sales and use tax on digital products and...

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Sales and Use Tax on Digital Products and ServicesManaging Multi‐State Compliance Challenges for Vendors and Customers

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

THURSDAY, MARCH 1, 2012

Today’s faculty features:

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

Laurie Wik, Senior Manager, Deloitte Tax, San Jose, Calif., g , , ,

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

Charles Kearns, Atty, Sutherland Asbill & Brennan, Washington, D.C.

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S l d U T Di it l P d t Sales and Use Tax on Digital Products and Services Seminar

March 1, 2012

Martin Eisenstein, Brann & [email protected]

Laurie Wik, Deloitte [email protected]

Charles Kearns, Sutherland Asbill & Brennan [email protected]

Today’s Program

Background Issues With Sales Tax And Digital Products[Laurie Wik]

Special Issues With Cloud Computing

Slide 7 – Slide 17

Slide 18 – Slide 33Special Issues With Cloud Computing[Martin Eisenstein]

Special Issues With Groupon-Type Coupons[Laurie Wik]

Slide 18 Slide 33

Slide 34 – Slide 35[Laurie Wik]

Problematic Digital Products And Services[Martin Eisenstein]


Practical Issues Faced By Corporate Taxpayers[Martin Eisenstein, Laurie Wik and Charles Kearns]

Meaningful Developments At The SSTP


Slide 68 – Slide 76g p[Charles Kearns]

BACKGROUND ISSUES WITH Laurie Wik, Deloitte Tax

BACKGROUND ISSUES WITH SALES TAX AND DIGITAL PRODUCTS

Agenda For This Section

Sales tax and digital products: Who, what, where, why and when

Sales tax nexus developments for sellers

Sellers and purchasers: The Great Divide

Copyright © 2012 Deloitte Development LLC. All rights reserved.5

Who, What, Where Why And When

• Digital products: Products and services provided or furnished electronicallyy

• Popular terms include: ASP, SaaS, hosted, cloud computing, Web-enabled, Web-based

• Examples of consumer digital products

• Movies, songs, video games, premium-level subscriptions to online g g p psocial networks


Who, What, Where, Why And When (Cont.)

Examples of business digital products

• Payroll solution

• Customer relationship management (CRM)

• Virtual call center platform

• Help desk software• Help desk software

• Business credit information database



Digital products may be subject to sales/use tax because the transaction is or involves the sale of:

• Software

• Data processing, data storage or canned informationp g g

• Digital equivalent to a traditional article of tangible personal property, a.k.a. digital goods



To which state is the transaction sourced?

Software applications or digital goods: Generally to the state where accessed/downloaded by “user”

• Hosted services

– “Benefit received”

“P i i l l f b i ”– “Principal place of business”

• Global contracts often do not recognize users in multiple jurisdictions.


Sales Tax Nexus Developments For Sellers

The “click-through” nexus law

N Y k t d l i 2008 t t b tt bl ti fNew York enacted a law in 2008 to create a rebuttable presumption of agency sales tax nexus for vendors with certain third-party e-commerce relationships, including:

V d th t li it l th h “ i t " ith t t– Vendors that solicit sales through “associates" programs with state residents via Web site link referrals

– When a commission or other consideration is paid to a state id t f th l f lresident for the sale or referral

– The vendor has gross receipts of more than $10,000 from New York customers as a result of the referrals.


Click-Through Nexus Legislation

WA

MEAK

MT ND

IDCT

MA

MD

IAMI

MN

MT

WYNY

PA

OR

NV

NH

OHRI

VT*

NJ

SD

NE

WI

AZNM

DE

AR

CO

MD

CA **KS

IL

MONC

SC

VAWV

OK

NVUT

TN

KY

IN

DC

LA

AL

HI

FL

GA

TX

MSAs of Jan. 10, 2012

`

* Vermont only in effect if 15 other states enact

Click-Through Ne s Stat te

Click-Through Nexus Legislation

Click-Through N St t t

enact

** California’s was stayed until 2012, subject to passage of a federal bill.

Click-Through Nexus

Copyright © 2012 Deloitte Development LLC. All rights reserved.

