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Sales & Use Tax for Cloud Computing, Software,

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Oct. 26, 2017

Sales & Use Tax for Cloud Computing

Joseph N. Endres, Partner

Hodgson Russ, Buffalo, N.Y.

[email protected]

Laurie Wik, CMI, Senior Tax Director

Alvarez & Marsal Taxand, San Francisco

[email protected]

Hanish Patel, Esq.

Eversheds Sutherland, Atlanta

[email protected]






Notice

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ALVAREZ & MARSAL TAXAND

SALES & USE TAX FOR CLOUD

COMPUTING,

SOFTWARE, APPS, AND OTHER DIGITAL

PRODUCTS AND SERVICES

Strafford Live Webinar

October 26, 2017

Laurie Wik

Senior Tax Director

Alvarez & Marsal Taxand LLC

Introduction

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Digital products - products and services provided or

furnished electronically via the Internet

“Cloud Computing”

Hosted Digital Products e.g., searchable databases,

information services, data processing services

Streaming or Downloadable Digital Goods; e.g. music,

movies

INTRODUCTION

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INTRODUCTION

DIGITAL PRODUCT TYPE Product/Vendor Example

On Premises Application Software TurboTax

App Evernote (mobile App version)

Cloud Computing - SaaS TurboTax Online

Cloud Computing - Platform as a

Service GitHub; eBay

Cloud Computing -Infrastructure as a

Service Dropbox

Data Processing Services

Fidelity National Information Services,

Inc.

Searchable Information Database LexisNexis

"Digital Good" - streaming Music Streaming Service e.g. Pandora

"Digital Good" - downloadable

MP3 Music files, electronically

downloaded books

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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)

WHAT IS CLOUD COMPUTING?

9


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. 3rd parties can access the customer’s

applications/content.


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Infrastructure as a Service (IaaS): Vendor provides

processing, storage, networks, and other fundamental computing resources.


12

Cloud Product Pricing Models

• Pay-Per-Use

• Pay-Per-Gigabyte Used

• Monthly or Annual Subscription

• Pay-Per-User

• Revenue-Share


13

STATE POSITIONS ON DIGITAL PRODUCTS

A transaction may be taxable because the jurisdiction construes the transaction to be : • A sale or lease of prewritten software, i.e. statutory tangible personal property (TPP), via constructive possession

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

• A digital equivalent to traditional TPP

• A digital good or specific digital good

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STATE POSITIONS ON DIGITAL PRODUCTS

A transaction may be taxable because the jurisdiction construes the transaction to be (cont.): •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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STATE GUIDANCE ON CLOUD COMPUTING

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

• Letter Ruling 12-8, Massachusetts Department of Revenue, November 8, 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, June 9, 2017 .

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• 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 not be the true object sought by the customer/user.

TO BE OR NOT TO BE APPLICATION SOFTWARE

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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?)

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Massachusetts Letter rulings in which a hosted product offering was

deemed access to application software considered (cont.):

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

thereof

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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CONTACT INFORMATION

Laurie Wik, Senior Tax Director,

Alvarez & Marsal Taxand LLC, San Francisco, CA

415-490-2354, [email protected]

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© Copyright 2015. Alvarez & Marsal Holdings, LLC. All rights reserved. ALVAREZ & MARSAL®,

® and A&M® are trademarks of Alvarez & Marsal Holdings, LLC.

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

NEXUS GENERALLY

First question: Nexus, what is it?

A. Nexus is a fancy word for “connection.” In order for a state to impose its income or sales taxes on an out-of-state business, there must be a requisite level of connection between the state and the business.

B. Fundamental requirement of both the Due Process and Commerce Clauses of the U.S. Constitution that there be:

“Some definite link, some minimum connection between a state and the person, property, or transaction it seeks to tax”

1. Allied-Signal, Inc. v. Director, Division of Taxation, 504 U.S. 768, 777, 112 S. Ct. 2251 (1992)

2. International Shoe Co. v. Washington, 326 U.S. 310, 66 S. Ct. 154 (1945) (in-state salesmen triggers Washington unemployment insurance tax levy)

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NEXUS GENERALLY

Nexus Defined

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

2. The “Bright Line” Test: Physical Presence

3. Do you have any people or property in the state?

• Offices

• Employees or independent contractors

• Inventories

• Other property – servers and Texas

4. De Minimis Standard? Is a “cookie” property?

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EXPANDING NEXUS

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 (including permanent use as of 1/1/18), 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 (change to digital music as of 9/30/17), PA (taxable as of 8/1/16) SD, TN, TX, UT, VT, WA, WI, WY.

