Los Angeles Settles Disputed Phone Tax for $92.5M

Recently, a class of plaintiffs settled with City of Los Angeles over its alleged unlawful collection of telephone utility user tax (UUT). The class alleged that the Los Angeles Municipal Code exempted from UUT all amounts not subject to federal excise tax. The disputed taxes were collected between Oct. 19, 2005 and Mar. 15, 2008.

Fighting all the way to the California Supreme Court, the plaintiffs proved that yes, California law allows for tax refund class actions against the city in this instance. After that defeat, Los Angeles settled without litigating the merits.

Los Angeles estimated its potential exposure at $300M. The settlement amount, $92.5M, is a cap that assumes roughly 70% of eligible claimants will not submit a claim. Unclaimed funds will return to the city. Claimants will receive 70% of their actual UUT with documentation of their payments or, otherwise, $30 for residential landline service, or $50 for business landline or mobile service. Businesses that paid for many landlines and mobile phones may find it worth their time to submit a claim.

Montana: OTCs Subject to Retroactive Sales Tax Assessments

Recently, the Montana Supreme Court ruled 5-to-2 that online travel companies (OTCs) were subject to sales tax under the existing sales tax statute. Furthermore, their liability is retroactive to November of 2010. However, the OTCs were not subject to lodging tax.

Sales tax is imposed “on the purchaser and must be collected by the seller.” A seller is defined as one who “makes sales” of services. The majority held that the OTCs were providing services and therefore subject to sales tax.

The majority allowed retroactive collection because, under the same analysis, the sales tax’s plain language included OTC receipts. Therefore, the Department’s inaction and the OTC’s inability to seek reimbursement from past customers did raise an issue of equity.

Lodging tax is collected by “the owner or operator of a facility.” Montana did not define the term “owner or operator.” That left the Supreme Court to apply the dictionary definition and hold that OTCs do not run hotels. Therefore, OTCs had no duty to collect lodging tax.

The Montana Supreme Court rejected the Department’s argument to adopt the neighboring Wyoming Supreme Court’s ruling. This ruling adds to the crazy-quilt tax obligations individual state and local governments impose on OTCs.

Alabama Remains Sweet Home for Streaming Content

Recently, a coalition of legislators and advocacy groups prevented the Alabama Department Revenue from imposing sales tax on streaming content.  The Department proposed to amend Administrative Code Rule 810-6-5-.09 to include “digital transmissions.”  The Department’s logic was that the sales tax statute, § 40-12-220(8), defines “tangible personal property” as anything which may be “seen or otherwise perceptible to the senses.”  Furthermore, Department officials recalled that Blockbuster rentals were taxable, and, due to that history, had the authority to tax its technological successor.

The business community, led by the Business Council of Alabama and Alabama Cable Telecommunications Association, voiced their concerns to the legislature.  The legislature instructed the Department to “withdraw the proposed regulation for further analysis and discussion of the issue with the state legislature.”  The legislature cited concern for administrative overreach and the possibility that the draft rule constituted a new tax, which only the legislature may enact.

While technologists have won a victory, the Department’s last communication on this issue has been: “. . .we will continue to move forward with enforcing the laws of which we are charged to administer.  As a result, the prospective protections afforded by the amended rule will not be available to businesses.”  Department officials have not explained if they will start retroactively assessments, start regulations passing regulations in secret, or just exactly what they mean.

Nevada Enacts Click-Through, Affiliate Nexus

On May 27, Nevada enacted legislation (A.B. 380) that adds click-through and affiliate provisions to its sales and use tax laws.  Click-through nexus is effective October 1, 2015.  Affiliate nexus is effective three months earlier, on July 1, 2015.

Under the new click-through nexus law, an out-of-state retailer contracting with Nevada residents whose referrals result in more than $10,000 during the preceding four quarters is presumed to have nexus.

The retailer may rebut that presumption by proving to the Department of Taxation that each Nevada resident did not engage in in-state activity “sufficiently associated” with the retailer’s ability to establish or maintain a market in Nevada.  Such proof includes sworn written statements, but only if provided in good faith.

Under the new affiliate nexus law, an out-of-state retailer is presumed to have nexus if it is (1) part of a controlled group of corporations and (2) has a component member with a physical presence in Nevada, (3) which is not a common carrier acting as such.  Furthermore, the component member must conduct activities “significantly associated” with the retailer’s ability to establish and maintain a market in this state.  Those activities include, but are not limited to, (a) selling the retailer’s products; (b) maintaining real estate to facilitate the retailer’s deliveries; (c) using the retailer’s intellectual property; (d) performing deliveries or services for the retailer’s customers; or (e) allowing the retailer’s customers to pick up orders from the retailer on the component members’ premises.

