Friday, June 15, 2012

Peisner Johnson & Company Turns 20

Twenty years ago today, Jerry Peisner and Andy Johnson formed Peisner Johnson & Company with a clear mission: Solve clients’ state tax problems. 

As the newest member of the PJCo team, I’d like to wish Jerry, Andy, and the rest of the team a happy 20th anniversary! Congratulations, Team, and here’s to many more years of continued excellence!

Wednesday, April 11, 2012

North Carolina Case Sends Shivers Through NC DOR

The North Carolina Court of Appeals has handed down a decision that has to be causing quite the stir at the NC DOR. It is certainly true that this decision is potentially far-reaching. It’s also a very surprising decision.

Anyone who has any use tax assessment pending in NC or has been assessed use tax in the last four years should take notice now. You could have a refund coming to you.

Let’s Set the Stage

Say you sell optional maintenance agreements. You decide to collect tax on the sale of maintenance agreements. If you collect tax on the sales of the agreements, it makes complete sense that no tax would be owed on parts that are used and/or transferred to your customers when you perform the warranty service. This is logical. But in some states, the converse is true (usually the ones who do not tax labor in general). That is, no tax is due upon the sale of the agreement itself, but use tax is due on the parts that are used in providing the warranty service.

Such is the case in NC. No tax is due on the sale of maintenance agreements; and use tax is due on parts used in performing warranty service. But, let’s say you collected tax on the sale of the agreement but did not pay tax on the parts used and now you’re under audit in NC. You make the completely logical argument that NC got their money, in fact NC probably got more from you than they would have if you had paid tax on the parts. You argue that NC should only tax you to the extent that cost of parts exceeds the revenue on optional maintenance agreements. Sounds like a valid argument, right?

It does, but NC is no different from most states in saying, first, that if you collect tax in error, you have to refund that money to your customers before they will pay it back to you. Second, NC would say (as would most states) that it’s a separate matter altogether that you owe tax on parts used in the service performed. NC would assess you a use tax on those parts and give you no refund or credit for the tax collected on the agreement sales. Even if the sale of the agreements were to the very same customer for whom you used parts in providing the warranty service.

The Double Standard of the State

Most states adhere to the theory that it would be unjust enrichment if a company were able to keep money it collected in error from its customers. When viewed from another viewpoint, the unjust enrichment theory is not without merit. For example, an unscrupulous retailer could simply tax everything it sells knowing that most people will pay tax whenever charged. Then that retailer would only remit tax on things that are actually taxable. And state governments don’t like anyone but themselves keeping tax on nontaxable items. So,  it does make sense that a state government would make it illegal for companies to keep sales taxes they’ve collected on nontaxable sales. It would be unjust enrichment and only the state can be unjustly enriched.

But, what about this situation? Is the company selling the maintenance agreements unjustly enriched here? They paid the tax on the sale of the maintenance agreements over to the state. It seems like if anything, NC is the only unjustly enriched party here.

The company fought the matter. My guess is that they were advised that they had little chance of prevailing. I’m also guessing that the NC DOR was supremely confident in their position. But the taxpayer did not go to battle without at least some ammo.  They had an argument based in North Carolina sales tax statute (Sec. 105-164.41) which says: “If upon examination of any return made under this Article, it appears that an amount of tax has been paid in excess of that properly due, then the amount in excess shall be credited against any tax or installment thereof then due from the taxpayer, under any other subsequent return, or shall be refunded to the taxpayer by the Secretary out of any funds appropriated for that purpose.” (emphasis added.)

The problem was of course that NC had an even more specific statute that seemed to say, very specifically, that in this scenario, you can’t offset use tax with sales tax improperly collected. It would have appeared to all parties that this taxpayer’s hopes were slim to none.

Here’s why this matters

First they went to the administrative hearing level and lost in a summary judgment. I’m sure no one was surprised that they lost at that level. Then the taxpayer filed for a judicial review of the agency decision with the Wake County Superior Court.

The Superior Court overruled the administrative decision, stating that the company was entitled to an offset against the use tax liability in the amount of tax charged on the optional agreements. The refund granted amounted to nearly $200,000 before penalty and interest.

The DOR must have been shocked by the courts decision. They appealed it to the next level.

But the appeals court affirmed the trial court.