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EXPANDING NEXUS

Physical Presence Under Attack:

• National Conference of State Legislators 1/2016 model nexus legislation

• Direct Marketing Association V. Brohl, No. 12-1175 (10th Cir. 2/22/16). Justice Gorsuch’s concurring opinion in DMA v. Brohl: “…Quill’s very reasoning —its ratio decidendi —seems deliberately designed to ensure that Bellas Hess’s precedential island would never expand but would, if anything, wash away with the tides of time.”

• Justice Kennedy’s concurrence regarding Quill in Direct Marketing Association V. Brohl, US Sup. Ct. No. 13-1032 (3/3/15).

• New Alabama rule for sellers with more than $250K in sales – has collected $39.1 million this fiscal year.

• New North and South Dakota Economic Nexus Laws: annual sales of $100K or 200 separate transactions. Not being enforced while appeals are proceeding. September 13, 2017, the South Dakota Supreme Court upheld the lower court’s holding that the state could not impose a sales tax collection and remittance obligation on sellers that do not have a physical presence in the state. The South Dakota Supreme Court’s ruling is the first by a state’s highest court. The Court observed that S.B. 106 was passed with the intention to challenge the US Supreme Court’s physical presence decisions. It appears that US Supreme Court is the next step.

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EXPANDING NEXUS

Physical Presence Under Attack (continued):

• New Tennessee Rule: “systematic solicitation” and sales that exceed $500K. This rule has been stayed pending court action.

• Massachusetts was going to require internet retailers with more than $500K in sales and more than 100 transactions to collect MA sales tax beginning 7/1/17. This policy has been revoked and the state is said to be working on a formal rule.

• Similar legislation failed to make it out of the Arkansas state House of Representatives.

• Vermont –HB 873 (enacted May 25, 2016) –Establishes economic nexus provisions ($100K in sales or 200 transactions) for sales and use tax purposes, remote seller notification requirements; various effective dates dependent upon either US Supreme Court action or actions by other states

• Wyoming –HB 19 (enacted March 1, 2017) –Adopts an economic nexus standard ($100K in sales or 200 transactions) for sales and use tax purposes, effective 1 July 2017

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EXPANDING NEXUS

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 affiliate nexus, including: AL, AR, CA, CO, CT, DC, FL, GA, IA, ID, IL, KS, KY, LA, MA, MD, ME, MI, MN, MO, NC, ND, NE, NJ, NM, NV, NY, OH, OK, RI, SC, SD, TX, TX, UT, VA, VT, WA, WI, WV, WY

> Several states now impose some sort of Amazon (Click-Through) nexus, including: AR, CA, CT, GA, IL, KS, LA, ME, MI, MN, MO, NC, NJ, NV, NY, OH, PA, RI, TN, VT, WA,

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EXPANDING NEXUS

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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EXPANDING NEXUS

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 – FEDERAL LEGISLATION

NEXUS ISSUES

The Marketplace Fairness Act of 2017

1. On April 27, 2017, a bipartisan group of senators introduced the Marketplace Fairness Act of 2017 (MFA).

2. Similar to previous iterations of the bill introduced in 2013 and 2015, the MFA 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 2017 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 2017 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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NEXUS – FEDERAL LEGISLATION

NEXUS ISSUES The Remote Transactions Parity Act of 2017

1. On April 27, 2017, a bipartisan group of senators introduced the Remote Transactions Parity Act (“RTPA”) of 2017.

2. Similar legislation was introduced in 2015 but failed to be enacted.

3. Like the MFA, the legislation would also create sales and use tax collection obligations for remote sellers, but has some differences and additional provisions.

4. Some key differences from the MFA include a different definition of a small seller. The RTPA has a phased in threshold starting at $10 million in year one, then $5 million, then $1 million. The exemption goes away in the 4th year. In addition to the monetary thresholds, any seller that sells on an electronic marketplace is NOT considered a small seller.

5. A difference from the 2015 version of the bill is an inclusion of a definition of remote seller which specifies when a company is NOT a remote seller which includes physical presences for more than 15 days in a state, leasing or owning real property and using an agent to establish or maintain the market in a state if the agent does not perform business services in the state for any other person during the taxable year.

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SALES AND USE TAX FOR DIGITAL


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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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

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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.

