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					Sales and Use Tax Updates
and Planning Opportunities

Jeremiah T. Lynch – Principal, Ryan
William Riesenberger – Legal
Counsel, Ohio Department of
Keith Wilson – Ohio Department of

                         January 29, 2009
Sales and Use Tax Developments

  Streamlined Sales Tax
  – Background
  – Current developments
  – Federal legislation
  Multistate Sales and Use Tax Developments – Industry
  and State
Sales and Use Tax Planning
Opportunities Agenda

  Sales Tax Planning Opportunities
   –   Information technology outsourcing
   –   Information technology groups
   –   Government contracts
   –   Manufacturing exemptions in a service economy
   –   Retailers - utilization of manufacturing exemptions
   –   Services vs. tangible personal property
   –   Sales and use tax incentives
   –   Corporate aircraft
   –   Amnesty programs
Streamlined Sales Tax Introduction and

  Forty-five states plus District of Columbia impose sales
  and use taxes
  More than 7,000 local jurisdictions impose sales and use
  taxes administered by the state, except in Alabama,
  Colorado, Louisiana, and Missouri
  Retailers required to collect and remit sales tax to states
  where retailer has physical presence
  Use tax is owed by consumer when retailer does not
  collect the sales tax
Why Doesn’t Seller Always
Collect Sales Tax?

  For decades, states have sought to require out-of-state
  retailers to collect their tax
  1992 Supreme Court decision in Quill Corp. v. North
  Dakota held: requiring collection of tax by out-of-state
  retailers with no physical presence in a state would be a
  burden on interstate commerce and would, therefore,
  violate the Commerce Clause of the U.S. Constitution
Remote Sales: What is at Stake?

  Compliance with sales tax laws by multistate corporations
  is too complex
  Local merchants suffer from lack of level playing field
  Significant losses of revenue expected due to growth in
  electronic commerce and inability of states to administer
  use tax with consumers
Remote Sales: What is at Stake?

  "State and Local Sales Tax Revenue Losses from
  E-Commerce,” July 2004 update to report by Dr. Bill Fox at
  Univ. of Tennessee: State and local governments lost
  between $15.5 billion and $16.1 billion in 2003 as states
  are unable to collect sales taxes from online sales
  Trend increases: By 2008, revenue projected loss for
  state and local governments ranges between $21.5 billion
  and $33.7 billion, with the greatest losses occurring in
  states that rely most heavily on the sales tax as a revenue
History of Streamlined Sales
Tax Effort

  1999: National Governors’ Association and National
  Conference of State Legislatures requested tax
  administrators to assist in addressing sales tax system
   – Make system less complex
   – Address unlevel playing field for merchants
   – Address loss of revenue from states unable to collect taxes already
Who is Involved?

  44 States; Washington, D.C.; and Puerto Rico
   – Legislative Branch
   – Executive Branch
  Local Governments
  Tax Practitioners
  Business Community
What Makes the System Complex?
Ask the People Trying to Comply…

  One level of tax administration per state…no locally
  administered sales taxes
  Have one rule that establishes who has the right to tax a
  Do not have so many different tax rates within each state
  and locality
  Do not have different state and local tax bases
  Work on common definitions of the same term
  Do not make the retailer be the policeman to determine if
  a claimed exemption is valid
Goals of the Streamlined Effort

  Create a simpler system for administering the various
  state and local sales taxes
  Where something could not be made more simple, make it
  Balance the interests of a state’s sovereignty with the
  interests of simplicity and uniformity
  Leverage the use of technology to ease tax collection
Results: Streamlined Sales and
Use Tax Agreement (SSUTA)

  SSUTA approved November 2002 by the states and
  amended since
  Provisions are based on simplification, uniformity, and
  technology principles
   –   Simplification (e.g., state-level administration of tax)
   –   Uniformity (e.g., uniform definition of “lease,” lease sourcing rule
   –   Technology (e.g., certification of tax calculation software)
   –   Balancing interests of state sovereignty
Results: Streamlined Sales and
Use Tax Agreement (SSUTA)

  Agreement became effective October 1, 2005
   – Nineteen full member states
       Full member state has made all changes to statutes and rules
         to comply with the provisions of the SSUTA
            Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan,
              Minnesota, Nebraska, Nevada, New Jersey, North
              Carolina, North Dakota, Oklahoma, Rhode Island, South
              Dakota, Vermont, Washington, West Virginia, Wyoming
   – Three associate member states
       For new associate states, changes to state’s statutes, rules,
         regulations, or other authorities necessary for compliance take
         effect no later than 12 months after becoming an associate
       For existing associate states, changes to state’s statutes,
         rules, regulations, or other authorities necessary for
         compliance must take effect on or before July 1, 2009
            Ohio, Tennessee, Utah
Streamlined State Status – July 1, 2008


                                                 MT              ND
                          OR                                                                                                              VT
                                    ID                                                                                                         NH
                                                                  SD                        WI         MI                            NY         MA
                                                  WY                                                                                       CT RI

                                                                                  IA                                            PA
                               NV                                 NE
                                         UT                                                      IL   IN                                  DE
                     CA                                CO                                                             WV                  MD
                                                                       KS                                                       VA         DC
                                                                                       MO                   KY
                                    AZ                                      OK
                                                  NM                                   AR                                  SC

