Multi-State Sales and Use Tax Attorneys
Multi-State Sales and Use Tax Attorneys
Multi-State Sales and Use Tax Attorneys
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Over the past several years software as a service (“SaaS”) has been a booming industry.  Pioneers in the cloud computing industry, like Salesforce, have developed web based applications that offer a wide range of services to the user.  Driven by competitors such as Microsoft, Adobe, Sap, ADP, Oracle, IBM, Intuit and Google, the SaaS industry has become a $204 billion industry and grown by more than 16% last year.

Traditionally, from a sales tax perspective, states tax the sale of tangible personal property but not services.  While many states adhere to that mantra, several states have moved towards taxing software despite being intangible in nature.  Still, it can be difficult to determine whether SaaS is more like a software, which may be taxable, or if it feels more like a service provided, which is not taxable in many states.

States have been consistently inconsistent across the country in determining whether to tax SaaS.  States often have similar statutes and reach completely different conclusions in their quest to analyze SaaS.  Further, many situations occur in which a state can treat two seemingly similar SaaS companies differently within their own state.  In an attempt to comply, companies often struggle with charging the appropriate sales tax in the correct state and/or their state income tax obligations, with respect to SaaS.

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Effective August 1, 2016, Pennsylvania has joined the ranks of states attempting to expand their sales and use tax jurisdiction over digital downloads. With out-of-state internet sales taking away sales tax revenue from the states in conjunction with the sharp decline in “hard copy” sales of various media, states are scrambling to expand their tax base and capture categories of items that escaped their grasp when they evolved with the internet and technology.

ACT 84 of 2016 specifically extends to items delivered to “a customer electronically or digitally or by streaming unless the transfer is otherwise exempt. This includes music or any other audio, video such as movies and streaming services, e-books and any otherwise taxable printed matter, apps and in-app purchases, ringtones, online games, and canned software, as well as any updates, maintenance or support of these items.” While e-books and videos otherwise would be printed or “hard copy” materials subject to tax, apps and certain in-app purchases have never been available through a tangible medium.

Ultimately, the Act regains a lost tax base while also adding new items to it. The question remains that if a Pennsylvania resident makes a purchase while on vacation in Florida and listens to, for example, a one-time podcast while still in Florida, then does Act 84 of 2016 extend to that purchase? In other words, if the sale and entire use occurs within Florida but the purchaser is a resident of Pennsylvania, is the sale subject to Pennsylvania tax?

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Potential good news for the growing mobile workforce.  Currently, there is a Bill pending in the US Senate to simplify the exposure, withholding, and reporting of state income taxes for both employers and employees traveling across state lines to perform their job functions.  The US House of Representatives already passed the Act in late September 2016, and the Bill is now being reviewed and considered by the Senate Finance Committee.

Essentially, the law is attempting to limit employees subject to state income taxes if they work in a state for 30 days or less.  In addition, this would limit the burden on employers for withholding and reporting requirements for those same employees.  The law allows the employers to rely on its employees for reporting days worked in a state where the employee does not reside, as long as, the employer does not have actual knowledge that the employee is lying or the employer is colluding with the employee to lie about days worked in a state.

One of the interesting aspects of this Bill would be its applicability to professional athletes.   Professional athletes tend to earn their income from performing in states all over the country.  The Bill specifically defines a professional athlete and the wages earned that are applicable to the 30-day threshold.  This potential aspect could revamp the way professional sports operate, scheduling of games, or where a professional athlete chooses to play.

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Tennessee is the latest of states to jump on the economic nexus bandwagon.  In an effort to sidestep the physical presence the proposed rule would require out-of-state dealers that engage in the regular or systematic solicitation of consumers in Tennessee through any means and make sales exceeding $500,000 to Tennessee consumers during the calendar year would be considered to have substantial nexus with the state. One substantial nexus is established, the dealers would be required to register with the state and collect and remit sales and use tax.

Similar to recent rulemaking in Alabama, Tennessee does not believe its position offends the Commerce Clause. The proposed rule, may go into effect on or about November 8, 2016. It is worthy to note the rule is subject to committee review in both house of the Tennessee legislature and legislative approval is needed before a rule can become permanent.

Tennessee is not the only state attempting to combat Quill. Similarly, Alabama and South Dakota are litigating whether their economic nexus standards are sufficient to satisfy the Commerce Clause substantial nexus requirement. Earlier this year, South Dakota adopted the economic nexus for sales and use tax purposes. South Dakota is currently a plaintiff and defendant in two separate cases addressing the constitutionality of the substantial nexus law.

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If states could impose tax on every company that makes a sale within its borders, they would. Luckily, the Commerce Clause of the Constitution requires something known as “nexus,” or a connection, between a company and state in order for that company to be subject to state and local taxes. The standards for nexus can be ambiguous, particularly in recent years as a result of the radical changes to traditional business models that have occurred with the internet.

While nexus may seem easy to determine using the physical presence test, the definition of physical presence has in fact been something that courts across the country have struggled with since the beginning. That struggle has only become increasingly complicated with the internet and virtual marketplaces that no longer require a company to open a brick and mortar shop everywhere it wants to sell its products.