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Strafford - Sales & Use Tax for Cloud Computing, Software, Apps, and Other Digital Products and Services October 26, 2017

Hanish Patel, Esq. Eversheds Sutherland (US) LLP [email protected]

Cloud Computing / Digital Goods

Eversheds Sutherland

Cloud Computing

Current Developments

43


Info. Bulletin #8, Ind. Dep’t of Revenue (Dec. 2016)

Indiana – Revisiting Cloud Computing

─ The Indiana Department of Revenue issued an updated version of Information Bulletin #8, stating that the taxability of cloud computing depends upon facts and circumstances. • Cloud computing taxable if purchaser has possessory or

ownership interest.

• Taxability of IaaS and PaaS depends on the nature of the rights.

─ Previous Information Bulletin, issued November 2011, indicated that cloud computing was subject to tax.

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Revenue Ruling No. 2012-05 ST, Ind. Dep’t of Revenue (Oct. 4, 2016, released Nov. 30, 2016).

Indiana – Application of the Department’s Bulletin

─ The Department held that a cloud computing service was not subject to sales or use tax because customers did not possess, control, or hold title to the software.

─ Instead, the software was downloaded and used by the company to perform functions for creating a virtual server that allowed customers to test their own services and applications.

45


Gen. Info. Letter ST 16-0033 GIL, Ill. Dep’t of Revenue (Aug. 17, 2016)

Illinois – API Provided Through Cloud May Be Taxable

─ The Department clarifies that computer software provided through a cloud-based delivery system that is only accessed remotely is not taxable.

─ However, if a customer is provided an application program interface (API) or a remote access agent to enable the customer to access the provider's network and services, such a transfer may render entire charge subject to tax, unless the transfer qualifies as a nontaxable license of computer software.

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Taxpayer Info. Ruling LR16-011, Ariz. Dep’t of Revenue (Sept. 23, 2016)

Arizona – Recurring Payment Provider Not Taxable

─ A subscription billing and recurring payment provider was not taxable under the personal property rental classification for transaction privilege tax (TPT) purposes.

─ Taxpayer’s clients uploaded their customer information to the taxpayer’s server through the Application Program Interface (API), which is cloud-based, and were able to access transaction data through a web-portal.

─ Although the Department has frequently ruled that using remotely hosted software constitutes a lease of tangible personal property, the Department found that the clients did not have sufficient control and use of the API and portal to constitute a rental.

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Letter Ruling 16-12, Tenn. Dep’t of Revenue (Dec. 16, 2016)

Tennessee – Nontaxable Document Management Solutions

─ The Department ruled that a taxpayer’s charges for web-based document management and compliance solutions are not taxable.

─ Taxpayer’s clients have the ability to upload, store, manage, and view digital copies of their documents and create information reports on the taxpayer’s cloud-based storage database.

─ Although remote web-based access to software is taxable, the Department found that the true object of the transactions was data storage services and access to the web-based portal was incidental.

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In the Matter of the Petition of RetailData, LLC, No. 825334 (N.Y. Div. of Tax App. 2016)

New York – Taxable Retail Pricing Information Services

─ “Competitive price audits” did not constitute the nontaxable furnishing of information which is personal or individual in nature and which is not substantially incorporated in reports furnished to other persons.

─ The Tribunal’s decision turned on the source of the raw data rather than the existence of a customized request from the customer.

49


Private Letter Ruling 15-008, Utah State Tax Comm’r (July 20, 2016)

Utah – Taxable Bundled Dashboard and Website

─ Taxpayer’s fee for a distributor dashboard and personal website is taxable, unless the fee for the dashboard is separately stated.

─ Taxpayer sold nutritional, dietary, and skin care products through a network of independent distributors.

─ Dashboard: • The distributor dashboard granted the taxpayer’s distributors online

access to their customers and down-line distributors. Similar information could be received by phone or printed statement.

• The Commission found that though there was use of software, the essence of the transaction was nontaxable information access.

─ Personal website: • The personal website could be shared with a distributor’s customers

and down-line distributors. • The Commission found that the sale of a personal website was

taxable as prewritten software because these websites were not individual sites for each distributor, but customizations of a standard website.

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Private Letter Ruling 142730026, Tex. Comptroller of Public Accounts (Jan. 31, 2017)

Texas – Nontaxable Insurance Tracking Service

─ Taxpayer’s insurance coverage tracking service was held as a nontaxable professional service.

─ Taxpayer’s customer performed underwriting services and taxpayer’s coverage tracking service included monitoring insurance policies, determining the sufficiency of coverage, online and telephone access to borrowers, and providing the lender with online access to standard and customized reports.

