By Stephanie Do and Pilar Mata

The Colorado Department of Revenue determined that an out-of-state S corporation was not subject to Colorado income taxes and was not required to register with the Department. The S corporation provided information technology consulting services and designed accounting software systems. One of the S corporation’s clients was located in Colorado; however, the S corporation performed its work for that client from outside the state and accessed the client’s system through a virtual private network. Neither the S corporation nor its subcontractor traveled to Colorado to perform services on behalf on the client. The Department applied its factor presence nexus rule to determine whether the S corporation had nexus with the state, which provides that nexus is established when a business organized outside of Colorado has more than: (1) $50,000 of property; (2) $50,000 of payroll; (3) $500,000 of sales; or (4) 25% of the total property, total payroll or total sales in the state. The S corporation represented that it had no payroll or property in Colorado and did not have any apportioned sales to Colorado (presumably under a cost of performance sourcing methodology). Because the S corporation did not exceed any of these economic nexus thresholds, the Department held that the S corporation was not obligated to file a Colorado income tax return. Colo. Dep’t of Revenue, Gen. Info. Letter GIL-14-011 (Apr. 28, 2014).

In a fact-intensive ruling, the Texas Comptroller determines that the multistate benefit exemption does not apply to the purchase of various services performed in connection with computer software. To qualify for the multistate benefit exemption (which only applies to services that became taxable after 9/1/1987), the Comptroller explains that a taxpayer must prove by clear and convincing evidence that it operates in more than one state, and that the service that is purchased supports a separate, identifiable segment of the business rather than the general administration or operation of the business.

The Idaho Tax Commission Sales Tax Rule Committee is meeting today to discuss a recently released draft of proposed changes to Idaho Rule 27 “Computer Equipment, Software, and Data Services”.  The Commission is in the process of updating the regulation following recent legislation that amended the definition of tangible personal property to exclude electronically delivered and remotely access computer software as well as software delivered via “load and leave” where no tangible personal property containing software is transferred. The draft rules propose extensive changes to the regulations and the Commission is seeking comments and participation at future meetings.  

For more information, see the Sales Tax Rule Committee meeting packet available here.

By Nicole Boutros and Timothy Gustafson

The Michigan Supreme Court held that a taxpayer claiming a Michigan use tax exemption for sales tax “due and paid” on its purchases of tangible personal property must demonstrate that it actually paid sales tax on such property. The taxpayer provided a marine transportation service to transport asphalt and other products throughout the Great Lakes. Claiming its purchases of fuel from Michigan sellers were exempt from Michigan use tax pursuant to an exemption for tangible personal property on which sales tax was “due and paid,” the taxpayer provided auditors with invoices to demonstrate it paid sales tax, but the invoices did not separately state sales tax as a line item. The court held that the taxpayer could not claim the use tax exemption for sales tax due and paid because it failed to demonstrate that the price of the fuel included sales tax, notwithstanding that the sale was a taxable transaction. Rather, the use tax exemption for sales tax due and paid required the taxpayer to prove that either the taxpayer or the seller actually paid sales tax on the purchase of fuel. The court rejected the taxpayer’s argument that it was entitled to a presumption that the sale price of the fuel included sales tax on an otherwise taxable transaction merely because the duty to pay the sales tax falls on the seller. The court reasoned that such a presumption would entitle a purchaser to the use tax exemption whenever sales tax was due, without showing it was paid, and it would improperly shift the burden to the Department of Treasury to prove the contrary. Notably, the court acknowledged that both sales tax and use tax could apply to the same property but concluded that any double taxation would be traceable to a taxpayer’s recordkeeping and failure to demand proof that it paid sales tax. Andrie Inc. v Dep’t of Treasury, Docket No. 145557 (Mich. S. Ct. June 23, 2014).

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. 

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.

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. 

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.