The Wyoming Department of Revenue has published guidance addressing the sales tax treatment of a broad range of computer sales and services, including cloud computing, web hosting, and data storage.
U.S. House Passes Permanent Internet Tax Freedom Act
On July 15, the U.S. House of Representatives voted in favor of H.R. 3086, the Permanent Internet Tax Freedom Act (PITFA), by a voice vote. PITFA would permanently extend the moratorium on state and local taxation of Internet access and “multiple” or “discriminatory” taxes on electronic commerce.
View the full Legal Alert.
Legal Alert: U.S. House passes Permanent Internet Tax Freedom Act
On July 15, the U.S. House of Representatives voted in favor of H.R. 3086, the Permanent Internet Tax Freedom Act (PITFA), by a voice vote. PITFA would permanently extend the moratorium on state and local taxation of Internet access and “multiple” or “discriminatory” taxes on electronic commerce.
Read the full Legal Alert here.
Vermont Expands Taxation of Software to Include Remotely Accessed Prewritten Software
The Vermont Department of Taxes has released draft regulatory language regarding the collection of sales tax on remotely accessed prewritten software. In an effort to clarify further, the Department of Taxes will publish regulations to provide further guidance regarding the application of the tax. The deadline for comments on the draft rules is October 1.
Please click here for the full language.
Michigan Supreme Court Upholds the Compact Election
On July 14, 2014, the Michigan Supreme Court in a splintered 3-1-3 decision found in favor of IBM’s election to apply the Multistate Tax Compact’s three-factor apportionment formula to the now-repealed Michigan Business Tax (MBT).
Background
Several states, including Michigan in 1970, entered into the Multistate Tax Compact (Compact), which describes how multistate corporations allocate and apportion income. One provision of the Compact is an election that allows corporations to elect annually to apply the apportionment rules contained in the Compact (rather than state apportionment rules that deviate from the Compact). Michigan’s single sales factor apportionment formula for the MBT deviated from the Compact, and IBM elected to apply the Compact’s equally weighted, three-factor formula.
The Michigan Department of Treasury (the Department) rejected IBM’s election on several grounds, including that the Compact was repealed by implication as part of the MBT enactment in 2008. The Michigan Court of Appeals found in favor of the Department, and IBM appealed to the Michigan Supreme Court.
Michigan Supreme Court Decision
A divided Michigan Supreme Court issued three separate opinions on two distinct issues. A “lead opinion” and dissenting opinion were each supported by three justices. A concurring opinion joined in the result described in the lead opinion.
As to the election, four Michigan Supreme Court justices (the lead and concurring opinions) found that IBM was entitled to make the Compact election and use the Compact’s three-factor formula for its 2008, 2009 and 2010 tax years. Additionally, all seven justices held that the Modified Gross Receipts Tax component of the MBT is an “income tax” for purposes of the Compact (in addition to the Business Income Tax component of the MBT, which is also an “income tax”).
While the concurring opinion embraced the result contained in the lead opinion, it also relied on another basis to allow IBM to make the election. The concurrence determined that the Michigan legislature reenacted the election when it passed several pieces of legislation in 2011 to enact a new corporate income tax.
Sutherland Observations:
The Court’s holding was based on its ability to harmonize the two seemingly conflicting apportionment provisions. The court interpreted the Compact election as being compatible and capable of co-existing with Michigan’s apportionment regime for the tax years 2008 through 2010. In doing so, several key questions were not determined by the majority of the justices, including whether the legislature impliedly repealed the election and whether Michigan could unilaterally repeal the Compact.
If you have any questions about this Legal Alert, please feel free to contact any of the attorneys listed under ‘Related People/Contributors’ or the Sutherland attorney with whom you regularly work.
On July 14, 2014, the Michigan Supreme Court in a splintered 3-1-3 decision found in favor of IBM’s election to apply the Multistate Tax Compact’s three-factor apportionment formula to the now-repealed Michigan Business Tax (MBT).
