COST 2014 Intermediate / Advanced Sales Tax School May 18 23, 2014 Dallas, TX

Transcription

1 COST 2014 Intermediate / Advanced Sales Tax School May 18 23, 2014 Dallas, TX Session Title: Taxing Bits & Bytes Taxation of Electronic Information Services, Digital Products, and Access to Software (including Outsourcing to the Cloud) Speakers: Harley Duncan, KPMG, Washington, DC Carolynn Iafrate Kranz, Industry Sales Tax Solutions & Kranz & Associates, Washington, D.C. Abstract You are not alone if you feel like you are in the fog about the states taxation of electronic information, digital goods and accessing software without physically downloading that software. This session will not only give you a baseline and explain what those terms mean, it will also give you some comfort (or discomfort) to learn the states are having the same problems. With changes to the tax law moving slower than technology, this session addresses the issues the states are having when they attempt to tax the cloud. The presenters will also provide you with planning opportunities

2 ARIZONA Data Center Exemption - The Arizona Legislature has passed HB 2009 (June 2013) that allows qualified owners, operators and co-location tenants of computer data centers to apply for an exemption from Arizona TPT and use tax for qualified equipment that is installed in the computer data center, effective September 1, To qualify for the tax relief as a new computer data center, an owner or operator must notify the ACA within five years of certification whether or not its computer data center has created a minimum investment of: (1) $25 million if located in a county with a population under 800,000; or (2) $50 million if located in a county with a population greater than 800,000. To qualify for the tax relief as an existing computer data center, within five years of certification, an owner or operator must notify the ACA whether or not its computer data center has created a minimum investment of $250 million within the 72 months prior to September 1, Computer Backup and Restoration Services - The Arizona Department of Revenue has issued Private Letter Ruling LR (03/25/2013, released 07/19/2013) holding that a company that offers its customers online computer backup and restoration services is engaged in the business of renting tangible personal property in the form of prewritten software and is subject to transaction privilege tax under the personal property rental classification on its gross proceeds of sales or gross income derived from Arizona customers for its computer backup and restoration business. Online Order Delivery Charges - The Arizona Department of Revenue (ADOR) has issued Private Letter Ruling LR (05/13/2013, released 07/19/2013) holding that a company's gross proceeds or gross income from fees for shipping and handling associated with online sales are subject to transaction privilege tax (TPT) under the retail classification. The associated shipping and handling fees include both the cost of shipping the product and a charge for preparing the order. The Department found that since a charge is not a deductible delivery charge if it includes an amount other than the actual cost of delivering or shipping, the Company is subject to TPT on its gross proceeds of sales or gross income derived from S&H Fees on products delivered to Arizona because the S&H Fees include an amount other than the actual cost of delivering or shipping. Prewritten Computer Software - The Arizona Department of Revenue has issued Private Letter Ruling LR (04/29/2013, released 07/19/2013) holding that an employment application/selection business is engaged in the business of renting tangible personal property in the form of prewritten software and is subject to transaction privilege tax under the personal property rental classification on its gross proceeds of sales or gross income derived from Arizona customers for software it sold. The Department found that the company was engaged in the business of renting tangible personal property in the form of computer software because, among other things, its customers use the software - 2 -

3 when they add, delete, and modify job descriptions and can select which behavioral assessment questions they would like to pose to applicants. Computing Capacity Services Taxable; Data Storage Services Exempt - The Arizona Department of Revenue has issued a Private Taxpayer Ruling LR (6/25/2013, released 11/5/2013) holding that gross income derived from providing computing capacity services was taxable while data storage services were not. The company at issue offering two distinct services: (1) customers obtained computing capacity; and (2) customers stored, retrieved, and maintained content, data, applications and software on its servers. The Department found that since the first service offering involved the renting of tangible personal property for a consideration, those activities therefore were subject to TPT under the personal property rental classification on gross income derived from Arizona customers. However, the data storage service offering did not meet the requirements of the personal property rental classification, and did not fall under any remaining TPT classifications - therefore, were exempt if offered separate and distinct from the computing capacity services. ARKANSAS Digital Audio Works - The Arkansas Legislature has passed H.B. 1547, effective July 1, 2013, which amends Arkansas Code Ann to provide that Arkansas sales and use tax applies to sales of, or subscriptions to, audio-visual work and digital audio work to an end user who does not have the right to permanent use, and whose use is contingent on continued payments to the seller. Digital audio-visual work is defined as an electronically transferred series of related images that when shown in succession, impart an impression of motion, together with accompanying sounds, if any. Digital audio work means an electronically transferred work that results from the fixation of a series of musical, spoken, or other sounds, including ringtones. CALIFORNIA Warranties and Maintenance Agreements - The California State Board of Equalization has issued Publication 119 (July 2013), which explains how the sales and use tax applies to optional and mandatory retail warranties and maintenance agreements sold along with products. Many retailers sell warranties or maintenance agreements along with products such as cars, computers, and home electronic equipment. Publication 119 explains how sales and use tax applies when you sell a warranty or maintenance agreement (sometimes called a "service plan") or when you make a repair covered by such an agreement. Taxability of Software Maintenance Clarified - The California Board of Equalization has approved and authorized publication of proposed amendments to Regulation

