By Chris Mehrmann and Madison Barnett

The New York State Department of Taxation and Finance issued an advisory opinion explaining that the petitioner’s Internet-based document transfer subscription plans are not subject to sales and use tax. Because the primary purpose of the transactions is to facilitate the transfer of files over the Internet, the Department concluded that the plans constitute non-taxable “bridging” services rather than taxable sales of prewritten software, even though a limited download of software is involved. N.Y. Advisory Opinion, TSB-A-16(6)S (Feb. 25, 2016).

By Elizabeth Cha and Scott Wright

The Texas Court of Appeals held that a seismic data gathering company was entitled to a cost of goods sold (COGS) deduction for costs of labor and materials incurred to acquire and process seismic data for its clients. Pursuant to Tex. Tax Code § 171.1012(i), a taxpayer may include costs from “furnishing labor or materials to a project for the construction … of real property” in its computation of COGS. The Comptroller had denied the taxpayer’s COGS deduction because the Comptroller characterized the taxpayer as a service provider to companies engaged in the exploration and production of real property (i.e., oil and gas wells). The court rejected this view and agreed with the taxpayer’s position that its activities satisfied the statute because the taxpayer’s seismic services and products were integral to the customer’s oil well drilling process. Hegar v. CCG Veritas Serv. (U.S.) Inc., No. 03-14-00713-CV (Tex. App. Third Dist. Mar. 9, 2016).

On March 22nd, South Dakota Governor Daugaard signed into law Senate Bill 106, the passage of which may be the ultimate vehicle to challenge Quill at the U.S. Supreme Court. With landslide support in the South Dakota Senate and House of Representatives, S.B. 106 adopts an economic nexus standard for sales tax remittance and allows for an expedited challenge by the state. Because the bill will take effect on “the first day of the first month that is at least fifteen calendar days from the date” it is signed by Governor Daugaard, the bill will be effective May 1, 2016.

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By Hanish Patel and Marc Simonetti

The Florida Department of Revenue (DOR) determined that the sale of certain online membership benefits—early, exclusive access to products and deals and unlimited cloud data storage—were not subject to Florida sales tax or the Communications Service Tax (CST). However, the DOR added that the taxpayer’s purchase of reorder button devices, which are provided for free to certain customers and allow customers to reorder products by pressing a button, are subject to Florida use tax when they are delivered in Florida because they are tangible personal property. This recent Technical Assistance Advisement (TAA) builds upon prior TAAs addressing the taxability of the same taxpayer’s other online membership benefits such as streaming video content and shipping discounts. In clarifying the 2014 TAAs, the recent TAA also confirmed that only the portion of the membership fees attributable to the taxable streaming video service is subject to the CST, but if such charges are not separately allocable in the taxpayer’s books and records, then the entire membership fee will be subject to the CST. Fla. Dept. of Revenue, T.A.A. No. 14A-010 (Apr. 7, 2014); T.A.A. No. 14A19-006 (Dec. 19, 2014).

By Jessica Eisenmenger and Amy Nogid

The Florida Department of Revenue determined that software upgrades that are delivered electronically are not subject to sales tax because the upgrade was a stand-alone version of the software and did not rely on the earlier, physically-delivered software to operate. The Department also determined that sales tax does not apply to the maintenance and support services related to the electronically-delivered software upgrade because the services are not taxable on their own and are not bundled with the sale of tangible personal property. Finally, the Department advised the taxpayer that it must secure refunds from the vendor and not the Department. If the vendor refused to refund the tax, it could receive a refund from the Department if it provided an Assignment of Rights from the vendor. Fla. Dep’t of Revenue, Tech. Assist. Adv. No. 15A-015 (Oct. 26, 2015).

By Evan Hamme and Charlie Kearns

Purchases of “data center equipment for assembly, use, or consumption in the operations of a qualified data center” on or after January 1, 2016, are exempt from Michigan sales and use tax.  M.C.L. §§ 205.54ee, 205.94cc; see generally Notice Regarding Data Center Exemption, Feb. 5, 2016. The data center exemption will sunset on January 1, 2036 or, as discussed below, two earlier dates if certain job creation benchmarks are not met.

