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Presenting a live 110minute teleconference with interactive Q&A Sales Tax on Information Services: Navigating Aggressive State Policies Navigating Aggressive State Policies Understanding Taxable Features of a Database or Service for MultiState Compliance 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, AUGUST 11, 2011 Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Irwin Mittleman Sales Tax Consultant Meridian Global Services New York Irwin Mittleman, Sales Tax Consultant, Meridian Global Services, New York Aaron Young, Partner, Reed Smith, New York Martin Eisenstein, Member, Brann & Isaacson, Lewiston, Maine For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10.

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Page 1: Information Services: Aggressive State Policiesmedia.straffordpub.com/...services-navigating-aggressive-state-policies-2011-08-11/... · Navigating Aggressive State Policies ... Irwin

Presenting a live 110‐minute teleconference with interactive Q&A

Sales Tax on Information Services: Navigating Aggressive State Policies Navigating Aggressive State Policies Understanding Taxable Features of a Database or Service for Multi‐State Compliance

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, AUGUST 11, 2011

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Irwin Mittleman Sales Tax Consultant Meridian Global Services New YorkIrwin Mittleman, Sales Tax Consultant, Meridian Global Services, New York

Aaron Young, Partner, Reed Smith, New York

Martin Eisenstein, Member, Brann & Isaacson, Lewiston, Maine

For this program, attendees must listen to the audio over the telephone.

Please refer to the instructions emailed to the registrant for the dial-in information.Attendees can still view the presentation slides online. If you have any questions, pleasecontact Customer Service at1-800-926-7926 ext. 10.

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Conference Materials

If you have not printed the conference materials for this program, please complete the following steps:

• Click on the + sign next to “Conference Materials” in the middle of the left-hand column on your screen hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a PDF of the slides for today's program.

• Double click on the PDF and a separate page will open. Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

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Continuing Education Credits FOR LIVE EVENT ONLY

Attendees must listen to the audio over the telephone. Attendees can still view the presentation slides online but there is no online audio for this program.

Attendees must stay on the line for at least 100 minutes in order to qualify for a full 2 credits of CPE. Attendance is monitored as required by NASBA.

Please refer to the instructions emailed to the registrant for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.at 1 800 926 7926 ext. 10.

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Tips for Optimal Quality

S d Q litSound Quality

For this program, you must listen via the telephone by dialing 1-866-873-1442 and entering your PIN when prompted. There will be no sound over the web connection.co ect o .

If you dialed in and have any difficulties during the call, press *0 for assistance. You may also send us a chat or e-mail [email protected] immediately so we can address the problem.

Viewing QualityTo maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key againpress the F11 key again.

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Sales Tax on Information Service: N i ti  A i  St t  P li i  Navigating Aggressive State Policies Seminar

Aug. 11, 2011

Martin Eisenstein, Brann & [email protected]

Irwin Mittleman, Meridian Global [email protected]

Aaron Young, Reed Smith [email protected]

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Today’s Program

Fundamental Concepts[Irwin Mittleman, Martin Eisenstein]

Slide 7 – Slide 15

Examples Of State Tax Treatment Of Information Services[Irwin Mittleman, Aaron Young, Martin Eisenstein]

Slide 16 – Slide 37

Related Sourcing Issues[Martin Eisenstein]

Slide 38 – Slide 45

Audit Risks And Audit Preparation Tactics[Aaron Young]

Slide 46 – Slide 56

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I i  Mi l  M idi  Gl b l S i

FUNDAMENTAL CONCEPTS

Irwin Mittleman, Meridian Global ServicesMartin Eisenstein, Brann & Isaacson

FUNDAMENTAL CONCEPTS

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Info mation Se ices DefinedInfo mation Se ices DefinedInformation Services DefinedInformation Services Defined

In the most general terms, an information service is the right to access a common databaseright to access a common database.

Common examples include consumer product reports, employment history reports and junkyard parts locator employment history reports and junkyard parts-locator services.

