By Open Weaver Banks and Liz Cha

The Arizona Department of Revenue (Department) issued a taxpayer information ruling stating that a taxpayer’s gross income from transactions provided through the use of computer software is not subject to tax under the personal property rental classification for Arizona Transaction Privilege Tax purposes.

The taxpayer’s software provides its customers with subscription billing and reoccurring payment provider services through a web-based portal. The taxpayer charges its client a percentage of successful billing transactions made during a particular time period. If a client violates the payment agreement with the taxpayer, the taxpayer will discontinue provision of its payment processing services and disable access to its software and web-based portal.

Under Arizona case law, software is treated as tangible personal property. The Arizona Transaction Privilege Tax generally subjects tangible personal property to tax when a taxpayer grants its customer the right to the tangible personal property for a perpetual duration (i.e., a sale) or for a fixed period of time at a fixed amount (i.e, a rental). The Department determined that the taxpayer’s activities would not be considered retail sales because the taxpayer’s billing practices were based on (1) a periodic fee and (2) the taxpayer could discontinue service if the customer failed to pay. With regard to whether the taxpayer’s services constituted a rental, the Department relied on Arizona precedent that taxpayer’s customers must gain sufficient control and use of software to constitute the rental of tangible personal property. In this case, the taxpayer’s customers lacked sufficient control of the software because both the taxpayer and customer used the software and the taxpayer updated information on the portal either manually or automatically so that the clients could view the status of payments processed and other analytical information. Accordingly, the Department determined that gross income from taxpayer’s software services was not a taxable activity under the Arizona Transaction Privilege Tax.

Arizona Taxpayer Information Ruling LR 16-011, Arizona Department of Revenue (September 23, 2016).

Eversheds Sutherland SALT releases the fifth edition of the “SALT Scoreboard,” a quarterly publication that tracks significant state tax litigation and controversy developments and tallies the results of taxpayer wins and losses across the country. Our quarterly publication features Eversheds Sutherland’s observations regarding important state tax decisions and will identify trends by issue, state and forum as they emerge during the year. This edition of the SALT Scoreboard includes insights regarding California’s “doing business” standard, Georgia tax credits, and a Spotlight on sales and use tax decisions.

View our Eversheds Sutherland SALT Scoreboard results from the first quarter of 2017!

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A recent US Supreme Court decision on surcharges strengthened taxpayers’ First Amendment rights when deciding how they present pass-through fees and taxes to their customers.

  • The Supreme Court held that a New York statute prohibiting a seller from imposing a credit surcharge was a speech regulation, subject to heightened scrutiny, because it regulates how retailers communicate their prices.
  • The decision’s reasoning regarding the communication of prices as speech clarifies that the heightened scrutiny standard also applies to state and local tax statutes regulating a taxpayer’s ability to separately identify taxes and fees on customer invoices.

Prior to this decision, courts and states have taken differing positions on whether a seller may be prohibited from separately identifying tax on a customer invoice when the seller is not required to pass through the tax.

View the full Legal Alert.

The Georgia General Assembly passed significant tax legislation impacting selected industries, but failed to pass a number of broader tax bills:

  • Passed legislation impacts telecommunications, film production and music production companies and causes the review of all income and sales and use tax exemptions.
  • Stalled legislation included the reduction of the individual income tax rate, remote sales tax collection, taxation of transportation companies, and the treatment of refunds for direct payment permit holders.

Taxpayers should expect any stalled legislation to be re-introduced in the next legislative session.

View the full Legal Alert.

Read our March 2017 posts on stateandlocaltax.com or read each article by clicking on the title. For the latest coverage and commentary on state and local tax developments delivered directly to your phone, and to submit your pet to be featured in our Pet of the Month, download the latest version of the Eversheds Sutherland SALT Shaker app.

Abby close up.jpgThis month, we are revisiting one of our prior Pets of the Month for a “Closer Look” follow up. This month we honor Abby Fulps, who previously shared her Pet of the Month glory with her sister Olive in 2012. Abby is a female Boston Terrier belonging to Stephanie Fulps, Sacramento SALT Office Coordinator/Paralegal and her husband Jason.abby super model 2.jpg

Also known as Abby Fabulous, Abby-licious, and the Queen, Abby will be 13 years young in May.

Stephanie found Abby’s adoption ad online in early February 2007 on the fourth page of a Google search for “Sacramento Boston Terrier adoption.” In her ad photo, Abby was wearing a black bandana with red kiss marks around her neck and the ad read, “My name is Abby. I am two years old. I get along with other dogs. I do not like cats.” Stephanie was instantly smitten and called the number and spoke to Abby’s owner who told Stephanie that her husband’s Rottweiler was the dominant dog of the house and that Abby wasn’t getting the attention she deserved. It turned out that Abby lived less than a mile away, and Stephanie and Jason were able to meet her that evening. By the weekend, Abby was living in her new home.

