The National Multistate Tax Symposium West · 2020-03-17 · • On March 22, 2016, Senate Bill 106 (S.B. 106) was signed into law. S.B. 106 amends Codified Laws 10-45 and 10-52,

The National Multistate Tax Symposium WestMove forward with confidence—State implications of tax reform

April 30–May 2, 2018

Indirect tax planning and compliance - What you can do now (Part 1)Trevor Kwan, Deloitte Tax LLPDwayne Van Wieren, Deloitte Tax LLPMay 2, 2018

3Copyright © 2018 Deloitte Development LLC. All rights reserved.

• Setting the stage – expanding physical presence and economic nexus

• “Click-through” nexus provisions

• Redefining agent or representative

• What it means to assist in making a market

• Information reporting - “use” tax approaches

• State challenges to Quill

• Considerations for no regrets sales tax compliance planning

• Classification, sourcing, and taxability of digital goods

Agenda

4

Setting the Stage – Expanding Physical Presence and Economic Nexus


• States have been passing various nexus laws requiring tax collection and filing responsibilities that

arguably push the boundaries of the concept of “physical presence” in a state. Examples include:

o Independent contractor/agency nexus

o “Click-through nexus” and related compensated solicitation/referral arrangements (approximately

twenty-one states currently)

o Affiliate nexus (approximately twenty-five states currently)

o Specific notification and/or reporting requirements exist in a handful of states as well (e.g., CO)

• States are also adopting “economic nexus” standards that challenge Quill’s physical presence nexus

standard

Setting the Stage - Expanding Physical Presence and Economic Nexus

6

“Click-Through” Nexus Provisions


• New York State enacted the first “click-through” nexus statute in 2008

• Seller is presumed to have nexus through an independent contractor or representative if the seller enters

into an agreement with a resident where the resident

o For a commission or other consideration

o Directly or indirectly refers potential customers to the seller

o Whether by a link on an Internet website or otherwise

o If the cumulative gross receipts from sales from residents with this type of an agreement exceeds

$10,000 in the preceding 4 quarter period

• Note – The resident independent contractor or representative program is frequently referred to as

“affiliate marketing relationships programs”

“Click-Through” Nexus - Introduction


• New York published guidance on rebutting the presumption in TSB-M-08(3.1)S (Jun. 30, 2008). The seller

may rebut the presumption by meeting two conditions

1. Contract condition – The contract prohibits

o “engaging in any solicitation activities…that refer potential customers to the seller including, but not

limited to: distributing flyers, coupons, newsletters and other printed promotional materials, or

electronic equivalents; verbal solicitation (e.g., in-person referrals); initiating telephone calls; and

sending e-mails.

o In addition, if the resident representative is an organization such as a club or a non-profit group, the

contract or agreement must provide that the organization will maintain on its Web site information

alerting its members to the prohibition against each of the solicitation activities described above;

and”

2. Proof of compliance condition – The resident must submit a signed certification stating that the

resident representative has not engaged in any prohibited solicitation activities

“Click-Through” Nexus - Rebutting the Presumption


New York

The New York Court of Appeals upheld the affiliate nexus standard in 2013. One of the keys to upholding the

statute was the “safe harbor” provision

Illinois

In 2011, Illinois passed a law similar to New York’s but absent a safe harbor provision. In 2031, the Illinois

Supreme Court struck the law down as in conflict with the federal Internet Tax Freedom Act. Subsequently,

Illinois passed another click-through nexus law that remains on the books.

