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BDO KNOWLEDGE Tax Webinar Series ‒ Today’s Digital Economy: Every State is Trying to Get Its Fair Share

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

BDO KNOWLEDGE Tax Webinar Series Today’s Digital Economy: Every State is Trying to Get Its Fair Share Joe Hatfield, SALT Senior Manager, BDO USA, LLP Steve Oldroyd, SALT Senior Director, BDO USA, LLP Dennis Sweeney, SALT Senior Director, BDO USA, LLP July 18, 2013


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AGENDA

1. Sales Tax Nexus - Traditional Nexus - Market Place Fairness Act

2. Sales Tax in the Cloud

3. Digital Goods and Services

4. Questions and Answers

Dennis Sweeney SALT Senior Director Steve Oldroyd SALT Senior Director Joe Hatfield SALT Senior Manager


Sales Tax Nexus

Dennis Sweeney SALT Senior Director, BDO USA, LLP


SALES TAX NEXUS Overview • Quill v. North Dakota, 504 U.S. 298 (1992) ‒ Required physical presence • “Amazon”/Click-Through Nexus

- Originated in New York: Law enacted on April 23, 2008, that requires out-of-state sellers to collect sales tax if they enter into an agreement with a NY resident for website referrals/links and pay a commission based on sales generated there from (i.e. click-thru nexus) N.Y. Tax Law § 1101(b)(8)(vi). Presumption ‒ A seller that makes taxable sales of TPP or services in a state has nexus when a state resident’s

website clicks through potential customers to the seller. Rationale ‒ Link on the website in New York creates a physical presence for the seller when the owner of the

website is a resident of New York and acts as a sales agent for the seller. - Amazon and Overstock.com challenged the constitutionality of NY’s vendor nexus law

Does not violate the U.S. Constitution: Overstock.com, Inc. v. New York State Department of Taxation and Finance, New York State Court of Appeals, Nos. 33 and 34, March 28, 2013.

Court reasoned that following the Quill case, physical presence in the state itself does not need to be substantial, but must be more than a “slightest presence” that solicitation in a state that produces a significant amount of revenue qualifies as more than a “slightest presence” in the state.

• Affiliate nexus laws - State asserts that nexus exists based on the existence of common ownership between an in-state taxpayer and an

out-of-state corporation

- Parent or other affiliate physically present and operating in the state will create nexus for the out-of-state affiliate.

• States ‒ Aggressive nexus standards whether by Dept. of Rev. policy or state legislation.


SALES TAX NEXUS Department of Revenue Policies • South Carolina Revenue Ruling, 09-9 (June 16, 2009)

- Examples of when a retailer that has established nexus with South Carolina include: a) The retailer maintains, temporarily or permanently, directly or by subsidiary, an office,

warehouse, distribution house, sales house, other place of business, or property of any kind in the jurisdiction of delivery.

b) The retailer or a subsidiary has, temporarily or permanently, an agent, representative (including delivery personnel and independent contractors acting on behalf of the retailer), salesman, or employee operating within the jurisdiction of delivery.

c) The retailer advertises via advertising media located in the jurisdiction of delivery (e.g., newspapers, television, cable systems, and radio).

d) The retailer advertises via advertising media located outside the jurisdiction but which has coverage within the jurisdiction of delivery (e.g., newspapers, television, cable systems, and radio).

• Tennessee Attorney General, Opinion No. 09-101 (May 28, 2009)

- A vendor’s agreement with a Tennessee resident under which the resident refers potential customers to that vendor in exchange for compensation creates nexus for sales tax purposes

- NOTE: Legislation was also recently passed ‒ See H.B. 2370, eff. March 26, 2012.


SALES TAX NEXUS Pennsylvania (Sales Tax Bulletin 2011-01, 12/01/2011, eff. Feb. 1, 2012) • Interpretation of existing tax law by PA DOR

• Examples of establishing nexus include:

- A remote seller’s affiliates, agents and/or independent contractors provide service(s) within the Commonwealth (including, but not limited to storage, delivery, marketing or soliciting sales) that benefit, support and/or complement the remote seller’s business activity.

- A remote seller who accepts orders that are directly shipped to Pennsylvania customers from a Pennsylvania facility which is operated by a remote seller’s affiliate, agent or independent contractor.”