For purposes of Michigan’s new data center exemption, a “qualified data center” is “a facility composed of 1 or more buildings located in [Michigan that is] owned or operated by an entity engaged at that facility in operating, managing, or maintaining a group of networked computers or networked facilities for the purpose of centralizing . . . the storage, processing, management, or dissemination of [one or more persons’] data.” To qualify for the exemption, a qualified data center must also generate 75% or more of its revenue from one or more “colocated businesses” that are not “affiliates” of the qualified data center. A “colocated business” is a “person that has entered into a contract with the . . . qualified data center to use or deploy data center equipment physically located within the qualified data center for a period of 1 or more years.” The new law defines “affiliate” to mean a person that controls or is controlled by the qualified data center, or a person that is under common control with the qualified data center; however, the exemption statute does not specify a specific ownership threshold required for “control.” Importantly, the Michigan data center exemption provides that exempt “data center equipment,” includes “only computers, servers, routers, switches, peripheral computer devices, racks, shelving, cabling, wiring, storage batteries, back-up generators, uninterrupted power supply units, environmental control equipment, other redundant power supply equipment, and prewritten computer software used in operating, managing, or maintaining the qualified data center or the business of the qualified data center or a colocated business.” 

The exemption is set to expire December 31, 2035, but two provisions in the new law could cause the exemption to expire at an earlier date unless the Michigan Department of Talent and Economic Development (TED) determines that certain benchmarks are met. Under the first benchmark date for the exemption to continue to apply, colocated businesses and qualified data center contractors must have created a sufficient number of at least 400 data center industry jobs or related jobs by January 1, 2022, or the exemption will be repealed as of that date. Under the second benchmark date, at least 1,000 such jobs must be created by January 1, 2026, or the exemption will be repealed as of that date.  

By Todd Betor and Jonathan Feldman

On February 11, the Wisconsin Court of Appeals held that the receipts earned by Orbitz, an online travel company, from its services and markups for reserved rooms are not subject to sales tax. Specifically, the court determined that Orbitz is not “furnishing” rooms or lodging for purposes of Wisconsin sales tax and rejected the Department’s argument that Orbitz acts as an agent of the hotels. In interpreting the taxing statute, any ambiguity must be resolved in favor of the taxpayer. The court further found that Orbitz’s service of making hotel reservations, but not actually furnishing the accommodations, is not a taxable service. Finally, the court rejected the Department’s attempt to analogize inconsistent decisions from other jurisdictions. Wisconsin Dep’t of Revenue v. Orbitz, LLC, No. 2015AP200 (Wis. Ct. App. Feb. 11, 2016).

 By Liz Cha and Todd Lard

Applying the “true object” test to the taxpayer’s web-based services, the Tennessee Department of Revenue ruled that charges for granting access to the taxpayer’s website for purposes of obtaining information would not be subject to sales tax. While the access to web-based services is tax-exempt as a sale of services, a subscription to the taxpayer’s web-based technology solution system that allows a customer to manage its own information is taxable as a sale of remotely accessed software. However, the taxpayer’s purchase of the technology solution system from a third party qualifies for a sale for resale exemption if it provides the third party with a properly completed resale certificate. Tennessee Letter Ruling No. 16-01, 01/26/2016.

By Charles Capouet and Charlie Kearns

The Georgia Department of Revenue released a letter ruling stating that a taxpayer’s health-related information service was not subject to sales and use tax. The service includes a web portal to provide health information and track the user’s personal results and the in-person performance of an annual biometric health assessment. The taxpayer’s service was not taxable because Georgia does not expressly designate the service as taxable. Ga. Letter Ruling SUT-2015-03, Ga. Dep’t of Revenue (issued Apr. 16, 2015, released Feb. 2016).

Yesterday, the U.S. Court of Appeals for the Tenth Circuit issued its opinion in Direct Marketing Association v. Brohl, reversing the district court’s order granting summary judgment. The Tenth Circuit held that Colorado’s notice and reporting requirements imposed on non-collecting retailers did not violate the dormant Commerce Clause because they neither discriminated against, nor unduly burdened, interstate commerce. In determining that Colorado’s law did not violate the dormant Commerce Clause, the Tenth Circuit further held that the application of Quill v. North Dakota is narrowly limited to sales and use tax collection.

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