State Sales Tax in the Digital Economy: Navigating Electronic Taxability and the Factor Presence Rule WEDNESDAY, FEBRUARY 10, 2016, 1:00-2:50 pm Eastern IMPORTANT INFORMATION 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 For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the 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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State Sales Tax in the Digital Economy February 10, 2016 David W. Bertoni, Partner Martin Eisenstein, Managing Partner Brann & Isaacson Brann & Isaacson dbertoni@brannlaw.com meisenstein@brannlaw.com Michael E. Carey, Esq. Brann & Isaacson mcarey@brannlaw.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.
STATE SALES TAX IN THE DIGITAL ECONOMY: NAVIGATING ELECTRONIC TAXABILITY AND THE FACTOR PRESENCE RULE February 10, 2016 Martin Eisenstein, Managing Partner David Bertoni, Partner Michael Carey, Associate BRANN & ISAACSON Material in this webinar is for reference purposes only. This webinar is being provided with the understanding that neither the author(s) nor Strafford Publishing (and its representatives) are engaged in rendering legal, accounting, investment, or any other professional service directly through this webinar. Neither Strafford Publishing (and its representatives) nor the author(s) assume any liability for any errors or omissions, or how this webinar or its contents are used or interpreted, or for any consequences resulting directly or indirectly from the use of this webinar. For legal, financial, strategic or any other type of advice, please personally consult the appropriate professional. 5
Background Issues Regarding Sales Tax on IT Services/Products By Martin Eisenstein Strafford 6
Background: IT Outsourcing Levels Data Processing / Storage Networks / Desktop Networks / Desktop Support On Site IMAC / Repair Help Desk / IMAC / Repair) Help Desk / Remote IMAC Software Strafford 7 7
Categories of IT Products • Software: – Custom • A few states (e.g. CT (1%), HI, NM, TX (most but not all situations)) tax custom software – Taxation of prewritten software based on method of delivery – Tangible medium: most states tax – Load and leave: Generally same as tangible medium (NV exception) – Electronically delivered: Fewer states tax (FL is not TPP) – Software as a Service (SaaS)(to be discussed) Strafford 8 8
Categories of IT Products: Detecting Problems and Fixing Them • Does It Work And Fixing It: Monitoring/Help Desk, IMAC (“Install, Move, Add and Change”) and Repairs – Sourced to where asset is located, which may not be location where service is performed • E.g. Monitoring, Help Desk and Remote IMAC – Monitoring/Help Desk • Generally taxable only where services are taxable but also taxable in CT (1%) and MS • Note: NM principle re performance of services • TX: taxable if monitoring for repairs but not for performance • NY: taxable if monitoring for security issues Strafford 9 9
Categories of IT Products: Monitoring, IMAC and Repair Services • IMAC/Repairs – First question: Is the service performed on software, whether remotely or not? • Taxable in certain states where help desk is not taxable: e.g. KS, MS, NM (services deemed performed in state of user). • Taxable in TX only if vendor supplied the software • Taxable in NJ only if performed on pre-written software • Not taxable in FL if software is electronically delivered – Second question: Is the service performed on hardware? • Taxable in many states: CT (full rate), FL, NY, TX – Third question: does the vendor supply the parts? • CA – 10% rule; IL and VA (50% of charge taxable) Strafford 1 10 0
Categories of IT Products: Data Processing • Data Processing Services: Compiling/processing information, manipulating data and maintaining and storing customer information • Threshold question: Who owns the servers and software? – If provider, then treated as data processing and taxable in 7 states (CT (1%), DC, HI, NM, OH, TX (80% of charge), SD). • Chicago Personal Property Lease Transaction Tax (5.25% or 9%) – If customer, then still may be taxable as data processing in DC and TX but not in other states • If Customer owns the equipment/data center, then need to consider nature of services supplied by Provider – Is it help supply to manage the data center? Taxable in OH, PA if performed there – Are they IMAC/repair services? Strafford 1 11 1
Categories of IT Products: Information Services • Right to access content contained in a common data base vs. access to software of provider or information of customer • Taxable in 15 states and generally in large States – NY, NJ, TX (but not CA) – Distinction from data processing • Stock quotes vs. stock trades • Westlaw/CCH but note Chicago personal property lease transaction tax • Broad interpretation (NY)(electronic plus individual report if common data base) vs. Narrow Interpretation (FL) Strafford 1 12 2
Background: The Analysis • Six Major Questions To Answer: (1) What is the service or product? (2) Is it a bundled service/product? (3) To what state(s) is the service/product sourced? (4) Does the state tax the product or service? (5) Do exemptions and/or direct pay permits apply? (6) Does the provider have nexus with the state where the service is sourced? Strafford 1 13 3
Question 1: What is the service or product? • Primary Object or Primary Function Test – Test courts applied when first addressing taxability of software before adoption of legislation characterizing software as tangible personal property. See, e.g. Sneary v. Director of Revenue , 865 S.W.2d 342 (Mo. 1993). – Some courts continue to use test to determine taxability of software based on the mode of delivery of the software. – Test currently used by many states to characterize the nature of an IT service. • Examples of Test – Andersen Consulting LLP v Gavin , 767 A.2d 692 (Conn. 2001): taxable computer and data processing services instead of nontaxable professional services provided by consulting firm. Strafford 14 14
Question 1: What is the service or product? • Examples of Application of Primary Object Test – Prodigy Services Corp., Inc. , 125 S.W.3d 413(Tenn. Ct. App. 2003) ((Tenn. Ct. App. 2003): Online (Internet) service not deemed a taxable telecommunications service but a nontaxable information service, because the primary object of the purchaser was to obtain access to the provider’s website and not to obtain the transmission of its messages. • The service provider, Prodigy, used transmission to provide its online services. – SSOV ‘81 , CCH ¶ 401-845 (1/19/95), the NY Tax Appeals Tribunal stated that primary function of taxpayer’s matching service at issue in that case was to “allow members to meet others” and thus not a taxable information service. • The service provider, SSOV, did produce information, but that was merely a byproduct of the service. Strafford 15 15
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