Kelly C. Miller
Dan Dixon
kmiller@reedsmith.com
ddixon@reedsmith.com
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Agenda/Objectives
 Affiliate Nexus (“Amazon”) Legislation
 Update: State Tax Treatment of Electronic
Goods & Services
 I. Digital Goods & Services
 II. Web Hosting
 III. Software
 IV. Cloud Computing (ASP; SaaS, etc.)
 Outlook for 2012
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Affiliate Nexus (“Amazon”)
Legislation
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Affiliate Nexus States - 2011
Affiliate Nexus Bill
Reporting Bill
Per DOR Bulletin (09/12)*
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Affiliate Nexus States - 2011



Affiliate Nexus States
 Arkansas
 California
 Colorado
 Connecticut
 District of Columbia
 Illinois
 North Carolina
 Rhode Island
Reporting Requirement States
 Oklahoma
 South Dakota
 Vermont
Affiliate Nexus per DOR
 Pennsylvania (09/12)
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States With Pending Affiliate Nexus Legislation - 2012
(as of March 2012)
Introduced; Dead
Pending
Passed; Awaiting Gov. Sign.
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States with Pending Affiliate Legislation - 2012



Introduced
 Florida
 Georgia
 Hawaii
 Iowa
 Kansas
 Louisiana
 Minnesota
 Mississippi
 Missouri
 New Jersey
 New Mexico
 Virginia
Passed; Awaiting Gov. Signature
 Tennessee
Introduced; Dead
 Arizona
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Federal Nexus Proposals

Main Street Fairness Act
 S. 1452/H.R. 2701
 July 29, 2011


Marketplace Equity Act
 H.R. 3179
 October 12, 2011


House Committee on Courts, Commercial and Administrative Law
Marketplace Fairness Act
 S. 1832
 November 9, 2011



Senate Finance Committee
Senate Finance Committee
Reid: “Need 60 for a vote…”
“Norquist” Resolution
 Sen. Res. 309
 November 2, 2011
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Recent Developments:
Electronic Goods & Services; Cloud Computing
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I. Electronic Goods &
Services
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A. Overview
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Digital Products – States Adopting SSUTA
SSUTA:
Specified Digital Products =
•Digital Audio-Visual Works
•Digital Audio Works
•Digital Books
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Taxation of Electronic (“Digital”) Goods
 Schemes of Taxation
 DOR
 Ruling; formal policy; FAQs; informal guidance
 Judicial
 DOR/TP prevails in court
 Statutory
 Non-Taxable
 No guidance
 Specifically enumerated
 Taxable
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B. Updates (3/2012)
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Digital Downloads
California


California State Board of Equalization has issued revised guidance on the
taxability of internet sales, including downloads of applications (“apps”),
eBooks, digital images, and software.
Publication No. 109 (March 2, 2012) clarifies that:

If you are either a California or non-California business and you sell electronic
data products, including: software, data, digital books (eBooks), mobile
applications (“apps”), or digital images, your sales will not be subject to tax unless
as part of the sale you provide the customer with a back up data copy on a
physical storage medium such as a CD-ROM; and

If you are either a California or non-California business and you sell canned
(read: non-custom; “out-of-the-box”) software to customers who download the
software from a server, your sales will not be subject to tax unless as part of the
sale you provide the customer with a back up data copy of the software on a
physical storage medium such as a CD-ROM (this also holds true if you are
selling a customer a database via download).

The Publication goes on to note that when a consumer purchases an eBook it
can do so on diskette or CD, but that the most popular method of delivery of
15and that these sales
eBooks is through a mobile app or other wireless download
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do
not involve the transfer of a back up copy
on a physical storage medium.
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II. Web Hosting
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Web Hosting Round-Up
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
Nebraska: Separately stated charges for web hosting and
maintenance of are not taxable. Nebraska DOR Website FAQs –
Business Taxes (Mar. 2012). (SSUTA)
South Dakota: Web hosting services are subject to sales tax (Tax
Facts No. 02/01/2012) .
California: A web-hosting provider will not be considered an agent
or representative of any out-of-state retailer for purposes of
California’s forthcoming affiliate nexus law. (Cal. Code Regs. 18
§1684(a), July, 2011).
Tennessee: Online hosting services not taxable
telecommunications services under true object/primary purpose
test. Tenn. Rev. Rul. 11-22 (June 10, 2011); Online web hosting
services not taxable Let. Rul. No. 11-38 (July 27, 2011).
Vermont: Website hosting not subject to tax. Tech. Bulletin TB-54
(Apr. 11, 2011).
Texas: A person whose only Texas activity is as a user of Internet
hosting is not engaged in business in this state. Tex. Policy Letter
Rul. No. 201103016L (Mar. 24, 2011).
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III. Software
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Software
 California