Nexus StatuteEnacted

Nexus LegislationUnder Consideration

Nexus StatuteRejected in 2010/2011

Authority AssertedWithout Specific

Legislation 1

1 BNA, Survey of State Tax Departments (2010). 10

Sales Tax NexusStates with guidance about in-state use of third-party servers include:

• California

• Massachusetts

• New Mexico

• New York

Ohio• Ohio

• Pennsylvania

• Vermont

• Washington


• Texas

11

Sellers And Purchasers: The Great Divide

States typically hold digital products purchasers responsible for tax when the vendor has not charged it. Sellers may not collect because:

• Seller may not have established nexus for sales and use tax purposes in the purchaser’s state.• Seller may have established nexus for sales and use tax purposes but• Seller may have established nexus for sales and use tax purposes but does not realize it or have the systems to handle sales tax collection.• Seller may have established nexus for sales and use tax purposes but has not researched or does not understand proper taxability of the digitalhas not researched, or does not understand, proper taxability of the digital product offering.• Seller may not be required to collect tax when the Streamlined

Sales Tax Project sourcing hierarchy is applicableSales Tax Project sourcing hierarchy is applicable.


Legislation In Congress

Federal legislation to require use tax collection by remote sellers:

g g

Federal legislation to require use tax collection by remote sellers:

The Main Street Fairness Act (see also S.1452), H.R. 2701

The Marketplace Equity Act, H.R. 3179

The Marketplace Fairness Act, S. 1832


SPECIAL ISSUES WITH CLOUD Martin Eisenstein, Brann & Isaacson

SPECIAL ISSUES WITH CLOUD COMPUTING

Cloud Computing: What Is It? *Cloud Computing: What Is It?

• Amalgam of computer services• Amalgam of computer services – Provider owns or leases equipment and software

from third parties.N ll i t i d i d t t• Normally maintained in a data center

– Cloud computing customer contracts to access host equipment and/or software and/or to obtain related

i f th id d dservices from the provider, on demand on a usage/subscription fee basis.

– Access is usually over the Internet through any of a b f l tf ( bil d i l tnumber of platforms (mobile devices, laptops,

tablets, desktops)/

* See reference materials, which contains the following ti l L t th S hi I Th A f Cl darticle, Let the Sunshine In: The Age of Cloud

Computing, State Tax Notes, Nov. 28, 2011

19

Cloud Computing: What Is It? (Cont.)Cloud Computing: What Is It? (Cont.)

• Types of service• Types of service– IaaS: Infrastructure as a service

• Access to data storage and computing resources• E.g., Amazon web services (“elastic compute cloud …

elastic block storage”)SaaS: Software as a service (e g Salesforce com)– SaaS: Software as a service (e.g., Salesforce.com)

• Access to software and/or applications• Similar to application services• Software remains on provider’s equipment and is not

downloaded or physically delivered on CDs or DVDs.

20

Cloud Computing: What Is It? (Cont.)Cloud Computing: What Is It? (Cont.)

– PaaS: Platform as a service• Use by customer of customer’s created or owned applications on

provider’s software (languages, libraries, tools)• E.g, Google app. engineg, g pp g• May be a hybrid of SaaS and IaaS, but treated most often as SaaS

as true object– Hosting and managing e-mailHosting and managing e-mail– Miscellaneous services such as privacy protection or hosting Web page

or virtual private network within the cloud

21

Drivers Of TaxabilityD t i ti Th F kDetermination: The Framework

• Characterization of the service– Is it tangible personal property or a taxable service?– Statutory/rule treatment

• Sourcing– Where is the host located?

h i h i d d h d i b– Where is the service used, and what documentation must be provided to provider?

22

Drivers Of TaxabilityDetermination: The Framework (Cont.)

• State statutes re: whether sale or lease takes placeState statutes re: whether sale or lease takes place

• Bundled charge or separate charge by service

• Pertinent exemptions

• Nexus for customers and providers

• Resale exemptions for providersesa e e e pt o s o p ov de s

23

Taxability Test By Service: IaaSTaxability Test By Service: IaaS

• Characterization– Data processing or computer service

• TX, DC, CT and OH.– Lease or rental of computer space if provider computer located p p p p

there• FL • Storage: Chicago (lease tax) and UT (Utah Op No 06-Storage: Chicago (lease tax) and UT (Utah Op. No. 06

004).– WA statute (digital automated services): Unclear at this point

General services statute: NM SD HI– General services statute: NM, SD, HI

24

Taxability Test By Service: IaaS (Cont )Taxability Test By Service: IaaS (Cont.)

