 5 years in the state & local tax practice at a Big 4 firm, serving both public and private companies in the Columbus, Ohio and Portland, Oregon markets. Anthony received his Bachelor of Arts in Accounting from Ohio Wesleyan University. He is a CPA in Ohio and is a member of the Ohio Society of CPA s and the AICPA.
WORKSHOP U Taxation Ted Bernert Todd Whittaker BakerHostetler LLP Franklin University ebernert@bakerlaw.com todd.whittaker@franklin.edu (614) 462 2687 (614) 947 6110 Anthony Ott GBQ Partners, LLC aott@gbq.com (614) 947 5311 1
Overall Themes Administrative pronouncements Expanding nexus apps, cookies and networks Traditionally exempt services under attack Continued focus on access, use, control or possession of remotely accessed software Treatment as Telecommunications Preloaded software bundled with tangible personal property 2
Pennsylvania Sales and Use Tax Ruling No. SUT 17 001 Support to canned software is subject to tax Support includes providing advice or guidance, help desk or call center support Far reaching interpretation may also impact certain consulting services Ruling published, then retracted amid complaints, revised and republished 3
Colorado General Information Letter No. GIL 17 012, 07/28/2017 Listing of services provided by taxpayer and related taxability Software delivered electronically is not tangible personal property Exempt SaaS/Hosting Exempt 4
Arizona Taxpayer Information Ruling No. LR16 011, 09/23/2016 (released March 2017) Taxpayer s subscription billing and recurring payment processing services not subject to tax Fees are based on transactions processed Determination that taxpayer not selling/renting tangible personal property (software) Commentary: Use of software to provide service and access by customer to software did not taint transaction 5
Arizona Taxpayer Information Ruling No. LR16 012, 12/05/2016 Software company not liable for use tax on code written by third party developers Taxpayer pays to have code created but code remains property of third party developers on their servers No taxable sale because no tangible personal property is transferred 6
Tennessee Revenue Ruling No. 17 17, 10/31/2017 Interpretation of Tenn. Code Ann. 67 6 231(a)(2) Access and use of computer software Charges for access to on line webinars Self Study Taxable Instructor Lead Exempt Key consideration is user interaction with software 7
Tennessee (Cont.) Additional interpretation of Ruling No. 17 17 Access to dating website is taxable User enters profile and contacts others through site Access to on line newsletters or on line lists are exempt Presumably, user does not interact with the software 8
Indiana Revenue Ruling No. ST 15 07, 03/07/2017 Software Interfaces determined exempt Taxpayer engaged third party to develop, and operate remotely, interfaces between Taxpayer s other remotely accessed software No control and possession of software provided to taxpayer Interface software is never transferred to the customer Vendor is providing an exempt service 9
Indiana Revenue Ruling No. ST 15 08, 03/07/2017 Mobile text messaging service determined to be taxable telecommunication service Cloud based software service (SaaS) allowing receipt and auto reply to text messages from third parties Department ruled that service meets the definition of Telecommunications: Electronic transmission, conveyance, or routing of voice, data, audio, video, or any other information or signals to a point, or between or among points. 10
Indiana (Cont.) What is the true object of the service? Transmission/routing of information between points; or A remotely accessed software tool that allows for the receipt of messages in a consolidated manner and for a custom or automatic reply How is this software different than email applications? 11
Texas Private Letter Ruling No. 151250584 Taxpayer s cloud based software texting service determined to be taxable data processing services Very similar facts to Indiana ruling Texas classified service as SaaS Highlights use of available statutes to tax the same service in two different manners Telecommunication Data processing 12
Utah Private Letter Ruling No. ST 16 004, 03/31/2017 Taxpayer sells remote cloud storage and virtual computing environment Infrastructure as a Service Taxpayer s servers are outside Utah Essence of transaction is use of Taxpayer s computer hardware Because hardware is outside Utah, transaction is sitused elsewhere Commentary: Normal receipt of benefit analysis for IaaS is moot because it was determined Taxpayer was not providing a service 13
Massachusetts Letter Ruling No. 17 1, 03/23/2017 Service fees charged to restaurants for mobile point of sale devices placed on tables Service fee constitutes lease of device together with included prewritten software Entire service charge is taxable Premium license fees charged to restaurant customers is taxable prewritten software 14
Massachusetts (Cont.) Adopted new Regulation effective 9/22/2017 Mass. Regs. Code 64H.1.7 Nexus creating activities conducted by internet vendors Use of in state software and ancillary data specifically targeting apps and cookies Contracts with content distribution networks Contracts with market facilitators or delivery companies operating in Massachusetts 15
Ohio Sales Tax Nexus Changes House Bill 49 Ohio Rev. Code Ann. 5741.01(I)(2)(h) and (i) Substantial nexus with this state is presumed to exist when the seller: Uses in state software to sell or lease taxable tangible personal property or services to consumers, provided the seller has gross receipts in excess of five hundred thousand dollars in the current or preceding calendar year from the sale of tangible personal property for storage, use, or consumption in this state or from providing services the benefit of which is realized in this state 16
Ohio Sales Tax Nexus Changes House Bill 49 (Cont.) Provides or enters into an agreement with another person to provide a content distribution network in this state to accelerate or enhance the delivery of the seller's web site to consumers, provided the seller has gross receipts in excess of five hundred thousand dollars in the current or preceding calendar year from the sale of tangible personal property for storage, use, or consumption in this state or from providing services the benefit of which is realized in this state. 17
Ohio Sales Tax Nexus Changes Sales Tax Information Release ST 2017 02 Explains ODT s position on enforcement of Software Nexus and Network Nexus In state software and content distribution networks provide requisite physical presence under Quill $500K threshold is said to insure seller s connection is substantial 18
Ohio Sales Tax Nexus Changes Sales Tax Information Release ST 2017 02 (Cont.) Example provided by ODT Sale of clothing by retailer through catalog application downloaded to individual s phone or computer The application is considered in state software The presence of the application on the user s phone/computer satisfies the physical presence requirement under Quill 19
Ohio Sales Tax Nexus Legislation Commentary Ohio not specifically targeting cookies like Massachusetts Quill Physical presence standard in question Can software be treated as tangible for purposes of nexus? May be discriminatory under Internet Tax Freedom Act 20
Increased complexity in sourcing For gross receipts and income taxes, business are required to allocate gross receipts from services Allocation traditionally based on where the benefit of the service is received Seller may not know where the benefit is received May be done based on Clicks/viewings Users Percentage of population Billing address Possibility of different application of sourcing rules by states resulting in the same receipts being taxed multiple times 21
Increased complexity in sourcing Sales and Use Tax Traditionally sitused based on where the benefit of the service is received Opportunity for purchaser to look through to its customers who may use/access the software without a charge? This methodology is consistent with sourcing for gross receipts/income tax Alternatively, must the service always be sitused to purchaser s corporate headquarters or based on use by purchaser s employees? Some states are situsing service based on location of service provider s servers 22