Recently, Washington state has found nexus with a company that made wholesale sales through infomercials. This particular company sent employees to Washington to participate in trade shows and other promotional events. However, they did not have a physical business location within the state.

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Hawaii was the most recent in a line of states to take a stance in the long tax battle between online travel companies, such as Priceline, Expedia and Orbitz, and states over what is commonly referred to as “tourist development taxes,” or “bed taxes.”  Over the last couple of years, states have fallen on both sides of the issue of whether hotel rooms are taxable at the price a hotel receives for a room or the price that an online travel company sells a room.  The Hawaii case, Travelocity.com, L.P. v. Hawaii Director of Taxation, involves two taxes, the first of which is called a “GET” or “general excise tax,” and the second of which is called a “TAT” or “transient accommodations tax.”

The 2015 court decision has been clarified this month in an announcement by the state that online travel companies were in fact liable for the “GET,” along with any penalties for late payment, on their portion of the sale price for hotel rooms located in Hawaii. However, online travel companies are not liable for the “TAT.” This is similar to states like Florida, in which the amount the online travel company receives for the rental of a room within Florida is not subject to local tourist taxes.

The state reasoned that the portion of the sale that online travel companies receive is in fact for “occupancy rights” that are used in their entirety within the state of Hawaii when the sale is for a room within the state. Under that reasoning, the state determined that the revenue made by the online travel companies is subject to Hawaii state tax.

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Florida’s hotel reservation industry recently received an important victory relating to Tourist Development Tax (“TDT”).  TDT is a tax imposed on the privilege of renting, leasing or letting “for consideration any living quarters or accommodations in any hotel . . ., or condominium for a term of six months or less.”  § 125.0104(3)(a)1., Fla. Stat.  Notably, the TDT is due on the consideration paid for occupancy in the county. § 125.0104(3)(a)1., Fla. Stat.

In 2015, the Florida Supreme Court held that the “consideration paid for occupancy” is limited to the actual rental amount paid for occupancy of the room and not to mark-up charges and service charges associated with the reservations.  See Alachua County v. Expedia, Inc., 175 So. 3d 370 (Fla. 2015).

The issue in Sarasota Surf & Racquet Club Condominium Assn., Inc. v. Sarasota County, et al., Case No. 2015 CA 002612 NC (Fla. 12th Cir, July 11, 2016) was whether reservation and cleaning fees charged by a condominium association to guests during the reservation process were subject to TDT.  The County argued that the fees were part of the total consideration paid for occupancy and therefore subject to TDT.  The association argued that, pursuant to Expedia, only the rental amount was subject to TDT, not the reservation and cleaning fees charged in connection with the reservation.

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On December 14, 2015, the Supreme Court of the State of Utah issued its ruling in the case of DIRECTV and DISH Network v. Utah State Tax Commission. At issue in this case was a tax scheme that provided a sales tax credit for “an amount equal to 50%” of the franchise fees paid by pay-TV providers to local municipalities for use of their public rights-of-way.

The franchise fees were imposed for the running of cable and the construction of hubs on public property. Therefore, it is exclusively cable providers who pay franchise fees and qualify for the credit. Meanwhile, satellite providers such as DIRECTV are not subject to franchise fees and do not qualify for the tax credit.

DIRECTV argued that the tax credit was a violation of the dormant commerce clause of the Constitution. The dormant commerce clause is a legal term that means that states cannot either discriminate against interstate commerce or unduly burden interstate commerce because the power to do is in the hands of Congress. From a practical perspective, allowing 50 states to regulate interstate commerce differently would cause complete chaos, so the federal government wants to reserve that power for itself. Furthermore, states’ motivation to help their own local businesses would weaken the national economy as a whole.
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Since Quill in 1992, states only have the power to impose taxes on businesses if they have a “physical presence” in the State. For example, in order for a state to be allowed to require a company to charge sales tax, the company must have a place of business in the State, employees in the State or have a representative in the State. However, as the economy has shifted, more and more States are enacting an “economic nexus” to impose a tax on businesses.

But, what is economic nexus?
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On April 25, 2016 an important decision for the sports world came down from the U.S. 2nd Circuit Court of Appeals involving Tom Brady. Being a sports fan and a tax lawyer, the opinion sparked my interest. Challenging the National Football League seemed to mirror the challenges we launch against government agencies every day. While the case is not exactly analogous for a few reasons, it was not that dissimilar for a taxpayer’s challenge to a government agency.

From a procedural perspective, the case stems from the infamous “deflate gate” scandal of the 2015 AFC Championship Game. During the game Tom Brady, of the four-time Super Bowl champion New England Patriots, allegedly instructed personnel to deflate the footballs below the legal pressure level in order to enhance his ability to grip the football. Specifically, after the game in question, the NFL officials determined that all 11 of the Patriots balls were inflated below the allowable level of 12.5 PSI, while none of the Colts balls were below.
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