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Sales Tax

The New “Click-Through”?: New York Budget Proposal Requires Marketplace Providers to Collect Tax

by McDermott Will & Emery and Stephen P. Kranz | Jan 22, 2015 | Constitutional Issues, Nationwide Importance, New York, Nexus, Sales Tax, Transaction Taxes

On January 21, Governor Cuomo delivered his State of the State address, along with proposing the new budget. The budget has a number of new tax proposals. One of those proposals would have a significant impact on e-commerce companies. Part X of the budget proposal amends the sales tax statutes to require marketplace providers to collect and remit sales tax on sales to New York customers. A marketplace provider is a person who, pursuant to an agreement with a seller, “facilitates a sale, occupancy, or admission” by the seller. A person can be a marketplace provider if they facilitate the sale, or are an affiliate of a person facilitating the sale. For purposes of this definition, affiliate companies are companies that have common ownership of 5 percent.

“Facilitates a sale, occupancy, or admission” means:

(1) such person, or an affiliated person, collects the receipts, rent or amusement charge paid by a customer, occupant or patron to a marketplace seller; and

(2) such person performs either of the following activities:

(A) provides the forum in which, or by means of which, the sale takes place or the offer of occupancy or admission is accepted, including a shop, store or booth, or an internet website, catalog or a similar forum; or

(B) arranges for the exchange of information or messages between the customer, occupant or patron, as the case may be, and the marketplace seller.

A marketplace provider meeting these requirements would be required to collect as if the marketplace provider were the vendor.

Under current law, a seller is required to collect and remit tax on sales made to New York customers. Under the budget proposal, a seller would no longer be required to collect if the marketplace provider provides a collection certificate to the seller. (The Division of Taxation is required to develop procedures to administer the certificate). If a marketplace provider does not provide a collection certificate, but does use language approved by the Division of Taxation and Finance in a publicly-available agreement, that will have the same effect as the provision of a collection certificate.

The imposition under the proposal is directly on the marketplace provider. There does not appear to currently be any provision that would allow a seller in a marketplace to collect instead of the marketplace provider, if the seller so desired.

Marketplace providers are relieved of liability if the information provided to them by the seller is incorrect. However, there is no provision in the bill requiring the marketplace sellers to provide any information to the marketplace provider.

The law does not change existing nexus or ‘doing business’ requirements. It appears that a marketplace provider would be required to collect only if the marketplace provider has nexus with New York under the Commerce Clause.

This proposal would have a significant effect on e-commerce companies, and could have an impact reminiscent of the impact of the click-through statutes. Companies that sell through a [...]

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Illinois Law Firm Continues to Clog Court System with Tax-Related False Claims Act Allegations—but Proposed Legislation May Offer Relief

by Mary Kay McCalla Martire | Jan 13, 2015 | False Claims Act, Illinois, Sales Tax

As many readers of this blog know, over the past 12 years the Circuit Court of Cook County, Illinois has been deluged with lawsuits filed by a Chicago law firm against internet retailers as a “whistleblower” under the Illinois False Claims Act. The factual support for the lawsuits comes solely from internet-based investigations, including purchases made on retailer websites. The lawsuits typically allege that the retailers have knowingly failed to collect and remit sales and use tax on some aspect of their internet sales shipped to Illinois. See 740 ILCS 175/1 et seq. Substantial damages are claimed, including up to three times the tax allegedly owed to the State, attorneys’ fees, and a penalty assessment for each tax filing that failed to disclose the tax due.

An initial wave of approximately 90 lawsuits was filed in 2003 and 2004 against retailers that did not collect Illinois tax on their internet sales. In 2011, the whistleblower firm began to file a second round of lawsuits against retailers that collected tax on their internet sales of merchandise, but not on the shipping and handling charges associated with those sales. To date, more than 200 of these “shipping and handling” tax lawsuits have been filed. Most recently, the whistleblower firm has filed claims against defendants in the liquor industry, alleging a failure to collect sales and use tax and, in some instances, the failure to remit Illinois’ gallonage tax on sales of alcohol.

The validity of these lawsuits is hotly contested. Many lawsuits have been dismissed, and at least two shipping and handling tax cases have resulted in trial rulings against the whistleblower firm and in favor of the retailer defendants. It remains to be seen how the courts will determine the viability of Relator’s most recent claims, which appear on their face to be flawed.

Many other cases, including those that raise only nuisance value damages, have been settled to avoid the cost of litigation. These settlements appear to have fueled the whistleblower firm’s continued voracious appetite for this type of litigation.