- A remote seller who has a contractual relationship with an entity or individual physically located in Pennsylvania whose website has a link that encourages purchasers to place orders with the remote sellers and receives consideration for the contractual relationship with the remote seller.

- Soliciting orders from Pennsylvania purchasers via click-through technology from the website of a Pennsylvania affiliate.


SALES TAX NEXUS New York New York State Department of Taxation and Finance TSB-M-09(3)S • Example: Company M maintains its corporate headquarters in New York and is affiliated with CompanyS.com

with a 57% ownership interest. CompanyS.com is located out-of-state and operates a website through which it sells taxable merchandise to customers in New York. Company M creates and administers marketing plans and makes purchases of inventory on behalf of CompanyS.com.

• Because Company M holds an ownership interest in excess of 50% and makes marketing decisions and purchases inventory on behalf of CompanyS.com, CompanyS.com must register for sales tax purposes and collect New York State and local sales tax.

• NOTE: The New York State Department of Taxation and Finance also issued administrative guidance on click-through nexus in TSB-M-08(3)S (May 8, 2008) and TSB-M-08(3.1) (June 30, 2008).


SALES TAX NEXUS Legislation

State Click-Through Nexus Laws State Effective Date Annual Threshold

(before required to file) Statute

Arkansas October 24, 2011 $10,000 Ark. Code Ann. Sec. 26-52-117

California No earlier than Sept. 15, 2012 (or 1/1/2013 if fed law enacted)

$10,000 and seller has more than $500,000 in CA sales (or related entity doing business in CA)

CA Sec. 6203 of Rev & Tax Code

Connecticut July 1, 2011 $2,000 Conn. Gen. Stat. Sec. 12-407(a)(12)(L)

Georgia December 30, 2012 $50,000 GA. CODE ANN. § 48,8,2(8)(K)

Illinois (Struck down ‒ decision on appeal ‒ PMA, Inc. v. Hamer, Illinois Circuit Court, First Judicial Circuit, No. 2011 CH 26333, May 7, 2012)

July 1, 2011 $10,000 35 ILCS 105/2 and 110/2

New York (Upheld ‒ Overstock.com, Inc. v. NY DOT, New York State Court of Appeals, Nos. 33 and 34, March 28, 2013)

June 1, 2008 $10,000 N.Y. Tax Law Sec. 1101(b)(8)(vi)

North Carolina August 7, 2009 $10,000 N.C. Gen. Stat. Sec. 105-164.8

Pennsylvania Per admin rule ‒ eff. Sept. 1, 2012 None Sales & Use Tax Bulletin 2011-01 (issued 12/1/2011)

Rhode Island July 1, 2009 $5,000 R.I. Gen. Laws Sec. 44-18-15

Vermont When adopted in 15 other states $10,000 Vt. Stat. Ann. tit. 32, Sec. 9701(9)(I)(H.B. 436)


SALES TAX NEXUS Legislation

State Affiliate Nexus Laws State Effective Date State Effective Date

AL 2003 NJ 2006

AR 2011 NC 2009

CA 2011 NY 2009 (upheld)

CO 2010 (enjoined) OH 2008

GA 2006 PA 2012

ID 2008 SD 2011

IL 2011 (struck down; decision on appeal) TN 2012

IN 2004 TX 2012

IA 2006 UT 2012

KS 2003 VA 2012

KY 2005 WI 2009


SALES TAX NEXUS Illinois 35 ILCS 105/2 (Effective July 1, 2011) • Click-Through Nexus: A retailer having a contract with a person in Illinois that receives a commission or other

consideration based upon the sale of tangible personal property for directly or indirectly referring potential customers to the retailer by a link on the person's Internet website.

• Affiliate Nexus: A retailer having a contract with a person located in this State under which: - A remote seller’s affiliates, agents and/or independent contractors provide service(s) within the State

(including, but not limited to storage, delivery, marketing or soliciting sales) that benefit, support and/or complement the remote seller’s business activity.

- The retailer sells the same or substantially similar line of products as the person located in this State and does so using an identical or substantially similar name, trade name, or trademark as the person located in this State; and

- The retailer provides a commission or other consideration to the person located in this State based upon the sale of tangible personal property by the retailer.

