Sales Taxation of Cloud Computing

Transcription

1 Sales Taxation of Cloud Computing Accounting & Financial Women s Alliance Annual Conference New Orleans September 29, 2014 Laurie Wik, Tax Director, DuCharme, McMillen & Associates, Inc. Learning Objectives Upon completing this course, you should be able to: Understand transaction tax nexus and taxability considerations related to cloud computing. Understand potential sourcing methods for cloud computing services. Understand typical compliance challenges associated with selling or purchasing cloud computing services. 1

2 Agenda What is Cloud Computing? Taxability Nexus Multistate Sourcing Issues Analyzing Cloud Computing Services What Is Cloud Computing? 2

3 Cloud Product Characteristics What Is Cloud Computing? Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications and services) that can be rapidly provisioned and released with minimal management effort or services provider interaction. The National Institute of Standards and Technology Definition of Cloud Computing, Special Pub (Sept. 2011) U.S. Commerce Department CLOUD SERVICE MODELS Software as a Service (SaaS), As Defined by The National Institute of Standards and Technology: The capability provided to the consumer is to use the provider s applications running on a cloud infrastructure. The applications are accessible from various client devices through either a thin client interface, such as a web browser (e.g., web-based ), or a program interface. The consumer does not manage or control the underlying cloud infrastructure including network, servers, operating systems, storage, or even individual application capabilities, with the possible exception of limited user-specific application configuration settings. Examples: CRM applications, accounting ERP applications, tax preparation applications. 3

4 CLOUD SERVICE MODELS Infrastructure as a Service (IaaS) As Defined by The National Institute of Standards and Technology: The capability provided to the consumer is to provision processing, storage, networks, and other fundamental computing resources where the consumer is able to deploy and run arbitrary software, which can include operating systems and applications. The consumer does not manage or control the underlying cloud infrastructure but has control over operating systems, storage, and deployed applications; and possibly limited control of select networking components (e.g., host firewalls). Example: AWS CLOUD SERVICE MODELS Platform as a Service (PaaS)As Defined by The National Institute of Standards and Technology: The capability provided to the consumer is to deploy onto the cloud infrastructure consumer-created or acquired applications created using programming languages, libraries, services, and tools supported by the provider. The consumer does not manage or control the underlying cloud infrastructure including network, servers, operating systems, or storage, but has control over the deployed applications and possibly configuration settings for the applicationhosting environment. Examples: Windows Azure Platform, AWS Elastic Beanstalk 4

5 Courtesy of Albert Barron, from his post Pizza as a Service posted on Linked 07/31/2014. Used with permission. Other Cloud-based product offerings Other product offerings furnished via the Internet Cloud: include information services, searchable data bases, movies, songs, videogames, premium level subscriptions to online social networks 5

6 Cloud Product Pricing Models Cloud Product Pricing Models Pay-Per-Use Pay-Per-User Pay-Per-Gigabyte Used Revenue-Share Monthly or Annual Subscription Taxability 6

7 State Positions on Cloud Computing Taxable because the jurisdiction construes the transaction to be: A taxable sale or lease of prewritten software (i.e., statutory TPP) Constructive possession vs. physical possession A Taxable lease or rental of statutory TPP despite no physical possession because server is single-tenant server An enumerated taxable service, e.g: Data processing, data storage service Digital Automated Service Canned Information Service such as data processing or information service in the state Not an enumerated exemption from general tax on services State positions on Cloud Computing Not Taxable because the jurisdiction does not construe the transaction to be: A sale or lease of prewritten software (i.e., statutory Tangible Personal Property - TPP ) because customer does not have physical possession of the server Not a sale or lease of software in the jurisdiction because vendor s server is not in the state The product is not prewritten software and not an enumerated taxable service 7

