By Mike Kerman and Charlie Kearns

The Indiana Department of Revenue (Department) found that a medical research company that purchased software licenses was entitled to an exemption from use tax for purchases of taxable computer software as long as it could show the licenses were ultimately used outside of Indiana. The Department added that an exemption is not permitted where a company shows that its licenses were not used in Indiana but fails to show that they were used elsewhere (“nowhere licenses”). Indiana provides a use tax exemption for property that is stored in the state temporarily awaiting subsequent use outside of Indiana. The taxpayer purchased software licenses from multiple vendors and, in each case, used only a portion of the licenses. For example, the taxpayer purchased 1,000 licenses from one vendor, but only used 63 of the licenses. Of those 63 licenses, the taxpayer only used two in Indiana and used the other 61 outside of the state. The Department explained that the taxpayer’s 937 “nowhere licenses” were not exempt from use tax based on the temporary storage exemption, because the taxpayer could not show that they were subsequently used out of state. Rather, only the 61 licenses that the taxpayer could show were used outside of Indiana were exempt. For use tax purposes, the “nowhere licenses” were effectively “used” in Indiana because the taxpayer purchased them and accepted delivery in Indiana, even though it did not actually employ the licenses. Ind. Letter of Findings No. 04-20140506, Ind. Dep’t of State Revenue (Aug. 26, 2015).

On September 30, the U.S. House of Representative voted in favor of H.R. 719, which includes provisions extending the Internet Tax Freedom Act through December 11, 2015. The bill, passed earlier in the day by the Senate, will now head to the President for his signature. If signed into law, this temporary extension will give Congress another opportunity to consider whether to re-extend the ITFA moratorium for another set time period or to make the moratorium permanent.

History of the Internet Tax Freedom Act

ITFA prohibits states from taxing Internet access and also prohibits the multiple or discriminatory taxation of electronic commerce. President Bill Clinton signed the ITFA moratorium into law on October 21, 1998. Congress has since extended ITFA four times: in 2001, 2004, 2007 and 2014. President Obama signed the most recent extension, H.R. 83, which extended the moratorium through September 2015. Thus, absent this extension, ITFA will expire on October 1 of this year. Because Congress enacted ITFA in 1998, limited guidance exists as to how the states would tax Internet access in the law’s absence.

By Jonathan Feldman and Stephen Burroughs

A mere 28 days after oral argument, a three-judge panel of the Michigan Court of Appeals unanimously upheld a Court of Claims decision that sanctioned the Michigan Legislature’s retroactive withdrawal from the Multistate Tax Compact in 2014 PA 282, by ruling for the Michigan Department of Treasury in the consolidated appeal. The court held that the retroactive repeal of the Compact and the three-factor election within did not violate the Contract Clauses of the state or federal constitutions, reasoning that the Compact did not contractually bind Michigan from exercising its full legislative power. Accordingly, the Compact was subject to Michigan law concerning the interpretation of statutes. The court held that the retroactive repeal satisfied the Due Process Clauses of the state and federal constitutions because: (1) taxpayers generally do not have a vested right in the continuing validity of taxing statutes; (2) because the Legislature had a legitimate purpose for giving retroactive treatment to 2014 PA 282; and (3) because the six-and-one-half year retroactive period was sufficiently modest. The court also struck down the taxpayers’ separation-of-powers argument, asserting that the Legislature has the authority and obligation to amend a statute it believes has been misconstrued by the judiciary and that 2014 PA 282 did not reverse a decision or repeal a final judgment. Finally, the Court held that the retroactive repeal does not discriminate against interstate commerce, violate taxpayers’ First Amendment rights to petition the government, or defy any other Michigan constitutional provision. The court noted that the application of 2014 PA 282 to IBM’s appeal of its 2008 tax year decided by the Michigan Supreme Court was not at issue here. Sutherland will provide additional analysis as this case moves through the appellate process. Gillette Comm Operations N Am & Subsidiaries v. Department of Treasury, No. 325258 (Mich. Ct. App. 2015) (consolidated with 49 other appeals).

Read our September 2015 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, download the latest version of the Sutherland SALT Shaker mobile app.

By Robert Merten and Charlie Kearns

The Missouri Department of Revenue has issued a comprehensive letter ruling answering 12 software-related sales tax questions on issues concerning canned software, custom software, software licenses, software invoices, software installation and software maintenance agreements. Missouri Department of Revenue LR 7615, Aug. 21, 2015. In the letter ruling, the Department applies Missouri’s general software taxability regulation, Missouri Code of State Regulations § 12 CSR 10-109.050, to particular and practical inquiries by a taxpayer company. Specifically, the Department’s letter ruling provides Missouri sales tax guidance for the following software transactions:

