The Florida Supreme Court recently rejected two sales tax ballot

The twice-monthly advisor on law, regulation, compliance and tactics Vol. XVII, No. 7, April 15, 2007 INSIDE Mississippi exempts disaster repairs, extends growth perks... 3 Lower rate for Mississippi cruise ship industry... 3 New Jersey addresses memberships... 4 Illinois must contact taxpayers attorneys... 4 Kansas rebate treatment revamped... 4 Puerto Rico details manufacturers exemptions... 4 Pennsylvania school benefits from airport parking... 5 Louisiana RR tax halted... 5 Federal suit against North Carolina satellite TV tax dismissed... 5 State Updates... 6 Alabama digital photos taxed... 8 SSTP ONLINE COURSE The CCH Learning Center proudly offers a new course, Streamlined Sales Tax Project. Price: $36. CPE Credits: 3. Visit http://cch.learningcenter.com. COMING SOON Washington conforms to SSTA PUBLIC PURPOSE PETITION APPROVED Florida ballot initiatives to remove sales tax exemptions denied, yet threat remains The Florida Supreme Court recently rejected two sales tax ballot initiatives. One proposal would have extended the sales tax to services, and the other would have automatically removed sales tax exemptions not specifically reenacted by the Legislature. However, a petition to require the Legislature to ensure that all new sales tax exemptions serve a public purpose was approved for the November 2008 ballot, though supporters must attain additional signatures. Although the two most drastic proposals were defeated, some experts fear those initiatives could soon be revived by the same citizens group or a state commission that recently reconvened. Technical language The two defeated proposals were rejected by the court on a technical issue: The initiatives proposed deadlines for action by the Legislature that would have been impossible to meet. The dates in the language of the proposals had become stale; Floridians Against Inequities in Rates (FAIR) had first sought to place their proposals on the ballot about five years ago. The initial attempt had failed to meet the single subject requirement for ballot proposals. Still, supporters of the proposals are not admitting defeat. Now, the worst is over, and the language of the proposals could easily be dusted and resubmitted, possibly in time for the 2008 ballot, says Bob Nabors, counsel for FAIR. They could revamp the dates, and it could be put on the ballot, Nabors adds. They d be starting from scratch, says Vicki Webber, counsel for the Florida Chamber of Commerce. That means gathering over 60,000 signatures to have the newly worded petitions put before the Supreme Court again. Plus, a total of over 600,000 signatures must be gathered by February of 2008 to see any of the three initiatives placed on the ballot, adds Jennifer Green, spokesperson for the Florida Institute of Certified Public Accountants. FAIR leaders haven t decided what they will do. Another route Yet, another means of getting the amendments on the ballot exists. The Florida Taxation and Reform Commission meets every 20 years and has

2 Sales & Use Tax Alert April 15, 2007 reconvened recently. Former state Sen. John McKay, chairman of FAIR, serves as one of the commission s 25 appointed members. The commission is empowered to put questions directly on the ballot. McKay, who previously served as president of the Senate, says the commission will likely discuss the two rejected proposals. But he won t say whether or not he will urge the commission to put the proposals on the ballot. I m going to be cognizant of the need to broaden the tax base, he says. My real goal has always been to create a fairer tax base. McKay says he will wait to see what other proposals are generated within the commission and the Legislature. The petitions The ballot summary approved by the Florida Supreme Court states: Each law granting an exemption to the sales tax shall contain a legislative determination that such exemption advances or serves a public purpose and shall contain the single subject of a single exemption. If passed by voters, the ballot question would amend Article III of the Florida Constitution by adding Sec. 21 to state: Each law creating or reenacting a sales tax exemption shall contain the single subject matter of a single exemption and shall contain a factual statement of the public purpose advanced or served by the exemption. This proposal would be troublesome, but not as devastating as the other proposals, Webber says. A separate piece of legislation would have to be passed for each sales tax exemption. So, if the Legislature wanted to create manufacturing exemptions, for instance, exemptions for boiler fuel and for replacement parts for manufacturing equipment could not appear on the same bill. One of the failed proposals would have required the Legislature to review each service rendered for compensation that is not taxed