Sales Tax Archives - Page 10 of 26

Sales Tax

Michigan Backs Off Cloud Tax, Refund Opportunities Available

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jan 14, 2016 | Audits, Michigan, Nationwide Importance, Procedure, Sales Tax, Tax Base, Transaction Taxes

After refusing to back down on the issue for years, the Michigan Department of Treasury (Department) issued guidance last week to taxpayers announcing a change in its policy on the sales and use taxation of remotely accessed prewritten computer software. This comes after years of litigating the issue in the Michigan courts, most recently with the precedential taxpayer victory in Auto-Owners Ins. Co. v. Dep’t of Treasury, No. 321505 (Mich. Ct. App. Oct. 27, 2015), in which the Michigan Court of Appeals held that remote access to software did not constitute delivery of tangible personal property. See our prior coverage here. The Department has announced it will apply Auto-Owners (and the numerous other favorable decisions) retroactively and thus allow for refunds for all open tax years. This is a huge victory for taxpayers; however, those that paid the tax (both purchasers and providers alike) must act promptly to coordinate and request a refund prior to the period of limitations expiring.

Implications

In issuing this guidance, the Department specifically adopts the Michigan Court of Appeals interpretation of “delivered by any means” (as required to be considered taxable prewritten computer software). Going forward, the “mere transfer of information and data that was processed using the software of the third-party businesses does not constitute ‘delivery by any means’” and is not prewritten software subject to sales and use tax. See Auto-Owners, at 7. Not only has the Department admitted defeat with respect to the delivery definition, but it also appears to have acquiesced to taxpayers’ arguments with respect to the true object test (or “incidental to services” test in Michigan). This test was first announced by the Michigan Supreme Court in Catalina Marketing, and provides that a court must objectively analyze the entire transaction using six factors and determine whether the transaction is “principally” the transfer of tangible personal property or the transfer of services with a transfer of tangible personal property that is incidental to the service.[1] In last week’s guidance, the Department states that if only a portion of a software program is electronically delivered to a customer, the “incidental to service” test will be applied to determine whether the transaction constitutes the rendition of a nontaxable service rather than the sale of tangible personal property. However, if a software program is electronically downloaded in its entirety, it remains taxable. This guidance comes in the wake of Department and the taxpayer in Thomson Reuters, Inc. v. Dep’t of Treasury stipulating to the dismissal of a Supreme Court case involving the same issues that had been appealed by the Department. In light of these developments, it appears that the Department has given up all ongoing litigation over cloud services.

Immediate Action Required for Refunds

Taxpayers who paid sales or use tax on cloud based services are entitled to receive a refund for all open periods. In Michigan, the period of limitations for filing a refund [...]

Continue Reading

McDermott Lawyers Publish Reference Guide on State Taxation of Meal Delivery

by McDermott Will & Emery | Jan 12, 2016 | Audits, False Claims Act, Local Tax, Nationwide Importance, Sales Tax, Tax Base

As the on-demand economy continues to boom, the delivery of everything! now! continues to be the mantra. In particular, delivery of meals and prepared food is the latest business model to see tremendous growth. Delivery of alcohol is coming not far behind. As restaurants and fast food chains shift from providing their own delivery (or perhaps no delivery at all) to delivering via one of the new service models, they must consider the impact that this decision will have on their sales tax collection obligation. This is especially true in light of the recent increase in predatory lawsuits targeting the overcollection and undercollection of sales tax on delivery charges.

McDermott Will & Emery state and local tax lawyers Steve Kranz, Diann Smith, Cate Battin and Mark Yopp recently published a whitepaper in State Tax Notes on this emerging topic that describes the typical service models that exist and offers a framework for restaurants and other prepared food providers to begin thinking about the often complex sales tax consequences. Steve Kranz also presented the key issues identified in this whitepaper at the National Conference of State Legislatures Executive Committee Task Force on State and Local Taxation meeting in Salt Lake City, Utah on January 8, 2016. Given policymaker interest in the topic, it is not unlikely that legislators will seek to rationalize the burdens that current sales tax rules place on the blossoming on-demand business models.

Focus on Tax Controversy – December 2015

by McDermott Will & Emery | Jan 4, 2016 | Income Tax, Insurance Tax, Local Tax, Michigan, New Jersey, New York, Sales Tax, Tax Base, Virginia, Washington

McDermott Will & Emery has released the December 2015 issue of Focus on Tax Controversy, which provides insight into the complex issues surrounding U.S. federal, international, and state and local tax controversies, including Internal Revenue Service audits and appeals, competent authority matters and trial and appellate litigation.