4 (8/15/2013), Computers, Programs, and Data Processing, to expressly clarify that when a consumer purchases prewritten computer software via an electronic download or load and leave transaction that does not include the transfer of tangible storage media, and also purchases a separate optional maintenance contract that includes the transfer of a backup copy of the same or similar prewritten program recorded on tangible storage media, then tax does not apply to the charge for the prewritten program itself, and tax applies to 50 percent of the lump sum charge for the optional maintenance contract. SBE Issues Proposed Amendments to Computer Software Regulation - The California State Board of Equalization has scheduled a public hearing to discuss proposed amendments to Regulation 1502(f)(1), which discusses the sale or lease of prewritten computer programs and associated maintenance contracts. The hearing will be held at 9:30 a.m. on December 17, 18, or 19, The proposed amendments clarify that a maintenance contract sold in connection with the sale or lease of a prewritten program may provide that the purchaser is entitled to receive a backup copy of the same or similar prewritten program recorded on tangible media storage, so that the purchaser may use the backup copy to restore the prewritten program. Additionally, the proposed amendments clarify that the rules associated with optional maintenance contracts also include those sold in connection with nontaxable electronic download and load and-and-leave transactions. The written comment period ends at 9:30 a.m. on December 17, Computer Regulation Amended - Effective July 1, 2014, California Regulation 1502 regarding computers, programs, and data processing is amended to clarify the tax status of purchases of optional computer program maintenance contracts that include a backup copy of the computer program. The amendments clarify that (1) a backup copy of a prewritten program recorded on tangible storage media may be included in a maintenance contract sold in connection with the sale or lease of the same prewritten program; (2) taxable optional maintenance contracts are still taxed the same, even if they include a backup copy of a prewritten program recorded on tangible storage media; and (3) maintain the bright-line rule that 50% of the lump-sum charge for an optional maintenance contract that entitles the customer to receive tangible personal property is taxable, even when such a contract is paired with a nontaxable electronic download or load-and-leave transaction. COLORADO Downloaded Software & Online Data Service - The Colorado Court of Appeals issued a decision in Ball Aerospace & Techs. Corp. v. City of Boulder, Docket No COA 153 (Colo. Ct. App. Sept. 13, 2012), interpreting the City of Boulder's software definition broadly to impose use tax on downloaded software. The court interpreted the language "contained on other machine readable form" to encompass software that the customer downloaded via the Internet. In addition, the court held that access to an online data - 4 -

5 service constituted the transfer of software. The court reasoned that by paying to access the online data service, the company purchased the right to remotely use the computer software contained on the service providers' servers, and thus, acquired requisite control over the software. Online Database Access and Digital Newspapers - The Colorado Department of Revenue has issued PLR (12/31/2012, released 4/8/2013) holding that a news provider's online subscription fees for access to the company's publication and proprietary stock screens and comparative performance ratings are not subject to sales or use taxes. The Department specifically found that digital newspapers qualify for the newspaper exemption where it is a duplicate of the paper version offered by the taxpayer. As to the electronic access to a variety of financial data and analyses, the Department found that the information was the provision of a non-taxable service since the products accessed are not static and the user has the ability to create semi-customized reports using filter functionality options. Sales Tax Treatment of Software, Maintenance Contracts - The Colorado Department of Revenue has issued Private Letter Ruling PLR (5/14/2013), which addresses the criteria for applying sales or use tax to sales of computer software and software maintenance contracts, including regarding "tear open" licensing agreements, electronic delivery or delivery through a tangible medium, and mandatory maintenance agreements included in the purchase price. Server Software Support Fee May Be Nontaxable Service - The Colorado Department of Revenue has issued General Information Letter GIL (5/14/2013), which explains that a company's monthly server support fee may be a nontaxable service because the charge is assessed regardless of whether tangible personal property is transferred to the client and the free patches and upgrades appear to be passed through without markup. Software License Renewal Fees Taxable - The Colorado Department of Revenue has recently released general information letter GIL (8/7/2013) holding that a software license renewal fee for continuing use of prewritten, canned software is subject to sales or use taxes when the original license was delivered through a tangible medium. Digital Goods & ASP Taxation - The Colorado Department of Revenue has recently released general information letter GIL (8/20/2013) clarifying that effective July 1, 2012, the modified definition of tangible personal property did not alter the tax treatment of digital goods, ASPs, software as a service, or cloud computing. Thus, the Department will continue to treat the sale of electronically delivered goods, such as music, movies, and books as taxable sales of tangible personal property. Furthermore, charges made by ASPs are not subject to sales tax to the extent the ASP's charges are for use of computer software. An ASP whose computer software or equipment is located in Colorado is subject to use tax for those items

