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INSIDE SALT
In-depth coverage of issues surrounding state and local tax
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Precedential Cloud Victory in Michigan Court of Appeals

by , and | Oct 30, 2015 | , , , ,

On Tuesday, a three-judge panel sitting for the Michigan Court of Appeals unanimously affirmed a lower court decision finding that the use of cloud-based services in Michigan is not subject to use tax in Auto-Owners Ins. Co. v. Dep’t of Treasury, No. 321505 (Mich. Ct. App. Oct. 27, 2015). While there have been a number of cloud-based use tax victories in the Michigan courts over the past year and a half, this decision marks the first published Court of Appeals opinion (i.e., it has precedential effect under the rule of stare decisis). See Mich. Ct. R. 7.215(C)(2). Therefore, the trial courts and Michigan Court of Appeals are obligated to follow the holdings in this case when presented with similar facts, until the Michigan Supreme Court or Court of Appeals say otherwise. While the ultimate outcome (i.e., not taxable) of the lower court decision was affirmed, the analysis used by the Court of Appeals to get there was slightly different and the court took the time to analyze over a dozen different contracts, as discussed below. Given the fact that a petition for review is currently pending in another Court of Appeals case (Thomson Reuters) decided on similar issues in 2014, it will be interesting to see if this development increases the Michigan Supreme Court’s appetite to hear a use tax case on cloud-based services. The Department of Treasury (Department) has approximately 40 days to request that the Auto-Owners decision be reviewed by the Michigan Supreme Court.

Facts

Auto-Owners is an insurance company based out of Michigan that entered into a variety of contracts with third-parties to provide cloud-based services. These contracts were grouped into six basic categories for purposes of this case: (1) insurance industry specific contracts, (2) technology and communications contracts, (3) online research contracts, (4) payment remittance and processing support contracts, (5) equipment maintenance and software customer support contracts and (6) marketing and advertising contracts.  The contracts all involved, at some level, software accessed through the internet. Michigan audited Auto-Owners and ultimately issued a use tax deficiency assessment based on the cloud-based service contracts it utilized.  In doing so, the Department cited the Michigan use tax statute, which like many states, provides that tax is imposed on the privilege of using tangible personal property in the state. See generally Mich. Comp. Laws Ann. § 205.93. The Department took the position that the software used in Michigan by Auto-Owners was “tangible personal property,” which is defined to include prewritten, non-custom, software that is “delivered by any means” under Michigan law. See Mich. Comp. Laws Ann. § 205.92b(o). The taxpayer paid the tax under protest and filed a refund claim, which was the focus of the Court of Claims decision being appealed.

Procedural History

At the trial court level, the Court of Claims determined that the application of use tax to the software used in Michigan by Auto-Owners would be improper. In doing so, the court issued three separate holdings—all in favor of the taxpayer. First, the court held that use tax [...]

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Illinois Appellate Court Holds City of Chicago Tax on Cars Rented Outside of but Used Within the City Valid

by | Oct 2, 2015 | , , , , , ,

An Illinois Appellate Court, in Hertz Corp. v. City of Chicago, 2015 IL App (1st) 123210 (Sept. 22, 2015), gave the City of Chicago (City) permission to require rental car companies to collect tax on vehicle rentals from locations within three miles of the City, overturning a lower court ruling that found such taxation was an extraterritorial exercise of the City’s authority.  The appellate court granted summary judgment to the City and lifted the permanent injunction enjoining the City from enforcing the tax.

The tax at issue is the City’s Personal Property Lease Transaction Tax (Lease Tax), which is imposed upon “(1) the lease or rental in the city of personal property, or (2) the privilege of using in the city personal property that is leased or rented outside of the city.”  Mun. Code of Chi. § 3-32-030(A).  While the Lease Tax is imposed upon and must be paid by the lessee, the lessor is obligated to collect it at the time the lessee makes a lease payment and remit it to the City.  Mun. Code of Chi. §§ 3-32-030(A), 3-32-070(A).