under the existing sales tax authorized in Chapter 212, Florida Statutes, and shall exempt from future taxation only those services whose exemption is determined to advance or serve a public purpose, except payment of employee salaries and benefits. The other failed proposal would require the Legislature to review all sales tax exemptions except those for food, prescription drugs, health services and residential rent, electricity and heating fuel. The Legislature would be required to reenact only those exemptions that advance a public purpose. The rest of the exemptions would be eliminated. Logistics Florida currently has some 300 sales tax exemptions, notes Green. Requiring the Legislature to review each of them would be a daunting and time-consuming task for a body that meets for two months once a year, she says. Plus, all services must be reviewed. Any exemptions approved must be examined and approved again in 10 years. EDITORIAL ADVISORY BOARD John L. Coalson Jr., J.D. Partner Alston & Bird LLP Atlanta J. Whitney Compton, J.D. State Tax Consultant Compton & Associates LLP Marietta, Ga. Michael A. Guariglia, J.D., LL.M. Partner, McCarter & English LLP Newark, N.J. George S. Isaacson Senior Partner Brann & Isaacson LLP Lewiston, Maine Frank G. Julian, J.D., C.P.A. Operating Vice President Federated Department Stores Inc. Cincinnati Beth Ann Kendzierski Director, Tax Apria Healthcare Inc. Lake Forest, Calif. Michael A. Lampert, J.D., LL.M. Board Certified Tax Lawyer West Palm Beach, Fla. Ned A. Lenhart, C.P.A. President Sales Tax Advisors of Georgia PC Atlanta Douglas L. Lindholm, J.D. President, Executive Director Council On State Taxation Washington Jeremiah T. Lynch Principal Ryan & Company New York B.J. Pritchett President Pritchett Sales & Use Tax Consulting Hot Springs National Park, Ark. Diane L. Yetter, C.P.A. President Yetter Consulting Services Inc. Chicago SALES & USE TAX ALERT (ISSN 1054-6812) is published twice monthly by CCH, a Wolters Kluwer business. Subscription inquiries should be directed to Sales & Use Tax Alert, 4025 W. Peterson Ave., Chicago, IL 60646. Telephone: (800) 449-8114. Fax: (773) 866-3895. E-mail: cust_serv@cch.com. 2007 CCH. All Rights Reserved. Sales & Use Tax Alert is also available electronically on the Internet with a searchable back-issue archive. Call customer service at (800) 449-8114 to get a trial electronic subscription. Photocopying or reproducing in any form in whole or in part is a violation of federal copyright law and is strictly prohibited without the publisher s consent. Sales & Use Tax Alert is designed to provide general information on sales and use tax and not to offer legal or accounting advice on individual problems. Questions on specific issues should be addressed to the professional of your choice. 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April 15, 2007 Sales & Use Tax Alert 3 They would spend all their time reviewing sales tax exemptions, Green states. Webber says the business community is concerned about a shifting tax landscape governed by taxation by default. Pyramiding tax structure Florida currently taxes a few services such as motor vehicle repairs, security services, and commercial cleaning, Webber explains. But extending the sales tax to all services could create a host of problems. For one, the kid who mows your lawn would now have to collect and remit sales tax. But more importantly, the state would face the prospect of a pyramiding tax structure. Consumers would be paying more in hidden taxes as service taxes would be absorbed into the cost of the final product. For example, a person buying a new home would now be absorbing the cost of sales taxation of a surveyor s, an architect s, and a realtor s fees. Learning from mistakes Florida attempted to tax services in 1987, Webber points out. The experiment lasted seven months before it was ended. Multistate and multinational service companies involved in areas such as financial, accounting and legal services decried the situation. How do you apportion the tax on a service if a multistate company performing the service has a home office in another state where some of the work, administrative, perhaps, is done? However, Webber and McKay agree that the taxation of advertising services brought about the termination of service taxation. The problem, as I recall, in particular the advertising industry and broadcasting industry initiated a campaign to overturn it, McKay says. They didn t want anyone to get into their pockets, and they own the airwaves. There is a resistance to taxing services in Florida because some view that as an income tax. GROWTH EXEMPTIONS EXTENDED Mississippi partially exempts disaster repairs Component materials sold to a certified enterprise for replacing, reconstructing, or repairing a building destroyed or extensively damaged in a statedeclared disaster