6 ASPs - The Colorado Department of Revenue has issued PLR (09/18/2013, released 11/19/13) holding that a company's charges for its software were not subject to state sales tax because the Company is an application service provider when it provides cloud collaboration services. The Company's charges for its hardware were not subject to state sales tax because with respect to the services provided, the company has dominion and control over the hardware, which helps to establish that it is the provider of services and, therefore, the user and consumer of the equipment used to provide those services. The CDOR also ruled that the Company is providing to its clients in Colorado intrastate telephone services (a service to which the Colorado sales tax applies) because the Company is providing access to software that routes and otherwise handles intrastate telephone calls that either originate or terminate at the client's place of business in Colorado, even though it provides only the routing and data handling functionality relating to voice and other data transmission. Software Licensing Agreements - The Colorado Department of Revenue has issued PLR (08/07/2013, released 11/19/13) holding that a taxpayer's sale of software that is prepackaged, has a nonnegotiable license agreement, and is delivered on a tangible medium is taxable. Nonnegotiable software license agreements presented to the buyer online qualify as a tear-open, nonnegotiable license. Sales of software sold with a negotiable licensing agreement are exempt. Additionally, the taxpayer s computer software maintenance contracts were subject to sales tax only if the original software was subject to tax and the upgrades were delivered in a tangible form. Software License Renewals - The Colorado Department of Revenue has released General Information Letter (8/7/13, released 1/6/14) holding that software renewal fees are simply a further charge for the continuing right to use what has already been established to be tangible personal property, and, therefore, it is subject to tax. GEORGIA Department Revokes Policy Statement on High-Technology Company Computer Equipment Exemption - The Georgia Department of Revenue has revoked Policy Statement ST (3/28/2014), which concerns the sales and use tax exemption under O.C.G.A (68) for sales or leases to qualifying high-technology companies of computer equipment exceeding $15 million in a calendar year for incorporation into a facility or facilities in Georgia. The policy statement, which also cites Reg as authority, states that the requirement that a qualifying hightechnology company that is affiliated with non-qualifying entities do a majority of its business with nonaffiliated entities does not apply to any exemption certificate that is issued on a company facility basis. The Department revoked the 2002 policy statement on the basis of the fact that it does not accurately reflect statutory language

7 IDAHO ASPs Exempt - The Governor of Idaho has signed into law H 0243 making application software accessed over the Internet or through wireless media exempt under the state sales and use tax, effective April 3, Pursuant to the new law, "tangible personal property" is now defined to specifically exclude application software accessed over the Internet or through wireless media. However, access to entertainment software is taxable, as well as access to software that is also offered by the vendor in other forms, such as tangible medium or electronic download. The new definition is codified at Idaho Rev. & Tax Code (b)(iii). Exemption Created for Electronically Delivered & Load & Leave Software; Remotely Accessed Software & Digital Products Clarified - The Idaho Governor signed into law H. 598 (4/4/2014) which creates an exemption for software delivered electronically or via load and leave effective July 1, It further amends the definition of remotely accessed software to remove the exclusions that were put into place in 2013, but to also expressly provide the digital music, books, videos and games are subject to tax. These changes will also be effective July 1, ILLINOIS Computer Server Leases - The Illinois Department of Revenue has issued Letter Ruling ST GIL (2/5/2013) discussing the tax implications to a company that leases computer servers from a third party with an option to buy at the conclusion of the rental period and in turn leases the servers to one of its customers with the same option to buy. In Illinois, there are two types of lease situations: conditional sales and true leases. Persons who purchase items for resale under conditional sales contracts can avoid paying tax on the purchase by providing a valid resale certificate. The lessor generally owes ROT on any installment payments when received. Under a true lease, lessors are deemed to be the end users of the TPP located in IL, and owe Use Tax based on the cost price of the property. Since IL does not impose tax on rental receipts, lessees incur no tax liability. Custom Software - The Illinois Department of Revenue has issued General Information Letter ST (4/30/2013) discussing the criteria outlined in Section that are required for the sale of computer software licenses and subsequent software updates to be exempt from retailer's occupation and use tax. Generally, if the software consists of custom-made computer programs, the sales are not considered taxable retail sales. Software Monitoring Services - The Illinois Department of Revenue has issued General Information Letter ST GIL (1/18/2013) regarding software monitoring services, holding that Illinois taxes do not apply to sales of services that do not involve the transfer - 7 -

8 of tangible personal property, but noted canned computer software is considered taxable tangible personal property. Software Maintenance Agreements - The Illinois Department of Revenue has issued General Information Letter ST GIL (5/28/2013) discussing the taxability of computer software maintenance agreements. In general, if the charges for the agreements are mandatory, those charges are subject to tax. Sales of maintenance agreements sold separately from property (optional agreements) are not taxable. Any property transferred incident to providing a patch or bug fix is taxed based on the taxability of the maintenance agreement that provides for the patch or bug fix. However, if the sale of a maintenance agreement includes charges for updates of canned software that consist of new releases or new versions of the software designed to replace an older version of the same product and that include product enhancements and improvements, the general rules governing taxability of maintenance agreements do not apply. If a maintenance agreement provides for updates of canned software and the charges for those updates are not separately stated and taxed from charges for training, telephone assistance, installation, consultation or other maintenance agreement charges, then the whole agreement is taxable as a sale of canned software. Certain Licenses of Software Not Taxable, Even When Reseller Is Involved - The Illinois Department of Revenue has issued general information letter ST GIL (6/19/2013), discussing sales of canned software and the exemption of certain software licenses from sales tax. A reseller of software will not be liable for sales tax, where a license agreement exists between the original seller of the software and the customer, provided that the reseller maintains a copy of the signed license agreement in its records and other criteria concerning the license transaction are met. Electronic Delivery - The Illinois Department of Revenue has issued General Information Letter ST GIL (07/31/2013) holding that information or data that is electronically transferred or downloaded is not considered the transfer of tangible personal property in Illinois. However, canned computer software is considered taxable tangible personal property, regardless of the form in which it is transferred or transmitted, including tape, disc, card, electronic means or other media. Software - The Illinois Department of Revenue has issued ST GIL (dated 9/19/ released 11/19/2013), explaining that while sales of canned computer software are subject to sales tax, sales of licenses to use software are not taxable if they meet specified criteria, including loss of access at the end of the licensing period, and clarified that subsequent charges for updates of canned software are taxable. Draft Regulation on ASPs, Web Hosting Forthcoming - The Illinois Department of Revenue has issued ST GIL (9/11/ released 11/19/2013), explaining that it is currently researching in order to draft rules governing application service providers, software hosting, and web-based software services, and until such time, a company must - 8 -