8 State Guidance on Cloud Computing State guidance addressing cloud computing as a topic includes: Policy Letter - Cloud Computing, Iowa Department of Revenue, January 11, Letter Ruling 12-8, Massachusetts Department of Revenue, November 13, Information Guide , Nebraska Sales and Use Tax Guide for Computer Software, Nebraska Department of Revenue, January 22, New Jersey Technical Bulletin, Cloud Computing, (SaaS, PaaS, IaaS) TB-72, New Jersey Division of Taxation, July 3, 2013 Fact Sheet 1001 The Sales and Use Tax Treatment of Cloud Computing, Vermont Department of Taxes, June 13, 2013 (expired 6/30/2014; new regulatory language released for public comment on 7/10/2014) Frequently Asked Questions Sales and Use Tax Treatment Computer Hardware, Software, Services, Wisconsin Department of Revenue, December 23, True Object/Primary Purpose Massachusetts: Generally, charges for the access or use of software on a remote server are subject to tax. However, where there is no charge for the use of the software and the object of the transaction is acquiring a good or service other than the use of the software, sales or use tax on software does not apply. 830 CMR 64H.1.3(14)(a) The sale of an online product which provided employment application collection and selection services through the seller s proprietary software were not subject to sales and use tax. -Massachusetts Dept. of Revenue Letter Ruling 11-4, (April 12, 2011) 8

9 True Object/Primary Purpose Massachusetts (cont.) A vendor s sales of hosted product offerings to physician offices were ruled not taxable because the products represented a combination of database access and data processing facilitated by pre-written software. Massachusetts Dept. of Revenue Letter Ruling 12-5 (May 7, 2012) True Object/Primary Purpose Massachusetts (cont.) The Department ruled subscription fees represented a taxable right to use the seller s software and the tools provided therewith. The ruling indicated that when both services and the right to use software are integrated or bundled in one transaction, the object of the transaction test is used to determine taxability. The Department ruled that the personal and professional services the taxpayer provided in connection with its product offerings were inconsequential, and the object of the transaction was the use of software in each case. Letter Ruling 12-10, Massachusetts Department of Revenue, September 25,

10 True Object/Primary Purpose Massachusetts (cont.) Subscription fees to an Internet-based marketing and customer-communications solution were ruled to represent a taxable use of software. Personal services provided by the seller s staff as part of the product offerings were deemed inconsequential. Letter Ruling 12-13, Massachusetts Department of Revenue, November 9, 2012 True Object/Primary Purpose Massachusetts (cont.) A seller who provided an automated software system embedded into its client s website or other on-line properties, was deemed to be providing taxable software, although the subscription agreement was not formally structured as a license or right to use or control the software. Letter Ruling 13-2, Massachusetts Department of Revenue, March 11,

11 True Object/Primary Purpose Massachusetts (cont.) The Department ruled that fees for the use of a Virtual Event Center Platform were taxable because the Company's customers were explicitly given a license to use the software. Letter Ruling 13-5, Massachusetts Department of Revenue, June 4, True Object/Primary Purpose Massachusetts Letter rulings in which a hosted product offering was deemed access to software considered: Substantial use of software by the customer The level of taxable to non-taxable elements included in a bundled offering The automated functioning of tasks performed by the product offering The performance of tasks sought by the customer from the product offering and the role of the seller s software in performing such tasks, i.e, is the software incidental to a task a human is performing or is the software the means of performing the task The intervention in the product offering by seller s personnel or lack thereof 11

12 True Object/Primary Purpose New Jersey: True Object Sales leads delivered via website to automobile dealership were taxable information services. The method of billing (e.g., per sales lead or flat fee for monthly subscription) did not affect the taxable outcome. Even where Website s service is packaged with website advertising or space, the true object of the overall service remains the provision of sales lead information. Regulatory Services Branch Technical Advisory Memorandum , November 5, 2011, New Jersey Division of Taxation True Object/Primary Purpose New York: A sale is taxable at the place where the tangible personal property or service is delivered or the point at which possession is transferred by the vendor to the purchaser or his designee (20 NYCRR 526.7[e](1)). Transfer of possession with respect to a rental, lease or license to use, means that one of the following attributes of property ownership has been transferred: Custody or possession of the tangible personal property, actual or constructive; the right to custody or possession of the tangible personal property; the right to use, or control or direct the use of tangible personal property. (20 NYCRR 526.7[e][4](1) 12