The subject of this litigation is the City’s application of the Tax in its Personal Property Lease Transaction Tax Second Amended Ruling No. 11 (eff. May 1, 2011) (Ruling 11).  The plaintiffs argued that Ruling 11 is an extraterritorial exercise of the City’s authority because the City lacks nexus with the rental transactions.  The Ruling “concerns [short-term] vehicle rentals to Chicago residents, on or after July 1, 2011, from suburban locations within 3 miles of Chicago’s border … [excluding locations within O’Hare International Airport] by motor vehicle rental companies doing business in the City.”  Ruling 11 § 1.  The Ruling explains that “‘doing business’ in the City includes, for example, having a location in the City or regularly renting vehicles that are used in the City, such that the company is subject to audit by the [City of Chicago Department of Finance] under state and federal law.”  Ruling 11 § 3.  As for taxability of leased property, the Ruling cites the primary use exemption, exempting from Tax “[t]he use in the city of personal property leased or rented outside the city if the property is primarily used (more than 50 percent) outside the city” and stating the taxpayer or tax collector has the burden of proving where the use occurs.  Ruling 11 § 2(c) (quoting Mun. Code of Chi. § 3-32-050(A)(1)).

Ruling 11 contains a rebuttable presumption that motor vehicles rented to customers who are Chicago residents from the suburban locations of rental companies that are otherwise doing business in Chicago are subject to the Lease Tax.  The Ruling applies to companies with suburban addresses located within three miles of the City.   The presumption may be rebutted by any writing disputing the conclusion that the vehicle is is used more than 50 percent of the time in the City.  The opposite is assumed for non-Chicago residents.  Ruling 11 § 3.  The [...]

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Hut, Hut, Phlmph — Florida Judge Denies Dismissal of Tax on Delivery Charges Lawsuit

by , and | Sep 10, 2015 | ,

In the latest development in the Florida litigation regarding the taxation of delivery charges, Judge Jack Tuter of the 17th Judicial Circuit Court of Florida determined that the complaint against Pizza Hut was sufficient to withstand a motion to dismiss for failure to state a claim. Order, Lauren Minniti v. Pizza Hut of America, No. 14-023335 CACE (07), 2015 WL 5037164 (Fla. 17th Cir. Ct. Aug. 26, 2015). The case is fashioned as a class action, but it is still in the early stages and the class has not yet been certified.

The substantive tax question in this case is whether Pizza Hut is liable to Plaintiff (and possibly a class of plaintiffs) for damages based on sales tax charged on a delivery fee paid in connection with a food delivery. (Read previous discussion of delivery fee litigation). Pizza Hut charged the plaintiff $0.17 in sales tax on the separately stated charge for delivering food. The plaintiff asserts that Florida law does not impose sales tax on delivery fees if a customer has the option to pick up the delivered goods. The plaintiff raised three counts against Pizza Hut: (1) violation of the Florida Deceptive and Unfair Trade Practices Act; (2) negligence; and (3) unjust enrichment. The only issue in the motion to dismiss was whether the plaintiff had alleged sufficient facts to support the causes of action. A similar case is pending against Papa John’s Pizza.

In its motion, Pizza Hut had first argued that Plaintiff’s sole statutory remedy was the difference between what Pizza Hut collected and the amount Pizza Hut paid to the state. Because Pizza Hut remitted the entire amount, no remedy was available. Judge Tuter determined that this was not a proper assertion in a motion to dismiss, but that it could be raised as an affirmative defense to the plaintiff’s substantive claims.

Secondly, Pizza Hut argued that the actions alleged by the plaintiff did not amount to an unfair or deceptive act. The judge determined that this was a factual determination not subject to a motion to dismiss. Similarly, the judge also found the plaintiff had included sufficient factual allegations in her complaint to allege negligence.

Finally, Pizza Hut argued that the plaintiff had failed to state a claim, because she had not exhausted her administrative remedies—specifically, she had not requested a refund directly from the state. The judge rejected this position because Florida regulation provides that “[a] taxpayer . . . who has paid a tax to a dealer when no tax is due, must secure a refund of the tax from the dealer and not from the Department of Revenue.” Fla. Admin. Code R. 12A-1.014 (4).

Pizza Hut must now file an answer to the plaintiff’s complaint and dispositive motions will be heard regarding the appropriateness of certifying the case as a class action.

Practice Note — Taxation of delivery fees is complicated.

This case is an example of the complexity in dealing with sales taxes that may [...]