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As she’s gotten older, Abby has become much more affectionate. For the longest time, it seemed she would only tolerate being pet, but now she sits with Stephanie every evening for an after work puppy rub-down. When Stephanie stops massaging long enough to take a bite of dinner or change the channel, Abby looks her in the eye and paws at her in protest.

This special gal is so pleased to be March’s Pet of the Month!

To submit YOUR pet to be featured, visit the Eversheds Sutherland SALT Shaker App, click the Pet of the Month in the drop-down, then click “Submit A Pet.”

 

Speakers and panels announced for Day 3: Managing State and Local Tax Controversies

Eversheds Sutherland is delighted to participate in a full-day program on Managing State and Local Tax Controversies (May 3, 2017) during TEI’s 2017 Audits & Appeals Seminar. Session details:

  • Beyond Paper Pushing – Consequences of State Tax Filings
    Speakers: Michele Borens and Andrew Appleby
  • Overcoming the Challenges of State Tax Audit Management
    Speakers: Jeff Friedman and Carley Roberts
  • Pay Up or Protest! Challenging Assessments
    Speakers: Eric Tresh and Tim Gustafson
  • Resolution Through the Courts
    Speakers: Eric Coffill and Maria Todorova
  • Navigating Through State Tax Controversy – Considerations Everyone Should Know About
    Speakers: Jonathan Feldman and Leah Robinson
  • Lunch panel featuring state tax judges
  • Industry Perspective of Managing Audits and Litigation
    Featuring:

    • Jim Kennedy, OppenheimerFunds
    • Cooper Monroe, Duke Energy
    • Tom Pucci, Expedia
    • Elena Xu, Facebook

TEI’s Audits & Appeals Seminar will take place May 1-3, 2017, in Seattle, Washington:

  • May 1-2: Insights and Skills for Federal Tax Controversy Success
  • May 3: Managing State and Local Tax Controversies, sponsored by Eversheds Sutherland

You are invited to register for all three seminar days, the first two days or the final day devoted to state and local tax controversy, depending on your individual needs.

View details and register now!

 

By Chris Lutz and Charlie Kearns

On February 10, 2017, the US Court of Appeals for the Sixth Circuit held in Wayside Church v. Van Buren County, 847 F.3d 812 (U.S. 6th Cir. 2017) that the Tax Injunction Act (TIA) and the principle of comity barred federal courts from hearing the taxpayers’ arguments that a Michigan county court’s foreclosure sale of their properties constituted an unconstitutional taking in violation of the Fifth Amendment of the US Constitution. On appeal from the US District Court, the Sixth Circuit concluded that the TIA and comity “only allow federal courts to exercise jurisdiction when state courts cannot provide ‘plain, adequate, and complete’ remedies,” and therefore, “only one analysis is required.” Because the taxpayers could bring their suits alleging an unconstitutional taking to state court—a “plain, adequate, and complete remedy”—the federal courts did not have jurisdiction to hear the matter. Wayside Church v. Van Buren County, 847 F. 3d 812 (U.S. 6th Cir. 2017).

By Nicole Boutros and Scott Wright

A New York State Division of Tax Appeals administrative law judge (ALJ) determined that a telecommunications provider’s electricity purchases were not exempt from sales tax as sales for resale. In so doing, the ALJ rejected the taxpayer’s assertion that it resold electricity by incorporating it into its telecommunications services, explaining that the regulation on which the taxpayer relied applies to tangible personal property purchases, which electricity is not. The ALJ further held that the taxpayer was not exempt under a separate provision for resales of electricity, finding that the taxpayer was not reselling electricity upon sale of its telecommunications services and that the electronic signals powering its network were only incidental to the services for which its customers contracted. Matter of XO Communications Services, LLC, DTA Nos. 826686 & 827014 (N.Y. Div. Tax App. Mar. 9, 2017).

By Evan Hamme and Tim Gustafson

The New York State Department of Taxation and Finance issued an advisory opinion exempting from New York state sales tax a charge the petitioner paid to a cable company to cover the cable company’s costs to expand its cable network to bring broadband Internet to the petitioner’s rural location. The Department disagreed with the petitioner’s contention that the charge was exempt from sales tax as a charge for a capital improvement on real property. However, the Department found the charge to provide broadband Internet service to the petitioner was nonetheless exempt from sales tax as a charge for the “provision of internet access service.”  N.Y. Advis. Op., TSB-A-16(32)S (Dec. 2, 2016).