Background
Several states, including Michigan in 1970, entered into the Multistate Tax Compact (Compact), which describes how multistate corporations allocate and apportion income. One provision of the Compact is an election that allows corporations to elect annually to apply the apportionment rules contained in the Compact (rather than state apportionment rules that deviate from the Compact). Michigan’s single sales factor apportionment formula for the MBT deviated from the Compact, and IBM elected to apply the Compact’s equally weighted, three-factor formula.
The Michigan Department of Treasury (the Department) rejected IBM’s election on several grounds, including that the Compact was repealed by implication as part of the MBT enactment in 2008. The Michigan Court of Appeals found in favor of the Department, and IBM appealed to the Michigan Supreme Court.
Michigan Supreme Court Decision
A divided Michigan Supreme Court issued three separate opinions on two distinct issues. A “lead opinion” and dissenting opinion were each supported by three justices. A concurring opinion joined in the result described in the lead opinion.
As to the election, four Michigan Supreme Court justices (the lead and concurring opinions) found that IBM was entitled to make the Compact election and use the Compact’s three-factor formula for its 2008, 2009 and 2010 tax years. Additionally, all seven justices held that the Modified Gross Receipts Tax component of the MBT is an “income tax” for purposes of the Compact (in addition to the Business Income Tax component of the MBT, which is also an “income tax”).
While the concurring opinion embraced the result contained in the lead opinion, it also relied on another basis to allow IBM to make the election. The concurrence determined that the Michigan legislature reenacted the election when it passed several pieces of legislation in 2011 to enact a new corporate income tax.
Sutherland Observations:
The Court’s holding was based on its ability to harmonize the two seemingly conflicting apportionment provisions. The court interpreted the Compact election as being compatible and capable of co-existing with Michigan’s apportionment regime for the tax years 2008 through 2010. In doing so, several key questions were not determined by the majority of the justices, including whether the legislature impliedly repealed the election and whether Michigan could unilaterally repeal the Compact.
If you have any questions about this Legal Alert, please feel free to contact any of the attorneys listed under ‘Related People/Contributors’ or the Sutherland attorney with whom you regularly work.
Legal Alert: Michigan Supreme Court upholds the compact election
On July 14, 2014, the Michigan Supreme Court in a splintered 3-1-3 decision found in favor of IBM’s election to apply the Multistate Tax Compact’s three-factor apportionment formula to
the now-repealed Michigan Business Tax (MBT).
Read the full Legal Alert here.
Minnesota Department of Revenue Revises a Release that Discusses Application of Sales Tax to Digital Products
Minnesota Sales Tax Fact Sheet No. 177, 07/01/2014
The Minnesota Department of Revenue updated its Sales Tax Fact Sheet on digital products to explain that webinars (electronically accessed live or prerecorded audio and audiovisual presentations) are exempt from tax provided the following three requirements are met:
(1) Admission to the in-person presentation is not subject to tax
(2) Online participants and the presenter can interact with each other during the presentation and
(3) Any limits on the amount of interaction (and when it occurs) are the same for both online and in-person participants.
Sutherland SALT Shaker: June 2014 Digest
Click here to read our June 2014 posts or read each article by clicking on the title. A printable PDF is also available here. To read our commentary on the latest state and local tax developments as they are published, be sure to download the Sutherland SALT Shaker mobile app.