                                                                                                 MS   AL          GA
                                                                  TX                   LA


   Full Member States                                 Non-sales tax states
   Associate Member States – flex to full             Project states – Not Advisory
   Advisory States – Not Conforming                   Non-participating state
Governance of SSUTA

  All member states have seat on
  the Governing Board

  Governing Board formed
  non-profit entity: Streamlined               SLAC
  Sales Tax Governing Board,

  Governing Board advised by       Governing
   – State and Local Advisory
   – Business Advisory Council                  BAC
Governance of SSUTA

                             SSTGB, Inc.
                             John Doyle

              Executive Director           Executive
               Scott Peterson              Committee

                    Finance             Review and      Nominating
                   Committee          Interpretations   Committee
Governing Board

  Interpretations of and amendments to SSUTA
  – ¾ vote requirement
  Certifies tax technology systems and service providers
  Reviews state compliance with SSUTA
  Implements of Administrative mechanisms
  – Vendor compensation
  – Multistate audit procedures
  Handles dispute resolution
State and Local Advisory Council

  Provides means by which states and local governments
  not on the Governing Board have input into the process
  Ex-officio membership on Governing Board
   – Chair – Sherry Harrell (TN)
   – Vice Chair – Vacant
  Develops new definitions and analyzes proposed
  Develops rules and advises on requests for interpretations
  Works with Business Advisory Council (BAC)
Business Advisory Council

  Voice of business community members
  Provides input to Governing Board and State and Local
  Advisory Committee related to the administration,
  interpretation, and compliance with and amendments to
  the agreement
  Members include businesses, associations, and
  Two ex-officio seats on Governing Board
   – Stephen Kranz, Sutherland
   – Richard Prem,
SSUTA: Key Features

  State level administration of local sales and use taxes
  Rate simplification
  – Allows one general state rate per state
  – Allows second rate on food and drugs; rate could be zero
  – Allows single local rate per jurisdiction
  No caps and thresholds
  Common state and local tax bases within a state
  Common tax base for local jurisdictions
  Uniform sourcing rule for goods and services
  – Destination based
  – States can choose origin sourcing for goods
SSUTA: Key Features

  Uniform sourcing rule
  – Telecommunications
  – Lease or rental of property
  – Direct mail
  One of the more “controversial” provisions impacting
  several states’ adoption of the SSUTA has been the
  “sourcing” rules. Prior to a recent amendment, the local
  tax determination of all sales had to be made under a
  “sourcing hierarchy.” Essentially, only sales completed at
  the seller’s location were sourced to the origin. Sales
  requiring delivery had to be taxed at destination.
SSUTA: Key Features

  A 2008 SSUTA amendment allow states to implement
  “origin sourcing” effective January 1, 2010, for certain
  types of sales
  – In-state transactions only
  – Sales of goods only, not sales or services or leases or rentals
  – May not allow destination jurisdiction to impose additional tax on
    transactions sourced to origin
SSUTA: Key Features

  Uniform Definitions
  –   Food and Food Ingredients    – Bundled Transaction
  –   Prepared Food                – Drugs
  –   Candy                        – Durable Medical Equipment
  –   Soft Drinks                  – Computer Software
  –   Dietary Supplement           – Prewritten Computer
  –   Clothing
                                   – Delivered Electronically
  –   Lease or Rental
                                   – Load and Leave
  –   Tangible Personal Property
                                   – Sales Price
SSUTA: Key Features

  Uniform treatment of bank holidays
  Uniform rules for sales tax holidays
  – Limited to defined products and within administrative guidelines
  Uniform drop shipment rule
  Uniform rule for bad debt credits
  Simplified electronic tax return
  Uniform exemption certificate and simplified exemption
  Uniform rounding rule
SSUTA: Key Features

  Central Registration System
  – Must register for all full member states
  – May register for associate member states
  When new states are added as full members, sellers
  receive notice from the Governing Board and
  automatically become registered to collect taxes in those
  Must register on Central Registration System to be eligible
SST Agreement Key Features: Amnesty

  Sellers who voluntarily register to collect tax receive
  amnesty against liability for prior sales regardless of nexus
  Not available to any seller that has received an audit
  notice from a state
  Available from date state joins Governing Board until one
  year after it has been a full member state
  Unavailable to sellers who are registered with state during
  preceding year or who are being audited
  Must remain registered for 36 months
  Sales tax liability only

 Full member states currently offering amnesty
  – Nevada (ends March 31, 2009)
  – Washington (ends June 30, 2009)
 Associate member states offering amnesty
  – Ohio
  – Tennessee (scheduled to end June 30, 2010)
  – Utah
Technology Implementation

  States must provide
  – Database matching tax rates to local jurisdictions
  – Database of boundary information for local jurisdictions
  – Taxability matrix that identifies whether defined products are
    exempt or taxable under the state’s laws
  Certification of sales tax administration software
  Central registration system
Taxability Matrix

  A state database that tells sellers what is and what is not
  To start with, a list of uniformly defined products and
  services, but will eventually include more
  Sellers are not liable for errors in how something is taxed if
  they follow what is in the taxability matrix
Technology Implementation

  Model 1 sellers use services of a Certified Service
  Provider (CSP)
  Model 2 sellers use a Certified Automated System (CAS)
  Model 3 sellers have an in-house (proprietary) system
SSTP Technology Model One:
The “Certified Service Provider” (CSP)