“Click-Through” Nexus – Specific Provisions


To date, over 20 states have adopted “click-through” or “affiliate marketing relationships program” statutes

including the following:

• Arkansas, California, Connecticut, Georgia, Illinois, Kansas, Louisiana, Maine, Michigan, Minnesota,

Missouri, Nevada, New Jersey, New York, North Carolina, Ohio Pennsylvania, Rhode Island, Tennessee,

Vermont and Washington

Some possible corporate reactions may be to:

• Start collecting taxes

• Don’t start collecting taxes

• Eliminate affiliate marketing relationships programs

• Maintain affiliate marketing relationships but with “safe-harbor” agreements

“Click-Through” Nexus – Additional Provisions

11

Redefining Agent or Representative


• Agent may be generally defined as “one who represents and acts for another under a contract or

otherwise”

• Representative may generally be defined as “a person or thing that represents another”; an agent

• For tax purposes an agent or representative is often defined as an independent person/contractor

performing services on behalf of a principal

• But can it include a subsidiary, parent or other member of an affiliated group?

• Can a unitary relationship be enough?

• Does it have to be related to sales activities? Consider New Jersey 2012 case.

• Does marketplace nexus exist?

Redefining Agent or Representative


• Nexus asserted for out-of-state entity based on its corporate relationships with one or more related

parties (affiliates) in the state or on activities those affiliates may perform on behalf of the remote retailer

• Affiliate nexus statutes generally look to the activities performed by an in-state affiliate which help related

entities to establish and maintain a market in that state

• Examples include:

o Use of common logos and trademarks

o In-state distribution centers from which delivery occurs

o In-state affiliate’s promotion of the out-of-state affiliate’s goods or services

Redefining Agent or Representative - Affiliate Nexus Statutes


Pursuant to Fla. Stat. Ann. § 212.0596(2)(k), “[e]very dealer ... who makes a mail order sale is subject to

the power of this state to levy and collect the tax imposed ... when:

o The dealer, while not having nexus with this state on any of the bases described in paragraphs

(a)-(j) or paragraph (l), is a corporation that is a member of an affiliated group of

corporations, as defined in s. 1504(a) of the Internal Revenue Code, whose members are includable

under s. 1504(b) of the Internal Revenue Code

o and whose members are eligible to file a consolidated tax return for federal corporate

income tax purposes and any parent or subsidiary corporation in the affiliated group has

nexus with this state on one or more of the bases described in paragraphs (a)-(j) or paragraph (l)”

Redefining Agent or Representative - Affiliate Nexus StatutesExample


Arizona Transaction Privilege Tax Ruling 16-3, 09/20/2016

ISSUE:

Is a business with Arizona nexus for Arizona transaction privilege tax (TPT) purposes that operates an online

marketplace through which third-party merchants sell tangible personal property at retail (hereinafter "online

marketplace") a "retailer" making "sales" on behalf of third-party merchants, and therefore responsible for

the retail TPT on sales to Arizona customers?

RULING:

A business that operates an online marketplace and makes online sales on behalf of third-party merchants as

evidenced by the marketplace providing a primary contact point for customer service, processing payments

on behalf of the merchant and providing or controlling the fulfillment process, is a retailer conducting taxable

sales. The gross receipts of that marketplace business derived from the sales of tangible personal property to

Arizona purchasers are subject to retail TPT, provided that the business already has nexus for Arizona TPT

purposes.

Redefining Agent or RepresentativeExample

16

What It Means to Assist in Making a Market


Jurisdictions may take an expansive view of what activities create or maintain a marketplace in the state,

including, but not limited to, the following:

• Visiting customers or potential customers in the state

• Performing services in the state, such as installation, repair, or warranty related services

• Accepting returns or allowing pick-up in a physical store located in the state

• Exhibiting at a trade show

• Training customer’s employees

• Referring customers in exchange for consideration

• Delivering products by a non-common carrier

• Procurement related activities

What It Means to Assist in Making a Market


Washington’s statute

“out-of-state seller, either directly or by an agent or other representative, performs significant services in

relation to establishment or maintenance of sales into Washington”

Oklahoma’s Compliance Initiative

“conducts any other activities in this state that are significantly associated with the vendor’s ability to

establish and maintain a market in this state for the vendor’s sale”