- California Court of Appeal Broadens Exemption for Intangible Assets
The California Court of Appeal held that the San Mateo County Assessor illegally assessed the intangible assets of the Ritz-Carlton Half Moon Bay Hotel. - Florida’s Bob Ross Cloud: Happy, Puffy and Tax-Free
The Florida Department of Revenue determined that the sale of remote storage and cloud computing services, along with related data transfer fees, are information services not subject to Florida sales tax or Communication Service Tax. - SALT Pet of the Month: Nell
Meet Nell, the adorable new Aussie/Great Pyrenees puppy belonging to Doug Mo, Of Counsel on the SALT team in Sutherland’s Sacramento office. - Signed, Sealed, Delivered, They’re Ours: Illinois Sources Cloud Computing Receipts Using Market-Based Approach
The Illinois Department of Revenue determined that a taxpayer’s cloud computing receipts should be sourced for sales factor purposes using a market-based approach because the receipts were derived from services. - Michigan Court of Appeals Holds that Checkpoint Is an Information Service. If Only the Department of Treasury Had a Subscription…
The Michigan Court of Appeals held that Thomson Reuters’ sale of Checkpoint, an online tax and accounting research program, was the sale of a nontaxable information service and not tangible personal property for purposes of Michigan’s use tax. - Eat, Drink and Fire Away: South Dakota Holds Lodge Operator Not Subject to Use Tax on Purchases of Food, Beverages and Ammo
The South Dakota Supreme Court held that a corporation operating a hunting lodge did not owe use tax on its purchases of food, beverages and ammunition because the lodge purchased the goods for resale to the lodge’s customers in the regular course of business. - Tennessee “Volunteers” Taxpayer for Alternative Apportionment
The Tennessee Court of Appeals held that the Commissioner had the authority to require Vodafone, a wireless communications provider, to use an alternative apportionment method for Tennessee franchise and excise tax purposes. - A Smorgasbord of State Tax Issues: Virginia Addresses Entity Classification, Nexus and Subject-to-Tax Add-Back Exception
In a post-audit challenge by a taxpayer, the Virginia Tax Commissioner addressed entity classification, nexus and royalty add-back issues.
SALT Pet of the Month: Nell
Meet Nell, the adorable new Aussie/Great Pyrenees puppy belonging to Doug Mo, Of Counsel on the SALT team in Sutherland’s Sacramento office. Nell was rescued along with her mother and six brothers and sisters from a woodpile by Big Dog Rescue in Sonoma County. Since settling into her new home, Nell has been nicknamed “The Puppy Gator” for her reputation as a biter. She loves all of her toys and unfortunately also thinks any shoes or slippers left out also belong to her. Nell has
two siblings: Libby, a 12-year-old Border Collie/Aussie mix, and Riley, a Lab/Border Collie mix. Both are also rescues, and Riley is featured on the label of the Mo family’s “Fancy Dog” cabernet, and they donate all profits from the wine back to Big Dog Rescue. Cheers to that!
Tennessee “Volunteers” Taxpayer for Alternative Apportionment
By Stephen Burroughs and Andrew Appleby
The Tennessee Court of Appeals held that the Commissioner had the authority to require Vodafone, a wireless communications provider, to use an alternative apportionment method for Tennessee franchise and excise tax purposes. Vodafone used Tennessee’s statutory cost-of-performance (COP) method to source its telecommunication service receipts. Using Tennessee’s statutory COP method, Vodafone sourced its receipts outside the state because “a greater proportion of the earnings-producing activity” occurred outside Tennessee. Ignoring the statutory COP method, the Commissioner sourced Vodafone’s receipts using customer billing addresses in the state because the statutory COP method resulted in an 89% decrease in Vodafone’s sales factor and created substantial “nowhere income.” In Tennessee, the Commissioner may exercise its alternative apportionment authority only in “limited and specific cases” that involve “unusual fact situations which ordinarily are unique and nonrecurring.” The court ruled that the dramatic reduction in Vodafone’s sales factor constituted a specific and unusual situation—despite the situation being common to all service providers without significant operations or capital assets in Tennessee. Further, the court held that the COP method did not clearly reflect Vodafone’s in-state activity, but did so without analyzing Vodafone’s in-state activity. Citing to the sales factor reduction and presence of “nowhere income,” the court ruled that when the “statutory formula ‘misfires,’” alternative apportionment is appropriate “where the state is entitled to receive more taxes….” The alternative apportionment application in this case is reminiscent of the Mississippi Equifax case, which raised the ire of taxpayers and legislatures alike. Vodafone Americas Holdings Inc. v. Roberts, Comm’r of Revenue, No. M2013-00947-COA-R3-CV (Filed June 23, 2014).