FOR LIVE PROGRAM ONLY Navigating Divergent State Sales Tax Treatment of Product and Service Warranties and Software Maintenance Contracts TUESDAY , FEBRUARY 21, 2017, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours . To earn credit you must: • Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover . • Listen on-line via your computer speakers. • Respond to five prompts during the program plus a single verification code . You will have to write down only the final verification code on the attestation form, which will be emailed to registered attendees. • To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Live Program : -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.
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Navigating Divergent State Sales Tax Treatment Feb. 21, 2017 Sean Evans, Director, Tax Advisory Services DuCharme McMillen & Associates, Overland Park, Kan. sevans@dmainc.com
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Sean C Evans, Director-DuCharme McMillen & Associates SALES TAX ON WARRANTIES AND SOFTWARE MAINTENANCE CONTRACTS
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Breakdown of state and local tax revenue Composition of State and Local Business FY 2015-2016 Taxes on business property 7% Sales tax on business inputs 5% 36% 7% Excise, utility and insurance taxes Corporate income tax 9% Unemployment insurance taxes Individual income tax 15% Business license and other business taxes 21% 7 7
What is on the horizon? • Continuation of expansion of tax bases ― Services • “Real Time” sales tax collection • Cross-training of auditor to cover multiple taxes • Local governments putting more enforcement on business licenses • Movement towards Gross Receipts Taxes 8 8
Tangible Personal Property vs. Real Property • Tangible Personal Property (TPP)- Defined as anything that one can touch, feel, smell, move, measure, or otherwise perceivable to the senses ― The sale or use of TPP generates a sales and use tax ― Our economy shifting more towards a service industry is making more services taxable and less services exempt ― Examples: Consulting or Legal Services • Real Property- Defined as property that is permanently affixed to a location and cannot be moved ― Examples: Land, Buildings, Walls 9
Assumptions Regarding Taxability 10
Taxation of Services • Services as a Tax Basis ― Some states are trying to increase base by adding sales tax to various services. ― Targeted areas for States: ― SaaS, PaaS, and IaaS ― SaaS- Software as a Service ― PaaS- Platform as a Service ― IaaS- Infrastructure as a Service ― Professional Services ― Consulting ― Automatic Data Processing ― Help Supply Services ― Computer Services 11 11
Tax Strategy for Dealing with Maintenance and Warranty Contracts Documentation is critical • • What does the contract cover ― Mandatory vs. Optional ― Upgrades only? ― Service only? ― Support only? ― How will the upgrades will delivered? • Do those in purchasing include details on the purchase orders as to the specifics of the contract? Do you have a process to review use tax on tangible personal • property given away under a maintenance agreement. 12
Exempt Sales of Warranties There are many different types of exemption certificates. There are state prescribed forms issued for several purposes. The Multistate Tax Commission (MTC) issued a certificate for resale purposes. Purposes of exemptions: Resale Industry Property Exempt organization Direct Pay permit holders Must be taken in good faith Obtained in a timely fashion 13
Texas-Software • Canned and custom computer programs are taxable. ― Texas sales tax law defines software as tangible personal property. ― Software is subject to tax whether delivered in tangible or electronic form. Unless otherwise provided, “the sale or use of a taxable item in electronic form instead of on physical media does not alter the item’s tax status.” Texas Tax Code § 151.010 ― Texas sales/use tax is due on a charge to download software to a computer in Texas, whether the software is downloaded from a server located in or outside of Texas. 15 15
Texas-Software-Related Services • Services connected with the sale of software are also taxable. ― Tax Code § 151.007 defines “sales price” to include a service that is part of the sale. ― Charges for certain services are considered part of the sales price of the software if the software vendor charges for the services. ― Such services are taxed in the same manner as the software, whether or not separately stated. ― Examples: installation, warranties and delivery charges 16 16
Texas-Taxable Services Tax Code § 151.0101 defines “taxable services” to include software repair, remodeling, modification, restoration, or maintenance services provided by the software vendor. ― Maintenance = providing error correction, improvements, or technical support These services are not taxable if purchased directly • from a third-party service provider who did not sell the software. 17 17
Software Installed on Texas Server Comptroller’s Decision No. 44,127 (2005): Taxpayer purchased software and installed it on a server located in Texas. The software was used by employees located in other states. Taxpayer’s Argument : The treatment of software as TPP is a legal fiction, and the legal fiction should be extended to where the users actually use the software. Comptroller’s Ruling : Installing software on a server located in Texas is a use in Texas. The software is taxable in Texas, regardless of whether users in other states can access the software. 18 18
California-Software Canned and custom computer programs • ― California taxes the sale of "canned" computer software, which is software designed and manufactured for general retail sale and not under the specifications or demands of any individual client. ― Tax does not apply to sales of canned software that are transmitted electronically from the seller's place of business to or through the purchaser's computer as long as the purchaser does not obtain possession of any tangible personal property in the transaction. ― Custom-ordered modifications to existing, prewritten programs are exempt, provided that such charges are separately stated. 19 19
California-Software Maintenance and Warranties • Optional vs. Mandatory ― If the purchase of the maintenance contract is optional to the purchaser, and there is a single lump-sum charge for the contract, then 50% of the lump-sum charge for the contract is subject to California sales and use taxes as a taxable sale of tangible personal property. ― If the contract is optional, and is for support only, the charge is tax exempted ― If the contract in optional, and for upgrades received in physical form, the charge is taxable ― If the contract in optional, and for upgrades received in electronic form, the charge is non-taxable. Mandatory maintenance and warranty contracts are taxable 20 20
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