What It Means to Assist in Making a Market Specific state examples

19

Information Reporting –“Use” Tax Approaches


• Passed legislation that was to become effective on March 1, 2012, requiring “non-collecting” retailers to

inform customers (as well as the state) that they may have a use tax obligation for taxable purchases

• The law specified that any out-of-state retailer that does not collect the sales tax on taxable purchases

that have gross revenues in excess of $100,000 in the state:

o To send a transactional notice to the customer that they may be subject to the state’s use tax;

o Send a detailed annual purchase summary to customers that purchase more than $500 of goods

during the year, reminding them of potential use tax obligations; and

o File the annual customer information report with the DOR

• Litigation ensued but the information reporting regime was ultimately upheld as constitutional when the

U.S. Supreme Court denied certiorari upon appeal in December 2016.

Information reporting“Use” tax approaches


Colorado –

• Upon lifting of the Colorado state court injunction, the state is free to move forward with the enforcement

of these requirements

• There is a $10 penalty imposed for each failure by the retailer to comply with the specified requirements

Vermont –

• similar requirements to the CO regime were enacted and became effective on “the earlier of July 1, 2017

or beginning on the first day of the first quarter after the sales and use tax reporting requirements

challenged in Direct Marketing Assoc. v. Brohl … are implemented by the State of Colorado.” There is a $5

per failure penalty upon the original sale, and a $10 per failure penalty for not filing the annual notice.

Louisiana and Oklahoma –

• These states have also enacted similar use tax reporting provisions, but do not currently impose any

failure penalty for not complying.

Information reporting “Use” tax approaches


• In Direct Marketing Assoc’n v. Brohl, 135 S. Ct. 1124, 1131 (2015), Justice Kennedy made statements in

his concurrence indicating Quill is ripe for reconsideration and could possibly be overturned:

o “Given…changes in technology and consumer sophistication, it is unwise to delay any longer a

reconsideration of the Court’s holding in Quill. A case questionable even when decided, Quill now

harms States to a degree far greater than could have been anticipated earlier.”

o “The instant case does not raise this issue in a manner appropriate for the Court to address it. It does

provide, however, the means to note the importance of reconsidering doubtful authority. The legal

system should find an appropriate case for this court to reexamine Quill and Bellas Hess.”

Kennedy ConcurrenceDirect Marketing Ass’n v. Brohl

23

State Challenges to Quill


South Dakota -

• On March 22, 2016, Senate Bill 106 (S.B. 106) was signed into law. S.B. 106 amends Codified Laws 10-

45 and 10-52, effective May 1, 2016, to require the collection of South Dakota sales tax on sales into

South Dakota if, in the previous or current calendar year:

1. The seller’s sales into South Dakota exceed $100,000, or

2. The seller had two hundred or more separate transactions into South Dakota.

• S.B. 106 provided the authority for South Dakota to bring a declaratory judgement action in order to

expedite the determination as the validity of this nexus standard under state and federal law. S.B. 106

also provided an injunction provision to enjoin enforcement of the law pending the declaratory judgment

action.

State Challenges to Quill


South Dakota -

• April 2016: State and online retailers filed declaratory judgments in Circuit Court.

• March 2017: Circuit Court struck down remote sales tax law; DOR appealed, setting the stage for review by

the state supreme court.

• September 2017: South Dakota Supreme Court affirmed the Circuit Court ruling, holding that this law was

unconstitutional in violation of the physical presence requirement under Quill.

• October 2017: South Dakota filed cert with the U.S. Supreme Court specifically asking whether the Court

should “abrogate Quill’s sales-tax-only physical-presence requirement.”

• The parties’ briefs and multiple amicus curiae briefs have been filed.

• On January 12, 2018, the U.S. Supreme Court agreed to hear this case.

• Oral arguments before the Court were held on April 17, 2018; a decision is anticipated in late June 2018.

• An injunction is currently in place that prevents the state from enforcing the law while constitutionality is

challenged.

