digital goods Archives

digital goods

Inaugural Seattle Tax in the City® | Highlights and Takeaways

by McDermott Will & Emery | Oct 20, 2017 | Uncategorized

McDermott extended its popular Tax in the City® program to Seattle, with a meeting on October 12 at the Amazon headquarters. McDermott established Tax in the City® in 2014 as a discussion and networking group for women in tax aimed to foster collaboration and mentorship, and to facilitate in-person connections and roundtable events around the country. The Seattle program was one of the best attended Tax in the City® events to date, featuring a CLE/CPE presentation about Privilege and the Ethics of Social Media by Cate Battin, Kristen Hazel and Jane May, followed by a roundtable discussion in which Elizabeth Chao and Sandra McGill discussed international issues related to income from digital products. Britt Haxton and Kristen Hazel discussed planning considerations related to federal tax reform, and Diann Smith provided the state and local tax considerations related to both issues. (more…)

Pennsylvania General Assembly Passes Revenue Package with Significant Digital Tax Expansion

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jul 14, 2016 | Audits, Pennsylvania, Sales Tax, Tax Base, Transaction Taxes

Yesterday, a legislative conference committee was appointed to approve an already agreed-upon $1.3 billion revenue package, which was immediately approved by both the House (116-75) and Senate (28-22) and sent to Governor Wolf for approval. The governor subsequently issued a press release confirming that he “will sign this revenue package.” A copy of the conference committee report (in full) that passed is available here.

The final revenue package includes (among a host of other revenue raising changes) a new tax on digital content and services, as described in more detail below. Specifically, the expansion captures most (if not all) digital goods within the sales and use tax imposition by defining them as tangible personal property. A number of digital services are also captured in the broadly defined language. (more…)

Alabama Appellate Court Finds Photos Merely Incidental to Nontaxable Photography Services

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | May 6, 2016 | Alabama, Audits, Nationwide Importance, Sales Tax, Tax Base, Transaction Taxes

Last Friday, the Alabama Court of Civil Appeals handed the Department of Revenue (Department) a significant loss in their continued attempt to tax non-enumerated services and tangible property provided in conjunction with those services under the sales tax. See State Dep’t of Revenue v. Omni Studio, LLC, No. 2140889 (Ala. Civ. App. Apr. 29, 2016). Specifically, the appellate court affirmed the taxpayer’s motion for summary judgment granted by the trial court, which set aside the Department’s assessment on the basis that photographs provided by a photography studio are merely incidental to the nontaxable photography services provided by the studio. While the prospective effect of the holding in the photography context is unclear due to recent amendments to the photography regulation (effective January 4, 2016), the case is significant in that it strengthens the “incidental to service” (or “true object”) precedent in Alabama and should be seen as a rebuke to the Department for ignoring judicial precedent in favor of their own administrative practices and guidance.

This decision is important in analyzing the taxability of mixed/bundled sales to Alabamans (i.e., where services and some degree of tangible personal property are provided as part of the same transaction). As with any decision, taxpayers should consider potential refund claims. (more…)

Alabama Legislature Rejects (Yet Another) Attempted Digital Tax Expansion

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Mar 21, 2016 | Alabama, Audits, Nationwide Importance, Sales Tax, Tax Base, Transaction Taxes

Last month, a much-anticipated bill drafted by the Alabama Department of Revenue (Department) was introduced in the Alabama Senate that would have expanded the definition of tangible personal property to include “digital goods.” See Senate Bill 242 (introduced February 16, 2016). Fortunately, the Senate Finance and Taxation Education Committee (Committee) rejected the bill on March 9, 2016, after hearing testimony from Assistant Department Counsel Christy Edwards and extensively questioning her on the bill’s content and motives. Notably, the Department continues to take aggressive positions in an effort to tax digital goods and services, without the requisite statutory or legislative approval to back it up.

Background

On February 28 2015, the Department proposed an amendment to Regulation 810-6-5-.09, which would have amended the rental tax on tangible personal property to include “digital transmissions” (broadly defined to include digital content such as streamed audio and video). After significant opposition from industry representatives, the Joint Legislative Council (composed of leadership from both chambers) wrote a letter to Commissioner Julie Magee in April 2015 requesting that the proposed regulation be withdrawn. It cited to the fact that the proposal was overly expansive and would in effect be the imposition of a new tax, a determination that rests with the legislature. See our prior coverage here. With hesitation and only after continued pushback from the Legislative Council, the Department withdrew the rental tax regulation amendment on July 7, 2015.