(Law was struck down but decision is on appeal ‒ Performance Marketing Association, Inc. v. Hamer, Illinois Circuit Court, First Judicial Circuit, No. 2011 CH 26333, May 7, 2012).


SALES TAX NEXUS Texas (S.B. 1, eff. Jan. 1, 2012) • A retailer is engaged in business in the state if the retailer maintains or uses in the state, either directly or

indirectly, or through a subsidiary or agent: - Derives receipts from the sale of tangible personal property situated in the state; and

- Holds a substantial (50% or greater) ownership interest in, or is owned in substantial part by, a person who

maintains a location in the state from which business is conducted, if:

The retailer sells a similar product line under a similar trade name as the in-state entity; or The in-state entity promotes or facilitates sales or otherwise assists the retailer in maintaining

market in the state, including by receiving returns; or Holds a substantial ownership interest in, or is owned in substantial part by, a person that maintains

a distribution certain or similar facility in the state and delivers property sold by the retailer to consumers.


MARKETPLACE FAIRNESS ACT OF 2013 Federal Legislation

Marketplace Fairness Act (MFA) S. 743

Marketplace Fairness Act (MFA) of 2013

(S. 743, Introduced April 16, 2013, 113th Congress, 2013-

2015)

Passed U.S. Senate May 6, 2013 69/27

President Obama administration has stated it “strongly supports” legislation. U.S. House of Representatives

believed to bring the bill for vote and to pass relatively quickly.

Currently in House Judiciary Committee

States would be authorized to require remote sellers

(i.e., Internet retailers and other direct marketers with no physical presence in the state) to collect and remit state and local sales and use taxes notwithstanding the substantial nexus standard established by the Supreme

Court in Quill Corp. v. North Dakota.


MARKETPLACE FAIRNESS ACT OF 2013 Federal Legislation If passed, the MFA would require online and other out-of-state “remote” sellers to collect and remit sales and use taxes on products and services they sell to those states that are either:

1. Full members of the Streamlined Sales and Use Tax Agreement (SSUTA), or 2. That enact certain simplifications in their sales/use tax systems.

• Small Seller Exclusion = $1M annual gross “remote sales” (measured nationally, not by state) ‒ Currently a subject of much debate in the House.

• States are required provide sellers with the software necessary to calculate and remit the tax via certified service providers (CSPs) and hold remote sellers harmless for errors or omissions resulting from incorrect information or software provided by the state.

• Not a “new” tax but a collection obligation for use tax already owed by consumers that purchase products from sellers that are not currently required to collect the tax (states are administratively unable to collect and police this tax at the individual level).


MARKETPLACE FAIRNESS ACT OF 2013 Federal Legislation The minimum simplification requirements contained in the MFA are:

1. There must be a single entity within the state to administer all state and local sales and use taxes, a single audit for all taxing jurisdictions within the state, and a single return to be filed with the single administering entity;

2. The state cannot require a remote seller to file sales and use tax returns more frequently than required for non-remote sellers or impose requirements on remote sellers that the state does not impose on non-remote sellers with respect to the collection of sales and use taxes under the MFA;

3. There must be a uniform sales and use tax base among the state and local taxing jurisdictions; 4. Remote sales must be sourced to the location "where the item is received by the purchaser;” 5. The state must provide remote sellers with information indicating the taxability of products and services in the state

and a rates and boundary database; 6. The state must provide remote sellers with software free of charge that will: (i) calculate sales and use taxes due on

each transaction; (ii) file sales and use tax returns; and (iii) reflect rate changes; 7. The state must provide certification procedures to software providers who make the software and services available to

remote sellers; 8. The state must relieve remote sellers from liability (including any penalties and interest) for tax collection errors

resulting from an error or omission made by a certified software provider; 9. The state must relieve certified software providers from liability (including any penalties and interest) for tax

collection errors due to misleading or inaccurate information provided by the remote seller; 10. The state must relieve both remote sellers and certified software providers from liability (including any penalties or

interest) for tax collection errors due to incorrect information or software provided by the state; and 11. The state must provide both remote sellers and certified software providers with 90 days' notice of a state or local

level rate change


MARKETPLACE FAIRNESS ACT OF 2013 Sales & Use Taxation ‒ Historical Perspective

U.S. Supreme Court (Bellas Hess

and Quill)

• Existing sales tax system is too complex to impose on a remote seller; therefore sales tax (use tax collection obligation) is limited to businesses that have a physical presence in a state.