Economic Nexus

26

Considerations for “No Regrets Tax Planning”


Tax Planning Considerations:

• Understanding your current nexus footprint

• Analysis of your compliance burden

• Systems issues

• Notices and audit defense

No Regrets Tax Planning

28

Classification


• ~45 States and D.C. impose sales and use tax (SUT) on sales of tangible personal property (TPP) unless

specifically exempt, but many states only tax specifically enumerated services.

• Historically, very few states enacted broad-based SUTs applicable to most services.

• Recently, there have been numerous (yet often unsuccessful) attempts by states to broaden the tax base

to include more services.

• States are starting to issue guidance on whether mere access to computer hardware and access-only

software are subject to SUT.

• Although few states tax computer and data processing services, per se, some jurisdictions are attempting

to classify access-only and/or hosting services as leases of TPP.

ClassificationWhat is a Service / Software?


Depending upon the state, a cloud computing transaction may be deemed to fall into one of the following

categories:

• Software (canned v. custom)

• Data processing or data storage service

• Information service (general v. proprietary)

• Computer service

• Digital automated service – service transferred electronically that uses one or more software applications

• Digital equivalent to traditional tangible personal property (i.e., digital goods)

Treatment of Cloud Related Items – Product or Service?


Taxability of cloud computing varies by state.

Not taxable because:

• The customer does not have physical possession of the item; therefore, it is not a sale or lease of

software or TPP.

• The vendor’s server is not in the state.

• The product is not canned or prewritten software and is not an enumerated taxable service.

Taxable because:

• The customer has “constructive possession” of the item; therefore, it represents a taxable sale or lease of

software despite no physical transfer of the item.

• The server is a single-tenant server; therefore, it is a taxable lease of TPP despite no physical possession.

• It is within the meaning of an enumerated taxable service.

• Customer receives benefit of a taxable service such as data processing or information service in the state.

Cloud/Software/Data Processing Services


Web Collaboration Services

Colorado PLR 16-014 (August 1, 2016)

• Web collaboration services provided to consumers in Colorado by means of servers located outside

Colorado are not subject to sales tax because these services are considered as interstate services.

• The Colorado DOR noted that the web collaboration services were comprised of all the necessary

elements of a telephone service but were not subject to tax because each transaction between a

participant and its telecommunication provider was an out-of-state call bridging service that was

connected through a server located outside the state and therefore was an interstate call.

Kansas Private Letter Ruling No. P-2013-001 (July 3, 2013)

• Sales tax applied to telecommunications and ancillary service charges for video and conferencing

services invoiced to customers whose primary place of use was within Kansas even when a different

and unrelated in-state provider links the customer to the public switched telephone network or to the

World Wide Web.


Cloud Computing

Illinois

ST 16-0033 GIL 08/17/2016 SaaS or COMPUTER SOFTWARE

A provider of software as a service is acting as a serviceman. If the provider does not transfer any

TPP to the customer, then the transaction generally would not be subject to Retailers’ Occupation

Tax, Use Tax, Service Occupation Tax, or Service Use Tax. If the provider transfers to the

customer an API, applet, desktop agent, or a remote access agent to enable the

customer to access the provider’s network and services, it appears the subscriber is

receiving computer software that is subject to tax. See 86 Ill. Adm. Code Parts 130 and 140.

34

Taxability


FL Technical Assistance Advisement, No. 16A-014, August 8, 2016

Taxpayer is a third-party retailer of software licenses but also customizes the software it sells to customers.

Taxpayer also purchases cloud-computing services as an integral part of its software solution and for resell.

Subscribers could only access software and cloud-computing solutions electronically.

Questions Posed:

o Is the sale of software and cloud-computing services taxable? – NO

o Is the sale of customized software delivered electronically and accessed over the internet taxable? –

NO

o Is the sale of cloud-computing services taxable? - NO

The DOR further clarified that any canned software sold via tangible medium would be subject to tax.