The appeals court acknowledged the more specific statute, but held that statute did not apply to the specific transactions at hand and therefore 106-164.41 applied and the company should be allowed to use the tax improperly collected sales tax to offset the use tax.

Obviously, this was a big deal indeed for the company in this case, but it could have far-reaching impacts in NC.

If your company has been assessed a use tax on purchases in NC, you should also review your sales very closely to see if you’ve ever charged tax improperly on any of your sales in NC. Maybe you charged tax on something that is actually exempt, or you charged the wrong rate even. If so, according to our understanding, you could offset the use tax assessment.



Here is the full decision:

NO. COA11-655

NORTH CAROLINA COURT OF APPEALS

Filed: 21 February 2012

TECHNOCOM BUSINESS SYSTEMS INCORPORATED, Petitioner, v. NORTH CAROLINA DEPARTMENT OF REVENUE, Respondent.

Wake County No. 10 CVS 004398

Appeal by respondent from order entered 7 January 2011 by Judge Ben F. Tennille in Wake County Superior Court. Heard in the Court of Appeals 9 November 2011.

Attorney General Roy A. Cooper, by Assistant Attorney General Tenisha S. Jacobs, for respondent-appellant.

The Wooten Law Firm, by Louis E. Wooten, and Everett Gaskins Hancock LLP, by E.D. Gaskins, Jr., for petitioner appellee.

BRYANT, Judge.

Where sales taxes were erroneously collected on optional maintenance agreements and paid to the North Carolina Department of Revenue, pursuant to N.C. Gen. Stat. §105-164.11(a), Technocom's use tax liability should be offset by the erroneously collected sales tax. Therefore, we affirm the ruling of the trial court.

Facts and Procedural History

On 26 September 2008, the North Carolina Department of Revenue (“the Department”) issued a Notice of Final Determination (“Final Determination”) to Technocom Business Systems, Incorporated, (“Technocom”), a corporation in the business of selling and leasing office equipment. The Final Determination was the result of an audit performed on Technocom for the period between 1 June 2002 and 31 August 2005.

In the course of its business, Technocom purchases and uses parts, supplies, and materials to fulfill its optional maintenance agreements. It is under these maintenance agreements that Technocom services the equipment that it sells or leases to its customers. Regarding Technocom's tax liability under these maintenance agreements, the Department made the following conclusion:

North Carolina imposes a State and local use tax on tangible personal property purchased inside or outside the State for storage, use or consumption in this State… . Use tax is payable by the person who purchases, leases or rents tangible personal property or who purchases a service.

[Technocom's] use of parts, supplies and materials to fulfill its optional maintenance agreements during the audit period constitutes a taxable use of tangible personal property within the meaning of N.C. Gen. Stat. §105-164.3(49) 1. [Technocom] did not pay sales tax or accrue use tax on these items, and the Department has assessed [Technocom] for the appropriate use tax in its proposed assessment and this final determination.

Between 1 June 2002 and 31 August 2005, Technocom collected sales tax on its optional maintenance agreements. The Department held that these agreements were not subject to sales tax because they did not involve services necessary to complete the sale of tangible personal property under N.C. Gen. Stat. § 105-164.3(37) 2. Technocom stated to the Department that its sales and use tax liability should be offset by the sales tax it collected on its maintenance agreements. In response, the Department stated that it could not refund or credit Technocom pursuant to N.C. Gen. Stat. §105-164.11(a) 3 because there was no proof Technocom had refunded its customers the sales tax it erroneously collected on its optional maintenance agreements.

On 18 November 2008, Technocom filed a petition for contested case hearing in the Office of Administrative Hearings (“OAH”). Thereafter, on 1 May 2009, Technocom also filed a motion for partial summary judgment and the Department filed a motion for summary judgment. By order entered on 16 November 2009, an administrative law judge granted summary judgment in favor of the Department and sustained the Final Determination. The order concluded that no provision of the Revenue Act allowed Technocom to offset its use tax liability with sales tax it erroneously collected from its customers.

The Department, in a final agency decision, upheld the 16 November 2009 decision of the administrative law judge. On 18 March 2010, Technocom filed a petition for judicial review of the final agency decision in Wake County Superior Court.