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In Chicago, Taxing the Cloud Will Wait (Mostly) Until 2016

by | Aug 12, 2015 | , , , ,

The City of Chicago has announced that it will be delaying the effective date for its recent ruling under the Personal Property Lease Transaction Tax until January 1, 2016. Personal Property Lease Transaction Tax Ruling #12 takes a broad view of how the 9 percent tax applies to cloud-based services. It was scheduled to come into effect on September 1, 2015, but after an outcry from the startup community, Chicago has pushed back the date on which it expects cloud-based providers to begin collecting and remitting tax. The additional time will allow the city to further consider potential exemptions for small businesses. Providers of information services, software as a service (SaaS), platform as a service (PaaS), and some forms of infrastructure as a service (IaaS) that have nexus with the city will now have until January 1, 2016, to begin collecting the tax. (See a detailed discussion of Ruling #12 and its implications in a previous post.) The delay could backfire for the city because taxpayers will now have more time to launch challenges to the tax.

Ruling #12 is only part of Chicago’s two-pronged approach to taxing the cloud. The city had at the same time issued Amusement Tax Ruling #5, which provides that charges for video streaming, audio streaming, computer game subscriptions and other forms of online entertainment, as well as temporary download rentals, are subject to the 9 percent Amusement Tax—not the Lease Transaction Tax. That ruling also was issued with a September 1, 2015, effective date.  This effective date for the Amusement Tax Ruling has not been changed, and the city has indicated that no such extension is currently under consideration.



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Favorable New York Guidance on Sales and Use Tax Exemption for Noncommercial Aircraft

by | Jul 28, 2015 | ,

On July 24, 2015, the New York Department of Taxation and Finance published guidance on the sales and use tax exemption for “general aviation aircraft,” effective September 1, 2015.  N.Y. Dep’t of Taxation & Finance, TSB-M-15(3)S (July 24, 2015).  The exemption, to be added as subsection (a)(21-a) of section 1115 of the Tax Law, exempts from sales and use tax “general aviation aircraft, and machinery or equipment to be installed on such aircraft.”  Previously, such sales and uses were fully taxable.

“General aviation aircraft” is defined broadly as aircraft used in civil aviation, except for commercial or military aircraft or “an unmanned aerial vehicle or drone.”  With respect to “general aviation aircraft,” the ruling states receipts from the following items are tax-exempt:

  • Aircraft itself
  • Property affixed to aircraft for its equipping, including furniture, fixtures, built-in appliances, window coverings, climate control systems or entertainment systems
  • Property that the aircraft has at the time of its sale that is necessary for its operation, such as avionics, radios, weather radar systems, and navigation and emergency lighting

Similarly, receipts from machinery and equipment installed on a general aviation aircraft after its purchase and necessary for equipping and normal operation are also tax-exempt.  The sales and use tax exemption for “general aviation aircraft” also applies to leases of one year or more of certain noncommercial aircraft (seating capacity of less than 20 passengers and maximum payload capacity of less than 6,000 pounds) subject to the accelerated tax payment provisions of section 1111(i) of the Tax Law.  However, effective September 1, 2015, these provisions no longer apply to aircraft.

However, receipts from the following items (termed “accessories”) are not exempt with respect to a general aviation aircraft:

  • Items of décor (paintings or other artwork)
  • Tableware, glassware or cookware
  • Small appliances
  • Linens, pillows, or towels
  • Other ancillary property

Regarding timing, the exemption applies generally to sales or uses occurring on or after September 1, 2015.  For the transition period, the exemption applies to sales made prior to September 1 if the purchaser takes delivery on or after that date, and applies to leases entered into before September 1 to the extent of the lease term beyond that date.



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Join McDermott Partners at the NYU SPS 2015 Summer Institute in Taxation

by | Jul 1, 2015 | , , , ,

July 13-24, 2015
New York, NY

Join today’s leading national and international tax authorities, including McDermott partners Art Rosen, Peter Faber, Alysse McLoughlin and Mary Kay Martire, for the NYU SPS 2015 Summer Institute in Taxation. The institute will feature a series of in-depth sessions on state and local taxation, partnerships, consolidated returns, trusts and estates, federal wealth tax and international taxation.

To register or for more information, please click here.