─ The Comptroller found that the service was not a taxable data processing service because the taxpayer used professional knowledge to determine the sufficiency of insurance coverage and any data processing was incidental to the professional service.

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Digital Goods

The Current Landscape

52


Overview of Business Models

─ Sellers of retail consumer digital products, including music, movies, books and software-related products like video games

─ Digital retailers sell products under various channels, terms and conditions • Delivery methods: streaming or cloud-based, downloads or

combination thereof

• Rights of use transferred: permanent rights of use (purchases) or less than permanent (rentals)

• Payment streams: À la carte (transactional) or subscription to a library of content

─ Direct-to-consumer issues

─ Facilities-based vs. over-the-top issues

53


Transaction Tax Considerations

─ Nexus • Similar to e-commerce retailers, but unique considerations for

rentals in states that characterize digital products as TPP

─ Marketplace Collection • Legislation – Minnesota, Washington

• Controversy – South Carolina

• Other theories

─ Characterization of Transaction • “Product transferred electronically,” “specified digital product” or

“digital service”?

• TPP?

• Utility service?

• Telecommunications service?

• Pay television service? Linear vs. non-linear?

• Taxable service (e.g., CT computer and data processing)?

54


Transaction Tax Considerations

─ Tax Consequences of Characterization (or Mischaracterization) • Bundled transactions

• Sourcing Sometimes depends on the seller (MTSA)

Documentation

• Exemption Certificate Issues • Resales or component part exemptions

• MPU certificates

• Trials or “free samples” and use tax accrual

─ …and Non-Tax Consequences • Communications service provider

• False Claims Acts/Qui Tam

• Class actions

55


Taxation of Digital Goods Overview

─ States continue to enact legislation expanding their sales taxes to digital goods and services and cloud-based goods and services. • There continues to be significant differences from state to state on how such

goods and services are taxed.

• Some states have alternative tax regimes where application of their taxes to such goods and services is unclear.

─ States also continue to evaluate their current authority to tax e-commerce services (e.g., cloud computing services, etc.). • States attempt to tax such goods and services by applying existing tax laws

related to the taxation of software or other tangible goods. Any attempt to include digital commerce in the tax base should be done legislatively to clearly identify the goods and services the state is seeking to tax.

─ A few states have specifically exempted digital goods/services or cloud computing services from taxation.

56


Digital Goods

Current Developments

57


Developments – States Ripe for Reform?

─ Alabama • Multi-year dispute with the DOR

• Seems to have calmed down with the new Governor/Commissioner

• DOR no longer willing to pursue on audit the rental tax on streaming video or VOD?

• Legislative issue?

─ Louisiana • Ongoing budget issues, previous attempts by LDR (and parishes)

to tax digital goods, and study committee recommendations create likelihood of base expansion in 2019 revenue session.

58


Developments – States Ripe for Reform?

─ Kentucky • In 2016, the Franklin County Circuit Court affirmed the Kentucky

Board of Tax Appeals decision in Finance and Administration Cabinet, Kentucky Department of Revenue v. Netflix, Inc. and held that Netflix’s streaming service was not a “multichannel video programming service” subject to the Gross Revenues Tax, Excise Tax and School Tax.

• Parties settled in early 2017, and DOR removed assessments against other OTT providers. However, it is still unclear if all OTT services will be treated equally.

59


Developments – Administrative Rulings

─ Florida • Rental of digital video is a “video service” and subject to CST, but the

purchase of digital video is sale of an “information service” not subject to CST.

• Fla. TAA Nos. 14A19-005 (Dec. 18, 2014) and 10A-031 (June 28, 2010)

─ Iowa • Streaming service is taxable “pay television.” In the Matter of

Amazon Services LLP, Iowa Dept. of Revenue, 2017-240-2-0000, 12/28/2016.

─ South Carolina • Charges paid by customers to stream content such as television

programs, movies, music and other similar media directly to their devices to watch or listen to these types of media on their own schedule instead of having to watch at a specific time are subject to the state’s sales and use tax as taxable communications services. South Carolina Revenue Ruling No. 16-5, 07/06/2016.

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Developments – Administrative Rulings

─ Pennsylvania • Effective August 1, 2016, the following digital and/or electronic

content (including updates and support) is taxable TPP: (1) video, (2) photographs, (3) books and any otherwise printed matter, (4) applications (commonly known as apps), (5) games, (6) music or any other audio (including satellite radio service), and (7) any other taxable tangible personal property that is delivered electronically or digitally, streamed or accessed. 72 PSA § 7201(m)(2).