1999-2000: Streamlined Sales

Tax Project & Governing Board

• Effort by states (through National Governor’s Association and National Conference of State Legislatures) and taxpayers to find solutions for the complexity in state sales tax systems.

Streamlined Sales and Use Tax Agreement

(SSUTA)

• Purpose is to modernize and simplify sales and use tax administration in order to substantially reduce the burden of sales tax compliance.

SSUTA Initiatives

Uniformity in state and local tax bases Central electronic registration system for all member states

Uniformity of major tax base definitions Simplified administration of exemptions

Simplification of state and local tax rates Simplified tax returns and tax remittances

Uniform sourcing rules for taxable transactions State funding of the administrative costs of compliance


MARKETPLACE FAIRNESS ACT OF 2013 Sales & Use Taxation ‒ Historical Perspective

24 states have passed the SSUTA (representing approx. 33% of the population in the U.S.).

• A “Full Member State” is a state that is in compliance with the SSUTA through its laws, rules, regulations and

policies.

• An ”Associate Member State” is a state that is in compliance with the SSUTA except that its laws, rules regulations and policies to bring the state into compliance are not in effect but are scheduled to take effect no later than 12 months after becoming an associate member.

SSUTA: Streamlined Sales and Use Tax Agreement This Agreement is the result of the cooperative effort of 44 states, the District of Columbia, local governments and the business community to simplify sales and use tax collection and administration by retailers and states. The Agreement minimizes costs and administrative burdens on retailers that collect sales tax, particularly retailers operating in multiple states. It encourages "remote sellers" selling over the Internet and by mail order to collect tax on sales to customers living in the Streamlined states. It levels the playing field so that local "brick-and-mortar" stores and remote sellers operate under the same rules. This Agreement ensures that all retailers can conduct their business in a fair, competitive environment. [SOURCE: streamlinedsalestax.org]


MARKETPLACE FAIRNESS ACT OF 2013 Sales & Use Taxation ‒ Tennessee’s SSUTA Status • Tennessee (currently an associate member) has delayed implementation of certain streamlined sales tax

provisions by two years under a bill (H.B. 176) signed into law by Gov. Bill Haslam (R) May 20, 2013. • Under the new law, the effective date of provisions aimed at conforming Tennessee to the multistate

Streamlined Sales and Use Tax Agreement will be delayed until July 1, 2015. - The postponed conforming provisions include special use privilege taxes imposed on:

Purchases of water, electricity, and fuel sold to or used by manufacturers Electricity sold to or used by a qualified data center Energy purchased from certain energy resource recovery facilities Tangible personal property sold and delivered to common carriers in Tennessee for use outside the

state

• Streamlined provisions that would apply the same rate of sales tax on cable television services that is assessed

on other forms of technology and those related to the taxation of dyed diesel fuel and aviation fuel also are delayed.


MARKETPLACE FAIRNESS ACT OF 2013 Federal Legislation


Sales Tax in the Cloud

Steve Oldroyd SALT Senior Director, BDO USA, LLP


SALES TAX IN THE CLOUD Overview • Generally, sales tax is imposed on all sales of tangible personal property (TPP) and specifically enumerated

services.

• Services ‒ Taxation of services varies by state (e.g. compare IL, CA, TX). Traditional Taxable Services • Cable television services • Repair and maintenance of TPP • Printing services • Personal services • Landscaping services • Dry cleaning services • Amusement services

Recent Trends • Data processing services • Information services • Telecommunication /

communication services (expanding interpretation)

• Computer Services (ASP/SaaS/Cloud Computing)

• Digital Goods

Digital Goods ‒ What is it? • Tangible Personal Property • Data Processing • Information Services • Telecommunications / Ancillary • Services • Software


SALES TAX IN THE CLOUD Electronically Downloaded Software 7-Eleven Inc. v. Combs, Texas Court of Appeals 03-08-00212-CV (4/22/2010)

• 7-Eleven argued its purchase of financial software

qualified for a “sale for resale” exemption for software transferred to third-party franchisees outside of Texas.