Again, the retailer may rebut the presumption of affiliate nexus.  Whether such rebuttal may take the form of sworn written statements from the combined group’s other members was not addressed by the new law.

Finally, if either the Department of Taxation or Tax Commission makes a finding, ruling, or agreement to exempt a retailer from sales or use tax, it must report to the legislature within 30 days of the decision, when that retailer has physical or affiliate nexus.

 

Congress’ Newest Attempt to Legislate Over Quill

Recently, the Remote Transactions Parity Act of 2015 (“RTPA”; H.R. 2775) has been introduced to the House Committee on the Judiciary.  Its introduction was due to Representative Jason Chaffetz’s (R-UT) promise to replace the Marketplace Fairness Act (“MFA”; died as H.R. 684; reintroduced in the Senate this year as S. 698), to the National Conference of State Legislatures when he spoke to it in December 2014.

In general, the RTPA allows states to impose sales tax on out-of-state vendors if the state is either a member of the Streamlined Sales and Use Tax Agreement or, alternatively, implements the “minimum simplification requirements” of the RTPA.  Such requirements include destination sourcing; a uniform sales tax base within the state; a single administrative entity, audit, and return per state; and relief from errors made in reliance on certified software or the states.

In contrast to the MFA’s federal exemption for sellers making less than $1M from state enforcement; the RTPA phases in with $10M, $5M, $1M exemptions each successive year, and eliminates the exemption entirely in the fourth year.  However, the RTPA also prohibits audits of registered remote vendors with less than $5M of sales unless there is “reasonable suspicion” of intentional misrepresentation or fraud – perhaps introducing Fourth Amendment jurisprudence to such audits.  It also prohibits the use contingent fee auditors.    Finally, states may not tax under RTPA until it has certified “multiple national certified software providers,” although the numerously of “multiple” is not defined.

This blog has covered the saga of federal sales tax legislation (for example, here), as well as its sometimes bizarre influence on state legislation (here, here, here, and here).  We look forward to covering what happens next.

New York Advises Sales of “Computing Power” Not Taxable

Yesterday, the New York Department of Taxation and Finance Office of Counsel issued advisory opinion TSB-A-15(2)S holding that cloud computing vendors providing “Internet infrastructure” were not subject to sales tax.  Taxpayer’s clients provided their own software to taxpayer, which ran that software for client’s purposes. Taxpayer provided hardware at data centers, including memory, processing, and storage, along with non-hardware components, such as operating systems, software development kits (SDKs), application programming interfaces (APIs), and client management consoles. Taxpayer charged an hourly rate based on the client’s hardware load and chosen operating system, along with a separately stated fee for data transfer. That business model is commonly referred to as “infrastructure as a service” (IaaS). 

Previously, New York has held that cloud computing vendors offering services were subject to sales tax because such services were transfers of the right to use prewritten software. See, e.g., TSB-A-10(28)S (2010), TSB-A-11(17)S (2011), and TSB-A-13(22)S (2013). That business model is commonly referred to as “software as a service” (SaaS) or “application service provider” (ASP).

However, in the instant case, New York applied the primary purpose test and determined the object of the sale was “computing power” rather than prewritten software. Although the state also found that the operating system constituted prewritten software, it further found that its transfer was an incidental part of the service and merely enabled clients to use the “computing power.” It concluded that “computing power” was not among the list of enumerated taxable services.

The state did not determine whether SDKs, APIs, or client management consoles constituted software.

Michigan Extends Nexus to Similarly Named Businesses

Recently, Michigan Governor Rick Snyder signed two bills that introduce affiliate and click-through nexus:

S.B. 658 (for sales tax) and S.B. 659 (for use tax).  The bills take effect October 1, 2015.  Michigan first considered affiliate nexus in 2011.

As we reported, most recently in December 2013, Michigan’s affiliate nexus provisions are similar to those of other states with one exception:  It extends the rebuttable presumption of nexus to one who “sells a similar line of products” as another seller with nexus and “does so under the same business name as the seller or a similar business name as the seller.”  This novel statutory language creates the threat of nexus by similar-sounding trade names.

Additionally, the new rebuttable presumption of click-through nexus applies to sellers annually earning more than $10,000 from in-state referral companies and more than $50,000 from in-state customers.

We will follow this legislative enactment, including attempts to enforce the novel attribution nexus provision, and whether larger e-commerce companies fire their Michigan affiliates similar to their Vermont counterparts earlier this month.

