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Sales & Use Tax for Cloud Computing, Software,

Apps, and Other Digital Products and Services Overcoming Vendor and Customer Compliance Challenges Due to Inconsistent Multi-State Tax Laws

THURSDAY, OCTOBER 29, 2015, 1:00-2:50 pm Eastern

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Oct. 29, 2015

Sales & Use Tax for Cloud Computing, Software, Apps, and Other Digital Products and Services

Joseph N. Endres

Hodgson Russ

[email protected]

Charles Kearns

Sutherland Asbill & Brennan

[email protected]

Laurie Wik

DuCharme McMillen & Associates

[email protected]




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5

Cloud Computing, Software, and Other Digital Products and Services - Introduction and Overview

Laurie Wik,

Sales and Use Tax Director



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INTRODUCTION AND OVERVIEW

Digital products - products and services provided or furnished electronically via the Internet Cloud

Cloud Computing

• Software as a Service, Platform as Service, Infrastructure as a Service

Hosted Services; e.g., searchable databases, information services, data processing services

Streaming Digital Goods; e.g., music, movies Not part of today’s presentation: “On-premises” software; i.e.,

downloaded, delivered on tangible media, or loaded onto customer’s server by vendor (“load and leave”).



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WHAT IS CLOUD COMPUTING?

Cloud Computing Definitions:

1. “Cloud computing is a model for enabling ubiquitous, 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 services provider interaction.” The National Institute of Standards and Technology Definition of Cloud Computing, Special Pub. 800-145 (Sept. 2011) U.S. Commerce Department

2. Cloud computing: A paradigm for enabling network access to a scalable and elastic pool of shareable physical or virtual resources with on-demand self-service provisioning and administration. International Telecommunications Union, Rec. ITU-T X.1601 (Jan. 2014)



8


Myth: You need to be a computer scientist to analyze cloud computing

for sales tax purposes.

Reality: You know more than you think you do!

Who’s that?



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Software as a Service (SaaS): Customer/User accesses a software application running on the SaaS provider’s cloud infrastructure .



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Platform as a Service (PaaS): Customer uses Cloud Provider’s cloud infrastructure and tools to build or deploy applications and content. Customer does not manage or control the underlying cloud infrastructure but controls its deployed applications/content. 3rd parties can access the customer’s applications/content.




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Infrastructure as a Service (IaaS): Customer is provided processing, storage, networks, and other fundamental computing resources. The customer does not manage or control the underlying cloud infrastructure but has control over operating systems, storage, and deployed applications, and possibly limited control of select networking components (e.g., host firewalls).



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Courtesy of Albert Barron, from his post“Pizza as a Service” posted on LinkedIn 07/31/2014. Used with permission.

https://www.linkedin.com/today/post/article/20140730172610-9679881-pizza-as-a-service?trk=hb_ntf_MEGAPHONE_ARTICLE_COMMENT



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CLOUD PRODUCT PRICING MODELS

Cloud Product Pricing Models

Pay-Per-Use

Pay-Per-Gigabyte Used

Monthly or Annual Subscription

Pay-Per-User

Revenue-Share



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STATE GUIDANCE ON “CLOUD COMPUTING”

State guidance addressing “cloud computing” as a topic includes:

Policy Letter - Cloud Computing, Iowa Department of Revenue, January 11, 2012.

Letter Ruling 12-8, Massachusetts Department of Revenue, November 13, 2013.

Information Guide 6-511-2011, Nebraska Sales and Use Tax Guide for Computer Software, Nebraska Department of Revenue, January 21, 2014.

New Jersey Technical Bulletin, Cloud Computing, (SaaS, PaaS, IaaS) TB-72, New Jersey Division of Taxation, July 3, 2013

Frequently Asked Questions—Sales and Use Tax Treatment—Computer Hardware, Software, Services, Wisconsin Department of Revenue, December 29, 2014 .



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OTHER DIGITAL PRODUCTS

Other product offerings furnished via the Internet Cloud: include information services, searchable data bases, movies, songs, videogames, premium level subscriptions to online social networks.



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STATE POSITIONS ON DIGITAL PRODUCTS

Jurisdictions may regard a transaction to be taxable because the jurisdiction construes the transaction to be :

A taxable sale or lease of prewritten software, i.e. statutory tangible personal property (TPP) Constructive possession vs. physical possession

A Taxable lease or rental of statutory TPP despite no physical possession because server is single-tenant server

A digital equivalent to traditional TPP A digital good or specific digital good An enumerated taxable service, e.g:

Data processing, data storage service Digital Automated Service “Canned” Information Service such as data processing or

information service in the state Not an enumerated exemption from general tax on services



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TO BE OR NOT TO BE APPLICATION SOFTWARE

Identifying the nature of a transaction is key to determining taxability.