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Chicago, Searching for Tax, Taxes Searchable Websites

by | Jul 1, 2015 | , ,

Taxpayers providing services over the internet need to carefully consider two recent City of Chicago rulings: Lease Transaction Tax Ruling #12 and Amusement Tax Ruling #5. Issued together on June 9, 2015, the rulings extend a 9 percent tax to most services provided online. Charges for video streaming, audio streaming, computer game subscriptions, and other forms of online entertainment are subject to the 9 percent amusement tax. Charges for essentially any other kind of interactive website or online service, with only a handful of exceptions, are subject to the 9 percent lease transaction tax. The lease transaction tax is supposed to be a municipal sales and use tax on the leasing of tangible personal property, but the City is stretching the tax to encompass the deemed use of the provider’s computer in accessing a website or program over the internet. As detailed in this On the Subject, providers of information services and cloud-based services need to evaluate the applicability of the City’s guidance and consider whether to comply or challenge the imposition of tax.

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House Judiciary Committee Approves Three State Tax Bills

by , , and | Jun 18, 2015 | , , , , , ,

Yesterday, on June 17, 2015, three state tax bills were favorably reported to the United States House of Representatives (House) by the House Judiciary Committee (House Judiciary) after considering each during a half-day markup. The bills that were advanced included: (1) the Mobile Workforce State Income Tax Simplification Act (Mobile Workforce, H.R. 2315); (2) the Digital Goods and Services Tax Fairness Act (DGSTFA, H.R. 1643); and (3) the Business Activity Tax Simplification Act (BATSA, H.R. 2584).

Mobile Workforce State Income Tax Simplification Act

The Mobile Workforce bill was the first considered and seeks to establish a clear, uniform framework for when states may tax non-resident employees that travel for work. As advanced, the bill generally allows states to impose income tax compliance burdens on non-resident individuals only when the non-resident works in a state other than their state of residence for more than 30 days in a year. The bill also prevents those states from imposing a withholding requirement on employers for wages paid to such employees. Three proposed amendments seeking to limit the adverse revenue impact to New York were discussed and rejected. The Mobile Workforce bill was then favorably reported to the House by a vote of 23-4.

Digital Goods and Services Tax Fairness Act

DGSTFA would implement a uniform sourcing framework for states and localities seeking to tax digital goods and services. In doing so, the bill prevents any state or locality from imposing multiple or discriminatory taxes. Of the three pieces of legislation considered yesterday, only the DGSTFA was amended. The amendment, offered by the bill’s lead sponsor Representative Lamar Smith, was technical in nature and did not change the basic protections the bill would provide. At the markup, Chairman Goodlatte noted that the National Governors Association (NGA), which had previously voiced objections, was no longer opposed to the legislation after the revisions—though the NGA testimony indicated that the organization could not support the legislation without addressing the remote seller sales tax nexus issue.

The first technical changes in the adopted amendment were to the definitions of delivered or transferred electronically and provided electronically. The amendment added the term digital good and digital service after each respective term of art to clarify that digital goods are delivered or transferred electronically, whereas digital services are provided electronically. The second technical change was to the definition of digital good. In modifying the term, the amendment clarifies that streaming and other similar digital transmissions that do not “result in the delivery to the customer of a complete copy of such software or other good, with the right to use permanently or for a specified period” are not digital goods and would instead fall under the definition of a digital service.

Business Activity Tax Simplification Act

BATSA would codify the prerequisite of physical presence for a state to impose a direct tax on a non-resident business. BATSA would modernize the existing federal protection against state income taxation offered under P.L. 86-272 to include solicitation for sales of intangible property and services [...]

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Remote Transactions Parity Act Introduced in the U.S. House

by , and | Jun 15, 2015 | , , , , ,

Today, Representative Jason Chaffetz introduced H.R. 2775, the Remote Transactions Parity Act of 2015 (RTPA), in the United States House of Representatives (House).

The RTPA addresses the Internet sales tax issue using the structure of the Marketplace Fairness Act (MFA), which passed the Senate in 2013 and was re-introduced earlier this year. Although the RTPA retains many of the features of the MFA, it adds protections for remote sellers and certified software providers.