• Sourcing– Where benefit received

• TX, WA, OH, CT, , ,• Chicago re: data processing terminals

– Where service provided• FL Chicago UT• FL, Chicago, UT

– Where first use occurs• WA: At host’s or customer’s terminals?

25

T bilit T t B S i S S/P STaxability Test By Service: SaaS/PaaS

• Characterization– As tangible personal property: 11 states do not tax pre-written

software delivered electronically.– Only a handful of states have dealt with taxability of SaaS and App

service provider services.• Generally treated under a true object test as pre-written y j p

software delivered electronically – CT treats it as a computer service.– TX treats it as a data processing service See e g Letter Ruling NoTX treats it as a data processing service. See, e.g. Letter Ruling No.

200401223L– SC treats it as a communications service.

26

Ta abilit Test B Ser ice SaaS/PaaS (Cont )Taxability Test By Service: SaaS/PaaS (Cont.)

• Sourcing• Sourcing– To state where software is hosted and not where used

• KS: Private letter rulings 0-2010-005, P-2007-006, P-2011-010

• UT: Private Letter Ruling 08-12• PA: Legal Letter Ruling No SUT 10 005• PA: Legal Letter Ruling No. SUT-10-005

– To state where used/accessed• NY: TSB-A-11(17)S and TSB-A-09(44)S• TX, OH, DC, WA, NM and HI.

– SC taxes only intrastate communications.

27

Taxability Test By Service: SaaS/PaaS (Cont )Taxability Test By Service: SaaS/PaaS (Cont.)

• Has a sale taken place of SaaS treated as tangible personalHas a sale taken place of SaaS treated as tangible personal property?– Expansive definition

• NY: Sale is “any transfer of title or possession or both andNY: Sale is any transfer of title or possession or both and any lease or license to use” and a right to use constitutes a license to use. 20 N.Y. Comp. Codes R and Regs. Sect. 526.7(e)(4)(iii)

N d fi iti– Narrow definition• UT: Sale includes transfer of possession, but right to

access to software on the Internet is not transfer of possession Private Letter Ruling 06-004possession. Private Letter Ruling 06-004

• AZ (Ariz. Reg. 15-5-154.B), IL 86 IL Admin. Code Sect. 130.1935(a)(1) and RI (RI Code R. SU11-25.7(2) may also restrict taxability, because SaaS not deemed a sale.y

28

Taxability Test By Service:Web Hosting

T bj ?• True object test governs?– Is the object a service or tangible personal property?

• Treated similarly to IaaS if object is service, unless pure management services

• Treated as SaaS if object is software program• Exempt under most state statutes. See, e.g. Wash. Rev. Code §p , g §

82.04.192(3)

• Is there an exemption under the ITFA?Is there an exemption under the ITFA?– See next slide

29

Other Issues Regarding Taxability• ExemptionsExemptions

– 20% data processing exemption in TX– Use in manufacturing, R & D

CT d d t t f 1%– CT reduced tax rate of 1%– CT data processing/IT exemption– ITFA (Sect. 1105 definition of Internet access)

• Services packaged with access to the Internet, such as a home page, e-mail and instant messaging, video clip, and personal electronic storage capacity

• Services described in bullet above that are not packaged with Internet access

• Any other products and services, even if they utilize Internet protocol, are not exempt Internet access.

30

O h I R di T bili (C )Other Issues Regarding Taxability (Cont.)

• Nexus issues– Does a provider have nexus in state of user?

• Unlikely as a result of mere provision of service. Quill Corp. y p Q pv. North Dakota, 504 U.S. 298 (1992)(physical presence test)

– Does a user have nexus in state from which service is provided?• Generally not physical presence but does provider host WebGenerally not physical presence, but does provider host Web

page and take orders for products?