Form of the transaction, i.e., the contract, may or may not agree with the substance of the transaction.

Software tends to be involved in the provision of most digital products, but the use of application software may or may not be the true object sought by the customer/user.



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TRUE OBJECT/PRIMARY PURPOSE

Massachusetts Letter rulings in which a hosted product offering was deemed access to application software considered:

Substantial use of software by the customer

The level of taxable, i.e., software elements, to non-taxable elements included in a bundled product offering

The automated functioning of tasks performed by the product offering

The performance of tasks sought by the customer from the product offering and the role of the seller’s software in performing such tasks, i.e, is the software incidental to a task a human is performing or is the software the means of performing the task

The intervention in the product offering by seller’s personnel or lack thereof



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TRUE OBJECT/PRIMARY PURPOSE

Massachusetts:

Massachusetts Dept. of Revenue Letter Ruling 11-4, (April 12, 2011)

Massachusetts Dept. of Revenue Letter Ruling 12-5 (May 7, 2012)

Massachusetts Dept. of Revenue Letter Ruling 12-10 (Sept. 12, 2012)

Massachusetts Dept. of Revenue Letter Ruling 12-13 (Nov. 9, 2012)

Massachusetts Dept. of Revenue Letter Ruling 13-2 (March 11, 2013)

Massachusetts Dept. of Revenue Letter Ruling 13-5 (June 4, 2013)



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Resale and other exemptions

Texas: 20% exemption from the value of information services and data processing services. Texas Tax Code Sec. 151.351.

Washington:

• Multiple Point of Use Exemption, Digital Products: RCW Section 82.12.02088, WAC458-20-15503(506)

• Multiple Point of Use Exemption, Remote Access Software: RCW Section 82.08.02088, WAC458-20-15502(11)

• Digital Products or Remote Access Software Made Available For Free to the General Public. RCW Section 82.08.02082, WAC458-20-15502(10)(c)(ii), WAC458-20-15503(504)

• Digital Goods Purchased for a Business Purpose. RCW Section 82.08.02087(1), WAC458-20-15503(505)

EXEMPTIONS APPLICABLE TO DIGITAL PRODUCTS



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CONTACTS

Laurie Wik

Tax Director, San Jose, California

408-955-0316, ext. 2717, [email protected]


SALES & USE TAX FOR CLOUD COMPUTING, SOFTWARE,

APPS, AND OTHER DIGITAL PRODUCTS AND SERVICES

Joseph N. Endres

Hodgson Russ LLP

1540 Broadway, 24th Floor

New York, NY 10036

Phone: (716) 848-1504

Fax: (716) 819-4711

SALES AND USE TAX FOR DIGITAL

PRODUCTS AND SERVICES

NEXUS ISSUES

First question: Nexus, what is it?

1. Nexus is a fancy word for “connection.” In order for a state to require an out-of-state seller to collect its sales tax, there must be a requisite level of connection between the state and the seller.

Quill v. North Dakota, 504 U.S. 298 (1992)

The “Bright Line” Test: Physical Presence

Do you have any people or property in the state? • Offices

• Employees or independent contractors

• Inventories

• Other property – servers and Texas

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NEXUS ISSUES

Just because you have “Nexus” with a state, doesn’t mean you have a sales tax exposure.

1. Not all states tax digital goods. You have to know the rules in each state. Unfortunately the rules are complex and in flux!

For example, California exempts digital goods. New York taxes digitally accessed or transferred software, but exempts other digital products such as music, pictures, etc.

States that tax digital products, other than software: AL, AR, AZ, CO, CT (but at a lower rate), HI, ID, IN, Chicago KY, LA, ME, MN (as of 7/1/13), MS, NC, NE, NJ, NM, OH (as of 1/1/14), SD, TN, TX, UT, VT, WA, WI, WY.

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NEXUS ISSUES

Can a third party’s activity in a state confer nexus on an out-of-state seller?

1. Affiliate / Click-Through Nexus – New York’s Amazon Law.

> Several states now impose some sort of click-through or affiliate nexus, including Arkansas, Arizona, California, Colorado, Connecticut, Georgia, Illinois, Kansas, Maine, Michigan, Minnesota, Missouri, Nevada, New York, New Jersey, North Carolina, Oklahoma, Pennsylvania, Rhode Island, Tennessee, Texas, Vermont and Washington

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NEXUS ISSUES

New York’s Recent Amazon Law (a quick history)

1. In 2008, New York amended its Tax Law (§1101(b)(8)(vi)), expanding the definition of a “vendor” required to collect and remit sales tax on the vendor’s taxable sales in New York

• The amendment accomplished this by creating a presumption of solicitation on certain out-of-state sellers who had agreements with New York affiliates.