area are exempt from half of the Mississippi sales and use tax due. SB3070 of 2007 is effective July 1, 2007. The partial exemption also applies to machinery and equipment for replacing property damaged or destroyed as a result of the disaster. The exemption includes manufacturing or processing machinery and equipment permanently attached to the ground or to a permanent foundation and not intended to be housed. To qualify, the sales must be made to certified enterprises eligible for partial tax exemptions on sales of component materials, machinery, and equipment during initial construction of the building that was destroyed or damaged. Growth exemptions The Mississippi Development Authority is authorized to extend state tax exemptions under the Growth and Prosperity Act for two years or until Dec. 31, 2020, whichever is first. Recent legislation, HB1024, HB1044, HB1045, HB1047, effective July 1, 2007, however, requires that businesses must be unable to use the exemptions as a direct result of a disaster. The business likewise must be located in an area that the governor declares a disaster. Replacement equipment and component building materials may be purchased exempt from sales and use tax. Also, the job creation credits against the corporate income tax for integrated suppliers, for permanent business enterprises, and for new direct jobs are revised so that if (1) the employer is located in a governor-declared disaster area and (2) the employer cannot maintain the number of employees required or use the credit carryforward as a direct result of the disaster, then an extension may be granted for two years. LOWER RATE FOR MS CRUISE SHIPS The gross proceeds or receipts of persons engaged in selling certain tangible personal property or performing construction activity on a cruise ship are now subject to Mississippi sales and use tax at a rate of 3.5%. HB1737 of 2007 is effective March 26, 2007. The same rate currently applies to floating casinos and floating restaurants and hotels. Conforming the tax rate for cruise ships will not affect or defeat any claim, assessment, appeal, or suit for taxes due or accrued before the March 26, 2007, effective date, whether the action is begun before or after that date.

4 Sales & Use Tax Alert April 15, 2007 New Jersey revises guidance on taxability of membership fees The New Jersey Div. of Taxation has revised its notice regarding the imposition of sales and use tax on certain initiation fees, membership fees, and dues. The tax is imposed on charges for initiation fees, membership fees, or dues for a shopping club or access to or use of the facilities of a health and fitness, athletic, or sporting organization, unless the members are predominantly age 18 or younger. In Tax Notes Initiation Fees, Membership Fees and Dues, issued March 2, 2007, the DT explains that initiation fees, membership fees, and dues are charges for the right, privilege, or entitlement to use the club or organization s facilities, paid by those who have met the requirements for membership. This includes the mere payment of fees, dues, or similar charges. A membership conveys a right, privilege, or entitlement that is not available to a non-member, other than as a guest. The fact that one of the rights or privileges is actual participation in the sporting activities does not affect the taxability of the membership. AFTER INITIAL CONTACT Illinois DOR must send penalty notices to lawyer Notices of penalty liability issued against two corporate officers for unpaid Illinois sales and use taxes were invalid because they were sent directly to the taxpayers instead of their attorneys after initial contact by state tax officials. Consequently, in Sweilem v. Dept. of Revenue, Dkt. No. 1-05-0157, the Appellate Court determined that the taxpayers did not waive their right to contest their personal liability when they did not respond to the notices within 20 days. A 1987 proceeding that was attended by the taxpayers and their attorney and in which the taxpayers were advised of their potential tax liability was determined to have been an initial contact. Under Illinois law, following an initial contact of a person represented by an attorney, the DOR shall not contact the person but shall only contact the attorney representing that person. The law was enacted to protect taxpayers from technically defaulting in a matter and did not depend exclusively upon the execution of a valid power of attorney. Kansas updates rules on retailers rebates, gifts Kansas retailers sales and compensating use tax regulations concerning sales of tangible personal property that involve gifts, premiums, prizes, coupons, and rebates have been amended recently. The Dept. of Revenue s Regs. 92-19-16a and 92-19-16b are effective April 13, 2007. Under one amendment, if a retailer donates property originally acquired for resale, the retailer