13 True Object/Primary Purpose New York (cont.) The Department ruled that a hosted product offering which allowed users to create, manage and deliver campaigns constituted the sale of taxable prewritten software. While seller did not assert a charge for the use of the software denominated as such, the [seller s] set-up fee and the messaging charge were ruled to constitute consideration for the right to use software. TSB-A-11(17)S, New York Commissioner of Taxation and Finance, New York State Department of Taxation and Finance Office of Counsel, Advisory Opinion Unit, June 1, True Object/Primary Purpose New York ( Cont.) Primary function test : A service s primary function will be based on an examination of the nature of the service and on what is being paid for by the purchaser. TSB-M-10(7)S, Sales and Compensating Use Tax Treatment of Certain Information Services, New York Department of Taxation and Finance, July 19,

14 True Object/Primary Purpose New York (Cont.) Provision of managed IT support services. Petitioner s activities were not considered to be selling software when it installed software agents on customers IT assets. The software agents, which act for and report to Petitioner, are used by Petitioner to perform its services. TSB-A-10(14)S, New York State Department of Taxation and Finance, Office of Counsel, Advisory Opinion Unit, Petition No. S081121A, April 8, Receipts petitioner derived from providing Lending Pit, Board Reporting and Performance Analytics services were sales of a taxable information service because the primary function of the service was the furnishing of information (which was not personal or individual in nature). SunGard Securities Finance LLC, New York Division of Tax Appeals, Administrative Law Judge Unit, DTA No , February 6, 2014 Sales Tax Nexus 14

15 Nexus For SaaS Companies To date, nexus for use tax collection purposes has required in-state physical presence. Traditional Sales/Use Tax Nexus Based on Entity s activities: A Seller must have physical presence in the taxing state to be required to collect use tax. Quill Corporation v. North Dakota, 504 U.S. 298 (1992) A seller s activities will be subject to use tax collection if the seller has physical presence in the taxing state, even if the seller's activities in the state have no relation to the transaction being taxed. National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977) Agency Nexus In Scripto v. Carson, 262 U.S. 207 (1960), the U.S. Supreme Court sanctioned the agency theory of nexus, finding that an out-of-state seller who used independent contractors to solicit business could be required to collect the state s sales tax. In Tyler Pipe Indus., Inc. v. Washington State Dep t of Revenue, 483 U.S. 232 (1987), the U.S. Supreme Court ruled that representatives performing activities on behalf of a seller while physically present in a state may create sales tax nexus for a seller if such activities are significantly associated with the seller s ability to establish and maintain a marketplace in the state for its sales. 15

16 Click-through Nexus Click-through sales tax nexus statutes create a rebuttable presumption of agency sales tax nexus for remote sellers with third-party e-commerce relationships when: Seller solicits sales through associates programs with in-state residents via website link referrals and Seller pays a commission or other consideration to the in-state resident for the sale or referral, and Seller has gross receipts of more than the annual statutory sales threshold. Click- Through Nexus Overstock.com, Inc., and Amazon.com, LLC, et al., Appellants, v. New York State Department of Taxation and Finance, et al., Respondents. New York Court of Appeals (March 28, 2013) The New York Court of Appeals held that plaintiffs failed to demonstrate the statute is facially unconstitutional under either the Commerce or the Due Process Clause. Court explained that active, in-state solicitation that produces a significant amount of revenue on the vendor s behalf qualifies as demonstrably more than a slightest presence Multistate News Hour 16