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Indicia Of What ConstitutesIndicia Of What ConstitutesAn Information ServiceAn Information ServiceAn Information ServiceAn Information Service

The dominant purpose for accessing the data is its The dominant purpose for accessing the data is its content.

The same or similar information is sold or could be sold The same or similar information is sold or could be sold to another person [this is a objective, not subjective, determination].

The information is not personal in nature or restricted.

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Indicia That Something IsIndicia That Something IsNotNot An Information ServiceAn Information ServiceNotNot An Information ServiceAn Information Service

User owns the database but accesses software to User owns the database but accesses software to manipulate the data.

The dominant purpose of application is not to gain The dominant purpose of application is not to gain access to the data.

The judgment of person providing the service is more The judgment of person providing the service is more important than the data.

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How Information ServicesHow Information ServicesAre Distinguished FromAre Distinguished From

Access To SoftwareAccess To Software

When you have access to software you are utilizing When you have access to software, you are utilizing software to perform a task or multiple tasks, e.g. add a column of numbers.

When you have access to a database, you can apply search parameters, but changes to the database are made by the owner of the informationby the owner of the information.

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Do All States TaxDo All States TaxDo All States TaxDo All States TaxInformation Services?Information Services?

Many states do not tax information services. Many states do not tax information services.

Many of the larger states, including New York, New Jersey Florida and Texas do tax information servicesJersey, Florida and Texas do tax information services.

Connecticut taxes computer services including “retrieving or providing access to information ”or providing access to information.

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Distinguishing An InformationDistinguishing An InformationDistinguishing An InformationDistinguishing An InformationService From AService From A

Professional ServiceProfessional ServiceProfessional ServiceProfessional Service

The states are just beginning to analyze the distinctions The states are just beginning to analyze the distinctions between a professional service and an information service, but a true object test typically is applied.

A professional service generally involves a level of comfort with the individual providing the service and the client.

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Chicago: The Hidden Tax On Information Services

• Chicago imposes, via § 3-32-030(A) of its Municipal Code, the “Personal Property Lease

g

p C , p yTransaction Tax,” an 8% tax on:

• The lease or rental in the city of personal property, or

• The privilege of using in the city personal property that is leased or rented outside the city.

• Under Rulings Nos. 3 and 9, the tax applies to charges for Chicago-based terminals to access servers located outside of Chicago for data processing services/information services such processing services/information services such as credit bureau reports.

• Ruling 1: Limit tax to if contract is signed in Chicago or if more than 50% of use is in Chicago50% of use is in Chicago

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Chicago: The Hidden Tax on Information Services (Cont.)

• Under Ruling 5, if data storage occurs on a server in Chicago, charges for this service are subject to personal property tax.

• However, if data storage occurs outside of Chicago, then the Chicago tax on lease of personal property doesn’t apply.

S• Summary

• Review carefully your contracts that involve any form of data information and storage to determine where these activities take place. Also, be aware of the Chicago tax that focuses on where terminals are situated for access to Chicago tax that focuses on where terminals are situated for access to computer services such as information services provided electronically, and where the servers are situated for purposes of storage charges.

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Irwin Mittleman, Meridian Global ServicesAaron Young  Reed Smith

EXAMPLES OF STATE TAX 

Aaron Young, Reed SmithMartin Eisenstein, Brann & Isaacson

EXAMPLES OF STATE TAX TREATMENT OF INFORMATION SERVICES

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New York Taxation OfNew York Taxation OfInformation ServicesInformation Services

Information created or generated from a common database or information that is widely accessible is an information service.information service.

The sale of a report that uses or relies on statistical models or historical data is generally considered to be an models or historical data is generally considered to be an information service.