2. Shortly thereafter, two out-of-state sellers with no physical presence in New York (no offices, employees, or property), Amazon.com and Overstock.com, challenged the constitutionality of the amendment

3. Nearly five years after the initial challenge, New York’s highest appellate court, the Court of Appeals, issued a decision on March 28, 2013. See, 20 N.Y.3d 586.

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NEXUS ISSUES

The “Click-Through” Nexus laws are likely here to stay, though some have been invalidated recently in certain states.

1. In late 2013 the Supreme Court refused to hear a challenge to New York’s Affiliate Nexus laws.

2. In October 2013, the state's highest court found Illinois' Internet sales tax void and unenforceable because it conflicts with a federal law. However, a new law was passed in 2015 that allegedly cures the prior law’s constitutional defect.

So it doesn’t look like a unified solution is going to come from the courts.

What about Congress?

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NEXUS ISSUES

The Marketplace Fairness Act of 2015

1. On March 10, 2015, Senators Enzi (WY) and Durbin (IL), along with seven other co-sponsors, introduced the Marketplace Fairness Act of 2015 into the 114th Congress.

2. Similar to previous iterations of the bill, the Marketplace Fairness Act of 2015 would allow states to require remote sellers to collect and remit sales and use taxes on sales to in-state customers under certain conditions.

3. The 2015 Act includes language substantially similar to the previous version, allowing states that (1) are full members of the Streamlined Sales and Use Tax Agreement (SSUTA), or (2) enact certain minimum simplification requirements outlined in the bill, to require certain remote sellers to collect and remit sales tax.

4. A small seller exception would exclude sellers with under $1,000,000 in gross annual receipts from total remote sales in the United States in the preceding calendar year from being required to collect and remit.

5. Finally, The 2015 version, however, prohibits states from imposing collection and remittance requirements on remote sellers prior to one year after Marketplace Fairness is enacted, or during the retail busy season between October and December of the first calendar year that Marketplace Fairness Act is enacted.

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SOURCING ISSUES

What state’s tax rules apply?

1. General Rule: For software and digital goods, the state where the end user is located typically controls……but be careful!

2. But what happens when users are located across various states? Or what if a service is performed for a business with locations in multiple jurisdictions (e.g., software-based accounting services, accounts payable, payroll, etc.)?

Principal place of business approach.

Reasonable estimates of user locations.

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SOURCING ISSUES

Multiple Points-of-Use (“MPU”) Exemption Certificates

1. A handful of states allow purchasers to provide sellers MPU Exemption Certificates when certain requirements are met.

• For example, in order for the exemption to apply, most states require that the software be transferred or accessed digitally and that the software be used by the customer in multiple jurisdictions.

2. These certificates can be a very effective way for a seller to limit its compliance obligation. A seller that receives the exemption certificate is relieved of its obligation to collect tax on the transaction. Rather, the purchaser is obligated to remit the tax to the state once it determines where the software is used by its employees.

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SOURCING ISSUES

Multiple Points-of-Use (“MPU”) Exemption Certificates

1. The following states have some type of MPU exemption: Colorado, Massachusetts, Minnesota (but only after mid-2013), Ohio and Washington

2. Unfortunately, several states that previously offered the exemption but later repealed it: Indiana , Iowa, Kansas, Kentucky, Nebraska, New Jersey, North Dakota, South Dakota.

3. Some states will still accept the MPU certificates informally.

4. NY accepts information from the purchaser regarding use.

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SOURCING ISSUES

Practical advice for sellers

1. Establish policy and procedure for sourcing sales transactions

e.g., SSTA sourcing hierarchy

2. Implement a rule for each product (SKU) sold

3. Information, information, information! Identify the best available information for sourcing purposes.

4. Maintain excellent record keeping with respect to exemption certificates.

Keep both a hard copy and a digital copy.

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©2014 Sutherland Asbill & Brennan LLP

CLOUD COMPUTING

UPDATES

Digital Economy

33

Charlie Kearns

Counsel

Sutherland Asbill & Brennan LLP

202.383.8064

[email protected]

Strafford – Sales & Use Tax for Cloud Computing,

Software, Apps, and Other Digital Products and Services


Virginia Cloud Computing Exemption

• The Virginia Tax Commissioner issued a taxpayer-favorable

ruling addressing Virginia sales and use tax on (1) computer

software sold to manufacturers and (2) cloud computing

services. Va. Pub. Doc. Rul. No. 14-42 (Mar. 20, 2014)

The Commissioner determined that Virginia’s manufacturing exemption can

apply to sales of computer software if the software is used directly in the

manufacturer’s production process (i.e., as an indispensable and

immediate part of the actual production process).