• Transfer to corporate owned stores outside of Texas not resolved. Issue was remanded to determine whether there was use in Texas, what kind of software was purchased and whether that purchase could be properly allocated between company stores and franchise stores.

• Comptroller argued that the true purpose of the software was to automate 7-Eleven’s stores for its own benefit, and that 7-Eleven used the software to provide data processing services.

Dechert LLP v. Commonwealth of Pennsylvania, Pa., No. 12 MAP 2008 (7/20/2010) • Canned software constitutes tangible personal

property.

• Purchases of licenses to use canned software are, therefore, subject to Pennsylvania sales and use tax.

• The delivery method for the software does not determine the taxability, according to the PA Supreme Court.


SALES TAX IN THE CLOUD Cloud Computing/ASP/SaaS • Hardware and software resources made available on the Internet and managed third party services.

• May be referred to as Application Service Provider (ASP), software as a Services (SaaS), or Cloud Computing

- Software housed and accessed remotely

- No downloads or delivery

- User may install temporary “applet” on computer/server

- State may treat transaction as sale/license of electronically delivered software

- Provision of computer services (e.g., data processing, information services)

- Specific tax treatment of ASP/SaaS transaction (e.g., CO, NC, TX, WA)


SALES TAX IN THE CLOUD Platform ‒ Application Service Provider • Application service provider (“ASP”)

- Provider retains custody over (or ‘hosts’) software for use by third parties. Users of the software hosted

by an ASP typically will access the software via the Internet. The ASP may or may not own or license the software, but generally will own and maintain hardware and networking equipment required for the user to access the software. The ASP may charge the user a license fee for the software (in instances where the ASP owns the software) and/or a fee for maintaining the software/hardware used by its customer.

- Typically the provider: Fully owns and operates the software applications; Owns, operates, and maintains the servers that support the software; Makes information available to customers via the Internet or a “thin client”; and Bills on a “per-use” basis or on a monthly/annual fee.


SALES TAX IN THE CLOUD Platform ‒ Software as a Service • Software as a service (“SaaS”)

- “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 a thin client interface such as a web browser (e.g., web-based email). 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.”

- Includes applications both general, such as word processing, email, spreadsheet, and specialized, such as customer relationship management (CRM), enterprise resource management (ERM), etc.


SALES TAX IN THE CLOUD Understanding Cloud Services • 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 service provider interaction.

Worldwide cloud computing sales are expected to reach $150B by 2014

The federal government has announced a plan to allocate 25% of its $80B annual IT budget to cloud computing

• Benefits of cloud computing

- Fully scalable - No major hardware or software upgrades required - Enables better use of IT budgets ‒ No large fixed investments - Customer pays only for what it uses - Accessible from the Internet ‒ Use software on terminal, but it resides on the server maintained by the

cloud provider - Location of the server, to the extent relevant, may be difficult to determine, particularly in the case of

large providers that have facilities in multiple locations.

Source: The NIST Definition of Cloud Computing


SALES TAX IN THE CLOUD Understanding Cloud Services • Five key elements

1. On-demand self-service: Get it when you need it 2. Measured service/usage-based billing: Pay for what you use (e.g. pay as you go) 3. Rapid elasticity: Increase and decrease capacity quickly 4. Broad network access: Access it from any Internet connection 5. Resource pooling: Share fixed costs, which lowers individual costs (e.g., multi-tenancy)

Source: The NIST Definition of Cloud Computing


SALES TAX IN THE CLOUD

Platforms

• Infrastructure as a Service (IaaS) - Raw computing power, storage and network

bandwidth

• Platform as a Service (PaaS) - Database, development tools and other

components required to support the delivery of custom applications

Deployment

• Private: Hosted • Community: SaaS provider • Public: Amazon, Rackspace • Hybrid: Combinations of 1,2,3 Means of delivery include:

• The Internet (including downloading, web-

browser access, streaming access) • Wireless carrier • Satellite


SALES TAX IN THE CLOUD Examples • Online learning and education

• Online health and medical advice • Social Networking websites

• Transferring funds between banks

• Salesforce.com ‒ CRM software • Web-based email • Google Wave ‒ Collaboratively work on same doc’s at same time • Virtual IT ‒ EC2 ‒ Online servers • Apple MobileMe ‒ Online network storage • Amazon Elastic Computer Cloud ‒ Synchronization, back-up and utility computing


SALES TAX IN THE CLOUD If taxable, to which state should the transaction be sourced for sales tax purposes?