Mark Yopp authored an article entitled “Waiting for Relief from Retroactivity,” which discusses how courts are expanding the ability of state legislatures to retroactively change taxpayer liability going back many years.

View the full issue (PDF).

Tax Breaks for Data Centers: The Numbers Might Be Cloudy

by McDermott Will & Emery | Dec 23, 2015 | Incentives, Income Tax, Nationwide Importance, Property Tax, Sales Tax

States are competing aggressively to attract data centers with various tax incentives. Data center companies and their business customers are taking them up on their offers. But are these incentives really a good deal for the businesses? Tax incentives that seem attractive at first glance may not be beneficial when they are examined in the context of the entire tax picture, especially in the unique, uncertain, and developing world of state taxation of technology and computer services.

With the rise of global commerce, cloud computing, streaming video and a wide array of other internet-related businesses, data centers have become big businesses. In 2014, the colocation data center industry reached $25 billion in annual revenue globally, with North American companies accounting for 43 percent of that revenue.[1]

To get in on the action, states have been trying to outdo one another by offering a slew of competing tax breaks to the industry. According to the Associated Press, states have provided about $1.5 billion in data center tax breaks over the past 10 years.[2] Some states have gone even further, providing tax incentives to the entire data center industry through changes in the tax laws themselves. Such incentives can include reductions or exemptions from sales and use taxes on data center products or services, favorable income tax rates for data center companies and favorable property tax rules for data center assets. According to a recent analysis by the Associated Press, at least 23 states provide such statutory data center tax incentives.[3] Just a few of the most recent examples include a sales tax exemption for data center equipment in Michigan,[4] a broadening of the sales tax exemption for data center electricity and equipment in North Carolina[5] and a favorable apportionment formula for data centers in Virginia.[6] Importantly, many of these incentives apply not only to the data centers themselves, but also to their customers.

Businesses considering whether to take advantage of these incentives would be well advised to consider not only the potential benefit from any particular tax incentive, but also whether the decision would affect their tax picture as a whole. Because of the current uncertain and changing landscape for state and local taxation of technology and computer services, the analysis of these incentives for data centers and their customers can be particularly complex.

One item that a taxpayer might overlook when considering whether to take advantage of an incentive program is what affect, if any, the choice of location might have on the taxpayer’s property factor for income tax apportionment purposes. Obviously, location of a company’s technology equipment in a data center under a colocation agreement will cause the company’s in-state property factor to increase due to its equipment being located in the state. However, data center customers also should be aware that local tax authorities might also argue that the colocation payments themselves constitute consideration for the use of real or tangible personal property and thus the [...]

Continue Reading

Financial Statement Countdown for Remote Sellers Selling into Alabama

by McDermott Will & Emery, Diann Smith and Stephen P. Kranz | Dec 16, 2015 | Alabama, Nationwide Importance, Nexus, Sales Tax

Remote sellers making sales into Alabama have until January 1, 2016, to begin collecting sales tax regardless of their physical presence in the state or consider whether there is any impact on financial statement issues as a result of non-collection.

This summer, the Alabama Department of Revenue issued a surprising new regulation, § 810-6-2-.90.03. This rule specifically provides that a remote seller with more than $250,000 of sales into the state that also meets the provisions of the “doing business” statute must register for a license and collect and remit sales/use tax to the state. Notably, the list of activities that are considered “doing business” includes solicitation of sales using cable television advertising; substantial solicitation of sales plus benefitting from any banking; financing; debt collection; telecommunication; or marketing activities occurring in this state; any contact with the state sufficient to allow Alabama to impose a sales and use tax collection requirement under the U.S. Constitution. Ala. Code § 40-23-68(b)(9). The rule goes into effect January 1, 2016.

If this had happened 10 years ago, the response would be simple – Alabama’s economic nexus threshold is clearly unconstitutional under Quill. However, several developments, both legal and environmental, have made the analysis more complex. First, the Alabama legislature has provided an option to remote sellers to use the “Simplified Sellers Use Tax Remittance” process. This program creates almost the simplest tax calculation and remittance process possible: one rate, no exemptions, single jurisdiction filing. Alabama is surely counting on the Supreme Court of the United States to find that this simplified process removes the burden which concerned the Court in Quill. There are, of course, numerous arguments against this scenario; many of them quite strong. Nevertheless, Alabama’s clever, parallel compliance juggernaut does mandate some respect.