• Note Texas safe harbor Texas Tax Code Ann Sect 151 108(b)• Note Texas safe harbor Texas Tax Code Ann. Sect. 151.108(b)– Amazon click-through nexus statutes are not relevant, because the

provider does not provide a link to user’s Web page for a fee or commissioncommission.

31

Oth I R di T bilit (C t )Other Issues Regarding Taxability (Cont.)

• Sale for resale for providers– Depends on characterization of equipment usedp q p

• E.g., FL, UT and Chicago treat IaaS as a lease of tangible personal property; thus, acquisitions should be treated as a resale of property.p p y

• SaaS and PaaS as resale of software

32

Other Issues Regarding Taxability (Cont )Other Issues Regarding Taxability (Cont.)

• Billing– Should there be a bundled fee or a fee by type of service?

• SSTA may not permit unbundling as it relates to cloud computing.

• Some state statutes may permit– 34 Texas Admin. Code Sect. 3.330(d)(2)

• Ideal is to break up fee into separate charges by service– Into IaaS, SaaS/PaaS and other servicesInto IaaS, SaaS/PaaS and other services

– Characterization on invoice is important

33

SPECIAL ISSUES WITH Laurie Wik, Deloitte Tax

GROUPON‐TYPE COUPONS

Prepaid Discount VouchersCalifornia issued comment on the taxation of deal-of-the-day instruments in its September 2011 Tax Information Bulletin.

TSB-M-11(16)S, Taxpayer Guidance Division, New York Department of Taxation and Finance, Sept. 19, 2011

WORKING DRAFT FOR PRACTITIONER COMMENT 9/16/11WORKING DRAFT FOR PRACTITIONER COMMENT 9/16/11, Application of Sales Tax to Sales and Redemption of Third Party Coupons, Massachusetts Department of Revenue


PROBLEMATIC DIGITAL Martin Eisenstein, Brann & Isaacson

PRODUCTS AND SERVICES

Taxability Of E-Books, Digital Audio Works(M i ) S ft A d Di it l Vid(Music), Software And Digital Video

State Electronic Books Taxable?

Digital Music Taxable?

Digital Canned Software Taxable?

Digital Video Taxable?

AL Yes Yes Yes Yes

AK n/a n/a n/a n/a

AZ Y Y Y YAZ Yes Yes Yes Yes

AR* No No No No

CA No No No No

CO Yes Yes Yes Yes

CT Yes, at a reduced rate of 1%

Yes, at a reduced rate of 1%



DE n/a n/a n/a n/a.

DC Yes Yes Yes Yes

* Per SSTA taxability matrix appendix

37

Taxability Of E-Books, Digital Audio Works(M i ) S ft A d Di it l Vid (C t )(Music) Software And Digital Video (Cont.)State Electronic Books

Taxable?Digital Music

Taxable?Digital Canned

Software Taxable?Digital Video

Taxable?FL No No No No

GA* No No No No

HI Yes Yes Yes Yes

ID Yes Yes Yes Yes

IL No No Yes No

IN* Yes Yes Yes YesIN Yes Yes Yes Yes

IA* No No No No

KS* No No Yes No

KY* Yes Yes Yes Yes

LA Yes Likely Yes Yes

38





Taxable?ME Yes Yes Yes Yes

MD No No No No

MA No No Yes No

MI* No No Yes No

MN* No No Yes No

MS Yes Yes Yes YesMS Yes Yes Yes Yes

MO No No No No

MT n/a n/a n/a n/a

NE* Yes Yes Yes Yes

NV* No No No No

39





Taxable?NH n/a n/a n/a n/a

NJ* Yes Yes Yes Yes

NM Yes Yes Yes Yes

NY No, subject to specific conditions described at

right

Generally, products transferred

electronically are not taxable unless they are

taxable software or otherwise qualify as

Yes No

otherwise qualify as taxable TPP.