17 Click-Through Nexus Overstock.com, Inc., and Amazon.com, LLC, et al., Appellants, v. New York State Department of Taxation and Finance, et al., Respondents. New York Court of Appeals (March 28, 2013) (continued) To plaintiff s claim that retailers will find it extremely difficult if not impossible, to prove New York affiliates do not solicit customers on the retailers' behalf, the Court said, Obtaining the necessary information may impose a burden on the retailers, but inconvenience does not render the presumption irrebuttable. Overstock.com, LLC v. New York State Department of Taxation and Finance, 20 N.Y. 3d 586 (2013), cert. denied, 2013 U.S, LEXIS 8648 (Dec. 2, 2013); Amazon.com, LLC v. New York State Department of Taxation and Finance, 20 N.Y. 3d 586 (2013), cert. denied, 2013 U.S, LEXIS 8717 (Dec. 2, 2013). Multistate News Hour Enacted Click-through legislation as of September 1, 2014 State Effective Date Annual Sales Threshold Arkansas 10/24/2011 $10,000 California 9/15/2012 $10,000 Connecticut 5/4/2011 $2,000 Georgia 12/31/2012 $50,000 Illinois 1/1/2015 $10,000 Kansas 10/1/2013 $10,000 Maine 9/18/2013 $10,000 Minnesota 7/1/2013 $10,000 Missouri 8/28/2013 $10,000 17

18 Enacted Click-through legislation as of September 1, 2014 (Cont.) State Effective Date Annual Sales Threshold New Jersey 7/01/2014 $10,000 New York 6/1/2008 $10,000 North Carolina 8/7/2009 $10,000 Rhode Island 7/1/2009 $5,000 Vermont When 15 states adopt $10,000 Enacted Affiliate Nexus Legislation as of September 1, 2014 State Effective Date Alabama 8/24/2012 Arkansas 7/27/2011 California 9/15/2012 Colorado 3/1/2010 (expanded law became effective 7/1/2014) Georgia 10/1/2012 Illinois 7/1/2011 Kansas 7/1/2013 Maine 10/9/2013 Missouri 8/28/2013 New York 6/1/2008 Oklahoma ($100,000 threshold) 7/1/

19 Enacted Affiliate Nexus Legislation as of September 1, 2014 State Effective Date Rhode Island 7/1/2009 South Dakota 7/1/2011 Texas 1/1/2012 Utah 7/1/2012 Virginia 9/1/2013 Wisconsin 7/1/2009 West Virginia 1/1/2014 Federal Legislation The Marketplace Fairness Act of 2013 (S.743): Approved by U.S. Senate in May Referred to House Committee on the Judiciary by the House of Representatives in May 2013; first public hearing held in March The Marketplace and Internet Tax Fairness Act (S.2609): Introduced in U.S. Senate on July 14, 2014; combines a modified version of S.743 with a ten year extension of the Internet Tax Freedom Act. Small Seller Exception for sellers with $1MM or less in gross annual receipts from total remote sales in the U.S. in the preceding calendar year. Act requires gross annual receipts of two or more persons to be aggregated if related to the remote seller within the meanings of IRC 267(b) and (c) or IRC 707(b)(1) 19

20 Federal Legislation (cont.) The Marketplace and Internet Fairness Act (the Act ) (cont.) If enacted, would grant authority to Streamlined Sales and Use Tax ( SSTA ) member states to require remote sellers to collect and remit tax with respect to remote sales sourced to that state; If enacted, would grant the same authority to non-ssta states upon adoption of minimum simplification requirements which require state to: Provide a single entity within the state for all state and local use tax administration, return processing, and audits, Provide a single sales and use tax return to be used by remote sellers to be filed with the single entity responsible for tax administration, Provide a uniform tax base among the state and local jurisdictions within the state, Provide information indicating the taxability of products and services and any exemptions. Federal legislation (cont.) Minimum simplification requirements of the Marketplace and Internet Fairness Act (the Act ) (cont.) Provide a tax rates and boundary database, Provide free software to remote sellers for calculating sales and use taxes due on each transaction at the time the transaction is completed and for purposes of filing state sales and use tax returns. Source all remote sales in compliance with the Act s hierarchal sourcing rules. Location where product or service is received by purchaser, based on instructions furnished by purchaser for delivery When customer specifies no location, source to customer s address known to seller If customer s address not known, source to address of payment instrument Lastly, source to seller s address if customer s address not available 20