Florida’s Rose By Any Other Name: A “Music Service […] is a Music Service;” Unless It’s An Information Service

Recently, the Florida Department of Revenue (“Department”) issued companion advisory opinions

14A19-005 and -006.  The Department found that purchases and rentals of online movies and music are not subject to sales tax.  Furthermore, purchases are also not subject to communications services tax.   However, rentals are taxable as communications services.

The taxpayer’s video service allows customers to access video in streaming or downloadable format, or both.  Customers either purchase or rent videos.  Purchasers may keep the video permanently and watch it as many times as desired.  Renters, on the other hand, may only watch once, within a certain timeframe from the time of rental.

In addition to purchasing and renting videos, the taxpayer grants access to its digital content to customers who purchase a membership.  That membership program principally features free two-day shipping, but also includes free access to video and music streaming and downloading services..  However, customers who cancel their membership, or allow it lapse, lose access to their digital content.

Generally, Florida only imposes sales tax on the sale of tangible personal property.   Fla. Stat. Ch. 212.05.  Furnishing information by way of electronic images is not the sale of tangible personal property.  Fla. Admin. Rule 12A-1.062.

Florida also imposes a communications service tax on the transmission of voice, data, audio, or video, including “video service.”  “Video service” includes pay-per-view, digital video services, and music service.  However, the sale of information services is specifically excluded from that tax.   Information services include the “capability for […] making available information via communication services.”  Fla. Stat. Ch. 202.11.

Here, the Department found that purchases made from the video service in any format are purchases of an exempt information service for the “capability for” “making available” content, whether for download or by streaming via the customer’s online library.  However, rentals and membership-based access are taxable communications services because “this rental of digital video content [is] a ‘video service’” and, more simply, the “music service benefit is a music service.”  Finally, the taxpayer must determine the portion of the membership charge attributable to digital content rentals prior to collecting the communications services tax.

The Department did not clearly explain why the rentals or, more curiously, the membership services were not exempt information services since they provided the exact same “capability for” “making available” content.  Rather, it confined its analysis to matching product names with terms in the statute, suggesting opportunities for tax planning through creative naming.

Tax Tech Bytes

Minnesota exempts webinars from sales and use tax

Recently, Minnesota revised Tax Fact Sheet 177, announcing that webinars are tax exempt from sales tax starting July 1, 2014. In order to qualify for exemption, webinars must meet the following requirements: (i) in person presentation’s admission is not taxable; (ii) online participants can interact with presenters during presentation; and (iii) interactive limits if any must be the same for online an in person participants.

Washington provides exemption for purchases of financial information

Washington Department of Revenue announced that updated regulations will include a sales tax exemption for purchases of standard financial information by qualifying international investment management companies.

Wisconsin exempts educational webinars from sales tax

Wisconsin released a tax bulletin announcing that sales of live digital online educational services are not taxable. Similarly, live educational seminars are not taxable.

New Jersey amends sales and use tax to include internet nexus

New Jersey is bringing its tax regulations into the 21st century business practices. Recently, New Jersey amended its sales and use tax act to include out of state sellers’ internet activity as nexus. The amendment creates a rebuttable presumption that an out of state seller has sufficient nexus if the seller (i) enters into an agreement with a New Jersey independent contractor for compensation in exchange for customer referrals via the internet to the seller and (ii) incurs sales from these referrals that are New Jersey customers.

Clear Skies for Cloud Tax in South Carolina

Recently, The South Carolina Department of Revenue (“Department”) issued Private Letter Ruling 14-2 which found that cloud computing and storage services are not subject to South Carolina’s tax on communication services.

A non-resident taxpayer requested the Department to determine whether their services are subject to South Carolina’s sales and use tax.  The taxpayer’s services include cloud computing and storage services which provide customers with the ability to process their data with the necessary computing resources. Customers can use their own software, taxpayer’s open source software or a third party’s software licensed by the taxpayer. In addition, no software is transferred to customer. The storage service provides customers the ability to store and retrieve vast amounts of data via the internet.

South Carolina imposes a sale and use tax on tangible personal property and certain enumerated services. These services include communications subject to Chapter 36 Title 12 (Section 12-36-910).  The communications subject to the sales and use tax are for the transmission of voice or messages. These include telephone, paging, cable and data base research/reporting. The communications included in the statute are for the “transmission of the voice or messages.”

The Department ruled that the taxpayer’s cloud computing and storage services do not transmit any voice data. In addition, taxpayer’s services do not render any reports to its customers. The cloud service only provides computer resources which include processors, memory and instant storage. Accordingly, the Department concluded that the taxpayer’s services are not within the scope of taxable communication services.

LexBlog