9 examine the Retailers' Occupation Tax Act to determine if its products constitute computer software. Written Signature Required on Exempt Software License Agreement - The Illinois Department of Revenue has issued ST GIL (dated 9/13/ released 11/19/2013) holding that a software license agreement must contain the written signature of the licensor and the customer to meet the signature requirement for an exempt software license. The Department specifically notes that "checking the box" to accept the terms of the license agreement online is not sufficient. Software, Maintenance and Consulting Services Discussed - The Illinois Department of Revenue has issued General Information Letter ST GIL (11/26/2013, released Jan 30, 2014) stating, generally, that if transactions for the licensing of computer software meet all of the criteria provided in subsection Section (a)(1), neither the transfer of the software nor the subsequent software updates will be subject to Retailers' Occupation Tax. If the charges for maintenance agreements are included in the selling price of the tangible personal property, those charges are part of the gross receipts of the retail transaction and are subject to tax. If agreements for the repair or maintenance of tangible personal property are sold separately from tangible personal property, sales of those agreements are not taxable transactions. In addition, professional or consulting services that do not include the transfer of tangible personal property are exempt. However, the transfer of any tangible personal property such as written reports, tangible media (CDs) and training manuals incident to a sale of service would result in SOT or UT liability. Cloud Computing Services - The Illinois Department of Revenue has issued General Information Letter ST GIL (11/26/2013, released Jan 30, 2014) holding that the telecommunications excise tax did not apply to cloud-based applications and services. Additionally, the Department commented that information or data electronically downloaded or transferred is not the transfer of tangible personal property, while canned computer software is taxable tangible personal property. Thus, if the computer software provided by the taxpayer consists of custom computer programs then the sales are not taxable retail sales, but must be prepared for the customer by special order. INDIANA Software Maintenance Agreements - The Indiana Department of Revenue has issued Letter of Findings No (1/30/2013) discussing the rules associated with software maintenance agreements. Specifically, the ruling states that all subsequent mandatory upgrades and modifications to canned software as part of a maintenance agreement are taxable

10 Computer Software Sales and Maintenance Agreements - The Indiana Department of Revenue has issued Letter of Findings No (2/27/2013) determining that a seller's sale of software and maintenance agreements that included software updates and computer hardware were subject to sales and use tax in the absence of evidence that the transactions were not sales of tangible personal property. Optional Warranty Contracts - The Indiana Department of Revenue has updated Bulletin #2 (March 2013) discussing optional warranty contracts. According to the updated Bulletin, warranty contracts now include extended service contracts. Also, tax paid on items used under optional warranty contracts is based on the acquisition cost of the warranty s service provider. The bulletin also provides examples surrounding the sales tax responsibility when there is a third-party warranty. For transactions where sales tax was collected and remitted on the sale of optional warranty contracts before the publishing of the January 2013 version of the bulletin, a retail merchant will not be required to collect sales tax or self-assess use tax on any parts used to fulfill the terms of the contracts. Digital Certificates - The Indiana Department of Revenue has issued Revenue Ruling ST (2/14/2013) holding that the sale of authentication services, including the provision of digital certificate, were not subject to the sales and use tax. Among the services provided by taxpayers in providing authentication solutions on a subscription basis is the provision of a digital certificate. The Department found that the digital certificates were neither specified digital products nor computer software. Accordingly, the sales of the authentication services were not subject to tax. Software Licenses and Maintenance Agreements - The Indiana Department of Revenue has issued Supplemental Letter of Findings (3/27/2013) holding that taxpayer's purchase of software licenses to an Indiana address could not be apportioned between multiple states without specific and concrete substantiation, such as the presentation to the seller of a direct payment permit, MPU certificate, a written supplement indicating its intent to use the software outside of Indiana, or proof that use tax was paid to those other jurisdictions where the software was ultimately used. Furthermore, taxpayers initial purchase of maintenance agreements prior to the law change exempting such purchases remained taxable. Computer Software Maintenance Agreements - The Indiana Department of Revenue has issued Letter of Finding (04/01/2013) holding that a taxpayer's purchases of computer software maintenance agreements, which included non-taxable services, were considered unitary transactions and therefore, subject to use tax on the total amount of the maintenance agreements. Under audit, the taxpayer protested the portion of the assessment related to phone support services, however, the Department determined that the software agreements were unitary transactions, which includes all items of personal property and services which are furnished under a single order or agreement and for