21 Federal legislation (cont.) The Act does not do any of the following: Apply to franchise, income, occupation tax or any other tax other than sales and use taxes Create any nexus or alter the standards for determining nexus between a person and a state or locality Effect the Mobile Telecommunications Sourcing Act Permit or prohibit a state from exercising authority over matters of interstate commerce If and when the Act becomes law, a state may exercise authority the first day of the quarter that is at least 180 days after state has published notice of State s intent to exercise authority the enactment. The Act limits states from exercising authority under the Act until one year after the date of enactment of this Act; and during the period of October 1 through December 31 of the first calendar year beginning after the date of the enactment of this Act. Federal legislation (cont.) Streamlined Sales Tax Agreement ( SSTA ) Member and Associate Member States as of September 1, 2014 Member States: Arkansas Georgia Indiana Iowa Kansas Kentucky Michigan Minnesota Nebraska Nevada New Jersey North Carolina North Dakota Ohio Oklahoma Rhode Island South Dakota Utah Vermont Washington West Virginia Wisconsin Wyoming Associate Member state: Tennessee 21

22 Federal Legislation (cont.) States in which legislation has been proposed as of September 1, 2014 in anticipation of authority granted under the Act include: Colorado District of Columbia Hawaii Ohio Pennsylvania Rhode Island South Carolina Virginia Multistate Sourcing Issues 22

23 Cloud Computing Sourcing For Sales Tax Software applications or digital goods: Generally the state where accessed/downloaded by user Hosted services: Benefit received Location from which the purchaser uses or directs the use of the software Principal place of business Cloud Computing Sourcing For Sales Tax SSTA General Sourcing Hierarchy Presuming no bad faith issues: Recognized: address provided by customer s instructions Next recognized: address for customer in seller s business records Next to last recognized: customer s address obtained during consummation of the sale Last recognized: address of seller s server 23

24 Sourcing: Sellers vs. Purchasers Generally, states hold digital products purchasers responsible for unpaid use tax when the vendor has not collected sales tax from the purchaser. Potential reasons for vendor/seller failure to collect may include the following: Seller may not have established nexus for sales and use tax purposes in the purchaser s state; OR Seller may have established nexus for sales and use tax purposes, but does not realize it, or does not have the systems to handle sales tax collection; OR Seller may have established nexus for sales and use tax purposes but, has not researched or does not understand the proper taxability of digital product offering; OR Seller may not be required to collect sales tax when the Streamlined Sales Tax Sourcing Hierarchy is applicable Analyzing Cloud Computing Services 24

25 Analyzing Cloud Computing Services STEP 1: IDENTIFY JURISDICTIONS Sellers: Perform Sales Tax Nexus Study Purchasers: Identify User s Physical Locations Consider Benefit Received Location(s) Analyzing Cloud Computing Services STEP 2: GATHER FACTS AND INFORMATION Gather vendor agreements, review public-facing information at the vendor s website, interview process owners and users STEP 3: ANALYZE THE SUBSTANCE Does the product reflect the Cloud Product attributes? (e.g., remote access; multi-tenancy; ondemand pricing) Who has access to and/or control of the product? Does the product involve human intervention? 25

26 Analyzing Cloud Computing Services STEP 4: EVALUATE THE FORM OF THE AGREEMENT Does the form of the agreement should match substance of the arrangement? Does the agreement contain a grant of software license? STEP 5: ANALYZE TAXABILITY AND SOURCING RULE Prepare Sales Taxability Matrix (Sellers) for nexus states Prepare Purchase Taxability Matrix (Purchasers) for user locations Identify the sourcing rule for each product; (vendor s and purchaser s matrix for the same cloud product may differ) Consider potential for exemptions Analyzing Cloud Computing Services STEP 6: IDENTIFY AND IMPROVE PERTINENT BUSINESS INFORMATION Identify existing available business information to apply for sales (purchase) transaction sourcing Develop improved sources of business information to apply for sales (purchase) transaction sourcing STEP 7: UPDATE SYSTEMS AND PROCEDURES Sale quotes, billing, purchase requisitions, purchase orders and reporting Implement FAQ section for Sales Tax issues on internal web or SharePoint site Document Multiple Point of Use (MPU) Certificates 26

27 QUESTIONS? CONTACT INFORMATION Laurie Wik Tax Director DuCharme, McMillen & Associates, Inc. San Jose, California ext