• Interpreting the 2016 legislation, the DOR ruled that a vendor’s sales of subscription-based, information retrieval products were taxable digital products – “electronic access to TPP.” Pennsylvania SUT 17-002, May 17, 2017.

• Tax applies regardless of whether the content is delivered electronically or digitally, streamed or accessed, and whether purchased singly, by subscription or in any other manner. Id.

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Developments – Legislative and Policy

─ 2017 Legislative Activity • Arkansas (base expansion)

• Maine (base expansion)

• West Virginia (base expansion)

• Arizona (local)

• Florida (local)

─ Study Groups • Arizona Committee to Discuss Digital Goods

• Colorado Digital Goods Work Group

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Local Concerns

─ Chicago – Labell case

─ California UUTs

─ Louisiana parishes

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Digital Goods

Policy Discussion

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NCSL Executive Task Force on State and Local Taxation Principles and Resolutions

─ Cloud-Based Services (August 2012) • To ensure that taxation is equitable, states should: Establish consistent

sourcing regimes that recognize the special challenges to avoid multiple taxation; and not impose discriminatory taxes on cloud-based services.

• States should base their decisions on the nature of the service and not on the nature of the provider.

• Avoid imposing tax through administrative action.

─ NCSL Supports Passage of the Federal Digital Goods and Services Tax Fairness Act (August 2016) • The National Conference of State Legislatures urges Congress to pass the

Digital Goods and Services Tax Fairness Act, in conjunction with or after consideration of the Remote Transaction Parity Act, to establish a national framework providing certainty and uniformity for state and local governments in the taxation of digital goods and services, while protecting consumers from multiple and discriminatory taxation and supporting the continued growth of the digital economy.

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NCSL Policy Directives and Resolutions

─ Standing Committee on Communications, Financial Services and Interstate Commerce • Government should not choose winners and losers of the digital

age.

• Government tax systems should regulate and tax communications and digital commerce in a competitively neutral and non-discriminatory manner.

• Video policies should assure that like services are treated alike, investment is encouraged and services are taxed in a non-discriminatory manner.

• Franchise fees should be tied to actual costs to use the rights of way and be collected by one central agency per state.

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NCSL Resolution – Next Steps

─ Issue: • The Resolution supporting the Digital Goods and Services Tax

Fairness Act was up for renewal at the August meeting.

• The Act is not yet introduced in the 115th Congress.

─ Solution: • NCSL adopted a resolution that would allow support of legislation

when it is introduced in this Congress if it: • Embodies the NCSL principles as outlined in the last resolution;

• Follows the principles for taxation of cloud-based services; and

• Does not pick winners and losers based on who provides the same service.

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Federal Legislation 114th Congress

─ H.R. 1643/S.851 (114th Congress) The Digital Goods and Services Tax Fairness Act: • Provides a framework for the taxation of digital goods and services.

• Restricts taxation of a digital good or service to taxation by a state or local jurisdiction whose territorial limits encompass a customer tax address, as defined by this Act.

• Provides a “bundling rule” for the taxation of digital goods and services transactions that are aggregated and not separately stated from other goods and services.

• Prohibits multiple and discriminatory taxation of digital goods and services.

• Excludes from the definition of “digital service” a service that is predominantly attributable to the direct, contemporaneous expenditure of live human effort, skill or expertise, a telecommunications service, an ancillary service, an Internet access service, an audio or video programming service, or a hotel intermediary service.

• Includes pay-per-view video services and video on-demand in the definition of a digital service.

• Supports the continued growth of the digital economy.

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Federal Legislation 115th Congress

─ The Digital Goods and Services Tax Fairness Act is not yet introduced in the 115th Congress. • The Sponsors are working with the communications industry to

address concerns the industry has with the prior version.

─ Communications Industry Concerns • Because of changes in technology, the growth of over-the-top

video services, and the current efforts of some state and local governments to tax digital goods and services because of the nature of the provider, the communications industry believes that the bill needs to be updated. Specific areas include:

• Updating and clarifying definitions of digital goods and services to account for the growth of over-the-top video services.

• Ensuring that all over-the-top video services are treated in a competitively neutral manner regardless of the provider.

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Sales & Use Tax for Cloud Computing, Software, …media.straffordpub.com/products/sales-and-use-tax-for...SALES & USE TAX FOR CLOUD COMPUTING, SOFTWARE, APPS, AND OTHER DIGITAL PRODUCTS