As an example, the Commissioner distinguished between software

used to direct or control production operations (exempt) and software

used only to monitor such operations (taxable).

The Commissioner determined that cloud computing services were exempt

from sales and use tax because they do not involve tangible medium and

qualify as a nontaxable service under Virginia’s exemption for electronic

transfers of software.

34


Florida Information Services Ruling

• The Florida Department of Revenue determined that the sale of

remote storage and cloud computing services, along with related

data transfer fees, are information services not subject to Florida

sales tax or CST. Fla. Dep’t of Revenue, Tech. Asst. Advisement,

TAA 14A19-001 (Mar. 13, 2014)

The Department determined that neither the remote storage nor

cloud computing services offered by the taxpayer involve a customer

paying for the transmission or routing of information

Rather, each offers a customer the capability to store and retrieve

data—hallmarks of a nontaxable information service

35


Georgia Cloud Ruling

• The Georgia Department of Revenue determined that

a company’s cloud-based applications and related

services are not subject to Georgia sales and use tax.

Ga. LR SUT-2014-05 (June 9, 2014)

Cloud-based services and hosting services are not taxable

services under Georgia law.

Because customers did not receive tangible personal

property in the transaction, this is not a retail sale subject to

sales and use tax.

The company is the end user of all tangible personal

property it uses to provide its services and therefore is liable

for sales and use tax on the purchase of those items.

36


Michigan SaaS Case

• The Michigan Court of Claims held that cloud computing, or

software as a service (SaaS), is a nontaxable service rather than a

taxable use of prewritten software. Auto-Owners Insurance Co. v.

Dep’t of Treasury, Case No. 12-000082-MT (Mich. Ct. Cl. 2014)

The Michigan Department of Treasury asserted that the insurance

company was liable for use tax because the transactions at issue

involved the “use” of prewritten computer software “delivered by any

means”

The court disagreed, reasoning the software was not “delivered”

because the third-party providers did not surrender possession or

control of the software to the taxpayer, nor did the third parties

actually transfer to the taxpayer the software needed to process and

produce the outcomes

37


Michigan Information Service Case

• The Michigan Court of Appeals held that Thomson Reuters’ sale of

Checkpoint, an online tax and accounting research program, was the sale

of a nontaxable information service and not tangible personal property for

purposes of Michigan’s use tax. Thomson Reuters Inc. v. Dep’t of

Treasury, No. 313825, LC No. 11-000091-MT (Mich. Ct. of App. May 13,

2014)

Department of Treasury argued Checkpoint was tangible personal property

because it constituted the sale of “prewritten computer software subject to tax

when plaintiff’s Michigan customers used and controlled the computer code

that resided on the web browser interface and on the server side”

Applying Michigan’s “incidental to service test,” however, the Court of Appeals

found Checkpoint customers sought access to information, not the underlying

computer code that constituted less than one percent of the transaction

Thus, any transfer of tangible personal property was incidental to the

information service

• Department of Treasury Update, November 1, 2015

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Minnesota Multiple Points of Use

Guidance

• The Minnesota Department of Revenue issued a Revenue

Notice, Minn. Rev. Not. No. 15-03 (Sept. 28, 2015), explaining its

policies on use tax refunds and amended use tax returns filed

based on use of a service, digital good, or computer software

used in multiple taxing jurisdictions.

Minnesota statutes provide that a taxpayer can apportion use tax if

the business purchaser knows a service, digital good, or computer

software will be used concurrently in multiple jurisdictions and the

seller provides a completed multiple points of use (“MPU”)

exemption certificate.

Minnesota statutes permit taxpayers to file refund claims when a

sale was exempt from tax under Minnesota law.

Despite the “exemption certificate” requirement, the Minnesota

DOR interprets the MPU statute to permit apportionment, and not

to “exempt” sales. The Minnesota DOR therefore determined

refund claims cannot be made based on the MPU apportionment

provision.

39


New Jersey Cloud Guidance

• The Division of Taxation issued a technical bulletin that

confirmed the state does not tax sales of cloud computing

services including SaaS, PaaS, and IaaS. New Jersey

Division of Taxation Technical Bulletin TB-72 (July 3, 2013)

• The Division explained:

SaaS retailers provide customers with access to software

through remote means;

PaaS retailers provide customers with computing platforms

through remote means; and

IaaS retailers provide customers with equipment and

services necessary to support and manage the customer’s

content and dataflow through remote means.