Although the State of Illinois has the right to intervene and lead the prosecution of these actions, for the past several years the Office of the Illinois Attorney General has generally declined to intervene in these actions. Unfortunately, when this occurs, the Illinois False Claims Act permits a whistleblower claimant to proceed on its own with the litigation. In almost all cases in which the State has declined to intervene, the whistleblower firm has elected to proceed on its own with its tax-related claims.

The continued activity in this area underscores the need for the Illinois General Assembly to address and pass House Bill 0074 – legislation carefully crafted, through negotiations with the Illinois Attorney General’s office, to modify the procedure for state tax-related False Claims Act litigation in Illinois. The legislation would vastly improve the current False Claims Act situation by modifying the law as follows:

Requiring whistleblowers with state tax-related claims to first disclose their claims [...]

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More Tax Money for the City of Chicago in 2015: Broader Bases, Increased Rates and Lesser Credit

by Jane Wells May | Jan 8, 2015 | Illinois, Local Tax, Property Tax, Sales Tax, Tax Base, Transaction Taxes

The City of Chicago’s (City’s) 2015 budget includes a number of changes to taxing ordinances found in titles 3 and 4 of the Chicago Municipal Code. The City of Chicago Department of Finance has notified taxpayers and tax collectors of the amendments, effective January 1, 2015, via a notice posted on its website. The text of the amendments can be found on the Office of the City Clerk’s website. The amendments, designed to bolster the City’s coffers, affect multiple City taxes by enlarging tax bases, increasing tax rates and tightening credit mechanisms. The amendments include:

Hotel Accommodations Tax(Section 3-24-020(A))
- The definition of “operator” (the tax collector) was amended to include: (1) any person that receives or collects consideration for the rental or lease of hotel accommodations; and (2) persons that facilitate the rental or lease of hotel accommodations for consideration, whether on-line, in person or otherwise.
- A definition of “gross rental or leasing charge” (the tax base) was added that excludes “separately stated optional charges” unrelated to the use of hotel accommodations.
Use Tax for Non-titled Personal Property(Section 3-27-030(D))
- A credit is available for sales and use “tax properly due” and “actually paid” to another municipality against the City’s 1 percent use tax imposed on the use in the City of non-titled tangible personal property that was purchased outside of the City. The added definitions of “tax properly due” and “tax actually paid” exclude other municipal taxes that are rebated, refunded, or otherwise returned to the taxpayer or its affiliate.
Personal Property Lease Transaction Tax
- The exemption from the tax for a “car sharing organization” (i.e., Zipcar) was eliminated. (Sections 3-32-020(A) (definition) and 3-32-050(A)(13) (exemption))
- The definition of “lease price” or “rental price” (the tax base) was amended to exclude nontaxable, separately-stated charges only if they are optional. (Section 3-32-020(K))
- The tax rate was increased from 8 percent to 9 percent. (Section 3-32-030(B))
Amusement Tax
- The amusement tax was amended to be imposed on the full charge paid for the privilege of using a “special seating area” such as a luxury suite or skybox (Section 4-156-020(F)). Credit against this tax is available in the amount of any other taxes the City imposes on the same charges (for example, food and beverage charges) if the taxes are separately-stated and paid. Previously, tax was imposed on 60 percent of the charge for a special seating area and did not include a credit mechanism.
- Credit against the amusement tax was eliminated for franchise fees paid to the City for the right to use the public way or to do business in the City. (Section 4-156-020(J))
- The amendments eliminated the additional tax imposed on ticket sellers (Section 4-156-033). The tax was imposed on sellers selling tickets from a location other than where the taxable amusement occurs on the amount of the service fee (as distinguished from the taxable admission charge). Now, all ticket sellers must [...]
  
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Currency Conversion Concerns: New York Issues Guidance on Virtual Currencies

by McDermott Will & Emery | Dec 23, 2014 | Income Tax, Nationwide Importance, New York, Sales Tax, Tax Base, Unclaimed Property

On December 5, 2014, the New York Department of Taxation and Finance (Department) released TSB-M-14(5)C, (7)I, (17)S. This (relatively short) bulletin sets forth the treatment of convertible virtual currency for sales, corporation and personal income tax purposes. The bulletin follows on a notice released by the Internal Revenue Service (IRS) in March of this year, Notice 2014-21.

The IRS Notice indicates that, for federal tax purposes, the IRS will treat virtual currency as property, and will not treat it as currency for purposes of foreign currency gains or losses. Taxpayers must convert virtual currency into U.S. dollars when determining whether there has been a gain or loss on transactions involving the currency. When receiving virtual currency as payment, either for goods and services or as compensation, the virtual currency is converted into U.S. dollars (based on the fair market value of the virtual currency at the time of receipt) to determine the value of the payment.

