Governor Andrew Cuomo’s 2015–2016 New York State Executive Budget Bill proposes several significant changes to New York’s sales and use tax statutes. Several of these changes, while touted by the governor as “closing certain sales and use tax avoidance strategies,” are much broader and, if enacted, will have a significant impact on the sales and use tax liabilities resulting from routine corporate and partnership formations and reorganizations.
Actually, there are really only two issues, but they are big issues.
Arizona’s Transaction Privilege Tax has always been an anomaly in the traditional state sales tax system. Contrary to some commentators, however, the recent amendments do not, and could not, impose an origin tax on Arizona retailers for remote sales delivered out-of-state. That is not to say that these amendments are benign. Oddly, the amendments provide incentives for Arizona residents shipping items out-of-state to purchase these items over the internet rather than visit Arizona retailers in person. Furthermore, these amendments create complexities for Arizona vendors shipping to foreign jurisdictions. Finally, these amendments create additional administrative problems for retailers that are difficult to address with existing software and invite double taxation problems that should not exist in a transaction tax world.
Background: Arizona Transaction Privilege and Use Tax
For retail sales, Arizona, like most states, has two complementary transaction-based taxes, but each tax is imposed on a different entity. The first tax, the Transaction Privilege Tax (TPT), is imposed directly on the retailer. Ariz. Rev. Stat. § 42-5001.13. A retailer will be subject to the TPT on the gross proceeds from a sale if “the location where the sale is made” is Arizona. Ariz. Rev. Stat. § 42-5034.A.9. A retailer subject to the TPT is allowed but not required to collect the amount of TPT it owes from its customers. Ariz. Admin. Code §§ 15-5-2002, 15-5-2210.
The second tax, the Arizona Use Tax, complements and backstops the TPT. The Use Tax is imposed on the use, storage or consumption in the State of tangible personal property purchased from an out-of-state retailer. Ariz. Rev. Stat. § 42-5155. Generally, the purchaser is liable for payment of Use Tax to the State, but a retailer is required to collect Use Tax from a purchaser if the retailer meets the constitutional nexus provisions. Ariz. Rev. Stat. §§ 42-5155, 42-5160. Use Tax is imposed only on transactions where TPT has not been imposed, i.e., a transaction is subject to either TPT or Use Tax, but not both. Ariz. Rev. Stat. § 42-5159.A.1.
The State and its courts have been clear that, while the location of the transfer of title or possession is relevant to the inquiry as to where the sale is made, it is the totality of the retailer’s business activities that identifies the location that may tax the proceeds. Exactly where that line is drawn, however, is not as clear. The Arizona Department of Revenue (DOR) has taken the position that, unless an exemption applies, a seller is subject to the tax if a purchaser buys a product at a store, even if the purchaser does not take possession in the state, and the product is shipped to a location outside of the state. The DOR is apparently taking the position either that the title transfers in the store, which cannot always be the case (a retailer could easily specify that title transfers to the customer outside the store, particularly if the retailer [...]
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Investors keeping a close eye on pending legislation (the Promoting Economic Growth and Job Creation Through Technology Act of 2014, Bill 20-0945) promoting investments in D.C. Qualified High Technology Companies (QHTC) will be happy to know it passed—but not without a serious caveat. While the bill was originally set to allow investors to cash in their investments after being held continuously for a 24-month period, the enrolled Act (D.C. Act 20-514) was amended to make the rate reduction applicable January 1, 2019 (at the earliest).
Background
In September 2014, the D.C. Council began reviewing a proposal from Mayor Gray that would lower the tax rate to 3 percent for capital gains from the sale or exchange of eligible investments in QHTCs, as previously discussed by the authors here. As introduced, the bill was set to be applicable immediately; however, all that changed when an amendment was made on December 2 that restricts applicability of the Act to the latter of:
As noted in the engrossed amendment, this was done to “ensure that the tax cuts . . . codified by the 2015 Budget Support Act (BSA) take precedence.” These cuts, previously discussed by the authors here and here, include the implementation of a single sales factor, a reduction in the business franchise tax rate for both incorporated and unincorporated businesses, and switch from cost of performance sourcing to market-based sourcing for sale of intangibles and services.