40


New Jersey (cont’d)

• The Division stated that SaaS, PaaS, and IaaS do not

fit within the definition of tangible personal property

(which includes “computer software”) because the

retailer does not transfer any software to its

customers

• Further, New Jersey does not enumerate SaaS,

PaaS, or IaaS as taxable services

41


New York Tax Bulletin

• The sale of prewritten software is taxable, and the

sale of custom software is not subject to tax. N.Y. Tax

Bulletin, TB-ST-128 (Aug. 5, 2014)

A sale of software includes any transfer of title or

possession, including a license to use.

The sale to a purchaser in New York of a license to remotely

access software is subject to tax because, by accessing the

software, the purchaser gains “constructive possession of”

and “the right to use or control” the software.

The situs of the sale is “the location from which the

purchaser uses or directs the use of the software, not the

location of the code embodying the software.”

42

http://www.tax.ny.gov/pubs_and_bulls/tg_bulletins/st/computer_software.htm







New York Information Services

Decision

• Web-based program that tracks the execution of

customers’ securities transactions, along with

aggregate financial industry data, was a taxable

information service because it was not “personal or

individual in nature.” Matter of Sungard Securities

Finance, LLC, DTA No. 824336 (N.Y.S. Tax App. Trib.

3/16/2015)

Taxpayer did not show that reports furnished as a result of

the information services were “personal or individual in

nature” to qualify for the exemption (e.g., consulting

services).

Service was not a taxable license of prewritten software.

43


New York Advisory Opinion

• Online drop shipment facilitation service determined

to be data processing service. N.Y. Advisory Opinion,

TSB-A-15(20)S (May 26, 2015).

Petitioner uses proprietary software to create internet-based

“hub”. Web merchants use the hub to order products from a

supplier and direct the supplier to deliver the product directly

to the end customer (i.e., drop shipments).

Although the service involved transmitting information

between merchant and supplier, the NYS Department of

Taxation and Finance determined that the service’s primary

function is to translate data from a format compatible with

merchant’s computer system to format compatible with the

supplier’s system. The service’s primary function, therefore,

is non-taxable data processing.

44


Chicago Department of Finance –

Lease Tax Ruling

• The Chicago Department of Finance determined that cloud

computing services are subject to Chicago’s Personal

Property Lease Transaction Tax. Personal Property Lease

Transaction Tax Ruling No. 12 (June 9, 2015).

Historically, Chicago applied the tax to certain intangible

property, and time-sharing on computers, rented computers,

leased software and nonpossessory computer leases.

The Department determined cloud computing, cloud

services, hosted environments, SaaS and IaaS constitute a

nonpossessory computer lease.

• The ruling was originally prospective and was set to

take effect Sept. 1, 2015. However, on Aug. 7, 2015,

the Department delayed the effective date to Jan. 1,

2016.

45


Washington – Domain Name Services

• The Washington Department of Revenue (“DOR”) issued

guidance on its website regarding domain name

registration services.

A domain name is a unique name that allows users to access a website

without using an IP address.

To access the global domain name clearinghouse, individual users must

use a third-party domain name registrar to purchase the domain name

on the users behalf.

In previous guidance, Wash. Det. No. 11-0081, the DOR determined

that domain name registration services qualify as “digital automated

services” for Washington tax purposes because the registrar transfers

the domain name to the user electronically.

The Washington DOR’s website guidance makes clear that these sales

are therefore subject to retail sales and use tax.

46


Vermont – Cloud Tax Repeal

• In June of 2015, Governor Shumlin signed a bill

repealing sales and use tax on cloud computing (i.e.,

remotely accessed prewritten software). S.B. 138,

Laws 2015 (eff. Jul. 1, 2015).

47


CONSUMER DIGITAL GOODS

UPDATES

Digital Economy

48

Charlie Kearns

Counsel


202.383.8064

[email protected]


What are Consumer Digital Goods

• Often digital equivalents to historically-tangible items,

e.g., books, music, video games, and video (movies,

television)

*Video discussed below

• Important distinctions with cloud-based services and

B2B services

• Influence of the Streamlined Sales and Use Tax

Agreement

49


Alabama Proposed Regulations –Streaming Video

and Electronic Transmissions

• The Alabama Department of Revenue (“DOR”) proposed amendments to the

state’s rental tax regulations, which would have applied the tax to “digital

transmissions” including on-demand movies and TV, and streaming audio and

video. Prop. Ala. Admin. Code r. 810-6-5.09.