  CSP is a third party that provides “cradle to grave” tax
  service that includes liability determination, return filing,
  and tax remittance
  CSP software applications must apply certification
  standards and must receive approval by the Governing
   – Calculation accuracy standards
   – Technology standards (e.g., ISO 17799, SAS70)
SSTP Technology Model One:
The “Certified Service Provider” (CSP)

  Four CSPs have contract with Governing Board
   –   Avalara
   –   Exactor
   –   Taxware
   –   Speedtax (6/1/08)
  Businesses who volunteer to collect tax in state may use
  CSPs at no cost – states pay CSP for services to
  volunteer sellers
  As of 6/01/08 there were 121 companies using a CSP
CSP - Responsibilities & Liabilities

  Integration of software with seller’s order processing
  Applied data and tax calculations
  Tax liability and statistical reporting
  Funds transfers
  System performance and security
SSTP Technology Model Two: The
“Certified Automated System” (CAS)

  CAS is a third party that provides liability determination tax
  administration service
  CAS software applications must apply certification
  standards and must receive approval by the Governing
   – Calculation accuracy standards
   – Technology standards (e.g., ISO 17799, SAS70)
  One CAS has contract with Governing Board
   – Taxware
  Businesses who use CAS pay the CAS for services
CAS - Responsibilities & Liabilities

  Integration of software with seller’s order processing
  Applied data and tax calculations
  Tax liability and statistical reporting
  System performance and security
Central Registration System

  The Streamlined Sales Tax Registration System (SSTR) is
  a Web-based system that enables taxpayers to volunteer
  to register to participate in Streamlined Sales Tax
  Taxpayers can use SSTR for both new voluntary
  registrations and updates to previously submitted
  registration information
  This system is a pass-through system in that the states will
  incorporate the data into their state system
  Updates to taxpayer information can be submitted by
  taxpayers using SSTR
  SSTR maintains all taxpayer information for specific
  business processes
Central Registration System

  The SSTR is Web based and a relational database is used
  as a back-end for the storage and retrieval of the data,
  thus providing dynamic information anytime, anywhere
  An XML file schema is used to exchange data between
  the SSTR system and the states
  As of April 1, 2008, there were 1,100 companies
  registered on the central registration system
  As of April 1, 2008, those companies had collected $210
  million in sales tax for the streamline states

  2006-01: Amnesty/treatment of taxes already collected
  2006-02: Amnesty extension for users of CSP model
  2006-03: Sourcing of down payments on leases
  2006-04: Prepared food/eating utensils
  2006-05: Fur clothing excise tax
  2006-06: Amnesty related to de-registration
  2006-07: Guidance on MPU- “concurrently available”
  2006-08: Amnesty related to de-registration
  2006-09: Amnesty for predecessor entities

  2006-11: Definition of food sold with eating utensils
  provided by the seller
  2006-12: Whether billing invoices, return envelopes and
  any additional marketing materials are included in the
  definition of “direct mail”
  2007-01: Whether the word “drug” is limited to an item or
  liquid that is consumed internally by the person or used
  externally on a person
State and Local Advisory
Council Update

  Digital products definition
   –   Audio visual works
   –   Audio works
   –   Book
   –   Undefined digital products
   –   Definition of tangible personal property
  Relief for purchasers - reliance on rate jurisdiction
  databases and taxability matrices
State and Local Advisory
Council Update

  Issue papers converted to rules of Governing Board
   – Telecommunication definitions
   – Drop shipments
   – Exemptions
  Replacement taxes
   – Listing of taxes
   – Rules
  Definition of sales price/sale for resale
  Maintenance contracts
Compliance Review and Interpretations
Committee (CRIC)

  Committee role and process
  Interpretation requests
  Impact on ruling requests, dispute resolution process
  On-going work to establish guidelines for business
Strategic Goals

  Recruit remote sellers
  Expand legislative leadership
  Recruit additional member states
  Resolve outstanding compensation issues with Model 3
  and 4 sellers
  Work with Congress on federal legislation
What’s next?

  2009 Legislative Sessions
   – Full member states
   – Associate member states
   – States seeking membership
       Florida SSUTA conformity legislation introduced January 13,
       Virginia SSUTA conformity legislation introduced January 14,
  Items being addressed in 2009
   – Direct mail
   – Sales price
   – Dispute resolution process
What’s next?

  Federal Legislation
   – Legislation to give member states of the SSUTA collection
     authority over remote sellers is expected to be reintroduced in the
     U.S. House of Representatives and U.S. Senate this month
   – The reintroduced legislation is expected to be identical to the Sales
     Tax Fairness and Simplification Act previously introduced by Rep.
     William Delahunt, D-Mass and Sen. Mike Enzi, R-Wyo., except
     that the proposal would allow the SST Governing Board to set the
     minimum sales threshold for required compliance by remote
Sales Tax Developments - 2009

  Expansion of the sales tax on services
  Sales and hotel tax rate increases
  Increased use of voluntary disclosure agreements
  New round of amnesty programs
  Imposition of penalties and higher interest charges
  Denial of bad debt refunds
  Aggressive nexus positions
  Corporate officer liability provisions strictly enforced
  State and local government budget deficits are expected
  to drive base expansion and/or rate increases
Sales Tax Developments