Nortel Networks v. SBE, 119 Cal Rptr 3d 905 (2011)





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
In 2011, California Appellate Court determined that all software subject to
copyrights or patents is exempt from California sales and use tax, even if they are
delivered to the customer on tangible media.
When canned software is transferred pursuant to a TTA, the appropriate measure
of tax (when a separately stated cost for the TPP is not stated on the invoice) is
200 percent of the cost of the materials and labor used to produce the tangible
personal property (the CD).
For the past 6 months, the Board has been telling taxpayers that it is in the midst
of conducting an industry study to help with the “200%” tax computation. The
Board has contacted over 300 companies to participate in the study, and only
one company has replied. The Board intends to follow up with these companies
and encourage their participation.
The Board’s has also suggested starting an "interested parties process" to
discuss whether clarifying amendments are necessary because, without the
study, the amendments would not include an "optional percentage" to estimate
the retail fair market value of tangible personal property transferred in a "software
media TTA.“
The Board intends to meet on March 20, 2012 to discuss these
issues further.
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Companies
should continue to file refund claims.
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Software


Colorado

In passing H.B. 1293 (6/7/2011), Colorado repealed a sales tax on prewritten
(“standardized”), canned software other than canned software delivered by tangible
storage medium.

The repeal essentially reinstates the prior guidance in Colorado on this issue—
Special Regulation 7—that exempts all software delivered or accessed by application
service providers (ASP), delivered electronically or through “load-and-leave.”

Effective date, July 1, 2012.
Connecticut


Louisiana


Software remains taxable; (data processing still taxed at 1%). Connecticut
Informational Publication No. 2011(15), 10/20/2011.
Taxes are still imposed on the sale, use, or lease of canned computer software and
software maintenance agreements. Louisiana Revenue Information Bulletin No. 11005 (Feb. 14, 2011).
Missouri

Purchases of: canned software downloaded over the internet; customized software
downloaded over the internet (by tangible form or electronically); licenses to use
software purchased and downloaded electronically; ‘mandatory’ software
maintenance if delivered electronically where original software 20
was delivered
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electronically or original software was separately stated in tangible form are all non-
Software

Pennsylvania


Rhode Island


Sale tax applies to a computer software download (including applications,
or “apps”). Sales Tax Advisory (9/30/2011)
Vermont


Dechert LLP v. Commonwealth of Pennsylvania, 998 A.2d 575 (2010)
 “Software maintenance” not taxable.
 Uniformity: Lead case on this issue could be litigated later this year.
 Companies should continue to file refund claims based on these issues to
preserve their rights.
Sale of prewritten, canned software is taxable. Tech. Bulletin TB-54 (Apr.
11, 2011).
Virginia

Department's long-standing policy is that the sale of prewritten software
delivered electronically to customers does not constitute the sale of
tangible personal property and is generally not subject to sales and use
taxation. See Va. Code § 58.1-609.5 1 and Public Document (P.D.) 05-44
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(4/4/05).
Virginia
Public
Document
Ruling
No.
11-112,
06/20/2011.
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IV. Cloud Computing
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Cloud Computing Update – Terms
 Remote Access

Remote Access

Software is housed on a server (in/out-of-state) and accessed on a computer or
web-enabled device via the internet or other network.
 SaaS

Software-as-a-Service

Software “on-demand”, if you will. With SaaS, software and the code running that
software is hosted on a server or series of servers and is access on a computer
or web-enabled device.
 ASP

Application Service Provider.