• After heavy scrutiny during the comment period, and a letter from the Alabama

Legislative Council that indicated that the Council would use its administrative

review powers to reject enactment of the proposed rule, the Alabama DOR

withdrew the proposed amendments.

• In a related attempt to subject electronic transmissions to sales tax, the Alabama

DOR modified and revoked in part a 1994 Revenue Ruling, Ala. Rev. Rul. 94-002

(Oct. 5, 1994). The 1994 Revenue Ruling determined that electronic satellite

transmissions were not subject to sales tax as tangible personal property (“TPP”).

• The Ala. DOR changed its interpretation of existing law to claim that electronically

transmitted information is TPP subject to sales tax, and that data receiving

equipment is TPP owned by the taxpayer and subject to rental tax.

50


Indiana Revenue Ruling – Merchandise

Authorization and Discount Coupon

Services

• The Indiana Department of Revenue (“DOR”) determined

that merchandise authorization and discount coupon

service are not specified digital products. Ind. Rev. Rul.

No. 2013-05ST (May 2015).

Indiana subject the sale of certain digital products to Indiana

sales and use tax. Specifically, digital audio (e.g., songs,

spoken word recordings, ringtones), digital audiovisual

works (e.g., movies), and digital books are subject to sales

tax.

The Indiana DOR determined that merchandise

authorization and discount coupon services do not qualify as

digital audio works, digital audiovisual works, or digital

books without significant analysis.

51


Kentucky Bd. of Tax Appeals ruling–

Streaming Video Not Subject to Telecom Tax

• The Kentucky Board of Tax Appeals held that Netflix’s digital

streaming service is not subject to Kentucky’s

telecommunications excise tax. Netflix, Inc. v. Kentucky Fin. &

Admin. Cabinet, Order No. K-24900 (Ky. Bd. Tax App. Sept. 23,

2015)

Kentucky’s telecommunications excise tax applies to the provision

of “multichannel video programming service.”

The Kentucky Department of Revenue argued that Netflix’s

streaming service was comparable to traditional television

programming, and that the streaming service was analogous to the

cable TV’s video on-demand, which is subject to the tax.

The Kentucky Board of Tax Appeals analyzed dictionary definitions

of “programming” and “comparable” to determine that Netflix’s

service is not sufficiently similar to cable television to justify

subjecting Netflix’s service to the tax.

52


Oklahoma Letter Ruling _

Background Music

• In addition, the Commission determined that receipts from sales

of “background music” are subject to Oklahoma state sales tax,

but only if transferred in a tangible medium . Ok. LR-14-008 (May

18, 2014).

The petitioner asked the Commission whether sales and use

tax would apply to monthly fees that could be transferred

either via satellite or Internet download, or via music disc.

The Commission determined that, if the charges for the

music were separately stated and the music was transferred

by satellite stream or Internet download, the charges were

not subject to sales and use tax.

53


Chicago Department of Revenue –

Amusement Tax Ruling

• The Chicago Department of Revenue (“DOR”) determined

that amusements that are delivered electronically (i.e.,

streaming services) are subject to Chicago’s Amusement

Tax. Amusement Tax Ruling No. 5 (June 9, 2015).

The Amusement Tax applies to movie theatres, sporting

events, cable television and mobile television.

Chicago determined that the Amusement Tax also applies to

streaming video, streaming music, online gaming and movie

rentals.

• The ruling applies only prospectively and took effect

Sept. 1, 2015.

• There will likely be challenges to this expansion.

54


FEDERAL LEGISLATION

UPDATES

Digital Economy

55

Charlie Kearns

Counsel


202.383.8064

[email protected]


Internet Tax Freedom Act Update

• On September 30, 2015, Congress passed a continuing

resolution extending the ITFA until December 11, 2015.

Further extensions through continuing resolutions or otherwise are likely as

December 11, 2015 approaches.

• Relationship with Remote Seller/Nexus Legislation?

Potential pairing of ITFA extension with federal remote seller/nexus

legislation?

S. 2609 introduced July 15, 2014 – 10 year extension (until November 1,

2014), retains grandfather clause – combined with Marketplace Fairness

Act

• A permanent extension of ITFA has passed the House twice. This version removes the grandfather clause from the previous version

The House passed the most recent version, H.R. 235, on June 9, 2015

56


Application of ITFA – Colorado PLRs

• The Colorado Department of Revenue (“DOR”)

analyzed a number of electronic messaging services

in two PLRs released the same day. Colo. Dep’t of

Rev. PLR-15-001, Colo. Dep’t of Rev. PLR-15-003

(released Apr. 5, 2015).