NC* Yes Yes Yes Yes

ND* No No Yes No

OH* No No Yes NoOH* No No Yes No

OK* No No No No

OR n/a n/a n/a n/a

PA No No Yes No

40





Taxable?RI* No No Yes No

SC No No No No

SD* Yes Yes Yes Yes

TN Yes Yes Yes Yes

TX* Yes Yes Yes Yes

UT* Yes Yes Yes Yes

VT* Yes Yes Yes Yes

VA No No No No

WA* Yes Yes Yes YesWA* Yes Yes Yes Yes

WV* No No Yes No

WI* Yes Yes Yes Yes

WY* Yes Yes Yes Yes

41

Taxability Of MagazinesTaxability Of Magazines

State Treatment of Digital S b i ti /Si l EditiSubscriptions/Single Editions

AL All digital magazines taxable

AK n/a

AZ All digital magazines taxable

AR All digital magazines exempt

CA All digital magazines exempt

CO All digital magazines taxable

CT All digital magazines taxable at 1%

DE n/aDE n/a

DC All digital magazines taxable

FL All digital magazines exempt

42

Taxability Of Magazines (Cont.)Taxability Of Magazines (Cont.)


GA All digital magazines exemptHI Digital subscriptions to magazines arguably

exempt, based on exemption for subscriptions delivered by second class mail; digital single editions taxable

ID Digital subscriptions taxable if less than $0.11/issue; all digital single editions taxable

IL All digital magazines exemptIN All digital magazines likely taxableIA All digital magazines exemptg g pKS All digital magazines exemptKY All digital magazines taxableLA All digital magazines taxableME All digital magazines issued at intervals notME All digital magazines issued at intervals not

exceeding 3 months exempt

43

Taxability Of Magazines (Cont.)Taxability Of Magazines (Cont.)


MD All digital magazines exempt

MA All digital magazines exempt

MI All digital magazines exempt

MN All digital magazines exempt

MS Digital subscriptions exempt; digital single editions likely exempt

MO All digital magazines exempt

MT n/a

NE All digital magazines likely taxable

NV All digital magazines exempt

NH n/a

44

Taxability Of Magazines (Cont.)Taxability Of Magazines (Cont.)State Treatment of Digital

Subscriptions/Single EditionsNJ All digital magazines exemptNM All digital magazines taxableNY All digital magazines exempt, if meets

definition of electronic periodical under statedefinition of electronic periodical under state law

NC All digital magazines taxableND All digital magazines exemptOH All digital magazines exempt, unless

provided to a consumer for use in its business

OK All digital magazines exemptOK All digital magazines exemptOR n/aPA Digital subscriptions exempt; digital single

editions probably exemptp y pRI Digital magazines exempt

45

Taxability Of Magazines (Cont.)Taxability Of Magazines (Cont.)State Treatment of Digital

Subscriptions/Single Editionsp gSC Digital magazines exemptSD Digital magazines taxableTN Digital magazines exemptTX Digital subscriptions arguably exemptTX Digital subscriptions arguably exempt,

based on exemption for subscriptions delivered by mail; digital single editions taxable

UT Digital magazines taxableUT Digital magazines taxableVT Digital magazines exemptVA Digital magazines exemptWA Digital magazines taxableWV Digital magazines exemptWI Digital subscriptions exempt if issued at

intervals not exceeding 3 months; digital single editions taxableg

WY Digital magazines exempt

46

Data ProcessingData Processing

• TX, CT, OH and DC tax• Includes storage, processing of information and retrieval of information• Examples include:

– Entry of data – Maintenance of employee work timeMaintenance of employee work time– Preparing payroll

• Who operates the computers?TX ( bl ) OH ( bl ) if d b– TX (taxable) vs. OH (non-taxable), if operated by customers

47

I f ti S iInformation Services

• Right to access content contained in a common data base, vs. access to software or information stored by provider on behalf of userE l W tl L i D & B t• Examples: Westlaw, Lexis, D & B reports

• Note common definition: Same or similar information can be sold to others, even though each user may, through a data base inquiry, use a diff t h tdifferent search term.

• Data are not owned by user and are not personal to user.

48

Information Services (Cont )Information Services (Cont.)• Many big states (including FL, OH, NY, NJ, TX and CT) impose

tax, with varying exemptions and rates.tax, with varying exemptions and rates.– Texas exempts 20%.– CT tax is reduced rate of 1%.

B t t th t MA d th t t d t t S MA• But, note that MA and many other states do not tax. See, e.g. MA Letter Ruling 11-2– Internet based service can be exempt under ITFA.