The Act was quickly passed on December 22 with the amendment language included and a heavy dose of uncertainty regarding when the reduced rate will apply (if at all), since it is tied to the financial plan and BSA. Practically, this leaves potential investors with the green light to begin purchasing interests in QHTCs, since the Act is effective now, yet leaves these same investors with uncertainty about the applicability of the reduced rate.
Practical Questions Unresolved
The enrolled Act retains the same questionable provisions that were originally present upon its introduction, raised by the authors here. Specifically the language provides that the Act applies “notwithstanding any other provision” of the income tax statute and only to “investments in common or preferred stock.” The common or preferred stock provisions appear to arbitrarily exclude investments in pass-through entities, despite the fact that they are classified as QHTCs, disallowing investors that otherwise would be able to take advantage of the rate reduction. In addition, the Act lacks clarity regarding the practical application of basic tax calculations, such as allocation and apportionment. The Act seems to stand for the proposition that the investments should be set apart from the rest of the income of an investor, but to what extent? Absent regulations or guidance from the Office of Tax and Revenue (OTR), taxpayers [...]
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On January 21, Governor Cuomo delivered his State of the State address, along with proposing the new budget. The budget has a number of new tax proposals. One of those proposals would have a significant impact on e-commerce companies. Part X of the budget proposal amends the sales tax statutes to require marketplace providers to collect and remit sales tax on sales to New York customers. A marketplace provider is a person who, pursuant to an agreement with a seller, “facilitates a sale, occupancy, or admission” by the seller. A person can be a marketplace provider if they facilitate the sale, or are an affiliate of a person facilitating the sale. For purposes of this definition, affiliate companies are companies that have common ownership of 5 percent.
“Facilitates a sale, occupancy, or admission” means:
(1) such person, or an affiliated person, collects the receipts, rent or amusement charge paid by a customer, occupant or patron to a marketplace seller; and
(2) such person performs either of the following activities:
(A) provides the forum in which, or by means of which, the sale takes place or the offer of occupancy or admission is accepted, including a shop, store or booth, or an internet website, catalog or a similar forum; or
(B) arranges for the exchange of information or messages between the customer, occupant or patron, as the case may be, and the marketplace seller.
A marketplace provider meeting these requirements would be required to collect as if the marketplace provider were the vendor.
Under current law, a seller is required to collect and remit tax on sales made to New York customers. Under the budget proposal, a seller would no longer be required to collect if the marketplace provider provides a collection certificate to the seller. (The Division of Taxation is required to develop procedures to administer the certificate). If a marketplace provider does not provide a collection certificate, but does use language approved by the Division of Taxation and Finance in a publicly-available agreement, that will have the same effect as the provision of a collection certificate.
The imposition under the proposal is directly on the marketplace provider. There does not appear to currently be any provision that would allow a seller in a marketplace to collect instead of the marketplace provider, if the seller so desired.
Marketplace providers are relieved of liability if the information provided to them by the seller is incorrect. However, there is no provision in the bill requiring the marketplace sellers to provide any information to the marketplace provider.
The law does not change existing nexus or ‘doing business’ requirements. It appears that a marketplace provider would be required to collect only if the marketplace provider has nexus with New York under the Commerce Clause.
This proposal would have a significant effect on e-commerce companies, and could have an impact reminiscent of the impact of the click-through statutes. Companies that sell through a [...]
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As many readers of this blog know, over the past 12 years the Circuit Court of Cook County, Illinois has been deluged with lawsuits filed by a Chicago law firm against internet retailers as a “whistleblower” under the Illinois False Claims Act. The factual support for the lawsuits comes solely from internet-based investigations, including purchases made on retailer websites. The lawsuits typically allege that the retailers have knowingly failed to collect and remit sales and use tax on some aspect of their internet sales shipped to Illinois. See 740 ILCS 175/1 et seq. Substantial damages are claimed, including up to three times the tax allegedly owed to the State, attorneys’ fees, and a penalty assessment for each tax filing that failed to disclose the tax due.
