Performance Marketing Ass n, Inc. v. Hamer, Illinois Supreme Court, No , October 18, 2013

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1 October 2013 Illinois Provisions of Click-Through Nexus Law Held Void The Illinois Supreme Court held that the definition provisions in Public Act (H.B. 3659), Laws 2011, the sales tax click-through nexus law, are void and unenforceable because they impose a discriminatory tax on electronic commerce under the meaning of the federal Internet Tax Freedom Act. The click-through nexus law is discriminatory because it imposes a use tax collection obligation on out-of-state retailers who maintain clickable links on websites while it does not impose a similar obligation on similar types of advertising, such as promotional codes, made available by out-of-state retailers through newspapers or other printed publications or over-the-air broadcasting. In addition, no other Illinois law imposes a similar obligation on other out-of-state retailers. The court did not address the question of whether the click-through nexus law violated the Commerce Clause of the U.S. Constitution. Performance Marketing Ass n, Inc. v. Hamer, Illinois Supreme Court, No , October 18, 2013 Cook County Nontitled Personal Property Use Tax Ordinance Invalid An Illinois Cook County trial court has issued an order and opinion, granting summary judgment to two law firms and ruling that Cook County s nontitled personal property use tax ordinance is invalid. The court held that the tax violated state law prohibiting a home rule county from imposing, under its home rule authority, a use tax, sales tax or other tax on the use, sale or purchase of tangible property based on the gross receipts from such sales or the selling price of the property. In addition, the court held the tax is an ad valorem tax on personal property in violation of the Illinois Constitution. Finally, the court held that the tax is per se discriminatory against interstate commerce in violation of the U.S. Constitution. Reed Smith, LLP et al. v. Ali, Director of the Cook County Department of Revenue, et al., Nos. 13 L and 13 L , Circuit Court of Cook County, October 11, 2013 Trucking Pass-Through Miles Includible in Apportionment Numerator A trucking company had to include in the numerator of its Illinois corporate income tax apportionment factor the miles driven through Illinois without picking up or delivering goods, which are otherwise known as pass-through miles.

2 A trial court decision in favor of the trucking company was reversed, and the case was remanded. The pass-through miles established a physical and economic presence in Illinois, and a contention that physical presence must be fixed within Illinois in order to be "in this state," as stated in the statute, was unsupported by case law. Rather, a prior court decision had determined that the phrase "in this state" was more broadly defined to include, not only being within Illinois borders, but also having a presence or existence in Illinois. Whether or not the trucking company was picking up or delivering goods in Illinois, it utilized the state s infrastructure and roadways, and its property and employees were physically present in Illinois. In addition, the trucking company alleged it paid Illinois fuel tax, which indicated that it engaged in additional economic activities with Illinois suppliers. The statute did not state that revenue miles were conditioned on the taxpayer generating income from people or entities within Illinois, and not including the pass-through miles in the apportionment formula would create a gap in taxation. An amendment to the statutory apportionment provision subsequent to the tax years at issue did not, as contended by the trucking company, establish that the apportionment factor did not previously include passthrough miles. In any event, the amendment did not apply to the present case, which concerned tax years prior to the amendment s effective date. Commerce Clause Claim The trucking company s contention that inclusion of pass-through miles in the numerator of the Illinois corporate income tax apportionment factor would violate the federal Commerce Clause was not addressed on appeal because the company had not raised the issue in the lower court. Witte Brothers Exchange, Inc. v. Department of Revenue, Appellate Court of Illinois, First District, No , September 30, 2013 Indiana Information Service Revenue Included in Sales Factor An Indiana income taxpayer that was an out-of-state business providing electronic information services was required to apportion its revenue from Indiana customers, for purposes of the sales factor of the apportionment percentage, to Indiana. The taxpayer reported Indiana sales figures based on cost of performance and excluded all of the "information services" revenues received from its Indiana customers from its Indiana numerator. The Department of Revenue performed an audit and issued an additional assessment. The taxpayer argued that the money earned from its Indiana clients should be sourced to the taxpayer s out-ofstate location. The taxpayer stated that the direct costs associated with the income producing activity were staffing, which included editorial, research, analysts, systems and database managers, and information technology, which included computers, servers, software development and maintenance. The taxpayer argued that the majority of the direct costs were incurred outside of Indiana. The department argued that the taxpayer only received revenue because the information was "rendered" to Indiana customers and that it did not have value unless it was offered to Indiana customers. Indiana regulations state that if the activity is performed within and without the state the receipts are attributed to Indiana if the greater proportion of the income producing activity is performed there, based on costs of performance. The term "income producing activity" means the act or acts directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profit. Further, the department will conclude that the actual "income producing activity" is performed in Indiana because "the act or acts directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profit" occur in Indiana. 2