will accrue tax on the amount it paid for the property when it files its next sales tax return, unless the retailer donates the property to an entity that is exempt from sales tax or that has provided the retailer a resale exemption certificate. Previously, no exception existed if the retailer obtained a resale exemption certificate or donated the property to an exempt entity. Under a second amendment, if a manufacturer s rebate is assigned to a retailer upon sale, the rebate will not reduce the amount subject to sales tax. However, an exception exists for a manufacturer s rebate on a purchase or lease of a new motor vehicle when the customer assigns the rebate to the dealer at the time of sale. Purchases or leases of boats, trailers, off-highway equipment, and other merchandise do not fall within this exception. Previously, there was no exception for manufacturers rebates on purchases or leases of new motor vehicles. NEW CEMENT EXEMPTION Puerto Rico gives details on exemptions for manufacturers The Puerto Rico Treasury Dept. has recently released information regarding the sales and use tax exemptions for raw materials, machinery, and equipment purchased by manufacturers as well as for cement. Articles for manufacturing The department on Feb. 22, 2007, released Information Bulletin No. 07-04 regarding the exemption from sales and use tax for articles for manufacturing. As provided in Code 2506, manufacturing plants are exempt from payment

April 15, 2007 Sales & Use Tax Alert 5 of the tax for both the purchase of raw material and the purchase of machinery and equipment to be used in manufacturing. Therefore, manufacturing plants that hold an exemption certificate may purchase raw material, machinery, and equipment to be used in manufacturing free of sales and use tax payment, using the Puerto Rican exemption certificates. Any merchant that sells raw materials and machinery and equipment to a manufacturing plant must document the exempt nature of the transaction as provided in Reg. 7240, Article 2407-1. Cement now exempt The department on March 6, 2007, issued Information Bulletin No. 07-06 to provide information concerning Act 24 of March 8, 2007, so that merchants will have an adequate opportunity to adjust their sales systems. Act 24 expanded the definition of raw material, found under Code 2301, to include cement. Therefore, every manufacturing plant is now exempt from the payment of sales and use tax on the purchase of hydraulic cement. The exemption is limited to the use of cement as a raw material in manufacturing. BENEFITS FROM NEARBY AIRPORT Pennsylvania school district s parking tax upheld A parking tax imposed by a Pennsylvania school district did not violate the federal or the state constitutions or federal aviation law, even though over 84% of the revenue from the tax was generated by fees from parking facilities owned by an airport authority. In Susquehanna Area Regional Airport Authority v. Middletown Area School District, Dkt. No. 1315 C.D. 2006, the Pennsylvania Commonwealth Court found that the parking tax was not a tax exclusively on commercial service airport businesses in violation of the federal Anti- Head Tax Act. Instead, the burden of the tax was on parking patrons, rather than airport businesses, and the tax applied to non-airport parking transactions. Further, the tax did not violate the Anti-Revenue Diversion provision of the Federal Aviation Act because proceeds of the tax were not generated by the airport and were not levied against parking lot owners. Additionally, the tax was not a business privilege or gross receipts tax on airport parking, in violation of the Pennsylvania Local Tax Reform Act, because the tax was imposed on designated transactions rather than on the gross receipts from all business activities. Regarding the U.S. Constitution, the tax did not violate the federal Commerce Clause because no other taxing jurisdiction had attempted to exercise its taxing authority. Finally, the tax did not violate the federal Equal Protection Clause because the tax was not excessive or unreasonable. Louisiana rail carrier tax violates federal 4-R Act Louisiana sales and use tax assessments imposed on a rail carrier s purchases of transportation fuel for interstate commerce were discriminatory and prohibited by the federal Railroad Revitalization and Regulatory Reform Act of 1976 (4-R Act). In Kansas City Southern Railway Co. v. Bridges, Dkt. No. 04-2547, the U.S. District Court initially determined that only the sales and use tax should be considered in determining whether that tax discriminates against rail carriers and that it was inappropriate to also consider the impact of alternative taxes such as the excise tax. Although rail carriers were subject to sales and use taxes on purchases and their use or consumption of transportation fuel, including diesel fuel, such purchases by motor and water carriers, who were direct competitors with railroads, were exempt. Further, air carriers were likewise exempt from tax on purchases and use of aviation gasoline. As such, the assessments were discriminatory in that motor, water and air carriers were treated more favorably than rail carriers under the state sales and use tax scheme, which is prohibited by the 4-R Act. North Carolina satellite TV tax challenge dismissed A federal suit brought by two satellite television providers challenging North Carolina s sales and use taxation of providers of multi-channel video programming was dismissed. The suit claimed the tax discriminated against interstate commerce in (Continued on page 8)

