In other news from Tennessee, on January 15, Tennessee introduced H.B. 1537 that, if enacted, would add click-through and affiliation provisions to the sales and use tax laws. Tennessee’s proposed legislation in all likelihood is in response to the lost sales tax revenue from Amazon.com. Amazon’s footprint in Tennessee is quite large with three large fulfillment centers in Tennessee.
Under the click-through provisions, a person is presumed to have click-through nexus if a person enters into an agreement with a resident of Tennessee, for consideration, directly or indirectly refers potential purchasers to the person. The referral can be via an internet link, internet website or other means.
The presumed nexus may be rebutted only by clear and convincing evidence that the Tennessee resident with the agreement did not conduct any activities that would substantially contribute to the person’s ability to establish and maintain a market.
Under the affiliate provision, substantial nexus to a person who does not have a place of business in Tennessee is established through the person’s affiliate’s maintenance, use, ownership or operation of any place of business having a presence in Tennessee. This presence must substantially contribute to the person’s ability to establish and maintain a market.
Unlike other proposed or affiliate statutes, this bill does not explicitly state what “factors” are considered in determining nexus. For example, in Hawaii’s proposed legislation, substantial nexus is determined by similar product lines or similar/substantially similar trade and service marks. Consequently, this language could result in aggressive enforcement measures by the state.
Stay tuned for updates as the bill progresses through Tennessee’s legislature.
Yesterday, the Tennessee Department of Revenue issued Letter Ruling #13-21. In the Letter Ruling, the Department considered the taxability of three distinct transactions.
The first two scenarios involve demonstrations of software. The Ruling concludes that when a taxpayer creates a “virtual lab” for testing and demonstration purposes, whereby it loads full-version software or a trial version of that software (for which it has a license) either on it OR its customer’s hardware, any charge relating to the same is not subject to Tennessee sales and use tax. The key factor in both of these instances was that there was no actual transfer of any license to use the software, and that a transfer of the same would be necessary to create a taxable sale. Moreover, the Ruling provides that creating a “virtual lab” under either of these scenarios would not fall within any definition of a taxable service.
This Ruling is most notable, perhaps, for its conclusion involving a third scenario—the sale of digital back up services. Here, the taxpayer backs up the customer’s data to the taxpayer’s servers—and, as the Ruling notes—it does so by creating a copy (digital) that it will provide to the customer upon request.
Tennessee has not been a state to shy away from the consideration of the taxability of electronic and cloud-based services (e.g., electronic data backup, which might be characterized as “cloud computing”). In a series of prior guidance, the Department has maintained a consistent position that access to data or software or charge for storage or retrieval of the same is not taxable:
-Fee for access to software = not taxable.
-Charge for data storage and retrieval = not taxable.
-Fee for access to software housed outside of Tennessee = not taxable.
The reasons? No transfer of title, control or possession of the software, which is required under Tennessee’s sales tax laws. Letter Ruling #13-21 re-affirms this conclusion, providing that data backup does not involve the transfer or possession of title and that data backup is not a taxable service. Thus, taxpayers questioning the taxability of their cloud-based products or software services to Tennessee customers have yet another source for guidance: the key, it seems, is a transfer title or possession of TPP. Without this, and barring the provision of an enumerated, taxable service, the outlook for cloud taxability questions remains clear.
Yesterday, Minnesota released an updated fact sheet on the taxation of digital products.
For background, Minnesota is a full member of the Streamlined Sales and Use Tax Agreement (SSUTA). This means that Minnesota has adopted SSUTA’s definitions for “specified digital products.” Like any full-member SSUTA state, Minnesota may ‘turn on’ or ‘turn off’ tax on specified digital products, however, it is to do so in accordance with the SSUTA definitions. For example, under SSUTA, a “digital audio work” is a work that “results from the fixation of a series of musical, spoken, or other sounds, including ringtones.” Thus, if a state is a full member of SSUTA, and it has decided to, say, treat digital audio works as a taxable sale (e.g., your download of music from iTunes) that means that not only songs but audiobooks and ringtones would be included in that bucket of goods subject to tax. To carve out an exception for, say, ringtones, when all other digital audio works are taxable would fall contrary to its adherence to the SSUTA definitions (or, “buckets”).
On January 16, Hawaii introduced H.B. 1651 that, if enacted, would add click-through and affiliate provisions to its general excise and use tax laws. Hawaii’s proposed legislation is among several states in the past year that have considered click-through nexus legislation. If enacted, the legislation would take effect on July 1, 2015.
In the proposed legislation, a seller would be presumed to have click-through nexus if the seller enters into an agreement under which a person in Hawaii, for consideration, directly or indirectly refers potential purchasers of tangible personal property to the seller. The referral can be via an internet link, internet website or otherwise. The otherwise may prove key. That is, what about an email blast or a phone call initiated by an affiliate marketer working in Hawaii on behalf of an e-retailer with no physical presence in the state otherwise?
The bill introduced for consideration contains a rebuttable presumption that the activities of the person in Hawaii is significantly associated with seller’s ability to establish or maintain a market in Hawaii. Sellers would bear the burden of showing that the activities were not substantially associated.
Under the affiliate provisions, a seller would be presumed to be engaged in business in Hawaii if the seller is a member of a commonly controlled group, as defined by IRC Section 1504, that includes an entity that has a substantial nexus with Hawaii. In addition, the entity must sell a similar product line as the seller or the entity uses similar or substantially similar trade mark, service mark or trade names.
Stay tuned for updates as the bill progresses through Hawaii’s legislature.