3 The taxpayer did not earn money from conducting out-of-state financial research or because a specific Indiana customer hired the taxpayer to conduct out-of-state financial research on that particular customer's behalf. The taxpayer earned money because it conducted financial research and then sold the results of that research to Indiana customers. The money earned from those Indiana sales transactions constituted Indiana-source income. Under Indiana law, receipts from any "income producing activity" performed in Indiana are always attributed to Indiana. Therefore, the revenue earned from the Indiana sales transactions constituted Indianasource income that had to be included in the sales factor. Letter of Findings No , Indiana Department of Revenue, September 25, 2013 Massachusetts Tax on Computer Services Repealed Massachusetts Gov. Deval Patrick has signed legislation that eliminates 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 date the tax initially took effect. Persons who failed to collect or pay tax on these transactions will not be subject to penalties. Vendors are required to make reasonable efforts to return to purchasers any tax that was collected but not remitted. Any taxpayer who remitted tax on these services is entitled to a refund. Abatement applications must be filed by December 31, The Department of Revenue has announced that vendors may also obtain refunds by electronically amending their returns on WebFile for Business. Vendors must return these refunds to customers within 30 days of receipt. Ch. 95 (H.B. 3662), Laws 2013, effective September 27, 2013, and as noted above; Release, Massachusetts Department of Revenue, September 30, 2013 Michigan State Supreme Court Vacates Decision Prohibiting Taxpayers from Combining Business Income from Separate Entities The Michigan Supreme Court has vacated the judgment of the Michigan Court of Appeals which held that taxpayers were not permitted to combine business income from separate entities for personal income tax purposes. The appellate court did not permit the taxpayers to add the property, payroll, and sales of multiple S corporations to establish a single property factor, a single payroll factor, and a single sales factor. In this case, the taxpayers S corporations were legally separate and distinct business entities and there was no common ownership at the entity level. The Michigan Supreme Court remanded the case back to the Michigan Court of Appeals for reconsideration in light of the Supreme Court s decision in Malpass v. Department of Treasury and Wheeler Estate v. Department of Treasury, 494 Mich. 237; 833 N.W. 2d 272 (2013). In these consolidated cases, the court ruled that (1) the personal income tax law did not prohibit individual taxpayers from combining profits and losses from unitary flow-through businesses and then apportioning that income on the basis of the businesses combined apportionment factors and (2) for the years at issue, combined reporting could include foreign entities to the extent that the foreign entity and the individual taxpayers in the state were a unitary business. Winget v. Department of Treasury, Michigan Supreme Court, No , September 30,