Second, Justice Anthony Kennedy clearly feels it is high time for the holding in Quill to be relegated to an era when only academics knew of the internet. One justice’s comments do not mean that sculptors should begin carving Quill’s headstone, but the Court already has at least two justices that do not believe the dormant commerce clause exists at all. Today, there is clearly the highest risk ever of some type of melting of the Quill iceberg.

So what does this mean for remote sellers with Alabama customers? First—of course such sellers could begin collecting, but, some sellers philosophically believe in the underpinnings of Quill and other sellers may find collection, even under the simplified system, financially oppressive and/or administratively difficult. For those sellers that will not or cannot comply, the immediate questions that must be answered are: (1) What are the risks of not collecting; and (2) Do those risks rise to the level of financial statement issues? Obviously the first risk is that with every sale, the seller may be incurring tax liability that it otherwise could have passed on to its customers. How real this risk is dovetails with the second issue. In determining the risk of probable loss (or other financial statement standard), [...]

Continue Reading

McDermott Partner Featured on The Kojo Nnamdi Show

by McDermott Will & Emery | Dec 16, 2015 | Nationwide Importance, Sales Tax

Yesterday, McDermott Will & Emery partner Steve Kranz was a featured guest on WAMU 88.5’s The Kojo Nnamdi Show, one of NPR’s most prestigious talk radio shows in the greater Washington, DC area. Kranz participated in this week’s Tech Tuesday segment titled “Taxing Your Online Shopping Spree” which focused on the current state of internet sales tax impositions in the United States and various proposals to tax e-commerce that are currently being considered by Congress and state legislatures. Kranz was joined by fellow guests Steve DelBianco, Executive Director at NetChoice, and Bill Fox, Director of the Center for Business and Economic Research at the University of Tennessee.

A permanent link to this informative discussion is available here.

NYS Tax Department Revised Sales Tax Publication Answers Some Questions but Not Others

by McDermott Will & Emery | Dec 4, 2015 | New York, Nexus, Sales Tax

The New York State Department of Taxation and Finance (Department) has just revised its Guide to Sales Tax in New York State, Publication 750.

The Guide will be particularly useful for companies that are just starting to do business in New York State. It provides a well-organized and easy-to-read outline of the steps that should be taken to register as a vendor selling products that are subject to the sales tax and to collecting and remitting taxes. Small businesses and their advisors will find the Guide particularly useful.

The Guide confirms the State’s required adherence to the United States Supreme Court decision in Quill Corp. v. North Dakota (a case in which the taxpayer was represented by McDermott Will & Emery) to the effect that an out-of-state company must have a physical presence in New York to be required to collect use tax on sales to New York customers. It confirms that a company need not collect use tax on sales to New York buyers if its only contact with the State is the delivery of its products into the State by the U.S. Postal Service or a common carrier. It cautions, however, that use tax must be collected if the company has employees, sales persons, independent agents or service representatives located in, or who enter, New York. Although the law has been clear for many years that a sales representative can create nexus for an out-of-state company even though he or she is an independent contractor and not an employee, some companies still seem to be under the mistaken impression that this is not the case. Moreover, although there is no New York authority directly in point, cases in other states have established the principle that nexus can be created by the presence in the state of a single telecommuting employee, even if the employee’s work is not focused on the state.

The Guide contains a cryptic reference to New York’s click-through nexus rule under which an out-of-state company can be compelled to collect use tax on sales to New York purchasers if people in the state refer customers to the company and are compensated for doing so. Such persons are presumed to be soliciting sales for the company and, although the presumption can be rebutted, that will prove to be impossible in the vast majority of cases. The Guide contains cross-references to Department rulings that explain the presumption and the manner in which it can be rebutted, but it would have been helpful if the Guide could have provided more detail about these rules.

One attractive feature of the Guide is that people accessing it online can use links in the Guide to get to relevant rulings.

In addition to the state-wide sales and use tax, special sales taxes that are imposed only within New York City are discussed. These include taxes on credit rating services and certain localized personal services such as those provided by beauty salons, barber shops, tattoo parlors and tanning [...]