Following a hearing held 10 December 2010, the superior court reversed the decision of the OAH and the Final Determination of the Department in a 4 January 2011 order. The superior court, in pertinent part, stated:

Transactions that do not generate a windfall and that do not result in the unfair treatment of customers are not included in the meaning of “exempt or nontaxable sales” in Section 105-164.11(a). Because the transactions at issue here are not “exempt or nontaxable sales,” Section 105-164.11(a) is not applicable. The general provision contained in Section 105-164.41 governs the outcome, and Technocom is entitled to a credit against the sales tax paid to the Department during the audit period.

The superior court remanded the case to the OAH with instructions to grant partial summary judgment in favor of Technocom, “leaving open the amount of the tax credit to which [Technocom] is entitled” for the OAH's determination. Pursuant to the superior court's order, the administrative law judge entered an order on 3 March 2011 stating the following:

1.   [Technocom] is GRANTED partial summary judgment on the following legal issue:

Whether the North Carolina Revenue Laws authorize Technocom to offset its use tax liability on the parts and supplies it provided to customers … with the sales taxes based on the sales of those same Service Agreements it had previously remitted in error to the Department[.]

2.   Petitioner is entitled to a tax credit of $192,457.33 on the parts and supplies [Technocom] previously charged, collected and remitted North Carolina sales tax on when it provided such items to its customers … if the Order entered in this matter on 4 January 2011 is affirmed on appeal.

3.   No further proceedings at OAH are required in this matter as there is no dispute about the amount of credit [Technocom] would be entitled to if the Order is affirmed on appeal.

The Department appeals the superior court's 4 January 2011 order.

The sole issue on appeal is whether the North Carolina Revenue Laws authorize Technocom to offset its use tax liability with sales taxes erroneously paid by its customers. The Department argues that no provision in the North Carolina Sales and Use Tax Act (“Act”), N.C. Gen. Stat. §§105-164.1 et seq., permits Technocom to claim such a credit against its use tax liability.

An appellate court reviewing a superior court order regarding an agency decision examines the trial court's order for error of law. The process has been described as a twofold task: (1) determining whether the trial court exercised the appropriate scope of review and, if appropriate, (2) deciding whether the court did so properly. When, as here, a petitioner contends the [superior court's] decision was based on an error of law, de novo review is proper.

Holly Ridge Assocs., LLC v. N.C. Dep't of Env't & Natural Res., 361 N.C. 531, 535, 648 S.E.2d 830, 834 (2007) (internal quotation marks and citations omitted).

Because this appeal centers on a close reading of the Act, we must seek “[t]he principal goal of statutory construction [which] is to accomplish the legislative intent.” Lenox, Inc. v. Tolson, 353 N.C. 659, 664, 548 S.E.2d 513, 517 (2001) (citation omitted). “If the language of a statute is clear, the court must implement the statute according to the plain meaning of its terms so long as it is reasonable to do so.” Id.

[T]he Act, with certain exceptions and in pertinent part, imposes upon persons engaged in the business of selling tangible personal property at retail in this state a state sales tax at a rate of three percent of the sales price of each item sold. The Act also imposes a complementary state use tax “upon the storage, use or consumption in this state of tangible personal property purchased within and without this state for storage, use or consumption within this state” at a rate of three percent of the cost of such property “when the same is not sold but used, consumed, distributed or stored for use or consumption in this State. …”

In re Assessment of Additional N.C. & Orange County Use Taxes, etc., 312 N.C. 211, 214, 322 S.E.2d 155, 158 (1984) (citation omitted).

The first purpose of the Act is to generate revenue for the state. Id. This is accomplished by a sales tax which is

imposed upon the retail merchant as a privilege tax for the right to engage in that business. The tax is, however, designed to be passed on to the consumer. The second purpose of the sales and use tax scheme is to equalize the tax burden on all state residents. This is achieved through imposition of the use tax in certain situations where the sales tax is not applicable.

Id. at 214-15, 322 S.E.2d at 158.

“While a sales tax and a use tax in many instances may bring about the same result, they are different in conception.” Colonial Pipeline Co. v. Clayton, 275 N.C. 215, 222, 166 S.E.2d 671, 676 (1969). “A sales tax is assessed on the purchase price of property and is imposed at the time of sale. A use tax is assessed on the storage, use or consumption of property and takes ef[f]ect only after such use begins.” Id. at 223, 166 S.E.2d at 677.