Includes single reports and subscriptionsIncludes single reports and subscriptions

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New York TaxableNew York TaxableNew York TaxableNew York TaxableInformation ServicesInformation Services

Genealogic research services Investment reports and services Colleges and scholarship search services Colleges and scholarship search services Employment history reports Archive services

O li d ti i Online dating services People- or parts-locator services Sports scouting reports Public records furnished by a private entity

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Risk Management Services AreRisk Management Services AreggTaxable In New YorkTaxable In New York

Ri k t i l d l i f k t h Risk management includes analysis of market share, investment portfolio, computer networks, security, etc.

Th i l t ti ti l d t d hi t i l Those services rely upon statistical data and historical data to generate a report.

A t t li t b l i t b t t i A report to a client may be personal in nature but contains information from common database and that can be included in reports to others.

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WebWeb--Based Tenant EvaluationBased Tenant EvaluationService Is Taxable In New YorkService Is Taxable In New York

A Web-based report is used by developers to solicit selected retailers to the site.

Service is relying upon demographic data to find out which tenants have the best chance of success at location, and also the proximity of tenant’s competitorsp y p

A report to a client may be personal in nature but contains information from common database and that can be included in reports to others.

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DataData--Mining Of Client Web SitesMining Of Client Web SitesDataData Mining Of Client Web SitesMining Of Client Web Sites

A taxpayer provided data warehousing and data mining A taxpayer provided data warehousing and data-mining services for client Web pages, with which it evaluated the number of hits per page, how long visitors remained on site etcsite, etc.

This service was held to be personal, not a taxable information service because the information conveyed information service, because the information conveyed related exclusively to the client’s Web site, and information could not be sold to third parties.

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New YorkNew York New York Technical Service Bureau Memorandum

TSB M 10(7)S 07/19/2010TSB-M-10(7)S, 07/19/2010 Department has very broad view of taxable information

services Credit reports

Online dating

What is more personal that those types of services?

Primary functionI th M tt f th P titi f T l h k S i I In the Matter of the Petition of Telecheck Services, Inc., DTA 822275, 11/05/2009

Matter of Petition of SSOV '81 Ltd. d/b/a People Resources and Matter of Petition of Susan A Wallace TAT 810966and Matter of Petition of Susan A. Wallace, TAT 810966, 810967, 01/19/1995

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Examples Of How States IndividuallyTreat Information Services: Texas

• Texas in general

• State with largest scope of tax on t l t d i th t i l dcomputer-related services that include:

• Information services, data processing i d I iservices and Internet services

• Texas provides an exemption for 20% of charges for information services and data processing services.

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Examples Of How States Individually Treat Information Services: Texas (Cont.)

34 TAC S t 3 344 d fi t bl i f ti i f i hi • 34 TAC Sect. 3.344 defines taxable information services as furnishing general or specialized news or other current information, including financial information, by print, electronic or any other method.

• Examples of taxable information services:

• Newsletters

• Mailing lists (only that percentage that represents names of Mailing lists (only that percentage that represents names of persons located in Texas is taxable)

• Real estate listings

• Financial, investment, stock market, bond rating or financial reports

• News clipping services and wire services

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Examples Of How States IndividuallyTreat Information Services: Texas (Cont.)

• Excludes:• Excludes:

• Sale of information to a particular report

• Sale of information for medical research or scientific Sale of information for medical research or scientific purposes

• Internet access services or services furnished in j ti ith I t t conjunction with Internet access

• The first electronic information service were online services, such as AOL and Prodigy., gy

• Now, Internet access services/online services are taxable as Internet services, but there is a $25/month

ti hexemption per purchaser.

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Examples Of How States IndividuallyTreat Information Services: Texas (Cont.)