6 Sales & Use Tax Alert April 15, 2007 STATE UPDATES ALASKA The State Supreme Court has ruled the lieutenant governor properly decided not to certify a proposed ballot initiative that included a section requiring a supermajority vote for the Legislature to pass tax-related bills. State law usually requires an initiative to be enacted before its provisions become subject to challenge, but also allows a preelection challenge if the initiative conflicts with a constitutional provision that limits the initiative process. In this instance, the initiative s supermajority requirement conflicted with Art. II, Sec. 14 of the State Constitution, which requires bills to be enacted by a majority vote. Since Art. XI, Sec. 1 of the Constitution does not allow an initiative to amend a constitutional requirement, the initiative was properly rejected for violating constitutional restrictions on the initiative process. (Alaskans for Efficient Government Inc. v. Bretz, State Supreme Court, Dkt. No. 6103) ARIZONA A city lacked jurisdiction to annex the area where a taxpayer was located and, therefore, was without authority to levy and collect the municipal transaction privilege tax. The Court of Appeals determined that the city lacked the authority to annex the subject area due to the statutory requirement that annexed areas be contiguous, and, therefore, the city lacked authority to levy the tax. The Dept. of Revenue was appropriately dismissed from the action because the city could afford the taxpayer complete relief on its own in the form of a refund and interest. (Copper Hills Enterprises LTD. v. DOR, Court of Appeals, Dkt. No. 1 CA-TX 05-0007) ARKANSAS Effective March 1, 2007, sales and use tax is not due on admissions or access to places of amusement, recreation, entertainment, or athletic events for which no consideration is paid. The giving away of admissions, dues, fees, or access to a place of amusement, entertainment, recreation, or athletic events is no longer included in the definition of a sale. Also, free or complimentary passes and tickets, admissions, dues, or fees to places of amusement, recreation, entertainment, or athletic events are no longer considered taxable admissions. (Act 154 [SB273] of 2007) The sales and use tax exemptions for wheelchair lifts and automobile hand controls have been amended to allow an exemption in certain cases even if the equipment is prescribed for the patient after the sale. Generally, adaptive or durable medical equipment must be prescribed for the patient prior to the sale in order to qualify for exemption. Under the amendment, wheelchair lifts and automobile hand controls qualify for exemption if (1) the equipment is purchased in conjunction with the purchase of a motor vehicle, (2) the proceeds from the sale of the equipment are separately stated on the invoice or bill of sale from the purchase of the motor vehicle, and (3) the patient has a prescription for the wheelchair lift or automobile hand controls at the time the motor vehicle is registered. The exemption takes effect on the first day of the calendar quarter following the effective date of this act. (Act 140 [HB1357] of 2007, effective 90 days after adjournment of the 2007 legislature) CALIFORNIA A use tax proposal contained in Gov. Arnold Schwarzenegger s budget bill make sense, according to reports issued by the Legislative Analyst s Office. The proposal would make permanent a statutory provision, applicable for the period Oct. 1, 2004, through June 30, 2007, subjecting vessels, vehicles, and aircraft to use tax if they were brought into California within one year of purchase. Prior to October 2004, those items would be subject to use tax if they were brought into California within 90 days of purchase. Based on its review of the proposal, the LAO recommends that it be adopted. The reports can be viewed on the LAO Web site at http://www.lao.ca.gov/. (Highlights of the 2007-08 Analysis and Perspectives and Issues; Analysis of the 2007-08 Budget Bill; 2008-08 Budget: Perspectives and Issues; California Legislative Analyst s Office) IDAHO The House of Representatives has failed to pass legislation that would authorize