The General Assembly has defined a “sale” as a “transfer for consideration of title or possession of tangible personal property … for consideration of a service.” N.C.G.S. §105-164.3(36) (2009). A sale may include such things as a “lease or rental” or a “transaction in which the possession of property is transferred but the seller retains title or security for the payment of the consideration.” Id. The sales tax collected on the “sales price” includes the “total amount or consideration for which tangible personal property … or services are sold, leased, or rented.” N.C.G.S. §105-164.3(37) (2009). A sales price includes “charges by the retailer for any services necessary to complete the sale.” Id. (emphasis added). A “use”, on the other hand, is the “exercise of any right, power, or dominion whatsoever over tangible personal property … by the purchaser of the property or service.” N.C.G.S. §105-164.3(49) (2009).

In the instant case, Technocom does not dispute that it improperly collected sales tax on amounts charged under its optional maintenance agreements and that Technocom should have paid a use tax in connection with the parts and supplies it provided under those agreements. However, it does argue that pursuant to N.C. Gen. Stat. §105-164.41, the Department is required to issue Technocom a credit against “any” tax. Technocom asserts that the Department should credit the sales taxes made in error against the use tax assessment levied by the Department, particularly, whereas here, the Department seeks to treat the transactions at issue as a “use” for tax purposes but as a “sale” for refund purposes.

N.C.G.S. §105-164.41, titled “Excess payments; refunds[,]” states that “[if] it appears that an amount of tax has been paid in excess of that properly due, then the amount in excess shall be credited against any tax or installment thereof then due from the taxpayer[.]” N.C.G.S. §105-164.41 (2009). On the other hand, N.C. Gen. Stat. §105-164.11 (2009), titled “Excessive and erroneous collections[,]” provides guidance in situations where excessive and erroneous collections are made and, specifically, prohibits the relief sought by Technocom. N.C.G.S. §105-164.11 provides the following:

When the tax collected for any period is in excess of the total amount that should have been collected, the total amount collected must be paid over to the Secretary. When tax is collected for any period on exempt or nontaxable sales the tax erroneously collected shall be remitted to the Secretary and no refund shall be made to a taxpayer unless the purchaser has received credit for or has been refunded the amount of tax erroneously charged.

N.C.G.S. §105-164.11 (2009) (emphasis added).

The rules of “[s]tatutory construction require[] that a more specific statute controls over a statute of general applicability.” Stewart v. Johnston County Bd. Of Educ., 129 N.C. App. 108, 110, 498 S.E.2d 382, 384 (1998). “When two statutes apparently overlap, it is well established that the statute special and particular shall control over the statute general in nature, even if the general statute is more recent, unless it clearly appears that the legislature intended the general statute to control.” Trustees of Rowan Technical College v. J. Hyatt Associates, Inc., 313 N.C. 230, 238, 328 S.E.2d 274, 279 (1985) (citation omitted).

N.C.G.S. §105-164.41 is the more general statute, applying to any situation where the amount of tax has been paid in excess of that properly due. However, although N.C.G.S. §105-164.11 is a more specific and particular statute, it does not apply to the instant case, as the Department would have us hold. N.C.G.S. §105-164.11 only applies to taxes collected on “exempt or nontaxable sales.” As previously stated, a sale is the transfer of tangible personal property for a consideration to be paid. In its February 2010 Final Agency Decision, the Department concluded that the optional maintenance agreements at issue constituted a taxable use of tangible personal property within the meaning of N.C.G.S. §105-164.3(49) and not a sale. Accordingly, the Department held that the agreements were subject to use taxes and not sales taxes. Therefore, N.C.G.S. § 105-164.11 does not apply. We hold that the general provision in N.C.G.S. §105-164.41 governs the outcome, entitling Technocom to a credit against the sales tax paid to the Department during the audit period. Based on the foregoing, the order of the trial court is affirmed.

Affirmed.

Judges ELMORE and STEPHENS concur.

  
Footnotes

1   N.C.G.S. §105-164.3(49) defines "use" under Article 5 of the General Statutes.

2   N.C.G.S. §105-164.3(37) defines the meaning of "sales price" under Article 5 of the general statutes.

3   N.C.G.S. §105-164.11(a) is titled, "Excessive and erroneous collections."

Thursday, March 8, 2012

Missouri DOR Rules on Software Delivered Through "Load and Leave" Method

Back in October of 2010, we published an article entitled Missouri Policy on Software Load and Leave is Ruled Out Is Software Even Taxable in Missouri Now? The article was in response to an administrative hearings decision that held that software delivered through a “load and leave” method was not taxable because it was not tangible property.