  Five of the biggest states – California, New York, Texas,
  Florida and Illinois – collectively have $75.3 billion in
  projected deficits
  Expansion of the sales tax on services
  – A number of states are looking at sales/use tax base expansion to
    cover budget deficits
      California - in addition to a general state sales tax rate
        increase from 5.0% to 6.5%, Governor Schwarzenegger has
        proposed subjecting a variety of services to California's sales
        and use taxes, including repair and veterinarian services, and
        applying the sales tax to recreational admissions including
        amusement parks, sporting events, and golf
Sales Tax Developments

      New York - Governor Paterson has proposed extending the
       New York sales tax to cable, satellite television, and radio
       services; personal services such as barbering, massages, and
       hair salons; transportation services such as limousines and
       buses; and to movie theatres and sporting events. In addition,
       the budget proposal would enact a new additional 18% sales
       tax on non-diet soft drinks, limit the capital improvement
       exemption to new construction, and eliminate the sales tax
       exemption on clothing and footwear under $110, and replace it
       with two exemption periods during which clothing and footwear
       under $500 would not be subject to sales tax
Sales Tax Developments

  More Rate Increases…
  – Minnesota voters approved a statewide increase of .375% effective
    July 1, 2009 to fund conservation, clean water projects and other
    earmarked uses
  – New York City will increase its hotel occupancy tax rate from 5% to
    5.875% effective March 1, 2009
  – Idaho Governor Otter has proposed a 40% increase in the state
    fuel tax
Sales Tax Developments

  New York Voluntary Disclosure Program –
  N.Y. Tax Law § 1700
  – Formal Voluntary Disclosure Program that replaces informal
    voluntary disclosure policies
  – Allows taxpayers to disclose any returns they failed to file and/or
    taxes that were not paid
  – Provided overdue taxes and accrued interest are paid, penalties
    will be waived and no criminal charges will be filed
  – At the time of disclosure, taxpayers may not be under audit, cannot
    have tax determined at time of disclosure, must not be parties to
    an active criminal investigation and must not be seeking to
    disclose a federal or New York listed reportable transaction
  – Unified Disclosure Program for back taxes owed to New York City
    also available
Sales Tax Developments

  Voluntary Compliance Initiative - NY Department of
  Taxation and Finance Publication 672
  – Program in effect from November 1, 2008 through January 31,
    2009 for tax years beginning before January 1, 2005
  – Eligible taxpayers can disclose underreported tax liabilities,
    interest and penalties resulting from tax avoidance transactions
  – Taxpayers who disclose a listed or reportable transaction will have
    50% of the normally imposed underpayment penalties waived;
    100% of underpayment penalties waived for all other types of tax
    avoidance transactions
  – Taxpayers under criminal investigation have been convicted of a
    crime related to tax or are parties to an administrative, civil, or
    criminal proceeding will not be eligible to participate
  – Taxpayers who were eligible to participate in 2003 Offshore
    Voluntary Compliance initiative cannot participate
Sales Tax Developments

  Michigan - Distribution of Telephone Books
  – Is distribution of telephone books a taxable use of those books?
       In Ameritech Publishing v. Michigan, Mich. Ct. App. (10/7/08),
         the Michigan Court of Appeals concluded the distribution of
         telephone books constituted a taxable use
       The decision rested on the broad definition of use: exercise of
         “a right or power…incident to the ownership of that property” in
         the state
       Directories were printed in Illinois and shipped to a distributor
         who delivered them to consumers
       Court of Appeals pointed out that Ameritech retained its certain
         rights to the books, even after they were in the hands of the
Sales Tax Developments

  Did Michigan tax base include printing services and
  – MCL § 205.93 defines price as “the aggregate value…without a
    deduction for the…cost of materials used, labor, or service cost…
    or any other expense”
  – Printing services could not be excluded from the tax base of the
    directories. The measure of the use tax was the cost of paper and
    printing services
  – The Court rejected the taxpayer’s Morton Buildings argument that
    the paper should not be part of the tax base
  – The Court also rejected the argument that imposing a use tax on
    the directories constituted an impermissible double taxation
    because Ameritech’s customers paid sales tax on their purchase of
    telecommunication services
Sales Tax Developments

  Electronic Information Services in Ohio:
  – Marc Glassman, Inc. v. Commissioner, Slip Opinion No. 2008-
    Ohio-3819 (8/5/08)
  – Summary of the case
      Taxpayer, a pharmacy chain, purchased a service that told it
       whether its customers’ insurance companies would cover
       particular prescription drugs
      The provider sent a “yes” or “no” response
      Pharmacy entered information at a computer terminal. The
       information would travel via a dedicated line to the provider
      Provider then routed the query to the insurance company, who
       gave a “yes” or “no” answer on coverage
      This message, along with the consumer’s copay and an
       authorization number, was sent to the pharmacy
Sales Tax Developments

      The pharmacy did not obtain access to the insurance
        companies’ data; it obtained a conclusion formulated by the
        insurer in response to a request
      The insurance company accessed its own data and provided
        this conclusion
  – Holding
      Because the pharmacy received a conclusion rather than
        access to data, the service was not a taxable “electronic
        information service”
Sales Tax Developments

  Wisconsin - What is custom software?
  – Wisconsin Department of Revenue v. Menasha Corp., Wisconsin
    Supreme Court Case No. 2004AP3239 (7/11/08), concluded that
    software purchased from SAP was nontaxable custom software
  – The system must be customized to fit a client’s operations
  – The system is only usable once it has been customized
  – Customization could take years to complete and would cost tens of
    millions of dollars
      System cost $5.2MM
      Installation and customization cost more than $13MM
      Implementation took seven years to accomplish
  – SAP concluded sales of this program were taxable because they
    were not custom software
Sales Tax Developments