An ASP is a company that is providing what amounts to remote
access, software on-demand, or SaaS.
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Survey of State Guidance on Remote Access Software
Statute or Regulation
DOR Ruling or Policy
No Specific Guidance
Unofficial Position or Policy
No Sales Tax
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Remote Access?
IT’S ALL MADNESS…
Software?
Automated Service?
Sale of TPP? No.
Information Service?
Not enumerated.
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Remote Access; Info Services; ASP/SaaS
Brand New and Notable …
 Utah

The Utah Tax Commission recently issued Private Letter Ruling No. 10011 (2/24/12) in which it determined that the provision of certain webbased “services” are subject to sales tax because the download of the
“applet” was considered the transfer of tangible personal property.
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The ruling cites several new provisions in Utah law and is a a significant shift
from prior rulings in Utah that held that access to software on an out-of-state
server was not taxable.
The applet was as a free download to the user that had no function by itself and
was “merely incidental” to the provision of the aforementioned web-based
services.
The Commission determined that the applet, coupled with the user’s purchase of
the service, equated to the transfer of a “right to use” the company’s proprietary
software under either a lease or contract.
The Commission further determined that the company’s users were really paying
for use of the company’s proprietary software rather than a service even though
there was no actual transfer of software to the users.
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Notable
because
Commission
focused
on
the
applet,
but
ultimately
determined
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Remote Access; Info Services; ASP/SaaS
NONTAXABLE
 Colorado


Florida



Online services are not taxable as sale of software. FYI Tax Pub. No. Sales
89 (July 1, 2011).
Software delivered electronically and services (training; installation; live
support) delivered online are not taxable as software and services only
delivered in electronic form. Tech. Asst. Advisement No. 11A-021 (July 23,
2011).
Licenses to use software are not subject to tax if the software is delivered
electronically. Tech. Asst. Advisement No. 10A-028 (June 21, 2010).
Illinois

Acknowledging “challenges” posed by cloud computing, DOR declined to
issue guidance. See e.g., GIL 10-0062 (Aug. 4, 2010); then on January 6,
2012, issued GIL 12-0002-GIL (Jan. 6, 2012):
 Information services; customized software (maybe); license to use
software (maybe); software installation = non-taxable; [Canned,
electronically delivered software = taxable]
 “Please note that the Department has determined that the proper forum
to determine the appropriate taxation of computer software Application
Service Providers (ASPs), software hosting and web-based software is
through a formal administrative rulemaking process rather than on a
case-by-case basis through individual inquiries.”
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Remote Access; Info Services;
ASP/SaaS
NONTAXABLE
 Illinois




Taxpayer provides two services; the first is a subscription service whereby customers are
notified of product recalls (information is communicated electronically); the second is an
electronically-maintained database of suppliers that have available medical products for
acquisition. Service #2 is only provided through an online database that is accessed on a
customer’s computer.
Data for both services is maintained on servers in IL and out-of-the state.
State determined that information or data services, transferred electronically, are not
taxable. State rules that overall purpose is the sharing of database information and not
TPP; delivery of data or information services electronically from database – not taxable.
(GIL Letter No. ST 11-0094, Nov. 30, 2011).
Indiana





Taxpayer develops online games played using social media networks. Software is hosted
on servers outside the state. Games include multi-player offerings, such as poker.
Games are generally free to play, however, certain add-ons (ex: poker chips) are not. The
only way to play these games is by going online. Players cannot access games by
downloading software.
Moreover, taxpayer explained, there is no actual software to download. In some instances,
the user may download an app (“application”) to a web-enabled device, however, user can
only play the game by accessing it online through the application.
Application may be downloadable but game software is not. No ownership tranferred; only
limited license-of-use.
Ruling: Taxpayer’s products transferred electronically are not specified digital products or
pre-written computer software; sales to end-users of digital goods (chips) for use in the
games, or the games themselves, accessed online, are not taxable. (Rev. Rul. No. ST 1104, 09/02/11).
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Remote Access; Info Services; ASP/SaaS
NONTAXABLE

Kansas




The Department determined access to software or applications, etc., by itself, is not a taxable
service in Kansas so long as there is no downloading, leasing or owning that software or
applications (which would be subject to tax).
Kansas