But, as we said then, this decision seemed to throw the whole question out in the open. Is software even taxable at all regardless of how it is delivered? Is the means of delivery completely superfluous and is it all about the true object of the transaction? That certainly seems to be the reasoning underlying the ruling. Consider this: the AHC stated that while it was true that precedents from the Missouri Supreme Court have applied to sales of software, the prior cases did not squarely address the issue of whether software is tangible personal property. In fact, tellingly, the AHC compared the sale of software on a disk to the sale of a share of stock. The sale of stock is not taxed because it is intangible in nature. Yes, it is represented on some fancy parchment stock paper, but the value of the paper is inconsequential to the value of the ownership interest it represents. It could certainly be argued using the reasoning in this case that in Missouri all software is intangible by nature and whether it is transferred electronically, by load and leave, or by tangible medium does not matter.

We said this issued should be watched in Missouri. And we have been watching.

The Missouri Department of Revenue has now issued a detailed ruling outlining its policies on software. Unfortunately, they do not go as far as to conclude that all software is exempt because it is not tangible property, but they do affirm all other aspects of the administrative hearing referenced above. According to the DOR, the taxability of canned software depends totally on how it is delivered. If by tangible personal property that remains at the purchaser’s location, then it is taxable. Below is the entire text of the ruling for your reading pleasure.

We still believe that this distinction is shaky at best. In sales/use tax, form often trumps substance and we understand that. But this treatment by MO strains all credibility. For example, let’s say a company in MO buys 10,000 licenses to MS Office for use by its employees all over the world. According to this ruling, if the software is installed electronically on the company’s server in MO and then subsequently downloaded and installed by employees in and outside MO, no, MO tax is due. However, if even one CD is part of the “originally delivery” of the software, then all licenses would be taxable in MO. That seems to be a huge stretch. If this comes up on audit and an assessment is made, I would expect someone to fight this and the issue of whether software is even tangible property will be raised again.

For now, though, at least we have some definite policies on software taxability in Missouri. Here is the ruling in its entirety.

Letter Ruling No. LR 7001, Missouri, (Jan. 27, 2012)

LR 7001

Taxability of Canned Software, Custom Software, Software Licenses, Mandatory & Optional Maintenance Agreements, Non-Downloadable Software Kept by Vendor & Load and Leave

January 27, 2012

Dear Applicant:

This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of Regulations 12 CSR 10-1.020, in response to your letter dated October 14, 2011.

The facts as presented in your letter ruling request, your previous letter, and through telephone conversations with Legal Counsel Eva Vlachynsky are summarized as follows:

Applicant purchases canned and customized software programs, licenses to use canned software programs, and mandatory and optional software maintenance and support for the software programs from a variety of vendors. Applicant purchases licenses to use original canned software programs that are downloaded to Applicant's local servers electronically through the internet. In the alternative, Applicant sometimes purchases an original canned software program that is downloaded from a tangible format. Once a software program is downloaded onto Applicant's local servers that are located in Missouri, the software is copied onto Applicant's other computers electronically according to the number of licenses purchased by the Applicant.

The maintenance and support that Applicant purchases provide updates, upgrades, or modifications to the software programs. Certain vendors will include the mandatory maintenance and support for a set period of time with the Applicant's software program purchase or license agreement. Support services provide the ability to speak with a representative via telephone or the ability to look up answers to a problem via website. Examples of maintenance and support materials are instruction manuals and troubleshooting information. Support service contracts may include software updates referred to as “patches.” Patches repair problems or allow additional functionality based upon problems with the software after its release date. Maintenance and support materials are distinguishable from any part of the actual software. The costs for the maintenance and support, whether mandatory or optional, are stated separately on the vendor's invoice or are billed as a separate invoice.

Applicant also purchases access to non-downloadable software programs through vendors' internet web sites. The non-downloadable software programs are not downloaded onto Applicant's local servers in Missouri but are merely accessible for Applicant's use via each vendor's web site.

Occasionally, Applicant will enter into a single agreement to purchase several products. In these instances, some products are downloaded electronically through the internet and some are delivered in tangible format. The vendor will separately state each item on a single invoice.