MFA Authorization Framework Retained

Like the MFA, the RTPA creates two paths for states to impose sales and use taxes on remote sellers. Through the first path, states that are members of the Streamlined Sales and Use Tax Agreement (SSUTA) are authorized to impose sales and use tax collection requirements on remote sellers. Under the second path, a state that is not a member state under the SSTUA would also be authorized to collect and remit sales and use taxes on remote transactions if it implements certain simplification requirements and protections for remote sellers and certified software providers. Many of these are carried over from the MFA, notably: (1) destination sourcing for interstate transactions; (2) a single entity for administration of sales and use tax; (3) a single audit of remote sellers per state; (4) a single return per state; (5) uniform tax base for all state and local sales taxes within the state; and (6) relief for errors, including remote sellers being relieved of errors made by a certified software provider or the state itself, and certified software providers being relieved of errors made by a remote seller or the state itself. Like the MFA, the RTPA would be effective one year from enactment, but not during the period from October through December in the year following enactment.

Changes

The RTPA contains several notable differences from the MFA, discussed below.

Small Seller Exception

Under the MFA, there is a fixed exception for small sellers and states are not authorized to impose a sales and use tax on small sellers, defined as remote sellers making sales of $1 million or less.

Under the RTPA, the small seller exception starts off larger, and subsequently phased out. In the first year, the exception applies for sellers making sales of $10 million or less. In the second and third year, the threshold is $5 million and $1 million, respectively. The exception goes away in the fourth year. Furthermore, under the RTPA sellers utilizing an electronic marketplace are not considered small sellers and are not entitled to the exception, no matter the year.

Protections to Sellers and Certified Software Providers

The RTPA provides additional protections for remote sellers and certified software providers.  The RTPA contains a mechanism to make sure that a state is not authorized to impose a sales and use tax collection requirement on remote sellers until it has certified multiple software providers, and those providers are certified in all other states seeking to impose authorization requirements. This is to ensure that a remote seller can [...]

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Tax Amnesty Hits the Midwest (and Beyond)

by , and | Jun 12, 2015 | , , , , , , , , , , , , ,

With many state legislatures wrapping up session within the past month or so, there has been a flurry of last-minute tax amnesty legislation passed. Nearly a half-dozen states have authorized upcoming tax amnesty periods. These tax amnesties include a waiver of interest and, in some circumstances, allow taxpayers currently under audit or with an appeal pending to participate. This blog entry highlights the various enactments that have occurred since the authors last covered the upcoming Maryland amnesty program.

Missouri

On April 27, 2015, Governor Jay Nixon signed a bill (HB 384) that creates the first Missouri tax amnesty since 2002. The bill creates a 90-day tax amnesty period scheduled to run from September 1, 2015, to November 30, 2015. The amnesty is limited in scope and applies only to income, sales and use, and corporation franchise taxes. The amnesty allows taxpayers with liabilities accrued before December 31, 2014, to pay in full between September 1, 2015, and November 30, 2015, and be relieved of all penalties and interest associated with the delinquent obligation. Before electing to participate in the amnesty program, taxpayers should be aware that participation will disqualify them from participating in any future Missouri amnesty for the same type of tax. In addition, if a taxpayer fails to comply with Missouri tax law at any time during the eight years following the agreement, the penalties and interest waived under the amnesty will be revoked and become due immediately. Finally, taxpayers who are the subject of civil or criminal state-tax-related investigations, or are currently involved in litigation over the obligation, are not eligible for the amnesty.

According to the fiscal note provided in conjunction with the bill, the state estimates that 340,000 taxpayers will be eligible for the amnesty and that the program will raise $25 million.

Oklahoma

On May 20, 2015, Governor Mary Fallin signed a bill (HB 2236) creating a two-month amnesty period from September 14, 2015, to November 13, 2015. The bill allows taxpayers that pay delinquent taxes (i.e., taxes due for any tax period ending before January 1, 2015) during the amnesty period to receive a waiver of any associated interest, penalties, fines or collection costs.

Taxes eligible for the amnesty include individual and corporate income taxes, withholding taxes, sales and use taxes, gasoline and diesel taxes, gross production and petroleum excise taxes, banking privilege taxes and mixed beverage taxes. Notably, franchise taxes are not included in this year’s amnesty (they were included in the 2008 Oklahoma amnesty).

Indiana

In May, Governor Mike Pence signed a biennial budget bill (HB 1001) that included a provision authorizing the Department of Revenue (Department) to implement an eight-week tax amnesty program before 2017. While the Department must promulgate emergency regulations that will specify exact dates and procedures, several sources have indicated that the amnesty is expected to occur sometime this fall. The upcoming amnesty will mark the second-ever amnesty offered by Indiana (the first occurred in 2005). Taxpayers that participated in the 2005 program [...]

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