Kansas Department of Revenue determined that determined that charges for a “hosted
software product”—in that case, videos offering continuing medical instruction for physicians—
are not subject to sales tax. Kansas Opinion Letter No. O-2012-001 (February 12, 2012).
[Contrast to Texas Policy Ruling No. 200812241L (12/16/08): Access to an online training
course via a website equals information services, even where no software is used.
Downloaded prewritten computer software is taxable; remote access software is not.
Department determined that remote access to the video gaming software and virtual goods is
not taxable, but if downloaded, would be taxable as downloaded prewritten software. Kan. Op.
Letter P-2011-004 (June 16, 2011).
Kansas
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Only when an ASP sells canned software to a client that can be used independently of the ASP
service is the charge taxable. All other separately stated ASP charges are not subject to tax.
Kan. Op. Letter O-2010-005 (June 22, 2010).
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So in Kansas, as long as there is no
physical download,
Remote Access; Info Services; ASP/SaaS
NONTAXABLE

Massachusetts
 The use of software was nontaxable because
object of transaction was database access rather
than the use of the software. Letter Ruling No. 11-4
(Apr. 12, 2011).


Nebraska
 Not taxable when the Application Service Provider (ASP) retains
title to the software and does not grant a license with ownership
rights to the user/customer. Neb. Information Guide No. 6-5112011 (July 27, 2011).
Pennsylvania
 “Access to software solely through the Internet is not a taxable transfer
of software, unless the server resides in Pennsylvania." PA SUT-08005; PA SUT-10-005.
 Ruling is rumored to be under review and could be revised.
 Administrative agencies not strictly following the ruling.
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Remote Access; Info Services; ASP/SaaS
NONTAXABLE




Rhode Island
 Remote access to software is not considered sale of pre-written
computer software (provided there is no downloading of the software).
SU 11-25.7(3).
Tennessee
 Fee for access to software ASP not taxable. Tenn. Rev. Rul. No.
11-22 (June 10, 2011)
 Charges for data storage and retrieval were not taxable. Let. Rul.
No. 11-38 (July 27, 2011)
 Fee for access to software housed outside of TN not taxable
because there was no transfer of possession or control. Let. Rul.
No. 11-58 (Oct. 10, 2011).
Virginia
 Online services are not taxable because there was no transfer of TPP.
Vir. Pub. Doc. No. 10-264 (Dec. 15, 2010).
Wisconsin
 ASP was not taxable because the software was incidental to service
and the users are not controlling software. PLR No. W1025002 (March
24, 2010).
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Remote Access; Info Services; ASP/SaaS
TAXABLE

Arizona



Indiana


Access to pre-written software maintained on servers outside of the
state subject to tax when accessed electronically. Ltr. of Finding 090746 (May 27, 2010).
New York


Cloud services treated as the taxable license of TPP TIR No. LR10-007
(Mar. 24, 2010).
Gross receipts derived from hosting software were subject to the
transaction privilege tax. Letter Ruling 11-011 (Jun. 22, 2011).
Online services constitute sale of pre-written software. See Adobe
Systems Inc., TSB-A-08(62)S; TSB-A-09(19)S (May 21, 2009); TSB-A10(2)S (January 20, 2010); TSB-A-10(44)S (Sept. 22, 2010); TSB-A11(17)S (June 1, 2011).
New York

Remote access to canned software is taxable. Taxpayer deemed to
have constructive possession of the software via "right to use or control
or direct the use" of the software. The situs of the sale was the location
associated with the license to use (i.e., the location of the taxpayer’s
employees that use the software). TSB-A-09(37)S, New York
Commissioner of Taxation and Finance, Aug. 25, 2009)
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Remote Access; Info Services; ASP/SaaS
TAXABLE
 South Carolina
 Rev. Rul. 05-13 (“charges by the [ASP] are similar to
charges by database access services and are
therefore subject to [tax].”)
 Washington
 Rev. Code Wash § 82.08.020(1)(b) (sales tax
imposed on ‘‘digital automated service’’ which
describes ‘‘any service transferred electronically that
uses one or more software applications.’’)
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Outlook for 2012 & Final Thoughts…
Dan Dixon
Kelley C. Miller
Reed Smith LLP
Reed Smith LLP
215.851.8854
215.851.8855
ddixon@reedsmith.com
kmiller@reedsmith.com
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