• No delivery, so no destination state?

• If sourcing is based on use, which is the state of use? - Location of customer/user - Location of the software/server - Conflict with sourcing between states that source SaaS sales based upon location of customer vs. location

of server

• If sourced by use and location of customer

- How do we determine where user is and use by customer occurs? - Factors:

Location of the server: What if multiple servers are involved? Seller location: Where application is developed and maintained? Customer billing address User location: Allocation of contracts/licenses for users in multiple locations?


SALES TAX IN THE CLOUD Electronically Downloaded Software Washington Wash. Rev. Code 82.04.050

Imposes tax on the sale of a “digital automated service,” defined to mean “any service transferred electronically that uses one or more software applications.”

Wash. Dep’t of Revenue Special Notice (11/02/2010):

Digital goods are taxable, unless they are purchased and used solely for a business purpose. “Online searchable databases (OSD) are digital automated services (DAS)” and not digital goods. As a result, OSDs do not qualify for the business purpose exemption, and therefore they “are subject to retail sales or use tax unless some other exemption applies.”

Kansas Kansas Opinion Letter No. O-2010-005, 06/22/2010

Fees charged by an ASP provider to its customers for ASP services are not subject to sales tax. Such fees include recurring monthly charges, set-up fees, support fees, training fees, data migration fees, and forms programming fees. However, the sale of canned software that can be used independent of the ASP service is subject to sales tax.

Massachusetts Letter Ruling No. 11-4 (Apr. 12, 2011)

Sale, license and right to use software on a server hosted by the taxpayer or a third party are taxable. When 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 tax doesn’t apply. Taxpayer provided information services to its customers based on data from prospective employees and then provides this information to its customers in a report. The object of the transaction was the database access, including reports prepared by the taxpayer, rather than use of the software; therefore the transaction was a nontaxable sale of services.

Florida TAA 10A-051, 12/06/2010

Sales of online authentication services to customers via the provision of a digital certificate (which allow an end user to recognize that he or she is indeed accessing the customers’ website) are not taxable.


SALES TAX IN THE CLOUD Cloud Computing/ASP/SaaS Minnesota

• Cloud computing not subject to sales tax regardless of serve location ‒ Considered an information service. • Hosted on service provider’s server. • Customer only has remote access to software. • Customer’s use of the software is for processing only. • Charges for maintenance and support are also not taxable.

New York • TSB-A-11(17)S (June 6, 2011) • Hosted marketing service provided that provides marketing services to clients that use email, direct mail and

other marketing channels to reach their customer is subject sales and use tax as the sale of prewritten software.

• Taxpayer licenses to clients the right to use the software housed on the taxpayer’s servers for the purpose of marketing campaigns.

• Taxpayer’s charges for optional training and consulting services were not taxable.


SALES TAX IN THE CLOUD Cloud Computing/ASP/SaaS Colorado

• Letter Ruling PLR-11-007 (Dec. 20, 2011): Ruling on Web-based IT solution

• Fees related to web-based file transfer and tracking solution are not subject to sales or use tax

• Similar to Google email services

• Essence of the transaction: Not the license of software or use of hardware but obtaining a nontaxable service

• Rental of hardware: Customer did not have sufficient degree of control, e.g., seller retained custody of

servers


SALES TAX IN THE CLOUD Cloud Computing/ASP/SaaS Iowa

• Dept of Rev. Policy Letter 12300002 (Jan. 11, 2012): Hosted software and training

• Hosted software and training fees are not subject to Iowa sales or use tax

• Cited the National Institute for Standards and Technology’s definition of cloud computing

• Noted that no software is downloaded or delivered to customers; title/possession to not transferred

• Fees meet definition of cloud computing services

• No statutory Iowa authority to tax such services


SALES TAX IN THE CLOUD Cloud Computing/ASP/SaaS New York

• Online educational services: Tower Innovative Learning Solutions (TSB-A-06(5)S (Feb. 2, 2006) Bundled

software/services

• Primary objective: Service or software?