  • Purchases of canned (“off the shelf”) software programs are not subject to sales or use tax if delivered electronically through the Internet, but are subject to sales or use tax if delivered in a tangible format.
  • Purchases of customized (special ordered) software programs are not subject to sales or use tax, regardless of whether the programs are delivered electronically or in a tangible format.
  • Purchases of licenses to use previously purchased canned software are not taxable if the original software was delivered electronically (even if subsequently copied), but are subject to sales or use tax if the software was delivered in a tangible format. 
  • Purchases of software maintenance/support delivered electronically (and remotely by phone) are not subject to sales or use tax if the original software was delivered electronically, but are generally taxable if it was canned software delivered in a tangible format (unless the maintenance/support is optional and is separately invoiced from the software) or if the maintenance/support provides for the delivery of canned software updates, upgrades or enhancements in a tangible format. 
  • Purchases of additional licenses for canned software delivered in a tangible format are not taxable unless they are part of the original transaction for the canned software.
  • Separately invoicing or separately listing on one invoice multiple software-related purchases (canned software, customized software, licenses to use canned software and/or software maintenance/support in which delivery of some of the items occurs in tangible format and others electronically) from the same vendor does not determine whether particular items are subject to sales or use tax.
  • Purchases of software programs installed by the vendor at the purchaser’s location in Missouri using a tangible storage media that is then taken away by the vendor upon installation (“load and leave” transactions) are not considered canned software deliveries in a tangible format, and thus are not subject to sales or use tax.
  • Purchases of licensed software installed at the vendor site onto servers or hardware also purchased from the vendor are considered part of the purchase of tangible personal property and, thus, are subject to sales and use tax. However, purchases of licensed software installed at the vendor site onto servers or hardware not purchased from the vendor are not considered canned software deliveries in a tangible format and, thus, are not subject to sales or use tax.

By Chris Mehrmann and Charlie Kearns

The Montana Supreme Court held that online travel companies (OTCs) – including Priceline, Expedia, Orbitz and others – are subject to the state’s sales taxes on accommodations, campgrounds and rental vehicles, but are not subject to the state’s lodging facility use tax. The court held that the reservation fees are subject to sales tax because, in its view, the fees are included in the sales price and that the OTCs, as sellers of these reservation services, must collect and remit these taxes to the Department of Revenue. However, because the OTCs are neither owners nor operators of lodging facilities, the court held that the reservation fees are not subject to the lodging tax. The OTCs requested a prospective application of the court’s decision, arguing that any imposition of back taxes would be inequitable. Rejecting this argument, in part, the court ordered that the OTCs pay tax retroactive to 2010, when the Department filed its lawsuit, since they were on notice that the Department considered them liable for tax. Interestingly, the court also noted that Montana’s lodging facility use tax and sales tax regimes are “inconsistent and incompatible.” Since the regimes were “created sixteen years apart” and “tax two separate transactions,” the court declined to read the statutes in pari materia. Dept. of Revenue v. Priceline.com, Inc., No. DA 14-0260 (Mont. Aug. 12, 2015). 

Thumbnail image for Wrigley.jpegMeet Wrigley, this month’s Pet of the Month, who was submitted through our SALT Shaker App by Gary Peric, founder of the State Tax Foundation. 

A real sweetheart of a pup, Wrigley (aka PL 86-272) is a mini Golden Doodle. Born to a small Poodle father and Golden Retriever mother, Wrigley celebrates her sixth birthday in November. Happy early birthday, Wrigley! 

Thumbnail image for Thumbnail image for Wrigley palm trees.jpgThe Perics, who are originally from Chicago and big Cubs fans, named their sweet pooch after Wrigley Field as well as the 1992 case, Wisconsin Department of Revenue v. William Wrigley, Jr., Co. Wrigley has been with them since she was eight or nine weeks old, and they have thoroughly enjoyed watching her grow up. She is a great companion and loves to play with everyone – especially children.

Wrigley’s favorite activity is retrieving tennis balls off the pier near the Perics’ summer home in Indiana. If she could, Wrigley would play fetch from sun up to sun down, but Gary limits her to only 10 throws a day to keep her from wearing herself out. 

Wrigley also enjoys playing with her half-brother Scout (same father, different mother). The two share a unique talent for standing on their hind legs and waving to people with a front paw.

Wrigley is so very happy to be September’s Pet of the Month!

Direct Marketing Association continued its fight against Colorado’s use tax reporting regime during oral arguments today before the United States Court of Appeals for the Tenth Circuit. After getting sidetracked with a jurisdictional question that proceeded to the U.S. Supreme Court, DMA returned to the Tenth Circuit and urged it to affirm the decision of the lower court that Colorado’s law violates Quill Corp. v. North Dakota.

View the full Legal Alert.

In a recent unpublished decision, Residuary Trust A v. Director, Division of Taxation (Kassner), the New Jersey Appellate Division relied on the “square corners doctrine” to hold that the New Jersey Division of Taxation was prohibited from imposing tax for the 2006 tax year based on a policy change not announced until 2011. In other words, even though the assessment may have been supported by the statute, the court determined that it would be unfair to assess the tax.

In their article for State Tax Notes, Sutherland attorneys Leah Robinson, Open Weaver Banks and Amy F. Nogid describe the New Jersey square corners doctrine, which prevents the government from achieving or retaining an unfair bargaining or litigation advantage.

View the full article reprinted from the September 14, 2015, issue of State Tax Notes.

By Chris Mehrmann and Amy Nogid

The Washington State Supreme Court held that a car dealership’s earnings from a “dealer cash” incentive program, offered by the manufacturer, American Honda Motor Company, to dealers to stimulate sales of certain car models within a specific time period, are taxable under the catchall provision of the business and occupation tax. The court further held that the incentive program did not qualify as a bona fide discount to the wholesale purchase price of the vehicles, which would not be taxable, because the dealer cash payments were not yet quantified or knowable at the time the dealership purchased the vehicles from the manufacturer. This opinion follows and upholds previous decisions on this issue against the taxpayer by the Washington Court of Appeals, the Thurston Superior Court, and the Board of Tax Appeals. (please see our prior coverage). Steven Klein, Inc. v. State of Wash., Dep’t of Revenue, Dkt. No. 91072-3 (Wash. Aug. 27, 2015).