the state s entry into the Streamlined Sales and Use Tax Agreement. The bill, which failed in a vote of 33-37, is similar to legislation that failed to pass in three prior sessions. It would not have made the substantive changes to state law necessary for full membership in the SST Governing Board. (HB7) INDIANA A security company that was a Delaware corporation was required to pay Indiana sales and use tax on the membership cards that were issued to its Indiana customers, although the sales of memberships in the security service program were not taxable. The sales of the memberships were transactions involving services and labor with an incidental transfer of tangible personal property (membership cards), and therefore were not taxable. However, because the membership cards were a transfer of tangible personal property, tax applied to that specific transfer only, not the entire transaction. (Revenue Ruling No. 2007-01ST, Dept. of Revenue) MISSOURI Legislation has been introduced in the Senate to conform the state s laws to the Streamlined Sales and Use Tax Agreement, effective Aug. 28, 2007. Similar conformity legislation died in four previous sessions of the Legislature. (SB576) NEW JERSEY The Tax and Fiscal Policy Study Commission has been created to study the state and local tax structure and related fiscal issues. Composed of nine appointed members serving without compensation, the commission will study the imposition, assessment, and collection of state and local taxes, including ways in which the tax laws could be revised to ensure greater efficiency and equity. The commission will also consider the relative incidence of tax burdens and the effects of redistributing tax burdens or tax bases, and the methods for providing funds for government services and infrastructure. (Chap. 43 [SB50] of 2007, effective Feb. 21, 2007) The Div. of Taxation has revised a bulletin explaining the rules that apply to contractors, fabricators/contractors, and flooring dealers when paying sales and use tax to suppliers or collecting the tax from property owners or customers. The bulletin was revised to reflect the increase in the sales tax rate to 7% that took effect July 15, 2006, expansion of the sales and use tax base effective Oct. 1, 2006, and the changes from the Streamlined Sales and Use Tax legislation (P.L. 2005, c.126) that took effect Oct. 1, 2005. (Bulletin S&U-3, DT, March 2007) NEW YORK Purchases and rentals of certain equipment and supplies by an off-premises caterer to provide to customers were not exempt sales for resale. While the taxpayer was not a traditional, on-premises caterer and derived a substantial portion of its income from its rentals to customers, these factors did not render its purchases or rentals of catering equipment sales for resale. Also, sales tax regulations did not distinguish between on-premises and off-premises caterers or between those caterers who were engaged in substantial rather

April 15, 2007 Sales & Use Tax Alert 7 STATE UPDATES than occasional rentals. (Elegant Affairs Inc., Div. of Tax Appeals, Administrative Law Judge Unit, DTA Nos. 820599, 820600, and 820601) Installation of wood, pellet, and gas burning stoves vented outside a building through the wall or via existing or new chimneys may qualify as a capital improvement for New York sales and use tax purposes because of the nature and method of affixation. Where the installation is performed for a property owner and requires holes to be cut in walls, ceilings, or roofs; flues or liners to be installed and attached in chimneys; or the reinforcement of floors or fireproofing of walls, the entire installation qualifies as a capital improvement to real property. Additionally, the installation of a zero clearance fireplace qualifies as a capital improvement because it is installed in a wall of a building and requires that the wall be opened and the fireplace inserted. Further, the installation of manufactured stone or brick veneers will generally qualify as a capital improvement. Where installations are made for a lessee or tenant of the real property, the installation will not be considered a capital improvement unless the lease provides that the property which was installed becomes the landlord s property. (TSB-A-07(1)S, Commissioner of Taxation and Finance) SOUTH DAKOTA For the sales and use tax refund program for the construction of agricultural processing and new business facilities, the phrase expansion of an existing building or structure has been defined. To qualify for the refund, the expansion of an existing building or structure must meet the following requirements: the expansion must significantly increase the floor space of an existing building or an existing structure; and the expansion must consist of a single project rather than an ongoing, systematic process of upgrading, retooling, or modernizing the