• Taxpayer provided software to customers for professional development skills. Upon completion of the Internet course, it awarded a certificate of completion from a learning subsidiary of Cornell University.

• Academic support (hosting online discussions) offered as a service

• Held nontaxable: Rationale was that the students’ primary objective is to attend a course of study. Students were not purchasing software.


Digital Goods and Services

Joe Hatfield SALT Senior Manager, BDO USA, LLP


SALES TAX IN THE CLOUD Data Processing Services Texas “The processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information.”

• Texas PLR 200805095L (May, 2008)

- Taxpayer provided online business application where its customers entered their business information into

the software via the internet. - Allowed the customer to conduct various activities including managing inventory, record sales, process

payroll, etc. - Taxpayer position ‒ It did not provide data processing; its customers performed any data processing

activities - Comptroller held that taxpayer provided data processing; taxpayer’s computer processed the information

entered by customers and made calculations to prepare a tax return (along with additional activities)

• Policy Letter Ruling No. 201004665L (Apr. 29, 2010)

- Medical transcription services that used a “software as a service” or SaaS cloud platform to perform and

deliver those services constitute taxable data processing services.


SALES TAX IN THE CLOUD Information Services New York “The collecting, compiling or analyzing information of any kind or nature and the furnishing reports thereof to other persons is an information service” The furnishing of information that is personal or individual in nature and that is not or may not be substantially incorporated in reports furnished to other persons is not a taxable information service • TSB-M-10(7)S (July, 2010)

- Intended to “clarify” tax treatment of certain information services Key factor is the “primary function” of the service Lists a number of services that are considered “information services” Revises previous positions on taxability of certain services

• DZ Bank (May, 2009)

- Web-based service that offered credit information of thousands of publicly held companies - Service determined to be a taxable information service, and not an electronic financial consulting service

• TSB-A-09(18) (April, 2009) - A web-based subscription service for online evaluation reports of broker-dealers is a taxable information

service because a common database was used.


SALES TAX IN THE CLOUD Digital Goods What is a digital good? • Tangible Personal Property • Data Processing • Information Services • Telecommunications/Ancillary Services • Software

Why does it matter? • Need to know what it is before we can determine how it will be taxed • States moving toward taxation of “digital goods” as new revenue source • SSTP definitions and rules



Florida TAA 11A-002 (1/13/2011)

• Sales transactions involving only digital

transmissions via the Internet to a customer’s computer, without any other evidence of the transfer of something tangible, are not sales of TPP for sales/use tax purposes.

• Such sales instead constitute services that are not subject to sales and use tax.

• On the other hand, files transferred via a hard drive, CD, flash drive, or DVD are TPP and thus subject to sales/use tax.

Indiana Commissioner’s Directive #41 (September 2011) • Sales and use tax is imposed on "products

transferred electronically" only if the products meet the definition of specified digital products, ancillary services, prewritten computer software, or telecommunication services.

• Previously, tax was based on whether products

transferred electronically were taxable in their tangible forms.



New York TSB-A-11(20)S, July 8, 2011

• Electronic books sold by CA company not subject

to sales tax

- Ruled e-books do not meet definition of TPP - Do not meet definition of information services - Do not include any software

North Carolina 2009 G.S. 105-164.4(a)(6b), eff. Jan. 1, 2010

• Imposes sales and use tax on digital property

which includes: - Audio works - Audiovisual works - Books, magazines, newspapers, other

publications - Photographs and greeting cards - Does not apply to information services



Kentucky Sec. 139.010, 139.200 • Imposes tax on the retail sale of “digital property,

”regardless of the user rights granted by the seller, or whether the buyer is obligated to make continued payments as a condition of the sale.

• “Digital property" means any of the following which is transferred electronically: 1. Digital audio works 2. Digital books 3. Finished artwork 4. Digital photographs 5. Periodicals 6. Newspapers 7. Magazines 8. Video greeting cards 9. Audio greeting cards 10. Video games 11. Electronic games 12. Any digital code related to this property

New Jersey

N.J. Rev. Stat. §§ 54:32B-3, 54:32B-2(zz))

• Effective May 1, 2011, “specified digital products”

are taxable.

• Such products are defined as “an electronically transferred digital audio-visual work, digital audio work, or digital book,” and includes digital code used to obtain a product.