  – Menasha provided SAP with a direct pay certificate
  – Menasha paid the tax and filed a refund claim to recover the tax
  – Department denied the refund claim
  – Menasha appealed the denial to the Tax Appeals Commission,
    which ordered the refund to be granted
  – Department appealed the Tax Appeals Commission’s decision to
    the Circuit Court, which ruled in favor of the Department
  – Menasha appealed the Circuit Court’s decision to the Wisconsin
    Court of Appeals, which ruled in favor of Menasha
  – Department appealed that decision to the Wisconsin Supreme
    Court, which upheld the Court of Appeals’ decision, resulting in
    granting the taxpayer’s refund claim
Sales Tax Developments

  Wisconsin Governing Law
  – Custom computer programs are excluded from the definition of
    taxable tangible personal property. Wisconsin Stat. § 77.51(20)
Custom Software?

  “Custom program” is
  defined by regulation.
   Factors to be considered        – Presumption that a program
  – Extent of presale                that costs less than $10,000
    consultation and analysis of     is not custom
    user’s requirements
                                   – Cannot be a basic
  – Whether program is loaded        operational program
    by vendor and extent to
                                   – Modification must be
    which it must be tested
  – Training required
  – Degree of enhancement and
    support needed
Sales Tax Developments

  A substantial amount of resources, time, and effort was
  needed to make the software operate for the taxpayer;
  therefore, it was not prewritten software
  – More than 3,000 modifications were made to the software
  – The software was not even useable without substantial, time-
    consuming, and expensive work by consultants or SAP personnel
Sales Tax Developments

  New York Out-of-State Retailers Purchase of Airtime and
  Advertising - TSB-A-08(36), Petition No. S070430A,
  August 6, 2008
  – Retailers with no physical presence in New York advertising on
    satellite and cable televisions in New York are not required to
    register for sales tax purposes nor collect any sales tax on sales of
    tangible personal property if orders are accepted and received
    outside the state
  – Neither advertising via satellite or television nor contractual
    relationships with service providers of advertising constitute
    physical presence; relationships are “arm’s length” and service
    providers are not agents of the taxpayer
  – Tangible personal property purchased out-of-state by New York
    residents is subject to use tax
  – Contrast with Amazon case
Sales Tax Developments Challenge to New York Nexus Statute - LLC v. New York Department of Revenue
  and Finance, New York Supreme Court, New York
  County, Index No. 601247/08, January 12, 2009
  – The New York Supreme Court, New York County, has dismissed a
    lawsuit filed by challenging the recently enacted
    statute requiring out-of-state Internet sellers with no physical
    presence in New York to collect New York sales and use taxes
    under certain circumstances
  – The statute in question creates a rebuttable presumption that a
    retailer “solicits” sales in New York if an in-state entity is
    compensated for directly or indirectly referring customers to the
Sales Tax Developments

  – Amazon sought a declaratory judgment that the new statute was
    invalid and unconstitutional, on the grounds that it violated the
    Commerce Clause and the Due Process and Equal Protection
    Clauses of both the U.S. and New York Constitutions
  – Amazon took the position that the statute was invalid because it
    imposed a tax collection responsibility without a physical presence
    in the state, and that its associates in New York were mere
    “advertisers” rather than traveling salesmen; they played no role in
    the sales transactions
Sales Tax Developments

  – The court dismissed Amazon’s Commerce Clause complaint,
    holding that the nexus statute only imposes a tax collection
    responsibility based upon the out-of-state seller’s conscious
    decision to contract with in-state residents who collectively refer
    more than $10,000 of New York based business. The court ruled
    this gives the seller the opportunity to prove that none of its
    contractors actively sought sales on its behalf in New York
  – The court also rejected Amazon’s Due Process claim, holding
    there is a rational relationship between facts triggering the
    presumption (contracts with in-state residents who are paid a
    commission to make referrals and generate more than $10,000 of
    New York revenue from such arrangements) and the facts
    presumed (that motivated New York residents would solicit
    business for Amazon from other New York residents)
Sales Tax Developments

  – Last, the court rejected Amazon’s Equal Protection argument
    because there was no evidence Amazon was treated differently
    than any other retailer similarly situated
Sales Tax Developments

  New York - Charges for Access to Prewritten Computer
  Software - TSB-A-08(62)S, New York Commissioner of
  Taxation and Finance, November 24, 2008
  – Charges for access to software that allows a customer to upload
    an image onto the service provider’s servers and manipulate the
    image to show various colors and views are subject to New York
    state and local sales tax when accessed by a customer located in
    New York because it is prewritten computer software.
  – When the company's customers access the software, it constitutes
    a transfer of possession of the software because the customer
    gains constructive possession of the software, and gains the "right
    to use, control or direct the use" of the software. This is true even if
    no "copy" of the software is transferred to the customer. Thus, the
    sale of a license to use the software to a customer in New York is
Sales Tax Developments