Cloud Computing


SUT Information Release ST 1999-04, September 23, 2016

Internet access and online services (IAPs and OSPs)

• Addition of “digital advertising services” to professional services

• “providing access…data…for the purpose of electronically displaying…promotional advertisements to

potential customers…”

• Effective date is December 1, 2016

Advertising is not taxable but information service is major component

Mixed use

Business versus consumer

True object test

Cloud ComputingOhio


Cloud ComputingMichigan

• Michigan Court of Appeals decision involving several SaaS type products:

o 1st Category –The product code that enabled the vendor system to operate did not satisfy

requirement that taxable “prewritten computer software” must be delivered in any manner. The

court held that no proof existed that the code was electronically delivered or that taxpayer

exercised ownership over the vendor code.

o 2nd Category – Some prewritten computer software was electronically delivered to taxpayer. While

this was sufficient for an ownership-type right when delivered to a “local client” or “desktop agent,”

the court held that such software was incidental to the vendors “rendering professional service”

under the “Catalina” test

• The Michigan Department of Treasury has opted not to appeal and has since established a refund

process consistent with the holding in this decision.


• A Texas Court of Appeals upheld a sales tax refund to a provider of online banking bill pay services, ruling

that a lower court correctly concluded the services do not fit within the State Comptroller’s definition of

taxable data processing services.

• The State’s Comptroller of public accounts had argued that the provider should have collected sales tax

on services it provided to banks enabling users to pay their bills online.

• A three-judge panel in the Court unanimously held the transactions on which the provider had been

required to pay taxes did not consist of statutorily taxable services such as word processing, data entry,

business accounting data production or other computerized data storage and manipulation.

Cloud ComputingTexas


Cloud ComputingChicago

• Chicago has taken the position that the Personal Property Lease Transaction Tax (“Transaction Tax”)

applies to non-possessory computer leases as well as to software transactions that qualified as exempt

under Illinois law

o “Nonpossessory computer lease” means “a lease or rental wherein use but not possession of the

personal property is transferred and includes, but is not limited to, leased time on or use of ...

Computers, computer software ... or data processing equipment”

• Transaction Tax Ruling #12 (7/1/2015, effective 1/1/2016) provides examples of taxable transactions

o Effective January 1, 2016:

A reduced Transaction Tax rate of 5.25% (rather than 9%) will apply to cloud products such as

PaaS, IaaS, and SaaS

A qualifying “small new business” will be exempt from the Transaction Tax on its sales or purchases

of nonpossessory computer leases


Pennsylvania

• Effective August 1, 2016, sales and use tax is imposed on downloaded videos; photographs; books; any

otherwise taxable printed matter; applications (commonly known as apps); games; music; any other

audio, including satellite radio service; canned software; and any other otherwise taxable tangible

personal property electronically or digitally delivered, streamed, or accessed. These items are taxable as

tangible personal property and are considered tangible personal property whether they are electronically

or digitally delivered, streamed, or accessed and whether they are purchased singly, by subscription, or in

any other manner, including maintenance, updates, and support. 72 P.S. § 7201.

New Jersey

• For sales and use tax purposes, “tangible personal property” includes prewritten computer software

delivered electronically.

Digital Goods

41

Sourcing


• Certain states source the rental of TPP at the location of the property (or the location where the property

is first used).

• This standard may be difficult to apply in a cloud computing situation, because oftentimes the locations of

servers and/or users of the software are either indeterminable or unknown.

• Some states tax electronically transmitted computer software, ASP and hosting services as the rentals of

TPP.

Query: Does constructive receipt of software equal an actual physical presence for nexus

purposes?

Sourcing


Inconsistencies across the states may lead to interesting and frustrating situations with respect to the

taxability, as well as the proper sales tax sourcing of a transaction (e.g., location of a server v. location

where service is performed v. location where benefit is derived).

• Example: Assume a service provider sells Software as a Service (Saas)

◦ Service provider is located in State A (service is performed in State A)

◦ Customer is located in State B (benefit is derived in State B)

Questions:

1. What are the tax implications if State A taxes the transaction based on where the service is performed

and State B taxes the transaction based on where the benefit is received?