California

Nortel Networks, Inc. v. State Board of Equalization, Court of Appeal of California, Second District, No. BC341568 (1/18/2011)* • The Court held that a license to use software to operate telephone switch hardware constitutes an exempt

transfer of patent and copyright interests under the Technology Transfer Agreement. The exemption applied since the software is copyrighted, contains patented processes, and enables the user to copy the software and make and sell products embodying the patents and copyrights.

*CA State Board of Equalization issued a News Release 5/27/11, indicating the CA Regulations would be amended in support of this decision.


Questions?


Speaker Biographies


BIOGRAPHY Joe Hatfield Joe Hatfield

Senior Manager, Tax Services [email protected] Direct: 214-665-0785 700 N. Pearl Suite 2000 Dallas, TX 75201 Tel: 214-969-7007 Fax: 214-953-0722 www.bdo.com

Joe Hatfield has more than 19 years of experience in the field of transaction taxes. He has performed refund reviews and audit defense projects for both publicly held and private companies.

Prior to joining BDO, he served as the Sales & Use Tax Manager for the world’s leading manufacturer of mobile phones. He also has three years of experience with an independent oil & gas company. He has been involved in performing multi-state nexus and taxability reviews as well as ERP and transaction tax system implementations.

His industry experience includes manufacturing, telecommunications, oil & gas, and software.


BIOGRAPHY Steve Oldroyd

Steve Oldroyd, CPA Tax Senior Director ‒ Sales & Use Tax, Property Tax Services [email protected] Direct: 408-352-1994 50 West San Fernando Street Suite 200 San Jose, CA 95113 Tel: 408-278-0220 Fax: 408-278-0230 www.bdo.com

Steve has more than 20 years of experience in state and local taxation and leads the Western Region’s sales and use tax and property tax consulting practices.

Prior to joining BDO Seidman, Steve worked for the California State Board of Equalization for 10 years as a Senior Tax Auditor in Silicon Valley. During Steve’s tenure with the Board, he was responsible for conducting sales and use tax audits on a wide variety of industries including but not limited to retailers, wholesalers, construction, life science and Fortune 500 manufacturers. Steve was also an instructor for the Board’s audit staff sales tax continuing education training and update classes.

After leaving the Board, Steve worked several years in industry and public accounting, holding positions equivalent to Director of State and Local Taxes. Steve’s management experience includes a large specialty retailer, a Fortune 100 computer manufacturer and a Big Four accounting firm.

Steve has been involved with many M&A due diligence projects and has provided valuable consulting advice to his multi-state clients. He has also been able to identify, document, and secure millions of dollars worth of sales/use tax refunds through a variety of reverse audit techniques and has extensive experience in successfully defending multi-state sales and use tax audits. Steve has spoken before numerous industry, professional and taxpayer groups.


BIOGRAPHY Dennis Sweeney

Dennis Sweeney Senior Director, Tax Services [email protected] Direct: 212-515-5497 100 Park Avenue New York, NY 10017 Tel: 212-885-8000 Fax: 212-697-1299 www.bdo.com

Dennis has more than 29 years of experience in Indirect Taxes, specializing in sales and use tax consulting. He has worked with clients in a wide range of industries, including pharmaceutical, communications, technology, retail, distribution, transportation and financial services companies.

Examples of expertise in the state and local tax area include:

• Identifying and obtaining refunds of overpaid sales and use tax for various types of clients with multistate activities.

• Assisting clients with identifying multistate nexus issues and quantifying any tax liabilities.

• Performing multistate sales and use tax research to determine application to clients’ products and services.

• Assisting clients with resolving tax liabilities through voluntary registration with state tax officials.

Prior to joining BDO, Dennis was a Sales and Use Tax Director for a “Big Four” firm; and he served as an in-house Sales & Use Tax Manager for an international Fortune 500 company. Early in his career, he worked as a Sales and Use Tax auditor for the states of Illinois and Minnesota Departments of Revenue.


BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For more than 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm serves clients through 41 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global network of 1,204 offices in 138 countries. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. www.bdo.com To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. Material discussed in this publication is meant to provide general information and should not be acted on without professional advice tailored to your individual needs. © 2013 BDO USA, LLP. All rights reserved. www.bdo.com

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