The IRS Notice only relates to “convertible virtual currency.” Virtual currency is defined as a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” Convertible virtual currency is virtual currency that “has an equivalent value in real currency, or that acts as a substitute for real currency.”

The Department’s bulletin also addresses only convertible virtual currency, and uses a definition identical to the IRS definition. The Department indicates that it will follow the federal treatment of virtual currency for purposes of the corporation tax and personal income tax.

For sales and use tax purposes, the bulletin states that convertible virtual currency is intangible property and therefore not subject to tax. Thus, the transfer of virtual currency itself is not subject to tax. However, the exchange of virtual currency for products and services will be treated as a barter transaction, and the amount of tax due is calculated based on the fair market value of the virtual currency at the time of the exchange.

The Department should be applauded for issuing guidance on virtual currency. It appears that these types of currencies will be used more and more in the future, and may present difficult tax issues.

However, the Department’s guidance is incomplete. There are a couple of unanswered questions that taxpayers will still need to ponder.

First, the definition of convertible virtual currency is somewhat broad and unclear. The Department and the IRS define “convertible” virtual currency as currency that has an “equivalent” value in real currency, but equivalent is not defined in either the IRS Notice or the bulletin. Many digital products and services use virtual currency or points that cannot be legally exchanged for currency to reward users, and the IRS and the Department should be clearer about the tax treatment of those currencies.

Second, although the Department will follow the federal treatment for characterization and income recognition purposes, the bulletin does not discuss apportionment. This is likely a very small issue at this point in time, but the Department will, [...]

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Texas Comptroller Defies the Laws of Physics

by Arthur R. Rosen | Dec 22, 2014 | Constitutional Issues, Nexus, Sales Tax, Texas

In this article, the authors examine a recent Texas administrative law judge’s opinion that says an out-of state company has nexus with Texas through downloaded software that it licenses to Texas customers. They argue that the state comptroller’s adoption of the decision allows sales and use tax liability to be based on economic nexus instead of physical nexus and is therefore unconstitutional.

Read the full article.

Lame-Duck Congress Mulls Laws to Ease State Tax Headaches

by Arthur R. Rosen | Dec 8, 2014 | Constitutional Issues, Income Tax, Nationwide Importance, Nexus, Sales Tax, Transaction Taxes

As it heads into the final weeks of its session, Congress is considering various bills that would restrict or expand states’ taxing authority. Almost every business in the country would be affected by at least some of these bills. While some of these bills have progressed further than others, any could become law—particularly if bundled into legislation that Congress must, as a practical and political matter, pass before the session ends. Businesses thus have an opportunity to ask their Senators and Representatives to take action to rein in some of the problems with state and local taxes.

Read the full article on CFO.com.

Three Strikes…Tax on Cloud Computing Out in Michigan?

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Dec 3, 2014 | Michigan, Sales Tax, Transaction Taxes

If the Department of Treasury (Treasury) was hoping that the Michigan courts would simply overlook the previous two cloud computing losses this year in Thomson Reuters (previously covered here) and Auto-Owners (discussed here), they appear to have been mistaken. Last Wednesday’s Court of Claims opinion in Rehmann Robson & Co. v. Department of Treasury marked the third Michigan decision this year to rule that cloud-based services are not subject to use tax in the state. In Rehmann Robson, the Court of Claims found that the use of Checkpoint (a web-based tax and accounting research tool) by a large accounting firm was properly characterized as a non-taxable information service, despite Treasury’s continued effort to impose use tax and litigate similar cloud-based transactions. This taxpayer victory comes just six months after the Michigan Court of Appeals in Thomson Reuters found that a subscription to Checkpoint was primarily the sale of a service under the Catalina Marketing test, Michigan’s version of the “true object” test, which looks to whether the use of tangible personal property was incidental to the provision of services when both are provided in the same transaction. The Thomson Reuters decision reversed a 2013 Court of Claims opinion that granted summary disposition in favor of Treasury’s ability to tax the cloud-based service as “prewritten computer software.”

Analysis

While all three Michigan decisions issued this year reach the same conclusion, the most recent decision makes an explicit effort to affirmatively block any potential avenue Treasury may use to impose the use tax on cloud-based transactions. For what it’s worth, the Rehmann Robson opinion was written by the same judge who wrote the Auto-Owners opinion released in March 2014, and contained an identical analysis. Unlike the Thomson Reuters decision that found use of prewritten computer software in the state, but simply found it to be incidental to the nontaxable information services provided under Catalina Marketing, Auto-Owners (and now Rehmann Robson) both undercut the Treasury’s argument before it begins.