• The Colorado DOR determined in both PLRs that any

potential taxes of e-mail services, including the

petitioners’ production messaging, would be

preempted by the ITFA.

57


Massachusetts Technical

Information Release

• Like several other states, the Massachusetts

Department of Revenue addressed the possible

expiration and subsequent retroactive enactment of

the ITFA:

ISPs may continue to rely on previous guidance, until further

notice, to determine the taxability of telecommunications

services and Internet access services.

The Department anticipates providing further guidance if

ITFA expires. Mass. TIR 14-10 (Sept. 11, 2014).

58


Digital Goods and Services Tax

Fairness Act of 2015

• H.R. 1643 introduced Mar. 26, 2015.

• Would regulate state taxation of downloaded music and movies and

online services

• Provides uniform sourcing rules for digital goods and services, and

excludes some digital services.

• Goal is to prevent “multiple and discriminatory” taxation of digital goods

and services.

• The U.S. House of Representatives’ Judiciary Committee’s

Subcommittee on Regulatory Reform, Commercial and Antitrust Law

held a hearing on three state tax bills on June 2, 2015 (DGSTFA, Mobile

Workforce, and BATSA).

59


VIRTUAL CURRENCY

Digital Economy

60

Charlie Kearns

Counsel


202.383.8064

[email protected]


Virtual Currency – Generally

• Decentralized Virtual Currency

Peer-to-peer currency – all aspects of virtual currency (e.g.,

Bitcoin) creation and transactions take place over a

distributed network.

There is no central authority or government that can

create more virtual currency unilaterally.

There is no central authority or entity that clears or

facilitates virtual currency transactions.

Virtual currencies are not backed by any central authority or

government and is not pegged against any currency.

Virtual currencies are currently used for (1) the payments for

goods and services and (2) trading and investments.

61


Virtual Currency Creation (“mining”)

• Unlike other normal currencies or digital currencies,

virtual currencies are not minted or created.

• Virtual currencies are created through a process

called mining.

Miners confirm and verify all virtual currency transactions

that occur by solving a complex mathematical formula.

As transactions are confirmed and added to the public

ledger, miners are given virtual currency based on the

amount of contribution towards solving the formula.

62


Virtual Currency Transactions

• Virtual currency transactions are not cleared or

processed by any central authority or entity.

Virtual currency transactions are verified by the miners,

within the entire distributed network.

Every virtual currency transaction is recorded on the public

ledger and the public address of the sending party and the

receiving party are recorded as well.

The public ledger is the digital record of all virtual

currency transactions. The ledger serves to maintain the

integrity and security of virtual currency transactions.

One cannot determine the identities of the parties from the

public addresses.

63


Virtual Currency Storage

• The storage of virtual currency requires a “digital

wallet”.

• There are two methods of “storing”:

Personal digital wallets installed on individual user’s

machines (computer, smart phones, etc.)

Hosted wallets operated by services providers on their

servers. The wallets are accessible through the internet and

is not hardware restricted.

• All virtual wallets have a private key and a public key.

Private key – allows individual users to access their

currency.

Public key – address that is used to send and receive

currency and is recorded on the public ledger.

64


Sales and Use Tax Issues

• Sale/exchange of virtual currency for cash

Will states follow characterization of virtual currency as

intangible property?

What is the sales price?

• Sale of taxable property or service paid by virtual

currency

Vendors who collect sales tax in virtual currency must

convert to dollars to remit the sales or use tax to the state

65


Wisconsin Sales and Use Tax Report

• The sale of virtual currency itself (exchanging

currency for virtual currency) is not subject to sales

tax because the virtual currency represents an

intangible right.

• However, when virtual currency is used to redeem a

taxable product, the retailer’s liability accrues at the

time of the purchase.

• The tax is measured in U.S. dollars based on the

value of the currency at the time the seller receives

the consideration.

66


Kentucky Sales Tax Facts

• The Kentucky Department of Revenue will consider

“Bitcoins” (and presumably other virtual currency) as

“consideration” provided by the purchaser in a

transaction. Ky. Dep’t of Revenue, Kentucky Sales

Tax Facts (June 2014).

• Accordingly, vendors accepting virtual currency

should convert the virtual currency into U.S. dollars,

charge Kentucky sales tax, and retain documentation

of the virtual currency’s value at the time of the

transaction.

67


California Publication

• California Publication 388, released Sept. 1, 2014,

discussed California tax principles in virtual currency

transactions.