• Sect. 151.0035, Tax Code; 34 TAC Sect. 3.330(a) seeks to tax all computer-related services, thus taxing data processing services, which are those items not otherwise within the definition of information services including:

P i f i f ti f th f ili d d i • Processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information

• Data processing services include:• Data processing services include:

• Word processing, data entry, data retrieval, payroll and business accounting, entry of inventory control data, maintenance of records of employee work time, filing payroll tax returns, preparing W-2 forms, and employee work time, filing payroll tax returns, preparing W 2 forms, and computing and preparing payroll checks

• Reports in the nature of information services under other states’ definition, such as data production, data search, information compilation, and other computerized data and information storage or manipulation

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Examples Of How States Individually Treat Information Services: Florida

• More narrow in scope than Texas but does tax “information services”

Fl C d S t 12A 1 062• Fla. Code Sect. 12A-1.062:

• Information services are defined to include collecting compiling and analyzing collecting, compiling and analyzing information or furnishing reports of information.

• Examples include newsletters, tax guides, research publications and other written reports of compiled information.

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Florida Information Services

• Broad exclusions from taxable services under Rule 12A-1.062

• Furnishing of information to a person or individual of a personal or individual nature, even if incorporated in reports furnished to other persons

• Furnishing information electronically or in digital form

• See Department of Revenue v Quotron Systems 615 So 2d • See Department of Revenue v. Quotron Systems, 615 So.2d 774 (Fla. 3rd DCA 1993): Seminal case that electronic transmission of information is not taxable as tangible personal property Case involved electronic delivery of personal property. Case involved electronic delivery of various financial news and information to subscribers. Images on a screen are not capable of being touched or possessed, and therefore are not tangible personal property.g p p p y

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l d f ( )Florida Information Services (Cont.)

E d li d i f ti i t f l t d i ti • E-delivered information is exempt from sales tax and communications services tax.

• Technical Assistance Advisement No. 09A-049, (Sept. 23, 2009):

• Taxpayer that delivers terminal equipment to customers and electronic information to terminals is not subject to sales and use tax on charges to customers, because the information is e-delivered, and the taxpayer owns the terminals

• Taxpayer is not required to pay a communications services tax; information services are excluded from definition of ;communications services.

• News research such as press clippings are also exempt.

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Florida Information Services: The Caveat

• Note the Florida “sleeping dog” for providers and recipients of services using a Florida-based server.

• Rule 12A-1.032(3): Consumers are considered to be using a portion of a computer (renting the computer) when that computer is accessed through terminal devices that are connected to a computer in Florida.

• Theory behind the rule: A customer is able to compile programs provide a variety of computations have programs, provide a variety of computations, have computational results printed out on his terminal and keep data stored within the computer file for future use. This produces basically the same results as if the customer had processed the same data on his own computer; i.e., the customer performs the tasks of entering data into the computer, and all processing is accomplished under his control accomplished under his control.

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New Jersey Definition OfNew Jersey Definition OfNew Jersey Definition OfNew Jersey Definition OfInformation ServicesInformation Services

Information services means the furnishing of any kind of o a o se ces ea s e u s g o a y d oinformation that has been collected, compiled, or analyzed by the seller, and provided through any means or method, other than personal or individual information that is not incorporated into reports furnished to others, NJSA 54:32B-3(b)(12), NJSA 54:32(B)-2(yy)

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How New Jersey SourcesHow New Jersey SourcesHow New Jersey SourcesHow New Jersey SourcesInformation ServicesInformation Services

The tax applies to the sale of information services received by customers in New Jersey. New Jersey Tax Notes, Information Services, 2-25-08.

Traditionally, New Jersey has taxed services based on where they occur, not on where the benefit of the service is received.

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Is An Information ServiceIs An Information ServiceAn Exclusive Category?An Exclusive Category?An Exclusive Category?An Exclusive Category?

Not in any sense Not in any sense

New Jersey taxes employment background checks as investigation service but they could in some jurisdictions investigation service, but they could in some jurisdictions be an information service.

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New Jersey TaxableNew Jersey Taxable

When information is sold to more than one person it is

New Jersey TaxableNew Jersey TaxableInformation ServicesInformation Services

When information is sold to more than one person, it is generally considered an information service. N.J.A.C. 18:24-35.4

Credit reports are an example of an information service, because a report of an individual’s creditworthiness can be purchased by multiple persons.purchased by multiple persons.