  Town Fair Tire Centers v. Commissioner of Revenue -
  Massachusetts Appellate Tax Board, No. C280607,
  – Tire seller required to collect use tax on tires sold to
    Massachusetts residents at stores in New Hampshire
  – Tire seller’s stores in Massachusetts established nexus in the
    state, satisfying the Due Process Clause of the Constitution
  – License plates and inspection stickers on customers’ cars clearly
    indicated they were destined for Massachusetts
  – Taxpayer did not suffer any burdensome recordkeeping
    requirements because customer data was already being collected
    for unrelated reasons
  – No violation of Equal Protection Clause, as similarly-situated
    vendors were not treated differently
Sales Tax Developments

  New Jersey Sales and Use Tax Nexus - v.
  Director, 2008 N.J. Tax Lexis 3 (2008)
  – New Jersey Tax Court held that (Taxpayer), a
    Washington state based company operating a website selling
    prescription and over-the-counter items nationwide was required to
    collect and turn over sales tax in New Jersey because one of its
    subsidiaries operated a warehouse in the state which distributed
    merchandise to customers
  – Even though Taxpayer’s sales flowed through another subsidiary
    that had no physical presence in New Jersey, the Tax Court
    asserted attributional nexus between the subsidiary and its in-state
  – Plaintiff satisfied the definition of a “seller” under N.J.S.A. §
    54:32B-2(i)(1)(B) required to collect sales tax by maintaining a
    place of business in the state and making sales of taxable property
Sales Tax Developments

  New Jersey - Bad Debt - Home Depot v. Director, 2008
  N.J. Tax Lexis 7 (2008)
  – Retailer sought refunds of sales tax on uncollectible sales charged
    to its private label credit cards
  – Director maintained the uncollectible accounts did not affect the
    retailer’s income and could not be considered bad debts that would
    make them eligible for a refund under N.J.A.C. § 18:24-23.2(a)
  – Plaintiff claimed the costs associated with uncollectible accounts
    were built into fees it paid to the banks and debt losses were borne
    by them
  – Court interpreted regulation to require that a seller must directly
    suffer the bad debt losses; effect of bad debts had no effect on
    plaintiff’s income
  – Summary Judgment was granted to the Division of Taxation in the
    Tax Court
Sales Tax Developments

  Connecticut - Refunds for Defective Product - Under
  DaimlerChrysler Corp. v. Pamela Law, Commissioner of
  Revenue Services, Connecticut Supreme Court, 284
  Conn. 701 (2007)
  – Automobile manufacturer paid refunds to purchasers of defective
    cars sold by retail franchises as required under the state “lemon
  – Manufacturer sought refunds of the sales tax remitted for the
  – Refunds were denied as auto sales were completed transactions
    properly subjected to sales tax under Conn. Gen. Stat. § 12-425,
    and petitioner was not directly involved in the transactions
  – Trial court held that petitioner was not an “aggrieved taxpayer”
    within the meaning of Conn. Gen. Stat. § 12-422 who could
    appeal a refund denial
Sales Tax Developments

  – Connecticut Supreme Court agreed with lower court that petitioner
    was not the purchaser of the vehicles nor ever responsible for
    payment of sales tax, so it was not entitled to a refund under § 12-
  – Higher court also interpreted that the “lemon law,” Conn. Gen. Stat.
    § 42-179, does not provide for manufacturer to seek a refund of
    state sales tax
Sales Tax Developments

  New York - Refunds for Defective Product -
  DaimlerChrysler Co., LLC v. Billet, 858 N.Y.S.2d 836 (N.Y.
  App. Div., 3d Dept. 2008)
  – Manufacturer not entitled to refund of sales tax on replacement
    vehicles provided to consumers in compliance with the state
    Lemon Law
  – Sales tax only refunded on customers who requested a refund of
    the purchase price than a replacement vehicle
  – No direct exchange of vehicles; taxpayer received defective
    vehicles from consumers and purchased replacement vehicles
    from dealers, creating an entirely separate sale that was fully
    subject to sales tax
  – No provision in tax statutes for refund of sales tax to manufacturers
    for purchases made to satisfy Lemon Law requirements
Sales Tax Developments

  New York - Internet Tax Freedom Act Amendments Act -
  TSB-M-8(4)C,(2)S, May 2, 2008; TSB-M-8(4.1)C,(2.1)S,
  August 29, 2008
  – Federal moratorium on taxation of Internet access charges
    extended through 2014 under Internet Tax Freedom Act
    Amendments Act
  – Internet access definition expanded to include telecommunications
    services “to the extent such services are purchased, used or sold
    by a provider of Internet access to provide Internet access”
  – Sales and gross receipts taxes cannot be imposed on purchases
    of telecommunications services by Internet service providers for
    purposes of providing Internet access to customers
  – Further guidance by Department of Taxation and Finance
    suggested that federal law pre-empted taxation of
    telecommunications services purchased to provide Internet access
    on November 1, 2005; providers may file for refunds
Sales Tax Developments

  Wisconsin - Internet Access
  – Sales tax does not apply to the sale of telecommunications used to
    provide Internet access
      Change was effective June 30, 2008
Sales Tax Developments

 “Before You Sign!” (Wisconsin)
  – Never sign a document unless you are sure you understand it
      The Wisconsin Tax Appeals Commission upheld an
       assessment of tax against an Officer of a Limited Liability
       Company (LLC) because it concluded that he was a
       responsible person, personally liable to pay delinquent sales
       tax the LLC owed. Christopher Field v. Wisconsin Department
       of Revenue, Dkt. No. 06-S-240.
      Petitioner was an officer of the LLC and authorized to sign
       checks on its behalf
      The LLC failed to pay sales taxes it owed to the state
      Petitioner signed an acceptance of personal liability for the
       taxes owed, but later claimed that he did not understand the
      This document provides, in pertinent part, “I, the undersigned,
       accept the responsibility for unpaid sales and use tax…”
Sales Tax Developments