• Varying interpretation of term and taxability– NY: Broad interpretation includes individual reports– FL: More narrow interpretation excludes furnishing of

information of a personal nature– NY taxes information provided electronically; FL does not.– As of 3/1/12, NY updated exemptions for electronic news , p p

services and electronic periodicals (TSB-M-12(1)S.).

49

What Is A Communication Service?What Is A Communication Service?• In general, a communication service is the transmission of signals,

i d d h i f i b i Iimages, sounds, data or other information between two points. In general, it includes related services such as voice mail.

• FL statute (Sec. 202.11(2)) as an example:– Taxable communications services means the “transmission,

conveyance, or routing of voice, data, audio, video, or any other information or signals ... to a point or between or among points ... [ d i l d ] i li i h d[and includes] computer processing applications that are used to act on the form ... of the content for purposes of the transmission,” but the term excludes Internet access service, e-mail and similar computer servicescomputer services.

• The emphasis is on the transmission of data, not on the content.

50

How Sourcing Becomes ProblematicHow Sourcing Becomes Problematic

Th i it ti• Three sourcing situations

1) Delivery within the state by a provider situated in the state

2) Customer has access via a terminal connected to a server in another state.

3) Receipt of service at more than one location

51

How Sourcing Becomes Problematic (Cont )How Sourcing Becomes Problematic (Cont.)

1) D li ithi th t t b id it t d i th t t1) 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 serviceonly in the state of service.

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

52

Sourcing Issues: StategApproaches To Interstate Delivery

2) C t h i t i l t d t i2) Customer has access via a terminal connected to a server in another state.

• All states tax 100% of taxable services delivered in theAll states tax 100% of taxable services delivered in the state, except for FL’s tax on use of a server located in FL; Chicago’s tax on lease of personal property insofar as storage space (but not on data processing/information

i ) d SSTA i li i d i (services); and SSTA states in limited circumstances (as described in a subsequent slide).

53

Sourcing Issues: State Approaches (Cont.)Interstate delivery: The general rule– Interstate delivery: The general rule

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

• Issue is the proof of where the service is received

• OH and WA permit use of billing address as a proxy of where the service is used, in the absence of a certificate of use. Ohio Rev. Code Sec. 5739.033

• Test under Goldberg: Is billing address or service address in the state, and does service originate or terminate in state?

54

Sourcing Issues: State Approaches (SSTA)

• The SSTA waterfall approach (OH: R.C. 5739.033(C))• If service received (i.e., first use) at the vendor’s place of

business, sourced at the vendor’s place of business• 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 sourced at the address of the

customer, as known from the vendor’s business records• If none of the above, then the address given in the transaction, g• If none of the above, from where the service was provided

55

S i I St t A hSourcing Issues: State Approaches(Several Locations For Receipt Of Service)

3) Receipt of service at more than one location3) Receipt of service at more than one location

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

S A 10( 2)S 10/18/10 k i d• 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 service to the number of employees located throughout the U.S. with access.

• In TSB-A-03(5)S, 1/31/03, acceptance of certificate relieved a provider of liability for non-NY employees, so long as provider obtains detailed information regarding address of employees of customer. Provider was still liable for tax for NY based employeesfor tax for NY-based employees.

• This is consistent with Goldberg and avoids multiple-taxation.

56

S i I St t A h (S lSourcing Issues: State Approaches (SeveralLocations For Receipt Of Service), Cont.

TX R l 3 342( ) id i h f d h• 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, then issue

ti tifi t t th i id th t b than exemption certificate to the service provider that bases the exempt amount on a reasonable method of allocation.

• Provider liable for tax for TX portion

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

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

57

S i I St t A h (S lSourcing Issues: State Approaches (SeveralLocations For Receipt Of Service), Cont.

• OH approach: R.C. 5739.033(D)• If the purchaser provides an exemption certificate, then the

d i li d f ll ti ibilit f ti tvendor is relieved of collection responsibility for entire tax; 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 andIn the absence of an exemption certificate, the vendor and customer can work out a reasonable, consistent and uniform method of apportionment. If the customer certifies to the same, then this method governs, and the provider pays tax on h OHthe OH percentage.