ISSUE 1:

Are Applicant's purchases of canned software downloaded electronically over the internet subject to sales or use tax?

RESPONSE 1:

No. Applicant's purchases of canned software downloaded electronically over the internet are not subject to sales or use tax.

Section 144.020.1, RSMo, imposes a sales tax upon retail sales of tangible personal property and certain enumerated services. Section 144.610.1, RSMo, imposes a use tax “for the privilege of storing, using or consuming within this state any article of tangible personal property.” Missouri Code of State Regulations 12 CSR 10-109.050(1) provides that “the sale of canned computer software programs is taxable as the sale of tangible personal property.” A “canned program” is defined as a standardized program “purchased ‘off the shelf’” or is a program “of general application developed for sale to and use by many different customers with little or no modifications.” 12 CSR 10-109.050(2)(A). A computer program may be a canned program “even if it requires some modification, adaptation or testing to meet the customer's particular needs.” Id.

Missouri Code of State Regulations 12 CSR 10-109.050(3)(A) further provides:

Tax applies to the sale of canned programs delivered in a tangible medium which are transferred to and retained by the purchaser. Examples of canned programs delivered in a tangible medium would include coding sheets, cards, magnetic tape, CD-ROM or other tangible electronic distribution media on which or into which canned programs have been coded, punched or otherwise recorded. 12 CSR 10-109.050(3)(A). If a purchaser does not receive a tangible medium of the original canned software, there is no sale of tangible personal property under Section 144.020, RSMo.

Here, the software is downloaded directly from the internet at the time of installation. Applicant never takes possession of any tangible personal property. Therefore, the purchase of the software downloaded electronically from the internet is not subject to sales or use tax.

ISSUE 2:

Are Applicant's purchases of customized software programs downloaded by tangible format or electronically through the Internet subject to sales or use tax?

RESPONSE 2:

No. Applicant's purchases of customized software programs downloaded by tangible format or electronically through the internet are not subject to sales or use tax. But purchases of canned software by tangible format that by has been adapted for Applicant's use is not custom software and is subject to sales or use tax.

Missouri Code of State Regulations 12 CSR 10-109.050(1) provides:

In general, the sale of canned computer software programs is taxable as the sale of tangible personal property. The sale of customized software programs, where the true object or essence of the transaction is the provision of technical professional service, is treated as the sale of a nontaxable service.

Missouri Code of State Regulations 12 CSR 10-109.050(3)(C) provides:

Programming changes to a canned program to adapt it to a customer's equipment or business processes, including translating a program to a language compatible with a customer's equipment, are in the nature of fabrication or production labor that are a part of the sale and are taxable.

Here, if the software is custom software and not canned software that has been adapted for a customer's use, whether Applicant purchases the customized software program in a tangible format or in an electronic format, the sale of customized software is treated as a nontaxable service. Therefore, Applicant's purchases of customized software programs are not subject to sales or use tax.

ISSUE 3:

Are Applicant's purchases of licenses to use canned software, when the original software was downloaded electronically through the internet to Applicant's server and afterward individual users download copies based on the number of licenses purchased, subject to sales or use tax?

RESPONSE 3:

No. Applicant's purchases of licenses to use canned software, when the original software was downloaded electronically through the internet to Applicant's server and afterward individual users download copies based on the number of licenses purchased, are not subject to sales or use tax.

Missouri Code of State Regulations 12 CSR 10-109.050(3)(B) provides:

Tax applies to the entire amount charged to the customer for canned programs. Where the consideration consists of license fees or royalty payments, all license fees or royalty payments, present or future, whether for a period of minimum use or for extended periods, are includable in the measure of the tax.

License fees are taxable if the original purchase of the canned program was subject to sales or use tax. A purchase of canned software that is downloaded through the internet is not taxable. If Applicant purchases licenses to use canned software that was originally downloaded through the internet, the purchases are not subject to Missouri sales or use tax.

ISSUE 4:

Are Applicant's purchases of mandatory software maintenance and support delivered electronically through the internet subject to sales or use tax if delivery of the initial software occurs electronically through the internet?

RESPONSE 4:

No. Applicant's purchases of mandatory software maintenance and support delivered electronically through the internet are not subject to sales or use tax if delivery of the initial software occurs electronically through the internet.