The Connecticut Department of Revenue recently announced the revocation of Special Notice 92(19) (“Notice”). As of December 19, 2013, the Notice may no longer be relied upon by taxpayers. The Notice was issued in 1992 on the heels of the United States Supreme Court decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
Prior to Quill, 1989 Conn. Pub. Acts 41, Sections 1 and 2 required out-of-state retailers with only an economic presence in Connecticut to collect use tax. In Quill, the Supreme Court held that physical presence with a taxing jurisdiction was required before the jurisdiction could impose use tax collection requirements. The Notice brought Connecticut’s sales and use tax requirements consistent with Quill by announcing that the Department would not enforce the 1989 Act.
Now with the Notice revocation, what does this mean for mail order retailers and the collection of Connecticut’s use tax? Is the state taking an economic nexus position? Connecticut may be inviting a taxpayer with a lot at stake to file a test case. Alternatively, Connecticut may believe that the Marketplace Fairness Act of 2013 may become law in 2014 and is simply removing potential barriers to its enforcement.
Today, our friend Cara Griffiths (State Tax Notes) published a great piece on Forbes.com, summarizing the state of Quill:
Without any further guidance, retailers have no concrete sense of what will constitute nexus with the state for sales and use tax purposes and whether the state will now assert that, despite Quill, a mere “economic presence” will trigger the requirement to collect and remit sales tax. If that’s the case, out-of-state retailers should proceed cautiously in Connecticut.
The Missouri Department of Revenue (“Department”) recently issued a Private Letter Ruling concluding that sales of digital video streaming service (“service”) is not taxable. In the ruling, a Missouri taxpayer requested that the Department determine whether their service is subject to Missouri’s sales and use tax. The service allows customers to either purchase or rent video content which is streamed via a variety of devices including television and computer. In order to access the service, a customer must have internet access. No other services or equipment are provided to customers.
Missouri imposes a sales tax on all retail sellers that sell tangible personal property or provide a taxable service in Missouri. In general, the sale of tangible personal property is taxable unless exempted by a specific statute. In contrast, a service is only taxable if a specific statute authorizes it. Under Missouri’s current regulations, the sale of an original program delivered over the internet is not the sale of tangible personal property.
Applying this law to the taxpayer’s facts, the Department concluded that renting or purchasing streaming videos over the internet is not the sale of tangible personal property. Instead, the Department concluded that the taxpayer was selling a service, one which is not among the enumerated taxable services. Accordingly, the Department found that sales or rentals of streaming video is not subject to sales or use tax.
In a recently issued ruling, Utah issued a Private Letter Ruling concerning the taxability of cloud-based applications. A Utah corporation requested the Utah State Tax Commission to determine whether their cloud-based applications are subject to Utah’s sales tax. The cloud-based applications support their customers’ telecommunication equipment by instructing the equipment on how to process incoming and outgoing calls. Customers utilize the applications via their own equipment. A monthly fee is charged to customers.
Utah imposes a sales tax on various transactions, including sales involving the use of any article of tangible personal property that is granted under a license. Tangible personal property includes pre-written computer software, regardless of the manner in which the pre-written software is transferred.
In instant case, the corporation grants a license for customers to use the cloud-based applications (pre-written software) on its equipment for a monthly fee. Under Utah’s statutes, pre-written software is a taxable tangible personal property sale regardless of method of transfer. The Commission concluded that the monthly charges for accessing the software for customers located in Utah are taxable as retail sales.
On December 2, the United States Supreme Court declined to hear appeals by Amazon.com and Overstock.com of a March 2013 decision by New York’s highest court upholding the constitutionality of that state’s affiliate nexus law.
Read Kelley Miller’s comments on this news in today’s edition of Law360 here.
On November 8th, the Massachusetts Department of Revenue revised and reissued Letter Ruling No. 12-8, originally released July 16, 2012. The original ruling addressed the taxability of a cloud computing product comprised of remote storage and computing capacity where users elect to use software licensed from a third-party rather than their own software or open-source software. The original ruling determined taxability based on the Department’s regulations providing licenses to use software on remote servers are taxable transfers. The Department ruled the entire purchase price was subject to tax because the costs for cloud services were part of the purchase price for the software.
Following the release of the original ruling, the Department was provided additional facts and now has reversed course, determining that the cloud computing product is not taxable because the licensed software is incidental to the nontaxable services provided.
The Department focused on the “object of the transaction test” in the revised ruling. Under this test, when nontaxable services and the right to use software are bundled in one transaction, the Department will apply “object of the transaction” test to determine taxability. While the test was mentioned briefly and dismissed in the first ruling, the new ruling found that the object of the transaction was the nontaxable computing capacity and remote storage services, and that the software provided was incidental to the services sought.
On October 31, Michigan reintroduced legislation that, if enacted, would add affiliate and click-through provisions to the sales and use tax laws. Michigan, who first considered affiliate nexus in 2011 and is among several states who are dusting off their previous failed attempts to take another crack at enacting affiliate nexus and click-through provisions.
Other states who have enacted similar affiliate nexus statutes require a vendor and another entity be related in some way or require that entity perform certain work that can be attributed to the vendor (thus causing the vendor to have nexus in a particular jurisdiction). However, Michigan’s proposed legislation would create nexus if a seller uses trademarks, service marks or trade names that are the same or substantially similar to those used by any other person that has substantial nexus with Michigan. Under this proposed legislation, a vendor that has no nexus under similar statutes may have nexus to Michigan if another person had a similar trademark. Even though each competitor has no legal relationship to the other, nexus would be impugned for the simple fact of similar trademarks.
Further, the legislation would create a rebuttable presumption that the activities of the other person were associated with the seller’s ability to maintain/establish a market in Michigan. Taxpayers would bear the burden of showing that the activities were not substantially associated.
Stayed tuned for updates as this bill moves through Michigan’s legislature.