Continue Reading

Precedential Cloud Victory in Michigan Court of Appeals

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Oct 30, 2015 | Audits, Michigan, Nationwide Importance, Sales Tax, Transaction Taxes

On Tuesday, a three-judge panel sitting for the Michigan Court of Appeals unanimously affirmed a lower court decision finding that the use of cloud-based services in Michigan is not subject to use tax in Auto-Owners Ins. Co. v. Dep’t of Treasury, No. 321505 (Mich. Ct. App. Oct. 27, 2015). While there have been a number of cloud-based use tax victories in the Michigan courts over the past year and a half, this decision marks the first published Court of Appeals opinion (i.e., it has precedential effect under the rule of stare decisis). See Mich. Ct. R. 7.215(C)(2). Therefore, the trial courts and Michigan Court of Appeals are obligated to follow the holdings in this case when presented with similar facts, until the Michigan Supreme Court or Court of Appeals say otherwise. While the ultimate outcome (i.e., not taxable) of the lower court decision was affirmed, the analysis used by the Court of Appeals to get there was slightly different and the court took the time to analyze over a dozen different contracts, as discussed below. Given the fact that a petition for review is currently pending in another Court of Appeals case (Thomson Reuters) decided on similar issues in 2014, it will be interesting to see if this development increases the Michigan Supreme Court’s appetite to hear a use tax case on cloud-based services. The Department of Treasury (Department) has approximately 40 days to request that the Auto-Owners decision be reviewed by the Michigan Supreme Court.

Facts

Auto-Owners is an insurance company based out of Michigan that entered into a variety of contracts with third-parties to provide cloud-based services. These contracts were grouped into six basic categories for purposes of this case: (1) insurance industry specific contracts, (2) technology and communications contracts, (3) online research contracts, (4) payment remittance and processing support contracts, (5) equipment maintenance and software customer support contracts and (6) marketing and advertising contracts. The contracts all involved, at some level, software accessed through the internet. Michigan audited Auto-Owners and ultimately issued a use tax deficiency assessment based on the cloud-based service contracts it utilized. In doing so, the Department cited the Michigan use tax statute, which like many states, provides that tax is imposed on the privilege of using tangible personal property in the state. See generally Mich. Comp. Laws Ann. § 205.93. The Department took the position that the software used in Michigan by Auto-Owners was “tangible personal property,” which is defined to include prewritten, non-custom, software that is “delivered by any means” under Michigan law. See Mich. Comp. Laws Ann. § 205.92b(o). The taxpayer paid the tax under protest and filed a refund claim, which was the focus of the Court of Claims decision being appealed.

Procedural History

At the trial court level, the Court of Claims determined that the application of use tax to the software used in Michigan by Auto-Owners would be improper. In doing so, the court issued three separate holdings—all in favor of the taxpayer. First, the court held that use tax [...]

Continue Reading

Illinois Appellate Court Holds City of Chicago Tax on Cars Rented Outside of but Used Within the City Valid

by Catherine A. Battin | Oct 2, 2015 | Constitutional Issues, Illinois, Local Tax, Nexus, Property Tax, Sales Tax, Transaction Taxes

An Illinois Appellate Court, in Hertz Corp. v. City of Chicago, 2015 IL App (1st) 123210 (Sept. 22, 2015), gave the City of Chicago (City) permission to require rental car companies to collect tax on vehicle rentals from locations within three miles of the City, overturning a lower court ruling that found such taxation was an extraterritorial exercise of the City’s authority. The appellate court granted summary judgment to the City and lifted the permanent injunction enjoining the City from enforcing the tax.

The tax at issue is the City’s Personal Property Lease Transaction Tax (Lease Tax), which is imposed upon “(1) the lease or rental in the city of personal property, or (2) the privilege of using in the city personal property that is leased or rented outside of the city.” Mun. Code of Chi. § 3-32-030(A). While the Lease Tax is imposed upon and must be paid by the lessee, the lessor is obligated to collect it at the time the lessee makes a lease payment and remit it to the City. Mun. Code of Chi. §§ 3-32-030(A), 3-32-070(A).