An initial wave of approximately 90 lawsuits was filed in 2003 and 2004 against retailers that did not collect Illinois tax on their internet sales. In 2011, the whistleblower firm began to file a second round of lawsuits against retailers that collected tax on their internet sales of merchandise, but not on the shipping and handling charges associated with those sales. To date, more than 200 of these “shipping and handling” tax lawsuits have been filed. Most recently, the whistleblower firm has filed claims against defendants in the liquor industry, alleging a failure to collect sales and use tax and, in some instances, the failure to remit Illinois’ gallonage tax on sales of alcohol.
The validity of these lawsuits is hotly contested. Many lawsuits have been dismissed, and at least two shipping and handling tax cases have resulted in trial rulings against the whistleblower firm and in favor of the retailer defendants. It remains to be seen how the courts will determine the viability of Relator’s most recent claims, which appear on their face to be flawed.
Many other cases, including those that raise only nuisance value damages, have been settled to avoid the cost of litigation. These settlements appear to have fueled the whistleblower firm’s continued voracious appetite for this type of litigation.
Although the State of Illinois has the right to intervene and lead the prosecution of these actions, for the past several years the Office of the Illinois Attorney General has generally declined to intervene in these actions. Unfortunately, when this occurs, the Illinois False Claims Act permits a whistleblower claimant to proceed on its own with the litigation. In almost all cases in which the State has declined to intervene, the whistleblower firm has elected to proceed on its own with its tax-related claims.
The continued activity in this area underscores the need for the Illinois General Assembly to address and pass House Bill 0074 – legislation carefully crafted, through negotiations with the Illinois Attorney General’s office, to modify the procedure for state tax-related False Claims Act litigation in Illinois. The legislation would vastly improve the current False Claims Act situation by modifying the law as follows:
The City of Chicago’s (City’s) 2015 budget includes a number of changes to taxing ordinances found in titles 3 and 4 of the Chicago Municipal Code. The City of Chicago Department of Finance has notified taxpayers and tax collectors of the amendments, effective January 1, 2015, via a notice posted on its website. The text of the amendments can be found on the Office of the City Clerk’s website. The amendments, designed to bolster the City’s coffers, affect multiple City taxes by enlarging tax bases, increasing tax rates and tightening credit mechanisms. The amendments include:
On December 5, 2014, the New York Department of Taxation and Finance (Department) released TSB-M-14(5)C, (7)I, (17)S. This (relatively short) bulletin sets forth the treatment of convertible virtual currency for sales, corporation and personal income tax purposes. The bulletin follows on a notice released by the Internal Revenue Service (IRS) in March of this year, Notice 2014-21.
The IRS Notice indicates that, for federal tax purposes, the IRS will treat virtual currency as property, and will not treat it as currency for purposes of foreign currency gains or losses. Taxpayers must convert virtual currency into U.S. dollars when determining whether there has been a gain or loss on transactions involving the currency. When receiving virtual currency as payment, either for goods and services or as compensation, the virtual currency is converted into U.S. dollars (based on the fair market value of the virtual currency at the time of receipt) to determine the value of the payment.
The IRS Notice only relates to “convertible virtual currency.” Virtual currency is defined as a “digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” Convertible virtual currency is virtual currency that “has an equivalent value in real currency, or that acts as a substitute for real currency.”
The Department’s bulletin also addresses only convertible virtual currency, and uses a definition identical to the IRS definition. The Department indicates that it will follow the federal treatment of virtual currency for purposes of the corporation tax and personal income tax.
For sales and use tax purposes, the bulletin states that convertible virtual currency is intangible property and therefore not subject to tax. Thus, the transfer of virtual currency itself is not subject to tax. However, the exchange of virtual currency for products and services will be treated as a barter transaction, and the amount of tax due is calculated based on the fair market value of the virtual currency at the time of the exchange.