11 which a total combined charge or price is calculated. Accordingly, the entire contract price of the maintenance agreements, including the non-taxable services, was subject to use tax. Web Hosting Services and Installation Services Exempt - The Indiana Department of Revenue has issued Letter of Findings (3/27/2013) holding that web hosting services and installation services are exempt from tax. ASPs Taxable - The Indiana Department of Revenue has issued Letter of Finding (01/01/2014) holding that a car dealership's purchases of computer based information systems, including software and web-based platforms, were subject to tax. Generally, electronically delivered canned software, including online prewritten computer software maintained on computer servers outside of Indiana and accessed via the Internet are subject to tax. With respect to GPS units purchased by the taxpayer and installed on customer's vehicles it sold as a requirement of financing the vehicle, the taxpayer asserted that the GPS units were eligible for the resale exemption because they were installed and sold with the car. However, since the taxpayer provided no information to show that the GPS units were itemized separately from the vehicles and resold to their customers, the purchase and use of the GPS units did not qualify for the exemption from sales or use tax. KANSAS Taxability of Video and Conferencing Services Discussed - The Kansas Department of Revenue has issued Private Letter Ruling No. P (7/3/2013), which states that state and local retailers sales tax applied to telecommunications and ancillary service charges for video and conferencing services invoiced to customers whose primary place of use was within Kansas. The taxpayer at issue provided voice, video, messaging, presence, audio conference, web conferencing, and mobility services that its customers accessed by voice over Internet protocol (VoIP). The department found that the services the taxpayer provided met the definitions under Kansas sales tax law of "telecommunication service" or "ancillary services." Under Kansas law, sales tax applies to gross receipts from any intrastate telecommunications service or ancillary service sourced to Kansas. Further, under the state s sourcing rules, telecommunications services are sourced to the customer s "place of primary use." The department adds in the letter that remote providers are liable for tax on the interstate telecommunications and ancillary services that they invoice to a customer s in-state primary place of use, even when a different and unrelated in-state provider links the customer to the public switched telephone network or to the World Wide Web. The department also states that when cloud computing is used to route electronic, voice, data, audio, video, or any other information or signals, the charges to the customer are taxable charges for telecommunications services or ancillary services

12 MAINE Definition of TPP amended - Recently enacted Maine Senate Bill 673 (4/15/2014) amends the definition of tangible personal property in Section 1752(17) to include "any product transferred electronically". The bill becomes effective 90 days following adjournment of the 126th Legislature's Second Regular Session. MASSACHUSETTS Draft Directive Issued on ASPs v. Canned Software - The Massachusetts Department of Revenue has issued a working draft for practitioner comment, Directive 13-xx (2/7/2013), to explain criteria for determining whether a transaction is a taxable sale of pre-written software or a nontaxable service. The factors discussed by the Department, and listed in the Directive in making such determination will be considered cumulatively; no one factor is determinative of taxability. Where both services and the right to use software are bundled in one transaction, the Commissioner applies an "object of the transaction" test. ASPs Taxable - The Massachusetts Department of Revenue has issued Letter Ruling 13-2 (3/11/2013) holding that charges for an ASP are subject to Massachusetts sales and use tax as the sale of prewritten computer software because it functions on an automated basis with little interaction from the seller s employees. Charges for a moderation service, which involves filtering of reviews by the seller s employees, are not subject to tax if the service is optional and the charges are separately stated. Social media marketing assistance provided by the seller is a nontaxable service because it involves substantial interaction between the seller s employees and the clients. However, it is subject to tax if it is sold in a bundled transaction for one subscription price with a prewritten software product. Virtual Event Center Subscription Taxable - The Massachusetts Department of Revenue has issued Letter Ruling 13-5 (6/4/2013) holding that subscriptions to a taxpayer s "virtual event center" - a platform that consists of a customizable website allowing customers to create their own online events - are subject to Massachusetts sales and use tax as prewritten software. Customers use online design tools to design their own event website. Subscriptions are taxable as software because the object of the transaction is use of the software to create an online event. Additionally, customers are given a license to use the software, which is generally a taxable transaction. Services provided by the taxpayer in a bundled transaction, such as design assistance and technical project management, are also subject to tax. These services may not be subject to tax if they are sold as separately stated optional services

13 Computer Services and Software Tax Repealed - The Massachusetts Department of Revenue has issued TIR (9/30/2013) repealing the sales and use tax on computer system design services and the modification, integration, enhancement, installation, or configuration of standardized software. The repeal is effective retroactive to July 31, 2013, the original effective date. The department will be required to refund all tax that was remitted during the time the tax was in effect. Refund claims must be filed by December 31, Persons who failed to collect or pay tax on these transactions would not be subject to penalties. Cloud Computing Regulation Revised - The Massachusetts Department of Revenue has revised Letter Ruling 12-8 (11/8/2013) addressing the taxability of cloud computing products. Charges for cloud computing products sold by the taxpayer are not subject to tax when the products are used with the customer s own application software or opensource (free) operating system software because there is no sale of prewritten software. Products that include operating system software licensed by the taxpayer from a third party are also not subject to tax. The object of the transaction remains the access to the taxpayer s computing resources and storage capacity. Charges for remote storage service are not subject to tax because the object of the transaction is the use of capacity in the taxpayer s hardware to store or back up the customer s data. Refund Deadline Approaching for Repealed Computer Services Tax - The Department reminds taxpayers that the deadline is approaching to file a claim for sales or use taxes that were submitted on computer and software services that was subsequently repealed. With the repeal of the tax in late September, the law included language extending the deadline for taxpayers to file a refund claim until December 31, Claims must be filed electronically. Database Access - The Massachusetts Department of Revenue has issued Letter Ruling LR14-1 (2/10/2014) holding that a taxpayer's sales to Massachusetts customers of subscriptions to its database, bundled with additional support or services for one subscription price, or sold separately, are not subject to sales or use tax. The sale or license of a right to use software on a server hosted by the taxpayer is generally taxable in Massachusetts. However, where use of a software application is bundled with substantial non-taxable services such as database access or data processing, the object of the transaction may be the nontaxable service rather than a sale of software. The Department held that if a taxpayer is providing the source of the content or information, which is accessed by customers on-line, this qualifies as database services and is not subject to the Massachusetts sales and use tax