  Wis. Stat. § 77.60(9) requires three elements to hold an
  individual personally liable for the taxes of an entity
  – The individual
      Must have authority to pay the taxes
      Must have the duty to pay the taxes
      Must have breached that duty
Sales Tax Developments

  The Wisconsin Department proved these elements by
  – Petitioner signed checks on behalf of the LLC
  – Petitioner was an officer, and consequently had the duty to pay the
    sales taxes owed by his business
  – Petitioner breached this duty by paying other creditors while the
    sales taxes were owed to the state
Sales and Use
Sales and Use Tax Planning
Opportunities Agenda

  Sales Tax Planning Opportunities
   –   Information technology outsourcing
   –   Information technology groups
   –   Government contracts
   –   Manufacturing exemptions in a service economy
   –   Retailers - utilization of manufacturing exemptions
   –   Services vs. tangible personal property
   –   Sales and use tax incentives
   –   Corporate aircraft
   –   Amnesty programs
Sales Tax Planning
Issues and Opportunities

  Information Technology Outsourcing – SUT Issues
   – Are the services being provided separately stated on invoices with
     clear descriptions relating to service deliverables?
   – How are software license agreements procured? Are they
   – Is custom software transferred?
   – Is software purchased electronically?
   – Does the contract clearly state the mechanism for delivery of
     software electronically?
   – Tax clause at a minimum should contain the following disclosures
        Disclose responsibility for transaction taxes, excise taxes
        Vendor income and property tax disclaimer for purchaser
Sales Tax Planning
Issues and Opportunities

   –   Late payments to tax authorities due to vendor error
   –   Responsibility for interest and penalties
   –   Exemption certificates, direct pay, etc.
   –   Responsibility for withholding taxes
Sales Tax Planning
Issues and Opportunities

  Information Technology Groups
   – Purchase for resale to affiliate groups
   – Ohio exempts the sale of computer services to an affiliate
       Affiliate is defined as two or more persons related in a way that
         one person controls the business operation of another
       One corporation owns 50% or more of the other corporation's
         common stock with voting rights
Sales Tax Planning
Issues and Opportunities
  Government Contracts
   – Government Contract Overhead Materials Cases
   – Raytheon E-Systems, Inc. v. Carole Keeton Strayhorn
     (Case No. GN-101511) (Texas)
       Ruled that purchases of materials by Raytheon that were
        allocated to qualifying contracts with the Federal
        Government qualify as exempt purchases for resale
       Case involved the purchase of indirect materials that were
        allocated to contracts with the Federal Government
        containing specific title – passage provisions in
        accordance with Federal Acquisition Regulations (FAR
       Because title to the materials passed to the customer, the
        items were deemed purchases for resale even though
        possession never transferred to Raytheon’s customer
Sales Tax Planning
Issues and Opportunities

  Manufacturing Exemptions in a Service Economy
   – Can you utilize manufacturing exemptions when you do not sell
     tangible personal property but only provide services?
   – Telecommunications industry has some of the most recent cases
  2004 – Supreme Court of Minnesota
  Sprint Spectrum LP, et al. v. Commissioner of Revenue
  (Supreme Court of Minn., A03-954)
   – Court’s Opinion: Ruled that the equipment purchased met the
     burden of proof entitling taxpayers to the tax exemption claiming
     that “the equipment produces telecommunication products that
     are tangible personal property to be sold ultimately at retail”
   – Law was subsequently changed
Sales Tax Planning
Issues and Opportunities

  Manufacturing Exemptions in a Service Economy
   – Texas Comptroller of Public Accounts Hearing
   – No. 43,999, 3/26/2004
       Claimant contended that purchases of telecommunications
         equipment were exempt purchases of manufacturing
         equipment under Section 151.318(a)(2)
       Prior to October 1, 1997, Section 151.318(a)(2) exempted
         tangible personal property used or consumed during the actual
         manufacturing process
       Effective October 1, 1997, the exemption was narrowed to
         include only necessary equipment that is directly used or
         consumed, which also directly makes or causes a chemical or
         physical change to the “product” being manufactured
Sales Tax Planning
Issues and Opportunities

  Manufacturing Exemptions in a Service Economy
   – Claimant contends that, in narrowing the exemption, the
     Legislature actually expanded the exemption to include the entirety
     of its network equipment, since the telecommunications it provides
     are “products” (as contrasted to “tangible personal property”)
   – Claimant’s contention was denied
   – In issuing Texas Hearing Number 43,999, the administrative law
     judge relied heavily upon prior decisions ruling against taxpayers
     in the State of Minnesota
   – It is interesting to note that six days after the issuance of this
     opinion in Texas, the Minnesota Supreme Court overruled the
     lower courts in granting a refund to Sprint Spectrum LP
Sales Tax Planning
Issues and Opportunities

  Retailers – Utilization of Manufacturing Exemptions
   – New York – Manufacturing related equipment used in store exempt
     from tax
        Lowe’s Home Centers, Inc. (TAT October 13, 2005)
   – Missouri
        Ronnoco Coffee Company, Director of Revenue, Missouri
         Supreme Court SC 86724, February 14, 2006
Sales Tax Planning
Issues and Opportunities