2. What are the tax implications if State A taxes the transaction based on the location where benefit is

received and State B taxes the transaction based on where the service is performed?

Sourcing


From a seller’s perspective, the concepts of destination and benefit may be difficult to apply to digital items

• Seller may have no idea where the receipt of the items takes place or where the items are used

From a purchaser’s perspective, location of use may not always be known.

• Is “use” at the server location or user location?

• States vary

• Trend toward user location

• Be aware of states that include software or digital products in their definition of TPP—they may take a

more traditional view of where these items should be sourced.

Digitals goods used concurrently in multiple jurisdictions (“MPU Transactions”)

• Should tax be paid to the state where the purchase is initially made?

• The state (or states) where the software is eventually used?

Sourcing


What states are doing about MPU transactions:

• Many states not only permit allocation or apportionment of the sale/use tax base, but require it.

• State statutes and regulations often do not provide a specific answer/approach, but instead provide for a

“range” of acceptable answers

• Auditors may look for an approach that assigns sales to locations where the service is being “received”

Practice Tips

• When allocating or apportioning the sales/use tax base, develop a sensible and uniform approach.

• Uniform does not necessarily mean that all transactions are equal, but rather that a particular type of

transaction should be allocated in the same manner to each state (unless a particular state has a different

sourcing regime).

Sourcing Multiple Points of Use (MPU) Transactions


Washington (Wash. Admin. Code 458-20-15502(11))

• A business claiming an MPU exemption must report and pay use tax on that portion of the digital code,

prewritten software, or remote access software used in Washington.

• The taxable amount is determined by the number of users in Washington compared to users everywhere.

• Generally, digital products and remote access software are used in Washington when the buyer first accesses,

downloads, possesses, opens, stores, enjoys, or receives the benefit of the service in Washington.

Minnesota (Miss. Stat. § 297A.668, Subd. 6a)

• Business purchaser that has not received a direct pay permit may use an exemption certificate indicating

multiple points of use if:

o Purchaser knows at the time of its purchase of a digital good, computer software delivered electronically,

or a service that the good or service will be concurrently available for use in more than one taxing

jurisdiction

o Purchaser delivers to the seller the exemption certificate at the time of purchase



Colorado (Colo. Rev. Stat. § 39-26-102(15)(c)(IV))

• Software sourced based on multiple points of use

• Purchaser must provide written statement to retailer attesting to license fees associated with points

in and out of Colorado

• Written statement relieves retailer of liability associated with the proration

Massachusetts (Mass. TIR 13-10, 7/25/2013)

• Computer/Software services sourced based on multiple points of use



Texas (Tex. Admin. Code 3.330(f)(3))

• A multi-state customer purchasing data processing services for the benefit of both in-state and out-

of-state locations is responsible for issuing to the data processing service provider an exemption

certificate asserting a multi-state benefit, and for reporting and paying the tax on that portion of the

data processing charge which will benefit the Texas location.

• A data processing service provider that accepts such a certificate in good faith is relieved of

responsibility for collecting and remitting tax on transactions to which the certificate relates


49

Leading Practices


• Embed the in-house Tax Department in the Procurement process to facilitate sales tax planning

• Leverage some initiatives of Industry groups/trade associations

• Provide feedback to taxing authorities, as appropriate

• Ask for help!

• Request a Private Letter Ruling

Some Leading Practices

51

Questions?


Contact information

Dwayne Van Wieren

Deloitte Tax LLP

[email protected]

Trevor Kwan

Deloitte Tax LLP

[email protected]

mailto:[email protected]

mailto:[email protected]


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Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

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Documents

The National Multistate Tax Symposium West · 2020-03-17 · • On March 22, 2016, Senate Bill 106 (S.B. 106) was signed into law. S.B. 106 amends Codified Laws 10-45 and 10-52,