• If the customer does not certify, the law requires reversion to the SSTA waterfall approach. But, that provides for uncertaintyuncertainty.

58

Sourcing Issues: Multi-State Uses

• Use of exemption certificates

WA (WA R C d S 82 08 02088) i• WA (WA Rev. Code Sec. 82.08.02088) permits provider to obtain an exemption certificate from the user for services used outside of the state, if the customer accepts responsibility for payment p p y p yof the tax due on services used in the state.

59

Martin Eisenstein, Brann & IsaacsonLaurie Wik, Deloitte Tax

PRACTICAL ISSUES FACED BY

Laurie Wik, Deloitte TaxCharles Kearns, Sutherland Asbill & Brennan

CORPORATE TAXPAYERS

Hypotheticals(From Brann & Isaacson)

• Cloud service provider with data centers in Texas but with offices in New Jerseywith offices in New Jersey

• Cloud service provider provides the following services:– Bundled service, including storing customer’s data,

processing data, use of provider’s SAS accounting software, hosting e‐mail

– Separate service of hosting Web site and taking orders

– Separate service of storage of data for customers

61

Hypotheticals (Cont.)((From Brann & Isaacson)

C t 1 it t d i N Y k Cit b t ith ffi i• Customer 1, situated in New York City but with offices in Ohio and Illinois, has contracted for the bundled service. to which it is billed at its NYC headquarters. Where if anywhere is the service taxable?Where, if anywhere, is the service taxable?

– Would the answer differ if the customer did not use ti tifi t ?exemption certificates?

62

Hypotheticals (Cont.)(From Brann & Isaacson)

C t 2 li t il ith ffi i T• Customer 2, an online retailer with offices in Tennessee and sales representatives located in California and Maine, contracts for the service of hosting the Web site and taking orders for its digital book productsand taking orders for its digital book products.– Is the service taxable, and if so where?– Where does the customer have nexus?– Where should the provider collect tax on orders?– Where must the customer pay taxes?– Would the above answers be different if the data

center were located in Washington?

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Hypotheticals (Cont.)(From Sutherland Asbill & Brennan)

• Over‐the‐top video customer purchases a subscription with a vendor supplied converter box in:– Miami– Chicago– Indianapolis

K L– Kenner, La.– Seattle

• Over‐the‐top video customer purchases a subscription for viewing on laptop in:laptop in:– Miami– Chicago– Indianapolis– Kenner, La.– Seattle

• Do the results change if the customer purchases on‐demand video for one time viewing rather than a subscription?

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one‐time viewing, rather than a subscription?

Hypotheticals (Cont.)(From Deloitte Tax)

A company will purchase certain commercial information from a vendor, which provides the information via its “risk management solutions database.” The company’s users will access the vendor’s database from the company’s offices in California, Massachusetts and New Jersey.

How should tax apply in each state for the vendor’s product offerings?

Core service offering

For a subscription fee the company can access business informationFor a subscription fee, the company can access business information about potential or existing customers and suppliers through the “core service offering,” which is an interactive, customizable Web-based application that will provide the company’s users access to the vendor’s pp p p yglobal database of more than 110 million businesses. The company’s users will be able to run searches and create customizable reports containing summary trade data, basic credit scores, legal filings and


general company information.

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Workflow “add-ons”

The company can add to the core service offering by purchasing workflow

( )

add-ons for a separately invoiced additional fee. The company will not receive any software to install on its server. The workflow add-ons include the following:

1. Decision-making tool: This is a customizable tool that enables users to establish rules and approval limits to automate credit decisions and will allow the company to make immediate credit decisions on newwill allow the company to make immediate credit decisions on new customers. It provides access to Equifax Bureau and has the ability to verify trade and bank references.

2. Account manager: The company can use this feature to manage the risk of its entire customer base by blending the company’s credit policy, its customers’ accounts receivable data, and the latest


information from the vendor’s database.

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Workflow “add-ons” (Cont.)

3. Collection tool: The collection tool is an on-demand tool to help manage overall risk exposure. The tool enables the company to enter invoice-level trade details. The collection tool provides workflow information related to collection activities.