existing building or structure. (SB38 of 2007, effective July 1, 2007) A new sales and use tax exemption applies to the sale of coins, currency, and bullion. Bullion is defined as any bar, ingot, or commemorative medallion of gold, silver, platinum, palladium, or a combination of those metals where the value of the metal depends on its content and not the form. The terms coins and currency are defined as any coins or currency made of gold, silver, or other metal or paper which is or has been used as legal tender. (HB1151 of 2007, effective July 1, 2007) Effective July 1, 2007, taxpayers subject to sales and use, motor vehicle, or certain miscellaneous tax audits will be allowed to provide additional pertinent papers and documents after the prescribed deadline. Such additional documents may be considered if: they are material; there are good reasons for the failure to submit the documents in a timely fashion; and the documents are submitted within a reasonable time period prior to any scheduled hearing. (SB59 of 2007) TENNESSEE Taxpayers are reminded that they will be able to make certain sales-tax-free purchases during two periods: a special one-time sales tax holiday April 27-29, 2007, and during the annual sales tax holiday Aug. 3-5, 2007. Both holiday periods include the same tax-exempt items, including qualified clothing and school supplies priced $100 or less and computers priced $1,500 or less. Details are available on the Dept. of Revenue s Web site at www.tntaxholiday.com. The site provides information for retailers and includes a reference sheet, a comprehensive list of qualified back-to-school supplies, clothing, and computers, an alphabetical list of exempt and taxable items, a list of frequently asked questions, and a sales tax holiday filing information flier. (Notice, DOR, Feb. 26, 2007) UTAH The State Tax Commission has updated its publication that provides general sales and use tax information. The publication provides information on various topics, including filing and reporting, forms, salesbased and other related tax types, the calculation of sales and use tax, and sales and use tax exemptions. Additionally, the publication gives examples of how sales and use taxes apply in numerous situations, such as when merchandise is returned, food stamps are used, or bad checks are returned. (Publication 25, STC) The State Tax Commission has updated its sales tax publication for providers of lodging. The publication discusses transient room tax rates and the taxable or exempt status of numerous transactions, such as purchases of soaps and linens, gift shop sales, rentals of safe deposit boxes, and sales of prepaid calling cards. Also discussed are exempt guests and how sales and use tax applies to stays of 30 days or longer, resort packages, tours, and admission charges for amusement and recreation. (Publication 56, STC) To determine the distribution of local option sales tax revenue, the points of sale on shortterm rentals (less than 30 days) of tourist properties were the municipalities where the rented properties were situated. The properties were located in different municipalities within one county. The physical location of the brokerage business that rented the properties was not relevant to determining the point of sale. (Private Letter Ruling, Opinion No. 06-026, State Tax Commission) WASHINGTON A dentist s purchase of a machine that manufactured crowns and prosthetic devices was not exempt from Washington sales tax as the sale to a manufacturer of equipment used in a manufacturing operation because the dentist was not a manufacturer and his dental practice was not a manufacturing operation. Although dental laboratories are classified as light manufacturing, and the purchase of the machine by a dental laboratory might have been exempt, dentists are service providers whose dental products are considered part of their dentistry services. (Stockwell, dba Murphy s Corner Dental, v. Dept. of Revenue, Board of Tax Appeals, Dkt. No. 63860) WISCONSIN The Dept. of Revenue has released a report summarizing various sales and use and other tax incentives available to businesses operating in the state. (State Tax Incentives for Economic Development, DOR) WYOMING Gov. Dave Freudenthal has signed into law a bill that permanently eliminates the sales and use tax on food for domestic home consumption. Formerly, only a temporary exemption existed for such food items from July 1, 2006, through June 30, 2008. (Chap. 140 [HB93] of 2007, effective July 1, 2007) Effective July 1, 2007, a resort district may impose a local sales and use tax at a rate not to exceed 3% (formerly, 1%) upon retail sales and the storage, use, and consumption of tangible personal property. Any such tax may be terminated by a resolution adopted by the board of the resort district. (Chap. 74 [HB151] of 2007) A county may impose a local option sales and use tax for general purposes at a rate not to exceed 2% (formerly, 1%), effective July 1, 2007. The total local option sales and use tax imposed within a county for general purposes, specific purposes, and economic development may not exceed 3% (formerly, 2%). (Chap. 133 [HB329] of 2007)