The Department should be applauded for issuing guidance on virtual currency. It appears that these types of currencies will be used more and more in the future, and may present difficult tax issues.
However, the Department’s guidance is incomplete. There are a couple of unanswered questions that taxpayers will still need to ponder.
First, the definition of convertible virtual currency is somewhat broad and unclear. The Department and the IRS define “convertible” virtual currency as currency that has an “equivalent” value in real currency, but equivalent is not defined in either the IRS Notice or the bulletin. Many digital products and services use virtual currency or points that cannot be legally exchanged for currency to reward users, and the IRS and the Department should be clearer about the tax treatment of those currencies.
Second, although the Department will follow the federal treatment for characterization and income recognition purposes, the bulletin does not discuss apportionment. This is likely a very small issue at this point in time, but the Department will, [...]
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In this article, the authors examine a recent Texas administrative law judge’s opinion that says an out-of state company has nexus with Texas through downloaded software that it licenses to Texas customers. They argue that the state comptroller’s adoption of the decision allows sales and use tax liability to be based on economic nexus instead of physical nexus and is therefore unconstitutional.
As it heads into the final weeks of its session, Congress is considering various bills that would restrict or expand states’ taxing authority. Almost every business in the country would be affected by at least some of these bills. While some of these bills have progressed further than others, any could become law—particularly if bundled into legislation that Congress must, as a practical and political matter, pass before the session ends. Businesses thus have an opportunity to ask their Senators and Representatives to take action to rein in some of the problems with state and local taxes.
If the Department of Treasury (Treasury) was hoping that the Michigan courts would simply overlook the previous two cloud computing losses this year in Thomson Reuters (previously covered here) and Auto-Owners (discussed here), they appear to have been mistaken. Last Wednesday’s Court of Claims opinion in Rehmann Robson & Co. v. Department of Treasury marked the third Michigan decision this year to rule that cloud-based services are not subject to use tax in the state. In Rehmann Robson, the Court of Claims found that the use of Checkpoint (a web-based tax and accounting research tool) by a large accounting firm was properly characterized as a non-taxable information service, despite Treasury’s continued effort to impose use tax and litigate similar cloud-based transactions. This taxpayer victory comes just six months after the Michigan Court of Appeals in Thomson Reuters found that a subscription to Checkpoint was primarily the sale of a service under the Catalina Marketing test, Michigan’s version of the “true object” test, which looks to whether the use of tangible personal property was incidental to the provision of services when both are provided in the same transaction. The Thomson Reuters decision reversed a 2013 Court of Claims opinion that granted summary disposition in favor of Treasury’s ability to tax the cloud-based service as “prewritten computer software.”
Analysis
While all three Michigan decisions issued this year reach the same conclusion, the most recent decision makes an explicit effort to affirmatively block any potential avenue Treasury may use to impose the use tax on cloud-based transactions. For what it’s worth, the Rehmann Robson opinion was written by the same judge who wrote the Auto-Owners opinion released in March 2014, and contained an identical analysis. Unlike the Thomson Reuters decision that found use of prewritten computer software in the state, but simply found it to be incidental to the nontaxable information services provided under Catalina Marketing, Auto-Owners (and now Rehmann Robson) both undercut the Treasury’s argument before it begins.
First, the court held that there was no tangible personal property transferred because the definition of “prewritten computer software” was not satisfied. Like many other states, Michigan defines this term as software “delivered by any means.” The court reasoned that because the accounting firm simply accessed information via the web that was processed via BNA and Thomson Reuter’s own software, hardware and infrastructure, there was no “delivery” under a conventional understanding of the word. Absent delivery, there was no prewritten computer software for Treasury to impose tax upon.
Second, the Court of Claims went on to note that even if prewritten computer software was delivered, the accounting firm did not sufficiently “use” the software to impose the tax. Because the accounting firm did not exercise a right or power over the software incident to ownership (other than the ability to control research outcomes by inputting research terms), there was no use. The court explicitly turned down Treasury’s argument [...]
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