14 MICHIGAN Cloud Computing Services - The Michigan Court of Claims has held in Auto-Owners Insurance Company v. Department of Treasury (3/20/2014) that cloud computing transactions are not taxable because they are characterized as nontaxable services. Taxpayer engaged in transactions with different vendors to provide services and products which all contained software accessed through the Internet. Under Michigan law, tax is imposed on the privilege of selling or using tangible personal property in the state. Tangible personal property is defined to include prewritten, non-custom, software that is delivered by any means. The court, focusing on the term "delivered", held that the transactions were not subject to tax since no software was actually transferred to the customers. MINNESOTA Omnibus Tax Bill Signed - The Minnesota Governor has signed into law omnibus tax bill H677 which brings sweeping changes for sales and use tax purposes. Effective March 31, 2014, the sales and use tax applies to warehousing or storage services for tangible personal property, excluding electronic data and self-storage services. Additionally, effective June 30, 2013, the bill taxes sales of specified digital products or other digital products to an end user with or without rights of permanent use and regardless of whether rights of use are conditioned upon payment by the purchaser. Under the bill, "tangible personal property" is defined to exclude specified digital products, or other digital products, transferred electronically. The bill also defines "digital audio works"; "digital audiovisual works"; "digital books"; "digital code"; other digital products ; and specified digital products. Also effective after June 30, 2013, H677 expands the exemption for qualified data centers by adding refurbished data centers. Digital Products - The Minnesota Department of Revenue has issued a release on Transitional Sales (6/1/2013) detailing the transitional rules for certain sales and use tax changes that take effect on July 1, 2013, including the taxation of digital goods. Specifically, if a digital product is ordered before July 1, but title or possession does not transfer to the purchaser and it is not first used until on or after July 1, the sale will be subject to the 6.875% general rate sales tax and any applicable local taxes; if a digital product is ordered before July 1 and possession transfers to the purchaser or it is first used by the purchaser before July 1, the sale may not be subject to the 6.875% general rate sales tax and any applicable local taxes. Computer Software and Maintenance - The Minnesota Department of Revenue has revised Minnesota Sales Tax Fact Sheet 134 (June 2013) related to computer software and maintenance contracts. Effective July 1, 2013, a purchaser of digital products, computer software delivered electronically, or a taxable service may source the sale to multiple locations if the purchaser knows at the time of purchase that these items will be

15 used concurrently in more than one taxing jurisdiction. Also, effective July 1, 2013, maintenance contracts for computer equipment are taxable where the repair service can be deducted as a business expense under the Internal Revenue Code. Digital Textbooks Exempt From Sales Tax - The Minnesota Department of Revenue has updated Sales Tax Fact Sheet 111 (June 2013), which discusses the application of sales tax to textbooks purchased and sold by schools and school districts. The publication notes that digital textbooks are exempt from the tax as of July 1, Taxation and Sourcing of Digital Products - The Minnesota Department of Revenue has issued Sales Tax Fact Sheet 177 (June 2013), which explains that as of July 1, 2013, the state sales and use tax applies to sales of digital products, including songs, ring tones, movies, novels, and electronic greeting cards, and a digital product customer may source the sale to multiple locations in some circumstances. Electronically Delivered Software - The Minnesota Department of Revenue has updated Sales Tax Fact Sheet 134 (June 2013), which provides guidance on how sales tax applies to computer software. The publication notes that beginning July 1, 2013, electronically delivered software may be sourced to multiple locations. Software Consulting & Implementation Services Not Taxable - The Minnesota Tax Court has held in SAP Retail, Inc. v. Commissioner of Revenue, No R (9/19/2013) that a software company that sold software consulting and implementation services to a customer that also purchased the company's software was not subject to sales tax on the services or related travel expenses. The services provided included advisory support, preparation of blueprints, configuring modules, and testing. The Tax Court found that the services were not taxable as fabrication labor or as installation charges and that were not among any of the enumerated taxable services in Minnesota. The Tax Court also found that the consulting services and related travel expenses were not part of the taxable sales price, which was the software license fee. Furthermore, the Tax Court found that the software company s consulting services were not necessary to complete the sale of the software license. Software Licenses Did Not Qualify as Custom Software - The Minnesota Tax Court has held in LumiData, Inc. v. Commissioner of Revenue, No R (12/18/2013) that a company's licensing fees received for its software product (which allowed suppliers to import a retailer s point-of-sale information into a database and then query the database to track sales, manage inventory, and identify future targets) were taxable as sales of prewritten computer software. The taxpayer's assertion that its license agreements did not constitute sales of prewritten computer software because each transaction required sufficient customization was rejected by the Tax Court. Under Minnesota law, a software modification or enhancement that is designed and developed to the specifications of a specific purchaser is nontaxable only if there is a reasonable, separately stated charge for