Getting severe weather alerts by e-mail or text is an information service, because it can be sold to multiple information service, because it can be sold to multiple persons.

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Services Not ConsideredServices Not ConsideredInformation Services In N.J.Information Services In N.J.

Services generally rendered by attorneys are generally not id d i f ti i b th l

Information Services In N.J.Information Services In N.J.

considered information services, because they are personal in nature.

A lti l li ti i th t i l il bl t R lt A multiple listing service that is only available to Realtors is not considered an information service, because the dominant purpose is to create cooperation among brokers, not to gain access to the information not to gain access to the information.

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ConnecticutConnecticut

T bl i Taxable services

Information services are not per se taxable.

Enumerated taxable servicesEnumerated taxable services

Credit information and reporting

Computer and data processing

Private investigation

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Connectic t (Cont )Connecticut (Cont.) Credit information and reporting S h i i l d b t t li it d t th bli Such services include but are not limited to the assembling

and evaluating of information regarding the credit standing, creditworthiness or credit capacity of any individual, corporation partnership or other type of entity; for thecorporation, partnership or other type of entity; for the purpose of furnishing and disseminating written or oral credit reports.

C t d d t i Computer and data processing

1% tax rate

Lower tax rate may apply to taxable remote services? Lower tax rate may apply to taxable remote services?

Private investigation

Includes engaging in detective or investigative duties, which could be an online service

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RELATED SOURCING ISSUESMartin Eisenstein, Brann & Isaacson

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S i  I  S  A hSourcing Issues: State Approaches• Three sourcing situationsg

• Delivery within the state by a provider situated in the state

• All states treat this as an intra-state sale and subject to tax only in the state of ser icestate of service.

• No other state has nexus with the transaction and could tax the sale transaction and could tax the sale under the Commerce Clause. See Goldberg v. Sweet, 488 U.S. 252 (1989).

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Sourcing Issues: StateApproaches To Interstate Delivery

• Second situation: Customer has access via a terminal connected to a server in another state.

• All states tax 100% of taxable information services delivered in the state, except for Florida’s tax on use of a server located in FL Chicago’s tax on a server located in FL, Chicago s tax on lease of personal property insofar as storage space (but not on data processing/information services), and the SSTA in limited circumstances as the SSTA in limited circumstances as described in a subsequent slide.

• See prior slides re: Florida and See prior slides re: Florida and Chicago

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Sourcing Issues: State Approaches (Cont.)

• Second situation on interstate delivery: The general rule

• See, e.g.. NYS (TSB-A-10(52)S 10/18/10); CT (ADC 12 426 27(d)) TX R l 3 330 d 3 342) Th 12-426-27(d)); TX Rules 3.330 and 3.342). The location of the terminal for access to the service controls

• Issue is the proof of where the service is received

• See Ohio and Texas statutes• See Ohio and Texas statutes

• Goldberg: Is billing address or service address in the state? the state?

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Sourcing Issues: State Approaches (SSTA)

Th SSTA t f ll h (OH R C 5739 033(C))• The SSTA waterfall approach (OH: R.C. 5739.033(C))

• If received (i.e., first use) at the vendor’s place of business, sourced at the vendor’s place of business, p

• If not received at the vendor’s place of business, sourced at the location of receipt known to the vendor

• If neither of the above, then at the address of the customer known from the vendor’s business records

• If none of the above then the address given in the If none of the above, then the address given in the transaction

• If none of the above, from where the service was provided

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Sourcing Issues: State Approachesg pp(Several Locations For Receipt Of Service)

• Third situation: Receipt of service at more than one location

• NY, CT, DC rules are silent on multi-office access.

• In TSB-A-10(52)S 10/18/10, New York permitted apportionment based on the ratio of New York-based employees with access to the number of based employees with access to the number of employees located throughout the U.S. with access.

• This would be consistent with Goldberg and avoid • This would be consistent with Goldberg and avoid multiple-taxation.