8 Sales & Use Tax Alert April 15, 2007 Satellite TV (Continued from page 5) violation of the Commerce Clause and also directly conflicted with federal law in violation of the Supremacy Clause of the U.S. Constitution. The action of the satellite companies in bringing suit in federal court was barred by the Tax Injunction Act and the principles of comity as well as the plaintiffs lack of standing under both clauses of the U.S. Constitution. The United States District Court for the Eastern District of North Carolina dismissed DIRECTV Inc. v. Tolson, Dkt. No. 5:05-CV-784-FL. However, Mark F. Horning, of Steptoe & Johnson LLP, in Washington, D.C., says the decision to dismiss will be challenged. We filed a notice of appeal in the U.S. Court of Appeals, Fourth Circuit. Horning adds that similar cases have been brought in Florida, Kentucky, Ohio, and Tennessee. The basic issues involve fairness of taxation where satellite television providers pay more tax than cable television providers. The issue of discriminating against interstate commerce comes into play where satellite providers are located out-of-state. Federal Suit The satellite operators brought suit in federal court in 2005 and initially alleged that state tax laws then in effect violated the dormant Commerce Clause by providing a 5% tax credit to cable television operators for franchise tax paid to local governments. In 2005, the North Carolina sales tax on satellite operators increased to 7% and although cable operators were subject to the sales tax, they received a credit against that tax for local franchise taxes paid. As a consequence, satellite companies paid a tax of 7% of gross receipts to the state and cable operators paid a franchise tax of 5% of gross receipts to local governments and an adjusted tax of 2% of gross receipts to the state. Legislation enacted in 2006 altered the taxation of satellite and cable providers and (1) repealed the authority of local governments to enter into franchise agreements with cable operators and impose taxes on them, (2) eliminated the tax credit for franchise taxes paid, and (3) mandated that the Secretary of Revenue distribute some of the gross receipts taxes paid by satellite and cable operators to local governments. The satellite providers amended their complaint and challenged this new regime. OTHER DOWNLOADS, TOO? Alabama digital photos are tangible personal property The sale of digital photographs transmitted electronically constituted a sale of tangible personal property subject to Alabama sales or use tax. In Robert Smith d/b/a FlipFlopFoto v. State Dept. of Revenue, an administrative law judge ruled that because Alabama treats electricity as tangible personal property, the electronic transfer of the digitized photographs constituted the sale of tangible personal property subject to sales tax. The photographer s transmission of digital images to customers via compact disc, over the Internet, or by e-mail was a taxable sale at retail, rather than a nontaxable professional service, because the final product provided by the photographer was the tangible photograph. Tangible personal property is not defined in the sales/use tax statutes but is defined for Alabama lease tax purposes at Code of Ala. 1975, 40-12-220(8) as property which may be seen, weighed, measured, felt or touched, or is in any other manner perceptible to the senses. In Curry v. Alabama Power Co., (1942), the Alabama Supreme Court applied an almost identical definition in holding that electricity, i.e., the flow of electrons, constituted tangible personal property for sales and use tax purposes. The court later confirmed that holding in State v. Television Corp. (1961), and Sizemore v. Franco Distributing Co. Inc. (1991). Other downloads? Bruce Ely, a partner with Bradley Arant Rose & White LLP in Birmingham, notes that this is a case of first impression, in which the Alabama courts for the first time have broached the topic of taxing digital photos. Ely warns taxpayers that the DOR is likely to use the rationale of this case to also tax Internet downloads of music, as well. Other digital products could follow. The department is now taking the position, at least informally, that this case does have broader implications, Ely says. An official within the Dept. of Revenue advised us recently that the department will now consider downloaded music as tangible personal property and subject to sales or use tax. That may come as a surprise to us parents of teenagers with I-pods and CD burners. Editor s note: Ely can be reached at (205) 521-8366.