4 Interest Rate to Increase for Certain Tax Refunds Beginning January 1, 2014, the Michigan Department of Treasury will be required to pay additional interest on a personal income tax refund owed to an individual taxpayer if the refund had not been paid within one of the following dates for the applicable tax year: May 1, for returns the department received by March 1 of the applicable tax year; 60 days from the date the department received the return, for returns received after March 1 of the applicable tax year. The additional interest must be paid at a rate of 3% per annum, calculated from the time the tax was due and until the refund was paid, if all of the following conditions are met: the refund was due on an original return that was timely filed under the applicable income tax provision; the department did not adjust the refund; the return was complete for processing purposes with no calculation errors and contained all required information prescribed by the department; the taxpayer had complied with the department's request, if any, for additional documentation or information within 30 days of the request; the refund was not subject to a suspension of the statute of limitations under Sec a(3) or (4), M.C.L., except for an audit by the department; no portion of the refund was subject to interception under Sec a, M.C.L., for other liability of the taxpayer; and the amount to be refunded was more than $1. Act 133 (H.B. 4002), Laws 2013, October 15, 2013 New York Taxability of Charges for Online Software Tool Discussed A taxpayer s sale of a software assessment tool that is available online is considered a sale of prewritten computer software and is subject to New York sales tax when sold to third-party consultants. Because the thirdparty consultants are not re-selling licenses to use the taxpayer s software tool, the consultants should not offer and the taxpayer may not accept a resale certificate for those purchases. The taxpayer s use of the software tool is subject to use tax because the taxpayer offers the software for sale in the regular course of business. The use tax is calculated on the consideration paid for tangible personal property that constitutes the blank medium, such as discs or tapes, used in conjunction with the software. Because the taxpayer does not reduce the software tool to tangible media but, rather, makes it available online, the base on which the use tax would be calculated is zero. The taxpayer s service of gathering data from its employer-customer and using that data to create reports generated by his proprietary software constitutes a personal or individual information service that is not subject to sales tax. The service constitutes an information service under Tax Law 1105(c)(1) because the taxpayer adds to the "intelligence" contained in the original data by analyzing it and presenting it in the form of a report according to the parameters of the taxpayer s software program. However, because the information provided by the taxpayer in these reports relates to an individual employer-customer s own data, and the taxpayer does not and cannot, under its agreement with its customer, furnish the information or reports to anyone else, the taxpayer s activities constitute an information service that is personal or individual in nature and therefore is excluded from the sales tax. Accordingly, the taxpayer is not required to collect sales tax when he sells reports to his employer-customers. The fact that the taxpayer may seek and receive permission from an employercustomer to use its data for research purposes in the future does not alter this result. 4

5 TSB-A-13(30)S, New York Commissioner of Taxation and Finance, September 10, 2013 Hosted Software Services Taxable A taxpayer s sales of a hosted software solutions system that assists law firms in the management and organization of their law offices, provided via the Internet, constitutes sales of prewritten computer software that are subject to New York sales and use tax because the taxpayer grants its customers a license to use its software. This is true even if no "copy" of the software is downloaded or transferred to the customer. Prewritten software remains taxable even if it is enhanced or modified for a specific purchaser. However, if the charge for custom modification or enhancement is separately stated on the invoice or bill, the charge for custom modification is exempt. The situs of the sale for purposes of determining the proper local tax rate and jurisdiction is the location associated with the license to use (i.e., the location of the customer s employees that use the software). If the customer s employees that use the software are located both in and out of New York, the taxpayer should collect tax based on the portion of the receipt attributable to the employee users located in New York. TSB-A-13(32)S, New York Commissioner of Taxation and Finance, September 10, 2013 Tennessee Equipment Qualifies for Industrial Machinery Exemption A taxpayer s purchases of equipment required by the federal Food and Drug Administration, including a water treatment system, HVAC system, boiler system, pigging system, RF guns, and antifoam treatment, are exempt from Tennessee sales and use tax as industrial machinery. Labels that accompany pallets of product sold to retailers are exempt as packaging. Labels used to track raw goods prior to the manufacturing process and the products during the manufacturing process are not packaging and are taxable unless they come in direct contact with the product. Printers used to print labels are taxable. Letter Ruling No , Tennessee Department of Revenue, August 27, 2013 Remote Storage and Virtual Computing Services Not Taxable Charges by a taxpayer for remote storage and virtual computing services (sometimes referred to as cloud computing) are not subject to Tennessee sales and use tax. The remote storage service allows customers to use a Web-based interface to store their data on the taxpayer s servers. The virtual computing service allows customers to procure computing resources in order to perform a variety of activities, including running applications, monitoring computers and computer usage, and hosting web domains. Both services are accessed through software on the taxpayer s servers, but the taxpayer does not transfer title, possession, or control of the software to customers, and the software is only used in conjunction with the service. The transactions do not involve a sale of tangible personal property or software. The services fall within the category of data processing and information services, which are specifically excluded from taxable telecommunications services. No use of tangible personal property occurs in Tennessee when customers access the software because all of the servers are located outside Tennessee. Incidental usage fees charged by the taxpayer for services, such as adding or moving files or retrieving data, are also not taxable. Letter Ruling No , Tennessee Department of Revenue, September 12,

6 If you have any questions, please contact your tax advisor or: Curtis Ruppal , x34069 The information provided in this alert is only a general summary and is being distributed with the understanding that Plante Moran, PLLC is not rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use CCH. All Rights Reserved 6