In response to the rejection of the proposed regulation, the Department went through its historic revenue rulings and revoked a number of technology rulings in January 2016, noting they will continue attempting to apply the rental tax to streaming services. Commissioner Magee cited the revocations as a mere “clarification” that did not change the law. In her comments to the revocations, Commissioner Magee noted that all taxpayers will be collecting and remitting tax in the future “[e]ither legislatively through a digital goods bill or through audits and assessments.”

Senate Bill 242

The digital goods bill arrived just a few weeks later, sponsored by Senator Trip Pittman. As introduced, the bill would define “tangible personal property” to include “digital goods.” For these purposes, digital goods include “[s]ounds, images, data, facts, or information, or any combination thereof, transferred electronically, including, but not limited to, specified digital products and any other service transferred electronically that uses one or more software applications.” As is readily apparent, this language is extremely broad and arguably includes every service delivered over the internet. The definition also raised concerns because it borrows from Streamlined language (“transferred electronically”; “specified digital products”), but Alabama is not a Streamlined state and does not define those terms elsewhere in the legislation or Code. As drafted, the bill would have become effective immediately upon passage.

After cancelling a scheduled Committee hearing earlier this month, citing the need for revisions, the sponsor and Department entered the March 9 public hearing with a substitute bill. Instead of defining “digital [...]

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Arizona ALJ: Remote Provider of Subscription Research Service is the Lessor of Tangible Personal Property

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | May 15, 2015 | Alabama, Arizona, Idaho, Nationwide Importance, Sales Tax, Tax Base, Transaction Taxes

In a curious decision out of Arizona, an Administrative Law Judge (ALJ) found an out-of-state provider of online research services was properly assessed transaction privilege tax (TPT, Arizona’s substitute for a sales tax) based on the logic that the provider was renting tangible personal property to in-state customers. The Office of Administrative Hearings (OAH) decision, No. 14C-201400197S-REV, available here, should be unsettling for all remote providers of subscription-based services with customers in Arizona. This decision offers an example of the continued push by states to administratively expand the tax base to include nontaxable digital services. Many states, like Arizona, do so by considering remote access to digital goods and services to be tangible personal property, as defined by statutes that are decades old.

Facts

The taxpayer was an out-of-state IT research firm offering internally-produced proprietary research and data compilation content remotely. The taxpayer’s headquarters, offices, servers and platform were all located outside Arizona. Customers accessed the research material via usernames and passwords received as part of a subscription. The Arizona Department of Revenue (the Department) determined that the subscription income was subject to the TPT because it was income from the leasing of tangible personal property. The taxpayer filed a protest with the Department, arguing that the online research services provided make it a service provider—not a lessor of tangible personal property. The taxpayer noted “at most, [they are] providing clients with a simultaneous license to use.”

Department’s Argument

The Department argued that the taxpayer was leasing tangible personal property (research and data content) through the subscriptions they provide to customers. Because they had exclusive access and use to the digital content (via username and password), the customers were able to perceive tangible personal property through their sense of sight. Therefore, the taxpayer’s receipts from subscriptions to its research and data content are taxable rental activities subject to the personal property rental classification.

Holding

The ALJ held the taxpayer did not meet its burden of proof of showing the Department misapplied the tax laws. The decision dismissed all of the taxpayer’s arguments that it is not engaged in leasing tangible personal property. At the outset, the ALJ found that the inability to control or modify the digital content was not enough to consider the customers to be lacking “exclusive control.” This is important because the Arizona Supreme Court has made it clear that the scope and application of the personal property rental classification (and its predecessor) hinges on the degree of control over the property in question that is ceded to its putative “lessee” or “renter.” In sum, because the access and use of the proprietary research and data content was offered for a periodic subscription (consideration), such activity is the leasing of tangible personal property, and the assessment by the Department was appropriate.

Analysis

As a threshold matter, it is unclear whether the Department has authority to consider remote access to digital content to be tangible property merely because the content may be viewed on [...]

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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.