• California will use a vendor’s advertised selling price

in U.S. dollars to measure the sales tax base.

• Accordingly, if the vendor will accept convertible

virtual currency, California vendors should retain

documentation of their regular sales price for similar

property when payment is made in U.S. dollars.

68


Missouri Letter Ruling

• The operator of an ATM that exchanges cash for

bitcoins is not required to collect and remit Missouri

sales and use tax on such transactions. Missouri

Letter Ruling No. LR 7411 (Sept. 12, 2014)

• The Department stated that the exchange of cash for

bitcoins is the sale of intangible property. Missouri

law does not impose sales or use tax on intangible

property, so the exchange of bitcoins for cash is not

subject to Missouri sales or use tax.

69


New York State Tax Memo

• New York explained that it will treat convertible virtual currency as intangible

property, with all the attendant consequences that flow from that

characterization. N.Y. Technical Memorandum, TSB-M-14(5)C, (7)I, (17)S

(Dec. 5, 2014).

• The Department will treat transactions using convertible virtual currency as

barter transactions. For sales tax purposes, since virtual currency is

intangible property, a transaction using virtual currency will not automatically

be subject to sales tax.

• If a person transfers virtual currency for taxable goods/services, the tax base

(i.e., the receipts or consideration) will be determined based on the market

value of the virtual currency in U.S. dollars at the time of the transaction.

• For Corporation Franchise and Personal Income Tax Purposes, the

Department will follow the federal treatment of virtual currency as described

in IRS Notice 2014-21.

70


New Jersey Tax Memo

• New Jersey asserted that transactions involving convertible virtual currency

(“electronic/digital money” with an equivalent/substitute value in real

currency) are subject to New Jersey sales/use tax, Corporation Business

Tax, and Gross Income Tax. N.J. Technical Advisory Memorandum, TAM-

2015-1(R) (Jul. 28, 2015).

• The New Jersey Division of Taxation will treat transactions where convertible

virtual currency is used as barter transactions.

• For Corporation Business and Gross Income Tax Purposes, the Department

will follow the federal treatment of virtual currency, meaning taxpayers will

realize gains/losses from sales or exchanges using virtual currency.

71


Washington Tax Topics

• Washington state also instructs taxpayers to charge

tax on virtual currency transactions.

• The base for purposes of measuring the tax is the

advertised price of the good at the time of the sale.

• It does not matter if the value of the virtual currency

fluctuates prior to the business redeeming it.

72


Charlie Kearns

Counsel


202.383.8064

[email protected]

73


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Amazon Appstore for Android!

Visit us at www.stateandlocaltax.com

@Sutherland_SALT Sutherland SALT Group

74



COMPLIANCE ISSUES

Define the Product Appropriately

E.g., Tax Preparation Services

Primary Purpose Test

Speak with One Voice

1. Make sure the following items all define the product consistently:

Contracts

Invoices

Marketing brochures

Website material

75



COMPLIANCE ISSUES

Frequently, a company’s sales tax obligations are complicated by the manner in which its products are sold. For example, when the company sells multiple products or deliverables (some taxable and some exempt) its sales tax liability can unnecessarily increase if the transaction is not billed properly.

New York’s Cheeseboard Rule: When taxable and exempt items are bundled into a single price, the entire charge can be subject to sales tax. See 20 NYCRR 527.1

If multiple products are sold (some taxable and some exempt), the company must be able to track the different revenue streams.

Sales tax audits are always more difficult and problematic if you don’t have good records detailing the transactions at issue.

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COMPLIANCE ISSUES

In order to minimize potential sales tax exposure, a company must know the sales tax rules in effect in the jurisdictions where it is obligated to collect the tax. Simple changes in transaction structure can greatly reduce tax liability

EXAMPLE: A business in New York State maintains a catalog of stock photos that various magazines and other publications frequently purchase in order to reproduce.

1. If the photo is sold in hard copy to a New York customer, then the sale constitutes a taxable sale of tangible personal property.

2. If, however, the photo is transferred electronically via e-mail or download from a Web site, the sale is not subject to tax, because New York does not tax digital products such as photos, music, movies, etc.

3. What if the seller also provided access to software through its Web site that allowed the purchaser to manipulate the digital photo? Then, the transaction is probably taxable. This demonstrates the need to separately state the taxable charge for the software from the non-taxable charge for the photograph.

77

Documents

Sales & Use Tax for Cloud Computing, Software, …media.straffordpub.com/products/sales-and-use-tax-for...2015/10/29 · Oct. 29, 2015 Sales & Use Tax for Cloud Computing, Software,