.

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Sourcing Issues: State Approaches (Severalg pp (Locations For Receipt Of Service), Cont.

• TX: Rule 3.342(g) provides a more straightforward approach.

• The general theme is for the purchaser to identify the segment of the business that the service benefits and segment of the business that the service benefits, and then issue an exemption certificate to the service provider that bases the exempt amount on a reasonable method of allocation.

• It is important that customer issue exemption certificate and be able to justify, from its books, its calculation.

• A reasonable method of allocation is the ratio of employees with terminals located in TX to the total number of employees with terminalsnumber of employees with terminals.

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Sourcing Issues: State Approaches (Severalg pp (Locations For Receipt Of Service), Cont.

• OH approach: R.C. 5739.033(D)

• If the purchaser provides an exemption certificate, the vendor is relieved of collection responsibility and the vendor is relieved of collection responsibility, and the purchaser may use any reasonable, consistent and uniform method of apportioning purchases by jurisdiction.

• In the absence of an exemption certificate, the vendor and customer can work out a reasonable, consistent and uniform method of apportionment and the customer certifies to the same. Then, this governs.

• If the customer does not certify, the law requires reversion to the waterfall But that provides for uncertaintyto the waterfall. But, that provides for uncertainty.

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AUDIT RISKS AND AUDIT Aaron Young, Reed Smith

PREPARATION TACTICS

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A dit Iss esAudit Issues SubstantiveSubstantive Nexus Taxable service Mixed transaction Value Other taxes Other taxes

Dealing with the auditor Strategy Correspondence Documentation

Resolving the matter Resolving the matter

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S bstanti e A dit Iss esSubstantive Audit Issues

Nexus Software

De minimis access software Affiliate nexus

Statutory guidanceStatutory guidance Click-through nexus In-state vendors Customers

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Substantive Audit Issues (Cont.)( ) Taxable service High-risk services

ASP i id ASP service providers Any remote service Data processingp g Use of common database Use of public records

D fi iti Definition Personal in nature Report provided to others Specifically enumerated

Credit reporting Data processing Data processing Title searches

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S b t ti A dit I (C t )Substantive Audit Issues (Cont.)

Mixed transaction Risk

Entire charge subject to tax Primary function/true object

Specific state guidanceSpecific state guidance De minimis

Specific state guidance Other taxable components

Embedded software TelecommunicationsTelecommunications

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S b t ti A dit I (C t )Substantive Audit Issues (Cont.)

Value Strategy

Do you provide a value computation? Concede issue De minimisDe minimis

Documentation to compute value

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S b t ti A dit I (C t )Substantive Audit Issues (Cont.) Other taxesOther taxes

Embedded software Canned vs. custom

U d ithi t Used within corporate group Telecommunications

Reimbursements Resale “Conduit” test

• New York Article 9 Sect 186-eNew York Article 9 Sect. 186 e• TSB-M-08(4.1)C

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Dealing With The A ditorDealing With The Auditor

Strategy Know the strength of your position Review the documentation Be prepared to address multiple taxation theories

SoftwareSoftware Telecommunications

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D li With Th A dit (C t )Dealing With The Auditor (Cont.) CorrespondenceCorrespondence Control the flow of information

Active vs. passive Strong position statement is vital

Legal position Threaten discoveryy

Freedom of Information Act requests Prepare tax computations N Narrow responses Be aware of additional issues

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Dealing With The Auditor (Cont.)g ( )

Documentation Customer agreements

What is the customer buying? Invoices Invoices

May be misleading Market and advertising

Web site Annual report Marketing materials Marketing materials

Technical documentation Affidavits

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Dealing With The Auditor (Cont.)g ( ) Resolving the audit Appeal procedurepp p

May result in additional leverage Negotiated settlement

Closing agreement Closing agreement Principled vs. unprincipled Refund action

Going forward Future transactions Implications with other taxes Implications with other taxes

Receipts factor sourcing

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