First, the court held that there was no tangible personal property transferred because the definition of “prewritten computer software” was not satisfied. Like many other states, Michigan defines this term as software “delivered by any means.” The court reasoned that because the accounting firm simply accessed information via the web that was processed via BNA and Thomson Reuter’s own software, hardware and infrastructure, there was no “delivery” under a conventional understanding of the word. Absent delivery, there was no prewritten computer software for Treasury to impose tax upon.

Second, the Court of Claims went on to note that even if prewritten computer software was delivered, the accounting firm did not sufficiently “use” the software to impose the tax. Because the accounting firm did not exercise a right or power over the software incident to ownership (other than the ability to control research outcomes by inputting research terms), there was no use. The court explicitly turned down Treasury’s argument [...]

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New Jersey Tax Court Finds Two Pennsylvania Taxes Are Not Required To Be Added Back

by Arthur R. Rosen and Richard C. Call | Oct 31, 2014 | Income Tax, New Jersey, Sales Tax, Tax Base

In a Corporation Business Tax (CBT) case, PPL Electric Utilities Corporation v. Director, Division of Taxation, Dkt. No. 000005-2011 (N.J. Tax. Ct. Oct. 2, 2014), the Tax Court of New Jersey found for the taxpayer and held that the Pennsylvania Gross Receipts Tax and Pennsylvania Capital Stock Tax were not required to be added back in computing New Jersey entire net income.

The case involves a 1993 amendment to the CBT statute regarding adding back taxes deducted in computing federal taxable income. Prior to 1993, the New Jersey statutes required taxpayers to add-back only certain federal taxes and the CBT in computing New Jersey entire net income. The amendment added a requirement that taxpayers add-back to federal taxable income taxes paid to states other than New Jersey “on or measured by profits or income, or business presence or business activity.” N.J.S.A. 54:10A-4(k)(2)(C). According to legislative history cited by the court, prior to the amendment “corporations which [did] business in several states [paid] a lower effective rate of tax on their New Jersey activities than [did] corporations which only [did] business in New Jersey.” The court explained that the amendment corrected the inequity “by requiring multi-state taxpayers to add-back state taxes similar to that of the CBT.”

The Tax Court concluded that the Pennsylvania Gross Receipts Tax is not subject to the tax add-back, finding that the tax is: (1) “based solely on the amount of electricity sold, regardless of whether income or profit is realized from such sales and not based upon the taxpayer’s business presence or business activity in Pennsylvania;” and (2) “passed through to the ultimate consumer of electricity.” The court held that the Pennsylvania Capital Stock Tax was not subject to the tax add-back because it was in substance a property tax.

Interestingly, the Tax Court found that the New Jersey Division of Taxation’s (Division) interpretation of the tax add-back was not only incorrect but also discriminatory.

The 1993 amendment was passed because previously, solely New Jersey taxpayers were taxed on a higher tax basis than similarly situated multi-state taxpayers . . . . Here, Taxation’s interpretation of the statute discriminates against multi-state taxpayers because they would be required to add-back the Pennsylvania Corporate Income Tax as well as other non-CBT-type taxes imposed by other states, such as the Pennsylvania Gross Receipts Tax and the Pennsylvania Capital Stock Tax, while solely New Jersey taxpayers are only required to add-back CBT-type taxes. This court finds that the Legislature did not intend to cure one inequity by imposing another.

Given the number of different types of state taxes in existence, this case may have broad ramifications for multi-state taxpayers subject to the CBT. We have seen the Division make similar adjustments to other companies on audit and this decision should be helpful in disputing those adjustments. Additionally, multi-state taxpayers may have refund opportunities for similar taxes that they have previously added back.

Tennessee SaaS Ruling Highlights Telecommunications Concerns for SaaS Providers

by Stephen P. Kranz | Oct 20, 2014 | Sales Tax, Tennessee

The Tennessee Department of Revenue recently released Letter Ruling No. 14-05, in which it considered whether certain cloud collaboration services are subject to the state’s sales tax. At a high level, the provider’s services are provided in a typical Software as a Service (SaaS) form: (1) the provider owns the hardware and software used to provide the services; (2) the software is installed on the provider’s servers; (3) the provider’s employees monitor and maintain the hardware and software; (4) the provider charges a customer a monthly user fee; and (5) customers remotely access the software (i.e., no software is ever downloaded by a customer). Of additional note, the provider does not license any of its software to the customers.

As the Tennessee Department has done in the past, it correctly determined that the SaaS arrangement does not constitute a retail sale of computer software because the provider “does not transfer title, possession, or control of any tangible personal property or software to a customer.” Instead, the provider “ultimately uses and consumes both hardware and software as a means of providing its services.”