16 the customization in an invoice or other statement given to the purchaser. Here, the taxpayer did not separately state its charges for modifications or enhancements in any documents furnished to purchasers. Thus, the entire license fee was taxable. Digital Products Fact Sheet Revised - The Minnesota Department of Revenue has revised Sales Tax Fact Sheet No. 177 (Jan. 2014) regarding digital products. The fact sheet describes common examples of digital products and the means of transferring digital products electronically, and discusses taxable digital products; nontaxable and exempt digital products; bundled transactions; exemptions; capital equipment; sourcing; multiple points of use (MPU); and other matters. MISSOURI Web Hosting Services and Installation Services Exempt - The Indiana Department of Revenue has issued Letter of Findings (3/27/2013) holding that web hosting services and installation services are exempt from tax. Management Services Provided Through Website or Computer Network Not Taxable - The Missouri Department of Revenue has issued Letter Ruling NO. LR 7267 (7/3/2013), which rules that a retail restaurant chain s back office services that it provides to its franchisees on a computer network are not subject to Missouri sales and use tax. The services provided by the taxpayer are not taxable services in Missouri. The taxpayer is providing these services through an Internet website that the franchisee accesses. The franchisee stores data on the taxpayer's computer network. The server that stores this data is not located in Missouri. Therefore, the taxpayer is not required to collect and remit sales tax on the services provided to its franchisees. Subscriptions to Online Database Not Taxable - The Missouri Department of Revenue has issued Letter Ruling No. LR 7281 (7/3/2013), which rules that A taxpayer's sales of subscriptions to its online database are not subject to Missouri sales tax because they involve neither a transfer of tangible personal property nor a taxable service. Proposed Changes to Software Regulation - The Missouri Department of Revenue has issued new proposed amendments to Regulation 12 CSR (Aug. 2013) regarding software to clarify when software transactions are treated as taxable sales of tangible personal property and when they are considered nontaxable sales of services. Streaming Video Content Not Taxable - The Missouri Department of Revenue has issued Letter Ruling No. LR 7338 (12/20/2013) holding that the sale or rental of streaming video content is not subject to sales or use tax. Under current regulations, the sale of the original program delivered over the Internet is not the sale of tangible personal property. Therefore, the sale of digital content for use with the original program that is delivered

17 over the Internet is not subject to sales tax. The customer does not receive any tangible personal property whether he or she rents or purchases the video, thus the streaming video content is not subject to tax. Proposed Software Regulation Revised - The Missouri Department of Revenue has proposed amending software Regulation , including clarifying that sales of software as a service are not subject to tax and updating language and examples on canned and customized software and maintenance agreements. NEBRASKA Data Center Exemption Enacted - The Nebraska Legislature has passed L.B. 1080, effective January 1, 2013, which allows tangible personal property and services obtained by a person operating a data center in Nebraska to be purchased exempt from sales and use taxes if they are assembled, engineered, processed, fabricated, manufactured into, attached to, or incorporated into other tangible personal property for subsequent use outside the state. The exemption also applies to the circumstance where the data center operator exercises a right or power over the tangible personal property in Nebraska for the purpose of later transporting it for use outside the state. "Data center" is defined to include computers, supporting equipment, and other organized assembly of hardware or software that are designed to centralize the storage, management, or dissemination of data and information, environmentally controlled structures or facilities or interrelated structures or facilities that provide the infrastructure for housing the equipment, such as raised flooring, electricity supply, communication and data lines, Internet access, cooling, security, and fire suppression, and any building housing the foregoing. Digital Photographs - The Nebraska Department of Revenue has revised Information Guide (June 2013) related to photographers and photofinishers to clarify that digital audio-visual works are taxed separately from tangible personal property. Taxable sales of digital property include the electronic delivery of digital audio-visual works, subject to the tax at the rate at the purchaser s address. Maintenance Agreements - The Nebraska Department of Revenue has issued Information Guide , 'Warranties, Guarantees, Service, and Maintenance Agreements' (6/20/2013). Specifically, the guide discusses the fact that the sale of a maintenance agreement is taxable if the property covered by the agreement is taxable. The charge remains taxable whether it is included in the sales price of the property, invoiced separately, or purchased at a later date. Charges for maintenance agreements to maintain computer software that include updates, enhancements, modifications, or free or reducedprice upgrades are taxable. However, charges for help desk or technical support services for software that are provided separately from a maintenance agreement, so long as no updates or enhancements are provided, are exempt

18 Cloud Computing Services Not Taxable - The Nebraska Department of Revenue has updated its sales and use tax guide on computer software, Information Guide (1/22/2014), to address the taxability of cloud computing services. "Cloud computing" includes software as a service (SaaS), platform as a service (PaaS), and infrastructure as a service (IaaS). Charges for services where customers remotely access software applications, operating systems, servers, and other network components by the Internet or other online connections are not taxable. This remains true regardless of whether the hardware, software, or network components are located in Nebraska or in another state. The service provider remains responsible for sales or use tax on purchases of software, hardware, and network components used in Nebraska. NEW JERSEY Cloud Computing Discussed - The New Jersey Division of Taxation has issued Technical Bulletin TB-72 (7/3/2013) discussing the taxation of cloud computing in New Jersey. The Division found that software as a service (SaaS), platform as a service (PaaS), and infrastructure as a service (IaaS) are all nontaxable services, as they do not meet the definition of tangible personal property and are not among the enumerated services. Furthermore, web hosting and data hosting services are also nontaxable. Information Services - The New Jersey Division of Taxation has issued Publication ANJ- 29 (8/20/2013) discussing the taxability of information services received by customers in NJ. A business that charges a fee for access to any type of information other than personal or individual information through any means (electronic or hard copy) is selling a taxable information service because the true object of that transaction is the information itself. Information services do not include personal or professional services or nonenumerated services in which the service provider may collect and/or review information in order to provide the purchaser with the true object of the service. The publication offers several examples of taxable and exempt information services. Proposed Changes to Software Related Regulations - The New Jersey Division of Taxation has proposed to amend regulations 18: , 18: , and 18: regarding the sales taxation of software. The proposed rules would clarify that both tangible and electronically delivered prewritten computer software will be deemed tangible personal property subject to sales tax, unless the software is delivered electronically for business use. Additionally, proposed changes further outline the treatment of software maintenance contracts and related software services. Comments are due to the Division by June 20,