4. Online credit application: The online credit application allows the user to create a customizable credit application. The data entered into the application is analyzed by the vendor’s software and that analysis isapplication is analyzed by the vendor s software, and that analysis is made available to the user. The software provides internal automatic alerts when an application is submitted.


MEANINGFUL Charles Kearns, Sutherland Asbill & Brennan

DEVELOPMENTS AT THE SSTP

Agenda For This SectionAgenda For This Section

• Brief overview of the SST Agreement

• Digital goods uniform definitions

• Digital goods operating rules

• Federal legislation

©2012 Sutherland Asbill & Brennan LLP6969

Streamlined Sales Tax OverviewStreamlined Sales Tax Overview

WA

MT ME

OR

NV

ID

MT

WY

ND

SD

NE

MN

IA

WIMI

PA

NY

VTNH

ME

NJ

MARI

NH

CT

DE

AK

DCCA

NVUT

AZ

CO

NM

KS

OK

MO

AR

IL IN OH

KY

TN

SC

NC

WVVA

MD

SST member states

SST associate member

TX LA

MS AL GA

FL

SC

states

States with SST legislation introduced/considered As of Feb. 23, 2012


in 2012

SST bills drafted but not yet introduced70

Uniform DefinitionsUniform Definitions

• “Specified digital products” Digital audio works (includes “ringtones”) Digital audio works (includes ringtones ) Digital audio-visual works Digital books

• Electronically transferred As used in the digital goods context defined as “obtained by As used in the digital goods context, defined as obtained by

the purchaser by means other than tangible storage media” Compare “delivered electronically,” as used in the computer

software context with “delivered to the purchaser by meanssoftware context, with delivered to the purchaser by means other than tangible storage media”


Uniform Definitions (Cont.)Uniform Definitions (Cont.)

• “Digital codes”• Alpha numeric codes used to purchase electronically• Alpha-numeric codes used to purchase electronically

delivered items• Digital code has the same tax treatment as underlying item.• Taxed at purchase, not redemption

• Important evolving issues, especially within the gaming contextImportant evolving issues, especially within the gaming context and virtual currencies


Operating RulesOperating Rules

Sect. 332• Operating rules that permit member states to select “toggles” in• Operating rules that permit member states to select toggles in

their digital goods tax imposition statutes, or mandate how certain transactions should be taxed. “Electronically transferred” or “specified digital products” Electronically transferred or specified digital products• “End user” • “Permanent use”• “Continued payment”• Subscriptions


Operating Rules (Cont.)Operating Rules (Cont.)

Sect. 333 Electronically transferred items (including “specified digital Electronically transferred items (including specified digital

products”) shall not be taxed as “tangible personal property.” Member states must specifically enumerate electronically

delivered items as taxable in a separate impositiondelivered items as taxable in a separate imposition.

Digital products sourcing SLAC formed Digital Products Sourcing Workgroup in

October 2011 to address sourcing regime for digital goods under the Agreement.

Definitions of “receipt,” recordkeeping and MPU


Federal LegislationFederal LegislationStreamlined Sales Tax-related (nexus) • Main Street Fairness Act (Durbin)Main Street Fairness Act (Durbin)

Authorizes SST member states to collect tax on remote sales, if the Agreement meets certain simplification and uniformity requirements

• Marketplace Equity Act (Speier, Womack) Authorizes states that meet certain simplification

requirements to collect tax on remote sales, but does not require SST membership

• Marketplace Fairness Act (Enzi) Authorizes SST member states, or states that meet certain

simplification requirements, to collect tax on remote sales


Federal Legislation (Cont.)Federal Legislation (Cont.)Digital Goods and Services Tax Fairness Act

Ensures digital goods are taxed only once, precluding g g y p gmultiple states from claiming the right to tax same transaction or multiple taxation in the course of production

Ensures only generally applicable taxes can be imposed y g y pp p(i.e., general sales taxes) and that it must be done legislatively

Precludes discriminatory telecom/utility taxes from applying y y pp y gto digital commerce solely because these goods and services are riding over broadband/communication networks

Ensures that digital commerce is subject to same rules as g jcomparable tangible goods

Provides certainty in how segments of the new economy can be taxed for state and local tax purposes

©2012 Sutherland Asbill & Brennan LLP

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sales and use tax on digital products and...

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