Missouri Code of State Regulations 12 CSR 10-109.050(3)(E) provides:

Program installation, training, and maintenance of software services are taxable under the following circumstances:

1. The purchase of the services is mandatory under the terms of an agreement to purchase software[.]

Under the regulation, the Director assumes, if the original purchase of the software was subject to sales or use tax, then program installation, training, and maintenance of software services are taxable if these services are mandatory under the terms of the purchase agreement. Here, although Applicant's purchases of the software maintenance and support are mandatory, the original software was not subject to tax because it was not purchased in a tangible format, but downloaded through the internet. Therefore, Applicant's purchases of mandatory maintenance and support downloaded electronically are not subject to Missouri sales or use tax when the original software was downloaded electronically.

ISSUE 5:

Are Applicant's purchases of optional software maintenance and support delivered electronically through the internet subject to sales or use tax if delivery of the initial software occurs electronically through the internet?

RESPONSE 5:

No. Applicant's purchases of optional software maintenance and support delivered electronically through the internet are not subject to sales or use tax if delivery of the initial software occurs electronically through the internet.

Missouri Code of State Regulations 12 CSR 10-109.050(3)(F) provides:

Program installation, training and maintenance of software services are not taxable under the following circumstances:

1. The purchase of the services is not mandatory under a software purchase agreement and the services are separately stated on the purchase invoice from software or other items purchased; or

2. The services are purchased separately from software or other tangible personal property.

Applicant's purchases of the software maintenance and support are optional. If an optional maintenance and support fee is separately stated on the invoice, it is not subject to sales or use tax. Applicant's purchases of optional software maintenance and support downloaded electronically through the internet are not subject to sales or use tax when the initial software was downloaded electronically through the internet or if the optional software maintenance and support is separately stated on the invoice and does not include software updates.

ISSUE 6:

If Applicant purchases canned software originally delivered in electronic format, licenses to use the canned software, mandatory and optional maintenance and support with delivery of some items occurring in tangible form and delivery of others occurring electronically, which products are subject to sales or use tax when the vendor separately states each product on a single invoice?

RESPONSE 6:

Purchases of canned software delivered electronically, licenses to use canned software when the initial software was delivered electronically, and mandatory and optional maintenance and support delivered electronically when the initial software was delivered electronically are not subject to sales or use tax when the vendor separately states each product on a single invoice. See Responses 1, 3, 4, and 5. However, any portion of these items delivered in a tangible format will be subject to sales or use tax.

ISSUE 7:

If Applicant purchases canned software originally delivered in tangible format, licenses to use the canned software, mandatory and optional maintenance and support with delivery of some items occurring in tangible form and delivery of others occurring electronically, which products are subject to sales or use tax when the vendor separately states each product on a single invoice?

RESPONSE 7:

Purchases of canned software in a tangible format, licenses to use the canned software when the initial software was in a tangible format, and mandatory maintenance and support when the initial software was in tangible format are subject to sales or use tax when the vendor separately states each product on a single invoice. Optional maintenance and support is also subject to sales or use tax when the initial software was in a tangible format. See Responses 1, 3, 4, and 5.

ISSUE 8:

Are Applicant's purchases of access to non-downloadable software housed on vendor internet web sites on servers located outside of Missouri subject to sales or use tax?

RESPONSE 8:

No. Applicant's purchases of access to non-downloadable software housed on vendors' Internet web sites on servers located outside of Missouri are not subject to Missouri sales or use tax if Applicant does not receive a tangible form of a software program that will allow it to access the non-downloadable software. See Response 1.

ISSUE 9:

Are Applicant's purchases of software programs subject to sales or use tax when the programs are installed by the vendor using a tangible storage media at the Applicant's web site and the tangible media is taken by the vendor after installation?

RESPONSE 9:

No. Applicant's purchases of software programs are not subject to sales or use tax when the programs are installed by the vendor using a tangible storage media at the Applicant's web site and the tangible media is taken by the vendor after installation.

Applicant does not take possession of any tangible media because the software is downloaded by the vendor from tangible media at the Applicant's web site and the tangible media is taken by the vendor after installation. Therefore, the purchase of the software is not subject to sales or use tax. See Response 1.

This letter ruling is binding upon the Department of Revenue with respect to Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals. If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change. For this reason, the interpretation set forth above should be reviewed on a regular basis. Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.

