By David Pope and Timothy Gustafson

Pursuant to a letter ruling request, the Massachusetts Department of Revenue determined that a taxpayer’s bundled sale of software and services related to Internet-based marketing and customer communications solutions was subject to Massachusetts sales tax. The taxpayer provided different types of software to its subscribers, which organized customer reviews, questions, answers, stories of the taxpayer’s subscribers, and extracted insights on customer preferences. The taxpayer provided the software either by embedding it on a subscriber’s website or as “software-as-a-service.” As part of the bundled transaction, the taxpayer also provided certain non-taxable services, including a monitoring service that filtered any obscene or illegal customer inputs and a social media marketing advisor service.  The Department first determined that all of the taxpayer’s software was subject to sales tax regardless of the method of delivery pursuant to Computer Industry Services and Products Regulation, 830 CMR 64H.1.3(3). Then, applying Massachusetts’s “object of the transaction” test to determine whether the bundled sale was taxable, the Department stated that the non-taxable services were deemed inconsequential when bundled with the taxable software. Although the Department concluded that sales tax applied to the total bundled product, it stated that the non-taxable services would not be subject to sales tax if the taxpayer sold such services as a separate, unbundled option. Massachusetts Letter Ruling No. 13-2 (Mar. 11, 2013).

By Zachary Atkins and Pilar Mata

The Colorado Department of Revenue issued a private letter ruling permitting a financial institution to deviate from Colorado’s special industry rules and use an alternative method of apportionment for corporate income tax purposes. The taxpayer, a savings and loan holding company with subsidiaries separately engaged in broker-dealer and banking activities, had substantial receipts from investment and trading assets and activities. Under Colorado’s special regulation for financial institutions (Colo. Code Regs. § 201-3(1)(c)(xiii)), receipts from investment and trading assets and activities are sourced based on the location of the “regular place of business of the taxpayer,” which is determined based on the location of the day-to-day decisions regarding the assets and activities. The taxpayer argued that an alternative apportionment methodology was warranted because this rule failed to reflect the location of the taxpayer’s market and instead reflected the taxpayer’s costs of performance. The Department concurred and, with respect to receipts from investment assets and activities, permitted the taxpayer to calculate its Colorado sales factor numerator based on the ratio of total deposits from Colorado customer accounts to total deposits from all customer accounts. Colorado Dep’t of Revenue, PLR-13-001 (Jan. 24, 2013).

By Saabir Kapoor and Andrew Appleby

The Colorado Department of Revenue (Department) determined that sales tax does not apply to a subscription fee for an interactive stock screening service. The taxpayer, a financial news and research organization, offered proprietary web-based stock screening tools to customers for a monthly subscription fee. To determine whether the subscription fee was subject to sales tax, the Department applied the state’s true object test established in City of Boulder v. Leanin’ Tree, Inc., 72 P.3rd 361 (Colo. 2003), which looks to whether the transaction is commonly understood to be for tangible personal property or a service. The key factor distinguishing the taxpayer’s product from other market survey publications was the interactive nature of the taxpayer’s system. Customers had access to real-time data that could be used to create quasi-customized reports based on search and filter functionality options. In concluding that the taxpayer’s product was a service under the true object test, the Department likened the taxpayer’s product to an “information service” as defined in Ohio and New York. See Ohio Rev. Code § 5739.01(B)(3)(e), N.Y. Tax Law §§ 1105(c)(1), 1105(c)(9). Colorado does not subject information services to tax, and therefore the Department determined that the taxpayer’s stock screening service was not subject to sales or use tax. PLR-12-007, Colo. Dept. of Rev. (published Apr. 8, 2013).

We are pleased to provide the following updates on state tax issues impacting the digital economy. The Sutherland SALT Team will continue to monitor these and other Digital Economy developments. Please visit the Sutherland SALT Digital Economy Forum to learn more, and please contact one of us if you have questions regarding the Forum.

Texas Comptroller: No Multistate Benefit for You!
 
In Decision No. 105,442, the Texas Comptroller of Public Accounts denied a telecommunications company’s refund claim for sales and use taxes paid on services related to custom software housed on switches located outside of Texas. The Comptroller ruled that the taxpayer, which had a principal place of business outside the state, did not show by clear and convincing evidence that such charges were eligible for the “multistate benefit exemption” or otherwise should not be included as part of the sales price of the custom computer software.
 
Indiana DOR: Authentication Services Via the Provision of a Digital Certificate Not a Specified Digital Product or Computer Software

The Indiana Department of Revenue has ruled that sales of “authentication services” for customers “seeking to perform secure electronic commerce and communications over the internet” were not subject to sales and use tax as either a specified digital product or prewritten computer software.