However, the Tennessee Department found that the cloud collaboration services are subject to the state’s sales tax as telecommunications services or ancillary services to telecommunications. The cloud collaboration services instruct a customer’s telecommunications equipment as to how to process and route calls, “augment[ing] a customer’s voice, video, messaging, presence, audio/web conferencing, and mobile capabilities.” As such, Letter Ruling No. 14-05 highlights a major concern for SaaS providers: that their services will be considered taxable telecommunications or ancillary services. While the cloud collaboration services are perhaps more clearly telecommunications or ancillary services than others, many SaaS offerings include an element of telecommunications by the very nature of remotely accessed software.

Fortunately, there are strong arguments in many states for most SaaS offerings to be excluded from the definition of telecommunications or ancillary services. Streamlined Sales and Use Tax Agreement (SSUTA) member states (Tennessee is an associate member) are required to exclude “data processing and information services that allow data to be generated, acquired, stored, processed, or retrieved and delivered by an electronic transmission to a purchaser where such purchaser’s primary purpose for the underlying transaction is the processed data or information” from the definition of “telecommunications services.” Therefore, where a provider can demonstrate that the true object of its offering is data processing or information services—and that any telecommunications services are merely incidental to those services—the offering should not constitute taxable telecommunications services. In fact, demonstrating that the telecommunications component of any SaaS offering is merely incidental to the true object of the service should be effective in almost all states, SSUTA members or not. Therefore, to adequately defend against the concern that a SaaS offering will be considered taxable telecommunications or ancillary services, providers should ensure that the true object of their offering is apparent and that it is clear that any telecommunications component is provided solely to facilitate that true object.

Illinois Courts Consistently Enforce Manufacturing Exemption Despite Department of Revenue Opposition

by Mary Kay McCalla Martire | Oct 14, 2014 | Illinois, Sales Tax

Illinois courts have issued three taxpayer-friendly manufacturing rulings in 2013 and 2014, underscoring the breadth of the exemption from use tax afforded to equipment and chemicals used in the process of manufacturing.

Cook County Circuit Court Holds Chemicals Effectuate a “Direct and Immediate” Change on a Product Being Manufactured and Thus are Tax-exempt

Most recently, in in PPG Industries, Inc. v. Illinois Dep’t of Revenue, No. 13 L 050140 (Cir. Ct. of Cook County, Ill. Sept. 9, 2014), the Circuit Court of Cook County, Illinois, reversed an administrative determination denying PPG a refund of use tax paid on its purchase of chemicals used in a manufacturing process, on the basis that the chemicals effectuated a “direct and immediate change” on the glass that was being manufactured. The exemption at issue exempts from tax “chemicals or chemicals acting as catalysts but only if the chemicals or chemicals acting as catalysts effect a direct and immediate change upon a product being manufactured or assembled for sale or lease.” 86 Ill. Admin. Code § 130.330(c)(6); see 35 ILCS 105/3-50(4) (exempt “equipment” includes same).

The Circuit Court opinion found that the Administrative Law Judge’s opinion was clearly erroneous under the facts as presented at the hearing. The Court rejected the ALJ’s finding that in order to be found to have a “direct and immediate” change on a product being manufactured, there must be a chemical reaction between the chemical for which the tax exemption is sought and the product being manufactured. The Court determined that the glass being manufactured underwent “an observable direct and immediate physical change as a result of” the chemicals at issue, finding that nothing in the exemption requires that the direct and immediate change relate to a chemical change and not a physical one. Additionally, the Court characterized a “direct” change as one in which after the chemicals at issue are added to the manufacturing process, “no additional steps or agencies in the manufacturing process intervene or are required to effect vital changes” on the product being manufactured. It remains to be seen whether the Illinois Department of Review (Department) will appeal the decision.

Illinois Appellate Court Finds Gas Leasing Corporation Owes No Tax on Hazmat Fees or Cryogenic Systems

On September 5, 2013, the Illinois Appellate Court issued a ruling in favor of ILMO Products Co. (ILMO), holding that ILMO did not owe Retailers’ Occupation Tax on the hazmat fees it charged in connection with its rentals of high pressure gas cylinders because the fees were part of a nontaxable rental and were not a taxable sale of gas. ILMO Prods. Co. v. Ill. Dep’t of Revenue, 2013 IL App (4th) 120973-U (Sept. 5, 2013). The Appellate Court also held that ILMO did not owe use tax on its purchase of cryogenic systems because the systems primarily were used as part of a manufacturing process.

The Appellate Court resolved the hazmat fee issue based on the parties’ pre-trial stipulations that the hazmat fee was a [...]

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