The subject of this litigation is the City’s application of the Tax in its Personal Property Lease Transaction Tax Second Amended Ruling No. 11 (eff. May 1, 2011) (Ruling 11). The plaintiffs argued that Ruling 11 is an extraterritorial exercise of the City’s authority because the City lacks nexus with the rental transactions. The Ruling “concerns [short-term] vehicle rentals to Chicago residents, on or after July 1, 2011, from suburban locations within 3 miles of Chicago’s border … [excluding locations within O’Hare International Airport] by motor vehicle rental companies doing business in the City.” Ruling 11 § 1. The Ruling explains that “‘doing business’ in the City includes, for example, having a location in the City or regularly renting vehicles that are used in the City, such that the company is subject to audit by the [City of Chicago Department of Finance] under state and federal law.” Ruling 11 § 3. As for taxability of leased property, the Ruling cites the primary use exemption, exempting from Tax “[t]he use in the city of personal property leased or rented outside the city if the property is primarily used (more than 50 percent) outside the city” and stating the taxpayer or tax collector has the burden of proving where the use occurs. Ruling 11 § 2(c) (quoting Mun. Code of Chi. § 3-32-050(A)(1)).

Ruling 11 contains a rebuttable presumption that motor vehicles rented to customers who are Chicago residents from the suburban locations of rental companies that are otherwise doing business in Chicago are subject to the Lease Tax. The Ruling applies to companies with suburban addresses located within three miles of the City. The presumption may be rebutted by any writing disputing the conclusion that the vehicle is is used more than 50 percent of the time in the City. The opposite is assumed for non-Chicago residents. Ruling 11 § 3. The [...]

Continue Reading

Hut, Hut, Phlmph — Florida Judge Denies Dismissal of Tax on Delivery Charges Lawsuit

by McDermott Will & Emery, Diann Smith and Stephen P. Kranz | Sep 10, 2015 | Florida, Sales Tax

In the latest development in the Florida litigation regarding the taxation of delivery charges, Judge Jack Tuter of the 17th Judicial Circuit Court of Florida determined that the complaint against Pizza Hut was sufficient to withstand a motion to dismiss for failure to state a claim. Order, Lauren Minniti v. Pizza Hut of America, No. 14-023335 CACE (07), 2015 WL 5037164 (Fla. 17th Cir. Ct. Aug. 26, 2015). The case is fashioned as a class action, but it is still in the early stages and the class has not yet been certified.

The substantive tax question in this case is whether Pizza Hut is liable to Plaintiff (and possibly a class of plaintiffs) for damages based on sales tax charged on a delivery fee paid in connection with a food delivery. (Read previous discussion of delivery fee litigation). Pizza Hut charged the plaintiff $0.17 in sales tax on the separately stated charge for delivering food. The plaintiff asserts that Florida law does not impose sales tax on delivery fees if a customer has the option to pick up the delivered goods. The plaintiff raised three counts against Pizza Hut: (1) violation of the Florida Deceptive and Unfair Trade Practices Act; (2) negligence; and (3) unjust enrichment. The only issue in the motion to dismiss was whether the plaintiff had alleged sufficient facts to support the causes of action. A similar case is pending against Papa John’s Pizza.

In its motion, Pizza Hut had first argued that Plaintiff’s sole statutory remedy was the difference between what Pizza Hut collected and the amount Pizza Hut paid to the state. Because Pizza Hut remitted the entire amount, no remedy was available. Judge Tuter determined that this was not a proper assertion in a motion to dismiss, but that it could be raised as an affirmative defense to the plaintiff’s substantive claims.

Secondly, Pizza Hut argued that the actions alleged by the plaintiff did not amount to an unfair or deceptive act. The judge determined that this was a factual determination not subject to a motion to dismiss. Similarly, the judge also found the plaintiff had included sufficient factual allegations in her complaint to allege negligence.

Finally, Pizza Hut argued that the plaintiff had failed to state a claim, because she had not exhausted her administrative remedies—specifically, she had not requested a refund directly from the state. The judge rejected this position because Florida regulation provides that “[a] taxpayer . . . who has paid a tax to a dealer when no tax is due, must secure a refund of the tax from the dealer and not from the Department of Revenue.” Fla. Admin. Code R. 12A-1.014 (4).

Pizza Hut must now file an answer to the plaintiff’s complaint and dispositive motions will be heard regarding the appropriateness of certifying the case as a class action.

Practice Note — Taxation of delivery fees is complicated.

This case is an example of the complexity in dealing with sales taxes that may [...]

Continue Reading