19 NEW MEXICO Information Service - The New Mexico Taxation and Revenue Department has issued Ruling No (1/31/2013) holding that an out-of-state online data provider s receipts from sales of licenses in New Mexico are subject to gross receipts tax. The online software programs compile data and generate economic forecasts for analytical purposes. However, receipts from selling services such as consulting and analyst services performed outside New Mexico are exempt even if the product of such services is initially used in New Mexico. ASPs Taxable - The New Mexico Taxation and Revenue Department has issued Ruling No (6/26/2013) holding that cloud-based services were subject to New Mexico gross receipts tax because the ASP was providing the customers with a license to use hardware and software. The host provided cloud-based hardware and software applications to customers in exchange for monthly usage fees. The department held that the transactions constituted licenses to use, and therefore were not service transactions. For New Mexico customers with computers located in New Mexico, the location of the licenses from the host is New Mexico. The licenses were, therefore, subject to tax. Web-based Services Exempt - The New Mexico Taxation and Revenue Department has issued Ruling No (7/19/2013) discussing the taxability of web-based services. An out-of-state company s receipts from providing access to customers in New Mexico to computing resources, using either open source operating system software or third-party operating system software, were taxable receipts from providing a license to use. The provision of remote storage capacity for data on a server located outside New Mexico is not taxable. The company s data transfer fees for uploading data, downloading data, or moving data within the company s network as part of the customer s use of the company s web-based services are exempt because the receipts are from services performed outside New Mexico. Gross Receipts from Digital Magazines - The New Mexico Department of Revenue has issued Ruling No (9/26/2013) discussing how a taxpayer should calculate the gross receipts earned from its publication of an online magazine. The taxpayer creates and distributes electronic newsletters free of charge to subscribers across the United States and internationally which carry paid advertisements from companies based entirely outside of New Mexico. The Department determined that the taxpayer may deduct from its gross receipts, for advertisers with no location in New Mexico, an amount equal to the percentage determined by dividing the number of magazines for each issue sold outside of New Mexico by the total number of magazines sold everywhere. The taxpayer may not deduct any portion of the receipts from advertisers located within New Mexico

20 NEW YORK Online Training Exempt - The New York Commissioner of Taxation and Finance has issued TSB-A-13(1)S (1/8/2013) holding that a taxpayer s sale of its online driver education training course is not subject to sales tax where access to online educational materials constituted a nontaxable educational service when the product extends beyond the use of software. While the taxpayer s program may include the employment of software, the student does not have control over the software other than to stop and restart the course online. The Department ruled that the software is an ancillary component of a larger transaction that is not subject to sales tax. Information Services - The New York Commissioner of Taxation and Finance has issued TSB-A-13(13)S (5/20/2013) holding that monthly fees for certain litigation and electronic discovery services are exempt as non-taxable personal information services. The taxpayer s litigation support services are information services because they include analyzing, compiling, and organizing the clients information, and adds to "intelligence" contained in the original documents. Despite the fact that the taxpayer could access and manipulate documents online, the Commissioner found that the primary function of the taxpayer s service is the provision of a personal information service, and not the sale of prewritten software. Separate charges for document production are taxable sales of tangible personal property. Electronic News Service Exemption - The New York Department of Taxation and Finance has issued Important Notice N-13-5 (June 2013) announcing that the cap amount for purposes of the sales and use tax exemption for electronic news services in effect for sales or uses of such services that occur from June 1, 2013, to May 31, 2014, is $2,190. ASPs Taxable - The New York Commissioner of Taxation and Finance has issued TSB- A-13(22)S (7/25/2013) holding that sales of access to fillable forms via an ASP are subject to New York sales taxes when accessed by a customer located in New York because the seller s product is prewritten software. The location of the code embodying the software is irrelevant, because the software can be used just as effectively by the customer even though the customer never receives the code on a tangible medium or by download. Although the taxpayer s customers do not have the right to alter or change the underlying code of the software itself, they gain constructive possession of the software and the "right to use, control or direct the use" of the software, because they have the right to alter the content by filling in the form. Certain Data Processing and Data Warehousing Services Not Taxable - The New York Commissioner of Taxation and Finance has issued TSB-A-13(24)S (9/9/2013) holding that a taxpayer s data processing and data warehousing services are not subject to New York sales and use tax. The taxpayer collects data from customers and stores the data until the appropriate submission date. The taxpayer then submits eligible data via a