Should additional information be needed, please contact Legal Counsel Eva Vlachynsky, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475 (phone 573-751-0961), or me.

Sincerely,

Alana M. Barragán-Scott

Tuesday, January 24, 2012

Don’t Shoot the Messenger; They Might Just Save Your Business

Last year we released a short video highlighting a situation we refer to as “the biggest tragedy in sales tax.”  Essentially a business which has a tax obligation, or “nexus”, to a state fails to collect sales tax from customers at the time of purchase and is audited.  The state assesses the business for the tax, plus heavy penalty and interest charges.  What once would have been willingly collected from paying customers now comes directly out of the company’s pocket.  And sadly, the penalty and interest charges from these audits can balloon even relatively small assessments into business crippling amounts.  Such was the case in the state of Washington just recently.

Friday, November 18, 2011

In A Stunning About-Face: Amazon Says It Will Start Collecting Sales Tax Everywhere -- For Their Affiliates. Why This is Such a Big Deal.

Many Internet-only retailers do not collect sales tax on their sales except in a few states where they have a physical presence or nexus. Amazon.com may be the largest of them all and certainly must be the most well-known, but by no means are they the only ones. There are many online sellers large and small who do not collect sales tax everywhere they ship product. Internet sellers have generally followed Amazon’s lead and taken the position that since they don’t have physical presence, they don’t have “substantial nexus” and therefore states can’t force them to be tax collectors. States have struck back with a variety of so-called “amazon laws” attempting to assert that these online sellers do in fact have at least a type of physical presence through so-called “click-through affiliates” and other agents in the state.

Online-only sellers usually collect tax in just a few states. This contrasts sharply with traditional retailers that have “brick-and-mortar” stores. These traditional retailers who also make substantial sales online (see walmart.com, bestbuy.com, etc.), almost universally collect taxes on their online sales. And with an estimated $170 billion dollars in online retail sales in 2010 according to the National Retail Federation, It’s become a huge issue. It’s a big deal for states starving for revenues and for small/local as well as large/international companies who may or may not be collecting tax on online sales.

Monday, September 26, 2011

This May Be Ohio’s Most Generous Use Tax Amnesty Plan Ever

Back in April, we wrote about Ohio Department of Taxation’s (ODT) use tax collection program.

They called their program the Use Tax Education Program. When the government uses the word “education” in a tax collection program title, you better hold on to your wallet! Their interest is not so much in education as it is in income repatriation.

But then almost as soon as the ODT announced their education program it was suspended because the legislature had the temerity to pass their own amnesty bill. The amnesty program would be effective October 1, 2011 so the ODT had to scramble to figure out the details.

The ODT has now announced the details (well some of them) via their website. Keep in mind that what the Legislature giveth, the regulator taketh (or at least attempteth to take) away, so it’s important to review the details of this program. But it does look to be relatively generous.

Keep this in mind too: This amnesty is for use tax on purchases. And it does actually waive some use tax on purchases made before January 1, 2009 that would otherwise be due. But what about sales tax on sales you make? There’s another program for that. Ohio also participates as an associate member of the SSTP and as such is obliged to offer an even MORE generous amnesty program that could waive all the tax you should have collected in OH if you qualify. More on that below after we discuss this new use tax amnesty program.

Friday, July 29, 2011

Nexus: It’s all about Physical Presence. Or is it?

By Michael J. Fleming

Nexus, it’s a fairly simple five letter word that the Miriam—Webster dictionary defines as a connection or link. At first glance the word doesn’t appear very scary, mystical or confusing, but when used in the context of taxes it is often one of the most misunderstood, misinterpreted and underestimated issues; making it a very common cause of tax problems. Why does this seemingly non-threatening word generate such heartburn in multi-state businesses?? Start with the US Constitution, add a couple federal laws and Supreme Court cases, multiply that by the laws passed in the each of the fifty states, then apply that to different categories of taxes, factor in states hungry for revenue and top it off with an ever evolving economy and you have your answer. Nexus is not static; states are constantly pushing the nexus envelope trying to increase their tax base. So even if you are a nexus expert (a Nexpert?), nexus is a topic that requires continuous monitoring and updating of knowledge.  The following discussion is intended to provide a glimpse into some of the basics of nexus and the role of physical presence.