  Services vs. Tangible Personal Property
  Qwest Dex, Inc. v. Arizona Department of Revenue
  (109 P3d 118, 04/05/2005)
   – Qwest Dex, Inc. (“Taxpayer”) is in the business of publishing the
     White Pages and Yellow Pages telephone directories
   – Taxpayer contracts with out-of-state printing companies (“Printers”)
     to print directories and contracts with out-of-state mills (“Mills”) for
     the paper
Sales Tax Planning
Issues and Opportunities

  Services vs. Tangible Personal Property
   – Once Printers receive paper from the Mills, they print the
     information supplied by the Taxpayer on that paper, glue the
     papers together into directories, and ship the directories to
   – Taxpayer paid state use tax on the cost of the directories, but
     claimed a refund of more than $3 million for the period between
     January 1995 through June 2000
   – Taxpayer argued that it owed use tax on the paper, but not for the
     printing services
Sales Tax Planning
Issues and Opportunities

  Decision of Court of Appeals of Arizona
   – Printers are not the retailers of the telephone directories
   – Printers are not in the business of selling directories and Taxpayer
     was not buying directories from the Printers
   – Must follow the clear meaning of the statute - Use tax statute does
     not provide for a use tax on services furnished by an out-of-state
     printer to an Arizona taxpayer
Sales Tax Planning
Issues and Opportunities

  Sales and Use Tax Incentives
   –   Enterprise zones
   –   Municipal rebates
   –   Corporation relocation or retention deals
   –   Special legislation enacted
Sales Tax Planning
Issues and Opportunities

  Acquisition of Corporate Aircraft
   –   Multiple New York State Advisory Opinions
   –   Corporation must qualify as an air carrier
   –   Can purchase airplane exclusively for use by related entity
   –   Aircraft engaged in intrastate, interstate, or foreign commerce
   –   Exemption also covers payments for fuel and servicing of airplane
Sales Tax Planning
Issues and Opportunities

   – Utilization of federal or state taxing or regulatory bodies to assert
     tax exemptions
        Internal Revenue Service
        Federal Communication Commission
        Environmental Protection Agency and state equivalent
          governing bodies
        Other governmental agencies
Sales and Use Tax Planning
Opportunities Agenda

  Last, but not least, amnesty programs
   – Alabama Governor Bob Riley and Revenue Commissioner Tim
     Russell announced that the Department of Revenue will
     temporarily waive penalties and will not seek criminal prosecutions
     for delinquent tax filers who come forward and pay their delinquent
     state taxes. This program is called “Operation Clean Slate,” and it
     runs from February 1 through May 15
Sales and Use Tax Planning
Opportunities Agenda

  Connecticut Amnesty Program
   – Program runs May 1 through June 25, 2009
   – Both income and sales and use taxes eligible for program
   – Amnesty not available if
       The taxpayer received notice from the Department that an
         audit examination is being conducted in relation to the affected
         taxable period for which amnesty is being sought
       The taxpayer is a party to any criminal investigation or to any
         civil or criminal litigation that is pending in any court for failure
         to file or failure to pay, or for fraud; is a party to a closing
         agreement with the Commissioner of Revenue Services; has
         made an offer of compromise that has been accepted by the
         Commissioner; or is a party to a managed audit agreement
   – Taxpayers will be required to pay tax and interest, but DRS will
     waive penalties and criminal prosecution
Sales and Use Tax Planning
Opportunities Agenda

  Massachusetts Amnesty Program
   – The Commissioner of Revenue is authorized to establish a tax
     amnesty program for a period of two consecutive months between
     January 1, 2009 and not later than June 30, 2009. During the
     amnesty program, the Commissioner may waive all penalties, but
     not the interest, on certain unpaid taxes subject to certain
   – The amnesty program applies to all penalties that could be
     assessed by the Commissioner for the failure of the taxpayer to
     timely file or pay any proper return for any tax types and for any tax
     periods, or to file proper returns that report the full amount of the
     taxpayer's liability
Sales and Use Tax Planning
Opportunities Agenda

   – Amnesty may be offered to taxpayers who have either any unpaid
     self-assessed liability or who have been assessed a tax liability,
     whether before or after their filing of a return, which assessed
     liability remains unpaid. However, the amnesty will not apply to
     any taxpayer who, before the start date of the amnesty program, is
     or has been the subject of a tax-related criminal investigation or
     prosecution, or to a tax liability for a period commencing on or after
     January 1, 2007
Sales and Use Tax Planning
Opportunities Agenda

  Open SSUTA Amnesty Programs
   –   Nevada (ends March 31, 2009)
   –   Washington (ends June 30, 2009)
   –   Ohio (open until one year after becomes full member)
   –   Tennessee (scheduled to end June 30, 2010)
   –   Utah (open until one year after becomes full member)
Contact Information

      Jeremiah T. Lynch                       William Riesenberger
            Principal                             Legal Counsel
              Ryan                        Ohio Department of Taxation
  610 Fifth Avenue, Suite 612             30 E. Broad Street, 20th Floor
  New York, New York 10020                   Columbus, Ohio 43215
          212.871.3901                             614.466.8394

                            Keith Wilson
                    Ohio Department of Taxation
                    30 E. Broad Street, 20th Floor
                        Columbus, Ohio 43215

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