By Madison Barnett and Prentiss Willson

The Florida Department of Revenue, adopting a recommended order of the Division of Administrative Hearings, ruled that a Georgia-based heavy equipment dealer had substantial nexus in Florida based on its delivery of equipment in company-owned trucks and its advertising in a Florida trade publication. The company’s contacts with Florida were limited to 116 sales over a three-year period (with only one sale in 2002), delivery of the equipment using company-owned trucks operated by company employees, its occasional pick-up of trade-in equipment, and its placement of advertisements in a Florida trade publication. The Department ruled that such physical presence was sufficient to create substantial nexus because it was “regular and substantial,” and “perhaps most significantly,” the company “deliberately and systematically targeted Florida customers in its advertising.” While the result may not be too surprising for the years where a large number of deliveries were made, one may question whether the ruling’s reliance on activities in later tax years (e.g., 2004) to create nexus for prior tax years (e.g., 2002, where a single delivery was made) is supportable. Rhinehart Equipment Co. v. Dep’t of Revenue, Dep’t of Rev. Final Order (Mar. 25, 2013).

By Jessica Kerner and Timothy Gustafson

The Georgia Court of Appeals dismissed a customer class action lawsuit seeking a sales tax refund from a utility company, holding that the applicable statutory provisions for claiming a refund of sales taxes did not authorize the customers to bring a direct refund cause of action against the seller. The utility company had charged its customers a nuclear power recovery fee and a municipal franchise fee, and then included the amount of these charges in the sales tax base. The customers did not challenge the utility company’s authority to impose the fees, but they alleged that the fees are not subject to Georgia sales tax and brought a class action against the utility company under two statutory refund provisions. The court, however, held that neither statute created a cause of action against the seller. The court stated that the “unambiguous language” of the first statute at issue provided for a specific remedy; namely, that a person who has erroneously paid sales tax may either request a refund directly from the dealer or file a refund claim with the commissioner. If the latter course of action failed, the court explained, the person could bring an action against the department—not the dealer. The second statute at issue had been enacted to authorize Georgia’s entrance into the Streamlined Sales and Use Tax Agreement with other states. The court noted that the Agreement required member states whose laws allow consumers to seek tax refunds from sellers to adopt seller-protection provisions, including the provision that a cause of action against a seller for over-collected sales tax does not accrue until a purchaser has provided written notice to the seller. The court held that this statute was intended only to adopt such seller-protection provisions and did not create a new cause of action against a seller. Georgia Power Company v. Cazier et al. ___ S.E. 2d­­­___, 2013 WL 1277820 (Ga. Ct. App. 2013).

By Saabir Kapoor and Pilar Mata

The California Court of Appeal reversed the trial court’s decision in favor of the State Board of Equalization (BOE), holding that a taxpayer’s evidence of communications with the BOE presented triable issues of material fact as to whether the BOE should be equitably estopped from relying on administrative exhaustion requirements. The taxpayer, D.R. Systems, Inc., argued that it filed a valid sales tax refund claim with the BOE when it wrote a letter, pursuant to the specific instructions of a BOE agent, explaining the taxpayer was owed a “large credit balance” that it had uncovered while performing a self-audit of prior year revenues. In order for a sales tax refund claim to be valid, California requires that the claim be in writing and state the specific grounds upon which the claim is founded. The BOE argued that the taxpayer’s letter was not a valid refund claim because it did not specify grounds for a refund, and thus had not exhausted its administrative remedies before filing suit. Although the court agreed with the BOE that the taxpayer’s communications did not constitute a valid refund claim, the court nevertheless found that the doctrine of equitable estoppel may be appropriately invoked to prevent an injustice to the taxpayer for failure to comply with a procedural requirement. Specifically, if the taxpayer could show at trial that its reliance on the BOE agent’s statements was reasonable, the BOE should be estopped from raising the taxpayer’s failure to exhaust administrative requirements as a defense. D.R. Systems, Inc. v. Cal. State Bd. of Equalization, Cal. Ct. App., Dkt. No. D060856 (March 7, 2013) (unpublished).

By Suzanne Palms and Andrew Appleby 

The Michigan Court of Appeals held that a taxpayer was not liable for additional single business tax (SBT) and use tax because the taxpayer was making sales of tangible personal property at its Michigan facility rather than performing a service. The taxpayer’s business activities at issue consisted of “mass printing of documents,” the content of which was delivered to the taxpayer electronically by its customers. The State argued that the taxpayer provided a service, while the taxpayer argued it was making sales of tangible personal property. The court relied on Catalina Mktg. Sales Corp. v. Dep’t of Treas., 678 N.W.2d 619 (Mich. 2004), and applied the “incidental to service” or “true object” test to find that the taxpayer was in the business of producing tangible personal property at the facility. The court determined that the taxpayer’s customers created the intangible content, and the taxpayer simply printed it on paper for delivery. Thus, the true object of the transaction was the printed document. The “true object” test is often used in the sales and use tax context, but this case is unique because the court applied the test not only in the use tax context but also in the SBT context. HOV Servs., Inc. v. Dep’t of Treas., Dkt. No. 309575 (Mich. Ct. App. Mar. 21, 2013) (unpublished).